Month: October 2023

Production is the engine that powers an economy and enables wealth-building. Capital is the fuel on which the engine of production runs, which we’ll call dollars. Interest rates represent the cost of dollars, meaning, the “rent-rate” to place dollars in the hands of producers to keep businesses producing. It is financially beneficial for businesses to borrow dollars only when the borrowed dollars are invested productively (after expenses, taxes, and inflation). In a “cash-only” society, interest rates wouldn’t matter so much, but in a highly indebted society, such as America and the world today, they are the most influential factor. That’s why the rate on the 10 Year Treasury bond is widely regarded as the barometer of the global financial system.

The artificially easy borrowing conditions and artificially low interest rates fueled by ‘Fed’ manipulations over the past two decades, culminating in 5,000 year low rates of 0% from 2020-2022,¹ resulted in the biggest debt load America has ever carried, both nominally and proportionately in certain respects. Joel Litman, founder of “Altimetry”, and a respected forensic accountant on Wall Street, recently revealed deep concerns for the U.S. economy and stock market for the next 24-36 months due to the following converging factors:

• $4 trillion in U.S. corporate debt, the majority of which must be refinanced, will mature in the next 36 months.

• A significant portion of this debt is of low credit quality.

• Lending institutions are struggling to make a profit in the present interest rate environment and are tightening lending standards.

• The majority of this debt will roll to a significantly higher interest rate than the rate at which it was last financed.²

The implications of this unique credit market challenge include:

• Small companies are at a disadvantage due to difficulty or inability to issue their own bonds, and must go to the general credit market, often at higher rates, to obtain financing.

• Many corporations, both large and small, with questionable balance sheets, may fail to obtain financing and be forced into bankruptcy.

• Profitability for companies renewing debt at a higher rate will likely be reduced. It’s unlikely Wall Street’s earnings estimates have fully priced-in this issue.

• Higher ‘risk free’ interest on savings attracts investment dollars away from stocks, which can be volatile and at times unpredictable, to safer securities, like Treasuries, CD’s, and Money Funds.

Prudent considerations regarding this credit market challenge are:

• Evidence of a crisis has not materialized, many credible investors remain bullish on stocks, and this is not a cause to panic-sell stocks.

• Focus on big companies with strong balance sheets that have pricing power.

• Maintain stop-losses on a meaningful portion of your equity exposure in an effort to mitigate risk.

• Get a competitive interest rate on all cash savings. Do not accept less than the going rate.

• If present market volatility is keeping you up at night, trim equity exposure to your comfort zone. Make sure your portfolio has sufficient cash to meet 36 months of planned distributions.

• Maintain a long-term perspective on your ownership of great businesses, and if you are able, reinvest all dividends.

I liken the decision to trust a collection of bankers with such incredible powers to hiring a very expensive, very bad mountain guide to lead a very dangerous climb. On the other hand, with the dollar lacking any immediate viable threat to its global dominance, America will survive this credit market challenge, and will likely emerge in a relatively short period to an environment that is quite favorable to business and investing.

Think about it, and may God bless your financial decision-making, Shaun.

“Honor the Lord from your wealth and from the first of all your produce; so your barns will be filled with plenty and your vats will overflow with new wine.” ~Proverbs 3:9-10

1 FRED, Economic Data, St. Louis Fed, October 20, 2023

https://fred.stlouisfed.org/series/FEDFUNDS

2 Joel Litman Webex Presentation by private invitation, October, 2023

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

The safest and surest way to climb a truly big mountain is to halve the load and cache stores of food and fuel deep in the snow between advancing camps for later retrieval. This caching system helps the mountaineer climatize, but it also distributes the weight for a more methodical progression up the mountain, and evades the risk of getting caught in a blizzard carrying 130 pounds of gear, or getting buried under it in a crevasse. Many Americans store the vast majority of their retirement capital in traditional, “yet to be taxed”, accounts, like 401(k)’s, 403(b)’s, and IRA’s, thereby consolidating the period of taxation on all future, fully taxable distributions exclusively to their retirement years. Consider the process, implications, and benefits of strategic Roth Conversions as you thoughtfully distribute the weight of planning your own retirement.

The process:

• Dollars converted from traditional retirement accounts to a Roth Conversion account are taxed as income in the year of conversion.

• Conversions should be accomplished by direct transfer, as opposed to rollover, to avoid penalties for improper procedure. In other words, never have a Roth Conversion check made out to you.

The implications:

• Be sure to know the rates at which converted dollars will be taxed by the Federal government and the state. A small amount of tax planning is involved in every Roth Conversion, so do the work.

• Concentrate conversions to ‘lower-than-average’ income years, especially those between partial retirement and when required minimum distributions (RMD’s) begin, “filling-up” the associative lower brackets with partial conversions. This will maximize income taxed at lower tax rates, a smart move!

• If you are under age 59½, be sure to pay the tax on a Roth Conversion from savings, not from the IRA, which would involve an early distribution penalty and defeat the purpose. Try to always pay Roth Conversion taxes from savings, as this will place more dollars in the Roth account growing tax free.

The benefits:

• Distributions from Roth Conversion accounts are tax free.

• Roth Conversion accounts have no RMD’s, so all conversions effectively reduce traditional retirement assets and future RMD amounts.1 This is especially beneficial to retirees in high tax brackets, and those who are forced to take RMD’s they don’t need.

• Roth Conversions, though taxed at the estate tax level, can be left to heirs income tax free. The Secure Act now requires full (tax free) distribution by non-spousal beneficiaries within 10 years. Educate your beneficiaries so they use the whole 10 years of continued tax free growth, and so they don’t miss the deadline for full distribution.

The cumulative benefit of strategic Roth Conversions to the wealth producer resembles that of the cache system to the mountaineer. Never allow a highly beneficial Roth Conversion opportunity to pass you by!

Think about it, Shaun.

“The prudent sees danger and hides himself, but the simple go on and suffer for it.”  ~Proverbs 2:3

1 Smart Money Minute, “How to Minimize Your Taxes on a Roth Conversion”, October 5, 2023

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.