Will the Covid-19 crisis, piled on top of the new Cold War with China, civil unrest, and the increasingly contentious 2020 Election trigger an economic cataclysm?[/caption]
Wealth warning! Global (economic) Chilling is forecast to unleash profound economic distortions that could prove highly hazardous to your wealth and upend your financial goals!
Is an investors’ Perfect Storm about to hit? Evil forces are gathering that could derail or completely destroy your wealth and retirement plan. Could you run out of money? Those at or near the magic retirement age of 65 years should take heed, as should all those concerned with retirement income. Those affected extend well beyond baby boomers. The impact of this storm could affect income streams even for the youngest savers who have little hope of living off fixed income doled out by the future Social Security Administration.
The Covid-19 crisis, piled on top of the new Cold War with China, civil unrest, and the increasingly contentious 2020 Election are conspiring to light the fuse.
Will it trigger an economic cataclysm or even worldwide Depression? Might it swallow your financial plan, eviscerate your investments, and destroy your retirement?
We surely hope not, but consider this Triple Threat facing today’s investors:
1. Mega-market crash Stock market valuations are flying too high, completely divorced from economic reality. Even Barron’s and the Wall Street Journal have branded this market a tech-stock-driven “bubble”. Bubbles always end badly, with huge losses and devastated dreams. The recent pounding tech stocks have taken could just be the initial tremors. Consider: in the last tech bubble, stocks peaked in March of 2000 before plunging by more than 80% in the months to come…and it took over sixteen years to recover those losses. If that happened again, could you wait a decade and a half to break even?
2. Hyper-inflation danger The US hasn’t seen serious inflation in decades, but conditions are ripening to see this return with a vengeance. The Federal Reserve has pulled out all the stops to drive interest rates down, juice the economy with cash, and implement a long-term easy money policy. These are perfect conditions for a plunging dollar, huge losses on investment bonds, the loss of purchasing power, and massive losses on “inflation-ignorant” investments. Mid-2020 has already seen the worst inflation since 1991, and it’s probably going to get much, much worse – even as the Fed keeps rates in the sub-basement for an extended period. Consider: if your nest egg were to keep shrinking at the same time prices for what you need are shooting up, where does that leave your life and retirement? Double-danger warning: such conditions spell doom for the bond market and may put severe cracks in the credit ratings of the revered U.S. Government Bond. And don’t forget the potential impact of run-away inflation on critical needs like health care!
3. Massive tax hikes inevitable Even before Covid-19, the US Federal Deficit was barreling toward unsustainable levels. Now, government debt is projected to actually exceed gross domestic product in short order. This is a huge deal. This is a massive debt load never before seen, even higher than after World War II. And from here, economic prospects look far drearier than in Post-War American, arguably our country’s finest hour. On top of that, Social Security and Medicare will go upside down shortly thereafter. This will be a massive bust. This crushing debt load can only be addressed one way – by raising taxes on the minority of voters who’ve accumulated wealth….and by “monetizing the debt” – basically letting inflation run rampant and paying the debt off “pennies-on-the-dollar-wise” with shrinking dollars. As this juggernaut rolls down the pike, neither the Trump tax cuts or the proposed Joe Biden tax plan will make much difference.
This trifecta of disasters could result in unbridled misery for those who don’t find ways to avoid them.
Consider: What could a sixteen-year nosedive in the value of your investments do if you are in or approaching retirement? At the same time taxes are gobbling ever-great shares of your incredibly shrinking dollars?
Let’s look at some simple math that maybe your financial planner has not done or shared with you .
Say the market tumbles 80% or so like it did in the last tech crash.
And if you think you’re not exposed to tech, better check and think again. Unlike on the last go-round for the tech bubble, indexes like the S&P 500 are increasingly dominated by pie-in-the-sky-valued tech. For instance, just 5 names – Apple AAPL -3%, Microsoft MSFT -3.9%, Google GOOGL -4.7%, Facebook and Amazon AMZN -3% now represent pushing 30% of the S&P 500! Does not leave much room for the other 495 names, and that’s before we consider “lesser” tech, like Adobe ADBE -4.3%, Advanced Micro, and pure-tech-siblings like FLIR, commutations, biotech, and other stealth tech bets that heighten the concentration of tech in the index.
Back to the 80% tumble. That would take a respectable $2M nest egg down to $400K – ouch!
And if you are pulling and spending – like out of an IRA – that’s before we look at taxes and inflation.
So if your nest egg tracks the last 16-year climb from tech crash to breakeven, your nominal return – before inflation – would be about 10.6% a year (Sounds good if you forget you are digging out from an 80% loss!).
If we adjust for not the mega-inflation I fear but just the 5% annualized from the recent read, the actual return – before taxes! – is about 5.5% (for you nerds, from real return = (1+ nominal return)/(1+ inflation) -1 which is near enough return – inflation rate for most of us!).
If we then take that nest egg with that real return and assume you pay today’s highest income tax rate of 37% – which is before any state income tax and I think much lower than future rates on “fat cats” like those interested in reading this article – we get some ugly news.
If someone did that at 65, and say, lived to 85, and spent both return and principal, leaving nothing for the kids or even a surviving spouse, here’s what the annual “pension” number would look like:
$31,726 before taxes.
$19,987 after taxes.
Jiminy Cricket, that’s scary!
I bet even five times that amount would leave you scrimping!
Surely, I hope that I am wrong. But in all my decades studying and practicing wealth management, I have never, ever seen the sky so dark.
1. Embrace the sort of tactical trading ethos that could enable you to not only skirt the devastation, but actually prosper through the carnage. Most advisors and securities administrators are clueless on this skill set, but in my view your asset allocation needs entirely new thinking to get you through this storm.
2. Study and accumulate the sort of assets that are likely to withstand and grow through inflation. And please, don’t knee-jerk yourself punch-drunk by saying real estate. That’s so 1970’s, and Covid-19 has Zoomed much of the real estate pantheon into the same barn where they keep the buggy whips.
3. Master your tax profile! Taxes is indeed the master wealth skill, and the reason that as a PhD – where I thought to finish my 40 years of higher education – I am now getting a Masters in Tax Law from Georgetown Law. There is no bigger club in the wealth toolbox than tax. I have made a lifelong study of it, and even I feel compelled to sharpen the saw.
This gathering triumvirate of dark lords – market bubble, hyper-inflation and confiscatory taxes – is so dangerous, and so urgent, that I have authored and will teach a dedicated course on it soon through my Family Wealth Education Institute. These classes are free, online, and open to all. I invite you to register, details are here.