January 16, 2020
China’s Gordian Knot
“Only when the world is good, China is good. Only when China is good, can the world get better.”
– Xi Jinping, president, People’s Republic of China
Xi’s message is a sobering reminder of China’s economic ascension. China is still booming, an astonishing 40-year rise from an impoverished nation to the world’s second largest economy. And its success could possibly make the world a better place. For example, China buys vast quantities of raw materials from other countries to fuel its manufacturing engine, and in return, consumers everywhere enjoy products famously labeled “Made in China.” Since the 2008 financial crisis, China also has been a driving force in worldwide recovery and growth. The world’s reliance on China is deepening. But daunting, complex economic challenges loom for this nation of 1.4 billion people. It’s a Gordian knot that could affect us all.
January 8, 2020
Three things to think about going into 2020
1. Brace for market volatility: Stock fluctuations could make 2020 a rollercoaster year. AMG believes economic growth next year will be slightly above trend, but the first six months might be choppy, making markets vulnerable to sharp corrections. Also, America will hold a presidential election in November, and pundits and politicians will most certainly try to persuade everyone that doom is approaching if the other side wins. While the gloom is probably overdone, elections create uncertainty and add to market volatility. Long-term investors need gut checks as to whether they are prepared to handle ups and downs, or whether they would prefer to sit on the sidelines and miss potential upside.
2. Prepare for success: Caution is always warranted when growth is tepid. The economy is on solid footing, and some of the trade uncertainty is appears to be resolving. It’s likely both domestic and foreign economic growth will pick up again through 2020, and that could give the markets a bump. A properly allocated portfolio can weather a downturn, but lost upside may be gone for good.
3. Update your estate: Again, the election plays a role. There is a chance for significant tax reform, including estate taxes. Don’t wait to make significant gifts or change your estate plan. Lawyers may be extremely busy at year-end. If gifting makes sense now, take care of it in the first half of the year.
December 31, 2019
Happy New Year!
A new year (and a new decade) is almost here! New Years is one of the most celebrated holidays around the world, but across the globe people ring in the New Year in many different ways. Here are just a few unique ways in which people welcome a new year.
England: If you are hoping for good fortune you’ll want to know a young, dark-haired male that likes to be early and comes bearing gifts. The British believe that good fortune follows the first guest to arrive through the front door as long as that person is a young brunette male that brings bread (to be full) salt (for wealth) and coal (for warmth).
Denmark: Friendship is measured in broken dishes as the Danish save their old dishes in order to break them on each other’s front doors. They will allow the broken dishes to pile up to show who has the most friends.
Puerto Rico: Get ready to clean. Puerto Ricans will clean their home, car, and even the streets to start the new year with a clean slate. They will also throw buckets of water out their windows to wash away any bad luck of the last year.
Mexico: Is also known to throw water out their windows. They also open the front door to symbolically sweep out the old year. In addition, families will toss coins on the ground and sweep them back into the house to encourage prosperity in the future.
Ireland: The Irish also get into cleaning, but when it gets closer to midnight, it’s tradition to throw bread at walls to chase away evil spirits.
Switzerland: Not into cleaning? Maybe Switzerland is a place to be as they are known to drop whipped cream on the floor and leave it there. It is said to bring a year of overflowing abundance.
Peru: The Peruvians will put three potatoes under a chair. One potato is peeled, one is partially peeled and one is left unpeeled. At midnight a person chooses a potato with their eyes closed for a prediction of the future. If you pick the one that was not peeled you will be prosperous, the one that is partially peeled means you will have a normal year and the one with no skin means you will not have money.
Estonia: You won’t go hungry in Estonia on New Years. Traditionally people will eat seven, nine, or twelve meals a day with the goal of having abundance in the next 365 days. These are considered the luckiest numbers, and if you find yourself stuffed, it’s okay to leave some food on your plate for the ancestral spirits.
Brazil: Lentils are the food that help with finances in the New Year. The number 7 also holds a special place for many different traditions and is considered a lucky number. You may eat 7 grapes for abundance, chew 7 pomegranate seeds to ensure a wallet full of money, or jump over 7 waves in the ocean and for each wave you make a wish for things in the coming year.
Spain: In Spain people will eat 12 grapes (one for each bell chime) at midnight. If you don’t, you may miss out on extra luck in the new year.
No matter how you celebrate the New Year we wish you a prosperous one!
December 13, 2019
Socially responsible investing: voicing your opinion with your wallet
QUESTION: I am worried about the world my grandkids will live in and want to invest in companies that are really trying to make a difference. How can I do that?
ANSWER: After almost a decade of economic and market improvement, many investors are looking for ways to use their wealth to improve the world or, at the very least, make certain their wealth is not doing harm. While philanthropic endeavors are certainly worthwhile, investing in companies that strive to do good while doing well is another way of making the world a better place.
This mindset has created a rise in socially responsible investing. In its early form, such investing focused on avoiding companies that sold questionable products and services such as tobacco and gambling. In its latest form, socially responsible investors evaluate which companies to back based on a variety of metrics, including environmental impact, workforce diversity, community involvement and ethical corporate governance.
December 5, 2019
Headlines – What’s Important
What worked well yesterday may not necessarily do so tomorrow. Paying attention to risk is just as important as focusing on returns. Most equity markets have done very well in 2019 and are close to or at all-time highs. The uncertainties that we currently face, require prudent diversification in areas that have not performed as well as the broad markets but provide good upside potential and downside protection. Here are the important headlines that AMG sees for Q4.
1. Do Not Worry About a Recession
Recession risks are elevated, roughly in the range of 20% to 35%, judging by the estimates of those that do such handicapping. Even at face value, that is far from 100% and the chance for a recession that repeats the severity of the 2008-2009 experience at this point is remote.
2. Fed Interest Rate Cuts are in the Past
The Fed’s “mid-cycle adjustment” is complete. The federal funds rate target will probably be unchanged over most, if not all, of the coming year, and the next Fed move likely will be an increase.
3. Be Wary of High-Yield Bonds
In spite of apparent liquidity in the high-yield credit market, indicators of stress have emerged. Capital outflows from the market could amplify stress, warranting investor caution.
4. Globally Diversify Equity Portfolios and Tilt Toward Value Stocks
Diversification helps mitigate risk in an environment of heightened uncertainty, and the valuation and expectations gap between value and growth stocks, globally, remains substantial.
November 27, 2019
As the holiday season is upon us, remember that wealth transfer is not always about finances; sometimes it’s about passing on treasured family recipes. In the season and spirit of sharing, we would like to share a couple of our families’ favorites. Enjoy and Happy Thanksgiving!
November 21, 2019
Assisting adult children financially requires care
QUESTION: My adult children aren’t as well off as I am, and I want to help them out financially. How much should I help them, and how can I best give it to them?
ANSWER: Children’s ages and income potential all play factors, so parents should carefully consider how such help will affect their kids emotionally and psychologically, as well as financially. Research suggests that access to too much money in your 20s can ruin your work ethic and take away the sense of accomplishment that comes from creating your own success. However, when you hit your 40s, your career path and work ethic are more cemented.
That being said, your children might not have read that research report. Some will ignore extra money and save it, some will spend it as fast as they get it, and others might become completely dependent on it. Sometimes allowing children to struggle financially can be more valuable than the gift. In other cases, children choose worthwhile career paths with little financial upside, such as being a teacher, where a little extra to help with bills and mortgages removes financial stress.
There are also stealthier ways of helping, such as contributing to a grandchild’s college education fund. This provides no extra income to the parents, but it alleviates a huge future liability. Or parents can loan money for a home purchase. But before you help out, follow these rules:
- Check with your AMG advisor ahead of time and understand how much you can afford to commit.
- Be clear with your children on how much you intend to give and when.
- Make certain the children have a sound plan for the extra money and will be financially responsible.
The key to all of these strategies is to know your children, and communicate your intentions while they communicate their needs. These can be uncomfortable conversations, but they are necessary and are the precursor to better estate and intergenerational-wealth planning.
November 14, 2019
Philanthropy can be a family affair
Many people are discovering charitable giving is a great way to strengthen family bonds while teaching children and grandchildren about their family’s values and traditions. A number of AMG clients have made philanthropy a family affair and are cultivating the next generation of donors and building social awareness at the same time. Here are some tips:
- Talk to your family about what matters to you – and them. Tell them why and how you choose to support certain charities. Ask them what charities and causes they are interested in and why.
- Encourage them to create their own tradition of supporting a needy cause by volunteering and donating annually.
If you have created a foundation or donor-advised fund:
- Ask family members to share in the foundation you have created and involve them in the foundation’s investment management.
- Assign a set dollar amount from which each family member can direct distributions for their own charitable giving. These family members, under your foundation, are creating a charitable tradition of their own.
The AMG Charitable Gift Foundation can help you create a family tradition of philanthropy and a lasting legacy.
November 7, 2019
Dollar Shortage Drove Bank Funding Stress
Money markets were roiled in September due to a spike in borrowing costs in the Federal Reserve’s multi-trillion-dollar overnight repurchase facility. Banks use this overnight “repo” facility to trade U.S. Treasury bills for short-term cash. The spike in borrowing rates occurred because there wasn’t enough cash to go around.
The drying up of liquidity in the repo market is the result of a combination of factors. First, the yield curve in the United States had been inverted for much of the year, meaning the rates on short-term Treasuries were higher than the rates on long-term Treasuries. In this situation, foreign central banks typically shop for the highest rates possible, selling long-term Treasuries and buying short-term Treasuries.
In recent years, however, foreign central banks have struggled to find enough short-term Treasuries from private commercial banks, so they have turned to the Fed’s uncapped foreign overnight repo facility for short-term collateral. This led to cash flowing out of the system and not being replaced. The foreign repo facility saw nearly $100 billion of inflows since the end of last year, which pulled a significant amount of dollars out of circulation.
At the same time, the U.S. Treasury Department has been running record deficits this year, selling hundreds of billions of dollars of Treasury securities and removing even more money from the system. Based on the Treasury Department’s anticipated funding needs, it will likely have to take hundreds of billions of dollars more by yearend.
The cash shortage in the repo market forced the Fed to step in and inject additional reserves into the banking system. It also likely contributed to the Fed’s decision to reduce short-term interest rates twice since September, which removed the yield curve inversion for the time being.
While this fix has calmed money markets for now, many experts are calling for a longer-term solution. Such a solution might involve the creation of a standing repo facility that covers all of banks’ short-term funding needs at a fixed rate. The Fed will also likely keep an eye on the yield curve inversion, aiming to reduce the incentive for foreign banks to drain more dollars from the vital short-term funding market.
November 1, 2019
Reduce your stress; plan for long-term care
QUESTION: Should I have long-term-care insurance or just plan on paying for it myself?
ANSWER: Long-term care is one of the most difficult topics in wealth management. Talking about death is uncomfortable for most people, and positively scary for others. It’s also a daunting task, full of difficult choices. Costs vary greatly depending on the type of care—in-home, assisted living or nursing facility. Assisted living in a senior community can be relatively affordable, high-end nursing-care facilities can cost over $140,000 a year, and in-home care can be substantially more expensive than that.
Some folks have enough assets to pay for their own care without burdening their spouse or heirs. Others want options. The long-term-care insurance industry now offers several choices.
- Traditional policies used to be the most common but have lost popularity in recent years due to cost. You pay premiums on a continual basis, and if you die without needing long-term care, no benefit is paid. There are riders that can be purchased that will return premiums paid if they exceed the benefits used.
- Hybrid policies are a combination of life insurance or annuity with long-term-care insurance. Many varieties are available. Some policies allow you to pay one lump sum in advance, with no other premiums owed, and return the initial payment if the benefits are unused. In other cases, the death benefit can be accelerated to pay for care, or a cash value is built and can be used to pay for benefits.
Whether you self-fund or purchase an insurance policy, there will be tradeoffs. While there is no one-size-fits-all answer, the smart path is to reduce your anxiety and uncertainty by joining those who have a plan.
October 24, 2019
What happened to my IPO?
AMG noted in January that a wave of initial public offerings (IPOs) could lead a number of unicorns—private, venture-backed companies with valuations in excess of $1 billion—to begin trading in the public markets. Indeed, that happened: Pinterest, Lyft, Uber, Slack, Peloton and others went public this year. Overall, the IPO market performed well through midsummer. Renaissance Capital’s IPO index in July was up over 40%, nearly double the return of the S&P 500. However, many high-profile, newly public companies began selling off starting in August. The IPO index declined, leaving it up 22% in October, still above the S&P 500, but only by a couple of percentage points.
Despite positive performance in aggregate, some high-profile venture-backed companies are now trading below their IPO price and some are below their last private market valuation. Several companies have pulled their plans to list publicly. Notably, WeWork pulled its IPO after tepid reception to its S-1 filing and its CEO resigned under intense scrutiny of his business dealings. This has led to questions about the health and viability of high profile yet still unprofitable venture-backed companies. Some have wondered if those companies waited too long to go public, while others have speculated that the venture model is broken.
Private markets are marked by inefficiencies. This makes it an attractive asset class. However, the same factors that drive inefficiencies can lead to irrational markets. This has been evident in late-stage venture funding for unicorn companies. Conversely, public markets offer efficient market pricing. While at times public markets can act irrationally, liquidity will allow for rational pricing over time.
As long as private companies become public, pricing adjustments will occur and investors are seeing that now. Ultimately, successful venture investing is driven by innovation and the drive of entrepreneurs to bring novel ideas to the market. Recognizing those trends before they are obvious, along with patience, determination and discipline, allows for successful long-term returns.
October 17, 2019
Risks are elevated, but recession not most likely outcome
A string of disappointing economic reports has heightened recession concerns. Weakness in manufacturing activity is a particular worry. For instance, the latest Purchasing Managers’ Index, compiled by the Institute for Supply Management, suggests that the manufacturing sector is now contracting. There is additional concern that weakness in manufacturing is spilling over into the economy’s larger service sector. Though still expanding, service-sector activity has clearly lost some momentum. Meanwhile, growth of both payrolls and consumer spending has also slowed. International trade has weakened, and owing largely to tariff- and trade-policy uncertainties, capital spending by businesses has fallen. On top of that, some financial market data, such as the Treasury yield curve, are flashing recession signals.
It is hardly surprising then, that economic forecasting organizations have been busy raising their estimates of recession probabilities for the coming 12 months, or so. A perusal of a number of such published estimates indicates a range of around 20% to 35%. Taking such estimates at face value, the recession risk is quite substantial, but it is not 100%, and a better outcome is more likely.
There is no question that economic growth has slowed. However, the 3.1% growth rate experienced in the first quarter of 2019 was well above trend and was not going to be maintained in any case. Third-quarter growth will probably be fairly weak (1.5 to 2%), in part due to adjustments that overshoot, as output and demand regress toward trend (a little above 2%) and temporary impediments such as the 737 MAX grounding, the GM strike and tariff issues take a toll.
Looking ahead, the odds favor an improvement in growth. Interest rates are low, and the Fed may yet make another rate cut this year. A subsequent rate increase is unlikely before late 2020. Fiscal policy will also provide support, first to private demand from the 2017 tax cuts and second through government spending due to the 2019 bipartisan compromise federal-budget legislation. Consumer spending will likely soon rebound due to a still-strong labor market and high levels of consumer sentiment, while business fixed investment will likely respond thereafter. Absent a significant adverse external event, the best bet is for real economic growth to be close to trend over the coming year.
October 10, 2019
Growing Risks in U.S. High Yield Credit
The amount of outstanding U.S. corporate debt has increased significantly since the Great Recession, particularly amongst the riskiest borrowers. In a new white paper, Growing Risks in U.S. High Yield Credit, AMG examines the current situation and provides its unique take on the outlook for the U.S. high yield credit market.
October 3, 2019
Value stocks might prove their value yet again
Value stocks struggled to keep pace with growth stocks during the past decade, but now the difference is roughly the same as March 2000 when value last began outperforming growth. The question for investors is whether value stocks have the potential to outperform growth stocks going forward. AMG believes so, although no one knows exactly when the cycle will turn.
AMG’s analysis of U.S. and foreign stocks reveals that value stocks outperformed growth stocks for nearly 40 years prior to the 2008 financial crisis. Sure, growth stocks surged past value at various times during those four decades. The tech bubble that burst in March 2000 is a prime example. But value stocks and value approaches to investing dominated.
This decade, following the financial crisis, growth stocks have been king, and value stocks have only managed one to two years of relative outperformance for the periods ending in 2010, 2014, and 2017. It’s unclear if markets are nearing a decade-long shift during which value will outperform growth, but AMG believes there are certain value equities worldwide that could do quite well going forward. U.S. small-cap value (SCV) stocks are one example:
- SCV performance relative to U.S. small-cap growth (SCG) stocks since the late 1970s shows a massive disparity in total return. A $100 investment in SCV in January 1979 would have grown to $11,109 by last June. This clearly outperforms the $4,069 for SCG and, incidentally, the $8,966 for the S&P 500.
- In each bull market since 1979, SCV on average has kept pace with SCG. And SCV stocks have outperformed in each of the three post-financial-crisis periods of global value-stock outperformance.
- During bear markets, SCV averages less than half the downside as SCG. In fact, during two of the last four recessions, SCV stocks have been flat-to-up while on average, SCG stocks lost 42% and the S&P 500 lost 31%.
In short, all of this means that U.S. small-cap value stocks have the potential to outperform both U.S. small-cap growth stocks and the S&P 500 in a bear market, while outperforming to the upside if value stocks surge.
September 26, 2019
From Cold War to Hot Peace
Are diplomatic relations between the United States and Russia better or worse than at the height of the Cold War? Worse, if you listen to Russian leader Vladimir Putin and President Donald Trump, former U.S. Ambassador Michael McFaul said Sept. 10 at a WorldDenver event in the Dome at AMG in Greenwood Village, Colo. Relations are indeed bad and deteriorating, acknowledged McFaul, who served as ambassador to Russia 2012-2014, but they are nowhere near as ominous as they were in the 1950s and ‘60s when each side had 50,000 nuclear weapons pointed at the other.
“I was scared to death as a kid … I was worried our governments were going to blow up the world,” McFaul said, noting that many young people today don’t even know what the Cold War was. “It was a very scary, scary time.”
Speaking to a crowd of 200, McFaul’s presentation was organized by WorldDenver, a nonprofit organization that promotes a deeper understanding of world events and cultures through the International Visitors Leadership Program, partially funded by the U.S. State Department, that brings roughly 600 visitors to Colorado annually and stages presentations by expert speakers.
September 18, 2019
Inverted Yield Curve and the Economy
Talk of the next U.S. recession has made headlines recently, partly because the yield on 10-year Treasuries has dropped below that of 3-month Treasuries twice this year—once in March and again in August. This phenomenon, known as an inverted yield curve in the bond markets, happens when the rates paid on short-term U.S. Treasury bills exceed the rates paid on long-term Treasury notes. Historically, inversions in the yield curve have been a warning sign that a U.S. recession could be looming. However, AMG National Trust’s (AMG) research suggests that the Treasury yield curve is a far less reliable indicator of a recession today than it was in the past.
Instead, AMG has identified additional key leading indicators that provide an outlook for the U.S. economy. These include: 1) the four-week moving average of initial unemployment insurance claims, 2) year-over-year change in the Conference Board’s Consumer Confidence Index, 3) the share of U.S. banks tightening lending conditions, and 4) the Chicago Fed’s National Activity Index, a broad measure of U.S. economic strength.
These key measures currently indicate that the U.S. economy is healthy—and that no recession is imminent—but they also suggest that a mild slowdown could be possible in the short term. Going forward, the health of the economy will likely depend on how well policymakers at the U.S. Federal Reserve (“Fed”) are able to deal with any such slowdowns and to what degree they can continue to support economic growth. AMG’s research suggests that, as long as U.S. inflationary pressures remain modest, Fed policymakers can keep interest rates low and will likely be able to take the necessary actions to sustain the U.S. economic expansion.
At AMG, our expert and research-driven approach sets us apart from other wealth management firms. It allows us to provide forward-thinking guidance to our clients that enable them to stick to their financial plans and not panic when there is volatility in the economy and markets.
September 5, 2019
Economic growth decelerated in the second quarter of 2019. However, real GDP growth was respectable.
The second-quarter slowdown of U.S. real GDP growth is not a cause for concern. First-quarter growth was unsustainable, while current data show production and labor markets remain healthy. It is true that manufacturing activity has flattened out. However, activity in services remains quite robust. In any case, the near-term outlook for the economy still calls for solid growth. The main driver of domestic demand, consumer spending, is on track for trend growth of around 3.0%. Demand for labor remains strong, and household finances can support additional spending through income growth and lesser savings. Surveys show that consumers maintain a high level of confidence about the economy and their personal finances.
August 29, 2019
Elder trust can give you, your heirs peace of mind
QUESTION: I’m getting up there in years, and I’m worried that I might make a bad financial decision in the future and squander my children’s inheritance, or impair my ability to take care of my own needs. Should I establish an elder trust that safeguards my assets while giving me a fixed monthly allowance?
ANSWER: Each person’s solution to this question is unique, depending on financial means, goals and family. Revocable trusts have many advantages. You as grantor have unlimited ability to contribute and withdraw funds. It is more tax efficient than an irrevocable trust. You can also change the terms of the trust, including the trustee, at any time.
This gives you the ability to appoint a separate trustee, such as AMG or a close family member. The trustee can manage the trust and even use it to pay your bills while still giving you unfettered access to the account. While the separate trustee does not have authority to prevent an unwise withdrawal on your part, they are in a unique position to spot erratic behavior and inform you. Of course, the flexibility in the revocable trust is also its main drawback. The ability to withdraw money, change the terms and fire the trustee at will leaves it open to many of the problems you are trying to avoid.
The irrevocable trust has more built-in protections but is less flexible because it’s very difficult to change any provisions once created. However, most people can build enough access to get comfortable with irrevocability. An independent trustee would manage the trust. The trust could be discretionary only, meaning the trustee approves the distributions based on your needs. It could be non-discretionary, requiring the trustee to make distributions paid at regular intervals. Or it could be both: a mandatory income stream with discretionary distributions based on needs. There is a little more initial work for you as you help the trustee understand your needs, but once the irrevocable trust is in place, the trustee takes over the heavy lifting on distributions, investments and taxes.
August 22, 2019
Pick a trustee you can trust
QUESTION: I want to set up an irrevocable trust to take care of my needs as I age, and I need to pick a trustee. What should I consider?
ANSWER: A trustee has many responsibilities, one of which is making distributions from the trust to you, the beneficiary. Many people want their children or a lifelong friend to serve in this role. These are the people you trust the most. They have an emotional investment in seeing to your needs. While trust is critical, there are other important factors. The trustee has broad responsibilities, including making distributions per the trust document and trust law, managing the investment portfolio and filing taxes. If distributions are made inappropriately, or not documented properly, significant estate and creditor protections can be lost. The trustee can hire experts to help but they need to be sophisticated enough to understand the advice.
The trustee’s personal situation and history also needs to be considered. A trustee close to you in age may run into problems as he or she ages. A trustee with family, marital or career issues might not have time for your needs. If your children are involved, it gets even more complicated. If you have two children, and they are married, you potentially have four different personalities guiding your trust, and it only takes one of them to create a conflict.
Another option is a corporate or professional trustee. They usually are good at investing prudently, following the trust document, filing taxes and making certain all decisions are well documented. One disadvantage is the trustee might be somewhat removed from your personal situation and slower to respond to your changing needs.
A popular option is a combination of the two. Have a corporate trustee and personal trustee serve as co-trustees. The personal trustee serves to help the corporate trustee understand your needs, especially in the case of discretionary distributions, while the corporate trustee takes care of the investment strategy, tax filings and documentation.
August 15, 2019
Worried about identity theft? Freeze your credit report
If you’re concerned about identity theft, corporate data breaches or someone gaining access to your credit report without your permission, consider freezing your credit report. A credit or security freeze is designed to prevent a credit-reporting company from releasing your credit report without your consent. That makes it difficult for identity thieves to open accounts in your name because most creditors want to see your report before approving new account.
A credit freeze does not affect your credit score or prevent you from getting your free annual credit report. To place a freeze, you need to contact each of the nationwide credit reporting companies: Equifax (800-349-9960); Experian (888.397.3742); and TransUnion (888.909.8872). Fees vary based on where you live, but usually range from $5 to $10.
Usually, a freeze remains in place until you ask the credit-reporting company to temporarily lift it or remove it altogether. There is a fee for that as well. You can ask for the freeze to be lifted for a specific credit application or for a specific time period, from one day to one year.
August 8, 2019
I have a big retirement fund, so why don’t I feel secure?
Retirement can be difficult for productive people who have been saving and investing most of their lives. Taking money out of savings, instead of putting it in, feels irresponsible. It can take several years to get comfortable. Fortunately, planning helps.
The first step is to figure out what’s your life endowment — the amount of money needed for living expenses over the rest of your life. If your life endowment is $5 million and you have $8 million, that’s great news. Not only do you have extra, but the excess is likely to grow over time, and you can plan how to allocate these legacy assets. Will you use the funds to help your family, the community or your alma mater?
The question is harder if you need a $5 million endowment and only have $4 million. How do you make up the deficit? You could work a few years and allow the assets to grow. But if working is not an option, you have more difficult decisions to make. You can cut back expenses, so you need less of a life endowment. But that could leave a significant amount unspent. That might be great news for your heirs, but you may miss out on great life experiences.
Another alternative is to follow a glide path, slowly spending down your assets to a pre-determined floor before you cut expenses. It allows you to live a fuller life while you are able. Having a plan in place and monitoring it provides the courage and comfort that, while the assets may decline, you will never run out.
August 2, 2019
AMG Insights on Iran – Part 3: Global Energy Supply & Iranian Oil
July 31, 2019
AMG Insights on Iran – Part 2: What is the U.S. After Now?
July 29, 2019
AMG Insights on Iran – Part 1: Iran/U.S. Relations
Recently AMG had a conversation with Ambassador Chris Hill to get his insights on the escalating Iranian tensions. In this three-part series we dig deeper into the current nuclear deal with Iran, newly imposed sanctions and their impact, global oil supply and how this issue may be resolved.
July 19, 2019
Fed hints at a non-essential rate cut in late July
The U.S. economy last month set a national record for the length of an economic expansion. Currently, the unemployment rate is a low 3.7%, and the number of job openings exceeds the number of unemployed persons by about 25%. Average wage rates have been gradually moving up, recently at a pace that is about a percentage point faster than consumer-price inflation. A wage-price spiral is not at hand, but various trend measures of annual consumer price inflation are above 2%. Second-quarter real GDP growth will come in below first-quarter growth. However, that will be largely due to a swing in inventories. Second-quarter growth in real final sales to domestic purchasers appears likely to have been in the range of 2.5 to 3%, or nearly double the first quarter’s growth.
At present, the Federal Reserve (Fed) maintains a target range for the federal funds rate of 2.25 to 2.5%. History would suggest that the Fed should continue its recent policy path—gradually tightening monetary conditions by raising its target rate. So what do financial-market participants think the Fed will do at its July 30-31 meeting? Recent interest rate futures prices place an implied probability of about 90% on two or more interest rate cuts before yearend, a 60% probability on 3 or more cuts, and a 20% probability on 4 or more. Judging from the minutes of the Fed’s latest monetary policy meeting and its formal post-meeting statement, Fed policymakers have become considerably more amenable to a rate cut. The icing on the cake came in early July when Fed Chairman Jerome Powell strongly hinted during congressional testimony that a rate cut could be forthcoming shortly.
The Fed’s rationale for a shift toward a more dovish stance is the risk that uncertainties related to foreign growth, international trade, low inflation, and the federal debt ceiling (which could be hit in September) could yet cause a serious impediment to economic growth, and that a near-term easing of monetary conditions could be a form of insurance against that risk. In AMG’s view, however, global growth is already at or near bottom, U.S. economic expansion will sustain a reasonable growth trend (about 2% near term), wage growth will continue to accelerate, and inflation will not stall out below 2%. An easier monetary policy in 2019 is not needed and, if implemented, will probably be reversed in 2020.
July 10, 2019
Innovation’s next wave: software inventing software
“Software is eating the world.” Marc Andreessen, founder of Internet pioneer Netscape, made that prophetic statement in 2011, and it’s even truer today. Seven of the world’s biggest companies today are technology firms, up from three just eight years ago. But sustaining that rapid growth is becoming more difficult as the labor pool shrinks for computer scientists, and software engineers and developers. The unemployment rate for technology workers hit just 1.3% in May. Hiring development talent has become one of the greatest challenges for growing technology companies.
Eric Norlin of SK Ventures, a venture-capital manager with whom AMG works, recently speculated that software itself might offer the solution to the software-developer shortage. He noted that software already is helping invent new software and the trend is bound to accelerate as companies look to alleviate bottlenecks in development. AMG works with venture capital funds owning interests in several companies innovating in this field, including the following:
- InVision – a prototyping and collaboration tool that helps web engineers and designers more efficiently develop interactive mobile and desktop landing pages.
- LaunchDarkly – a computer-coding tool that any business can use to test, manage and improve software features. The platform allows companies to make different features available to select groups without shipping everything to everyone at the same time.
- Torii – a cloud-based management platform that helps IT managers discover, audit and control software-as-a-service apps used by employees.
- Coder – A cloud-based development platform that allows programmers to collaborate on the same code in real time.
June 20, 2019
Storm clouds gather, dissipate, gather again
AMG’s latest Notes on the Economy cited the emergence of a few green shoots in a field of weakening global economic data. However, more recent economic news has been decidedly mixed, and negative factors have attracted headlines, raising the question of whether the green shoots will lead to continued economic growth or be crushed by the hail of unfavorable developments.
June 13, 2019
Outlook for the U.S. Economic Expansion
The recent inversion of the 10-year – 3month U.S. Treasury yield curve—historically a warning of a U.S. economic recession—is a far less reliable indicator today than it was in the past. In a new white paper, Outlook for the U.S. Economic Expansion, AMG explains why we believe this indicator is less reliable today and identifies other key leading indicators that help provide an outlook for the U.S. economy.
June 6, 2019
Why has inflation remained so moderate while unemployment has dropped so low and overall economic output appears to be straining capacity?
One prominent reason is that inflation is extremely dependent on the public’s expectations of what inflation will or should be. Further, expectations are anchored in past experience and generally do not change quickly. Another reason is that labor force growth has outpaced demographic projections. A third explanation is that labor productivity growth has offset some of the increases in labor costs. Nonfarm business labor unit costs have seen a five-year annualized increase of only 1.1%.
May 30, 2019
Impact of China/U.S. Trade Dispute
There are plenty of downside risks to the global outlook. The most recent headline grabber is the ongoing China/U.S. trade dispute. The imposition of additional tariffs would, of course, create a drag on growth for both parties. For example, the maximum threatened additional U.S. tariffs on Chinese products would raise about $105 billion in annual taxes or about 0.5% of U.S. GDP, and that assumes (falsely) that U.S. buyers do not switch to any non-Chinese products. So, the main immediate direct risk to U.S. growth would not be more than a few tenths of a percentage point, and the effect on global growth would hardly be noticed. There are potential secondary impacts of the tariff dispute, such as possible disruptions to global supply chains, postponed investment decisions, deterioration of consumer and business confidence, and adverse impacts on global financial markets. Their effects on growth are harder to ascertain and could be significant, but we do not think the “trade war” will sink the US economy.
May 23, 2019
Can moving to a new state save me from high state taxes?
QUESTION: Now that the federal deduction for state and local taxes is gone, should I consider changing residency from my high income-tax state to one with lower or no state taxes?
ANSWER: It depends on whether you plan to actually move or if you are just switching residency between homes you already own. If you plan on moving, in addition to the social and lifestyle implications, you must take into account all of your taxes and cost-of-living adjustments. Most states with low income taxes make it up with higher property and sales taxes. There are plenty of online calculators to help determine the difference. If you are thinking about switching residency to a second home, be aware that it involves more than just declaring a change on your tax return. Many states are aggressive about pursuing people whom they do not believe have actually left their state.
Here’s some steps to help show you have moved:
• Document that you have spent at least 183 days out of the state you are moving from. This is critical. If you spend half a year in a state, it will claim you as a resident.
• Change your voter registration and driver’s license to the new state.
• Join social, religious and community organizations in your new home state.
May 16, 2019
Defined-Maturity Funds can help build a bond ladder
Many investors are discovering an innovative way to invest in tax-free municipal bonds. Defined-Maturity Funds (DMFs) focusing on muni bonds are funds that mature at predetermined dates and seek to provide federally tax-exempt monthly income.
The key benefits of DMFs:
• Mature like bonds while offering monthly interest payments.
• Diversification and low cost of an investment fund.
• Ease of trading and daily liquidity. They can be sold at any time.
• Easily laddered with yearly options.
A laddered bond portfolio takes individual bonds maturing in different years to build a portfolio that consistently provides matured proceeds, a helpful feature for many investors. While the principal returned at a DMF’s maturity varies from the original investment because of inflows and outflows into the fund, the difference will generally be lower than potential changes in a typical investment fund without a defined-maturity date.
May 9, 2019
Opportunity Zones offer big benefits, huge challenges
The Opportunity Zone investment program ushered in by the 2017 Tax Cuts and Jobs Act provides an unprecedented ability to reduce capital gains taxes. If an investor realizes and rolls a capital gain into a Qualified Opportunity Fund (QOF) this year and holds the investment for 10 years, he or she gets a step-up in basis on the original gain of 15% and pays no capital-gains tax on the new investment. These benefits could boost after-tax returns 2 to 6%, depending on the investment.
May 2, 2019
China’s “total social financing” influences economies globally
China’s financial influence has grown so fast and vast that its economic oscillations affect not only emerging markets around the globe, but also those in the United States and the rest of the developed world. Over the past 12 years, China has been seeking a more balanced economy, reshaping it away from manufacturing toward a more consumer-driven model in an effort to soften economic highs and lows. It has been a rocky transition at times. So the communist nation’s policymakers have been providing economic stimulus when facing financial crises. They have done so using a tool called “total social financing (TSF),” a broad measure of credit and liquidity in the economy. If economic growth slips too low, the centralized government has infused more cash into the monetary system using TSF.
April 22, 2019
Has the next bubble arrived?
Recently we were asked “Has the next bubble arrived?” prompted after a recent column by Robert J. Samuelson in the Washington Post. The column references the work of Eugene Steuerle of the Urban Institute and his warning “that the economy might be on the edge of a giant ‘wealth bubble’ that will collapse with possibly dire consequences.”
April 11, 2019
Slow but stable economy should churn on after setting economic-expansion record
The United States is on track to set a national record this summer for the length of an economic expansion. How long it may continue after that is anyone’s guess. Nearly a dozen countries in recent history have experienced expansions that have lasted 15 years or more; so it is conceivable that U.S. growth could continue for several more years.
So what will end this expansion? Click here to learn more.
April 1, 2019
Analytics can sometimes blind investors to reality
Common sense and the stock market: Some folks would suggest that’s an oxymoron. But AMG maintains that’s what’s needed to preserve and build a portfolio over time. Years ago, Warren Buffett suggested that measuring his return on equity was a reasonable way to judge his company’s success. His thinking was simple: If he could get a 9 to 10% average return while reinvesting the bulk of the profits, Berkshire Hathaway’s stock price would eventually reflect that and double every seven years. It seemed like a reasonable formula for determining success.
March 21, 2019
Finding help and financial security in the gig economy
Do you have a child, grandchild or other close relative working in the gig economy, the temporary labor market of short-term contracts or freelance work as opposed to permanent jobs? Do they have a plan for financial security? If not, encourage them to develop a relationship with a local banker, preferably one you or another family member already know and trust. The gig worker can benefit from the banker’s experience with known family members when it comes to assessing their financial needs.
March 14, 2019
What’s the biggest mistake investors make?
Buying high and selling low. Investors are plagued by human psychology. As a species, we learned to survive by paying close attention to recent events and assuming those events will be repeated. This strategy worked well for hunter-gatherers who quickly learned to flee from rustling bushes and to avoid eating white berries.
Unfortunately, in investing scenarios, this psychology leads many of us to buy stocks after share prices jump based on the assumption they will rise again. Similarly, we want to sell stocks after a price drop, thinking they will continue falling. This behavior leads to markets going on long runs either up or down based strictly on investor psychology. To make matters worse, many professional short-term traders are aware of this and jump on these trends, extending the movements even farther.
How does an investor cope with markets plagued with irrational decision makers? Any trend that can’t continue forever won’t. Eventually, markets revert to their long-term fundamental values. The key is to work with your advisor and examine every investment’s long-term potential. Then, have the courage to take some profits when stocks are rising and buy when the market is falling. This might cause some heartburn because it’s counter to our instincts, but that’s okay. You’re human after all.
March 7, 2019
Unicorns might run wild in 2019
Ride-sharing competitors, Uber and Lyft, are planning to drive their competition from the roads to the stock market in 2019, as each looks to shift from privately held to publicly traded. These moves could set off a wave of initial public offerings (IPOs) this year for several other high-profile unicorns—private, venture-backed companies with valuations in excess of $1 billion. Unicorns also working toward IPOs this year include Airbnb, Pinterest, Postmates and Slack.
February 26, 2019
Fed Chairman Powell Says Labor Force Participation Rate Key For Widespread Prosperity
In his February 26, 2019 Congressional Testimony, Fed Chairman Jerome Powell cited Labor Force Participation Rate (LFPR) as one of the key factors for increasing widespread prosperity in the United States. The Chairman cited the fact that the United States lags its peer group in LFPR, especially among young, uneducated men, as one of the main mitigating factors to such widespread prosperity. “It is a problem here that stands out relative to other countries.” Powell emphasized the need for legislative efforts to encourage work via retraining and eliminating disincentives for participation saying, “Incentives do matter, and if you go back to work, your pay should only go up.” A recent AMG White Paper, Wanted: GDP Growth at 3% or Higher; Needed: Higher Labor Force Participation Rate, helps to explain the concerns of the Fed Chairman and suggests some policy initiatives that Congress might want to consider to get people back to work.
February 21, 2019
Record junk-debt levels could mean trouble in downturn
Low interest rates since 2009 have driven yield-starved debt investors into riskier assets. The high-yield credit market now totals nearly $3 trillion split between high-yield bonds and leveraged loans. The growth of these markets has been spurred by a plethora of nonfinancial corporate debt, which stands at its highest level in U.S. history.
Click here to learn more, and look for an AMG white paper coming soon.
February 14, 2019
If China stimulates its economy, emerging-market equities might rally
Many emerging-market equities have more or less gone sideways since recovering from the 2008 financial crisis. Much of this price stagnation has been driven by China’s slowing economy, which dominates emerging markets in two ways. First, China’s economy is huge, and its equity market makes up 30% of the MSCI Emerging Market Index, a leading measurement of performance. Second, up until the early 2000s, emerging economies did business mainly with developed economies. But now emerging economies do business primarily with each other, and China is the nexus. Thus, any economic hiccup or government stimulus in China permeates emerging markets.
February 7, 2019
U.S. economy should slow in 2019 but keep on chugging to growth record
The U.S. economy is the little engine that could—it just keeps chugging along uphill. “I think I can. I think I can. I think I can.” And it shows no signs of derailing anytime soon. In fact, Americans this summer are likely to see the longest boom in U.S. history—a decade of continuous GDP growth. AMG National Trust Bank doesn’t anticipate a recession in 2019, although we expect growth to slow down a bit through 2020. It makes one wonder why America has all this sustained growth. Some reasons are obvious and some are not.
January 31, 2019
Sustainable investing allows investors to align their values with their investing.
How do you employ your capital? Do you invest in equities and bonds, or donate to charities and philanthropic endeavors? Many investors do both to achieve two different goals: financial returns and giving back to their communities. For those investors, these two goals represent mutually exclusive uses of their capital. Sustainable investing is a growing type of investing that may offer certain investors the ability to invest with both goals in mind. Similar investing is sometimes called Socially Responsible Investing or ESG (Environmental, Social and Governance) Investing.
January 25, 2019
Government shutdown should have little economic impact, unless…
The U.S. government shutdown—while disruptive to the lives of some 800,000 federal workers and bothersome to
millions of Americans in general—should not materially affect America’s 2019 first-quarter economic growth.
But the longer it continues, the more impact it could have. Click here to learn why:
January 17, 2019
Understanding Blockchain and Cryptocurrencies
Is the end near for Bitcoin and other digital currencies? What about the new technology on which they operate: blockchain? A new AMG Special Report, Understanding Blockchain & Cryptocurrency, delves into the technological, regulatory and market forces impacting blockchain and cryptocurrencies, and tells investors what to expect going forward.
January 10, 2019
Wanted: GDP Growth at 3% or Higher; Needed: Higher Labor Force Participation Rate
The U.S. Labor Force Participation Rate is expected to decline as the baby boomer generation retires, and key groups of workers, including prime-age men, are dropping out at alarming rates, threatening GDP growth. How can the U.S. increase its Labor Force Participation Rate to mitigate these trends? AMG’s white paper, Wanted: GDP Growth at 3% or Higher; Needed: Higher Labor Force Participation Rate, suggests that public policy solutions can help, with significant implications for investors.
January 3, 2019
Finding Value in Active Management
What can investors expect from active management? AMG’s white paper, Finding Value in Active Management, examines historical trends and reviews key items investors should consider when researching active managers.
December 27, 2018
Questions to Ask Yourself About Managing Your Wealth
Now that you have worked hard and have accumulated wealth, worrying about how to manage it and coordinating all the various advisors may have become burdensome. Knowing how all the “pieces fit together” can give comfort that allows you to enjoy what you have and may continue to create. If you are a little uneasy, taking an inventory on your wealth relative to who you are and your goals could help to put your mind at ease. AMG’s wealth management questions are intended to help you confirm your strategy in creating a strong wealth management plan, so you are well positioned for the future.
December 21, 2018
Building a Sound Financial Future
Taking a few moments to assess how you feel about your financial future can lead to a stronger commitment to finding the direction and focus needed to determine your financial goals and ultimately financial success for you and your family. AMG has found that creating a comprehensive financial strategy is one way to meet your goals, and while there are no guarantees about future financial success, you are more apt to meet your financial goals with a strategy. AMG has a simple quiz to help assess how well prepared you are for your financial future.