Tag: Market Update

by Franklin J. Parker, CFA

The Summary

• It is earnings season! This week’s focus will be technology, with Apple, IBM, and Microsoft reporting. The technology sector is expected to report earnings growth of about 5%, however, all of that gain is expected to come from Nvidia. If you factor out Nvidia, analysts expect technology to report 3% fewer profits than last year. Overall profit growth for S&P 500 companies are expected to be flat on average. Financials have been a bright spot, however, with the sector reporting almost 15% higher profits over this time last year.
  
  
• This week we see data on durable goods sales, personal consumption expenditures, and the first GDP figures for Q3. Analysts are expecting GDP to post around 4.2%, which would be a pretty stellar figure and would likely have a mixed effect on markets. Such a high figure gives the Federal Reserve plenty of cover to continue hiking rates. That said, investors have reassessed the Fed’s potential path of rates after Powell’s commentary last week that he feels they have made substantial progress in the fight against inflation.
  
  
• At the end of the day, the fundamental economic data is not particularly good. Unemployment is still low (though rising), and retail sales were very strong last week — the two bright spots in the economy. However, we are entering the fourth quarter of earnings contractions, manufacturing is in contraction, and services are pretty much flat. Borrowing costs are the highest they have been in decades. Bankruptcies have increased 20%+ over last year, and the delinquency rate on subprime auto loans has risen to over 6%, which is the highest level since the data started in 1994. Cracks are beginning to show in the economy. Obviously, healing those cracks would be ideal, but that does not seem likely. More likely is a recession, so investors would do well to build some caution into their portfolios.

The Details

With world events as tumultuous as ever, let’s talk this week about how we can build a robust financial plan.

First, and most importantly: you need to articulate your goals very clearly. What is it you want to accomplish in the world? Do you want to simply maintain your lifestyle? Do you want to work on something meaningful? Do you want to build your business? Do you want to live on a rowboat in the middle of Lake Eerie?

Understanding what it is you want to do not only helps you organize your resources to accomplish that objective, it also helps you understand what things might happen that would derail your plan. That is, the objective defines risk.

Of course, once you have identified the risks in your objective, you can take steps to mitigate those risks. Once you’ve defined your objective, for example, maybe you see that you cannot possibly obtain your goal if you only use a savings account. Cash, in that instance, may be the riskiest investment you can make! Or, perhaps you discover that a bad year in your business is the riskiest thing that could happen. Now that you know, how could we offset that risk?

After defining goals and uncovering the risks which threaten them, you have to constantly update and adapt. Life is not static, your financial plan cannot be static either! Reassessing and re-evaluating — with an eagerness to identify and learn from what didn’t work — is a critical ongoing step.

While this three-step process is simple, this is not particularly easy. Defining goals is actually pretty difficult. Understanding the risks to those goals also takes some mental effort. And, of course, the ongoing execution and response to the real world is very difficult. That’s why it helps to have someone on your side to help. If you don’t have someone, we’d love to chat.

Chart of the Week

This week’s chart is an update to our “Is Life Getting Better?” Index. This chart looks at annual wage growth times total employment (only employed workers see their wages grow, after all), and then subtracts inflation. The absolute number is not the key point, but rather the change. On the upside September’s figure was about the same as August, however, the overall change post-pandemic has been dramatically lower.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• The big news today is, obviously, the attack on Israel. The humanitarian crisis is top of mind and our hearts and prayers go out to all affected by this (and all) war. Oil was the first asset to move, jumping slightly higher on concerns that instability in the region would lead to curtailed supply. Gold also reacted as a safe haven, partly due to the closing of US bond markets for Columbus Day. This is a developing situation and investors should keep a close eye on it.
  
  
• Earnings season starts this week, with the major banks reporting. Factset has forecast a very slight contraction in earnings this quarter for S&P 500 companies, which would make the 4th quarter in a row of declining profits. The last time we had four quarters of earnings contractions was 2019. This week we also see the all-important inflation figures for September. Reuters polling expects inflation to post at 3.6% and core inflation (which factors out food and energy) at 4.1%. These figures will easily move markets as investors try to parse the path of the Fed’s rate policy.
  
  
• The fundamental economic data is not positive. Four quarters of earnings contractions, unemployment is moving higher, the manufacturing sector is in contraction (and services are breaking-even), borrowing costs have increased substantially, and more pressure is on consumers due to higher debt payments. Yet, despite all of this, the US economy has managed to hold on to expansions quarter after quarter. Spending and employment are holding the economy together, so watching those for signs of weakness will be key moving forward.

The Details

Where does inflation come from?

The classic view of inflation, spelled out by Nobel-laureate Milton Friedman, is that “inflation is always and everywhere a monetary phenomenon.” That is by printing money backed by nothing, central banks are the sole cause of inflation in the classic view.

A recent view, espoused by Modern Monetary theorists, suggests that inflation is one of many types of economic dislocations that can occur from imbalanced government spending. Unemployment may rise, or inflation may rise, or business activity may slow — these are all types of economic dislocations caused by government policy with respect to the balance between taxes, spending, and money printing.

My view is a bit nuanced on this topic. In my view, when government prints new money to then spend invest into the economy, it necessarily devalues its currency. However, that devaluation has a lag associated with it — it doesn’t happen immediately. If that currency is invested in projects that grow the value of the economy more than the money-printing devalued it, then there is no inflationary effect.

However, if the spending does not create more economic growth, then you do get inflation.

Just like any other organization of humans, governments can, of course, make productive investments in this way. The difference between government and other organizations is that the incentives to do so are not primary. Thus, governments tend to be less likely to invest in productive projects. Noone pays the cost of being wrong, and ideology (rather than an objective measure of success/failure) tends to dominate.

Identifying the source of inflation is key to defeating it and preventing it in the future. Because the discussion is so closely tied with politics, we struggle to communicate about it clearly and accurately.

We tend to all agree, however, that inflation is definitely a bad thing.

Chart of the Week

One of the many intangible things that policymakers attempt to manage is perception and outlooks. Interestingly, economic optimism has not been this low since the depths of the 2008 financial crisis. There tends to be some overlap between market performance and this indicator, but not as much as you might think. Politically, however, it is telling. When economic optimism has declined substantially, you tend to see a change in political leadership, as indicated in the chart below (red represents a Republican president, blue a Democrat president). As the US election comes upon us next year, it is likely to be a fight with economic optimism as low as it is.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• What a difference a week makes! US stocks sold off 3% last week on the Fed’s commentary. While the Federal Reserve kept rates unchanged, Fed officials communicated that rates will likely need to stay higher for longer than markets otherwise expected — Powell even pointing to another rate hike before year end. Rather than declare “mission complete” the Fed’s tone was more of a “the war is still raging.” With borrowing costs reaching generational highs, investors are beginning to worry about the viability of many companies.
  
  
• The US government is scheduled to shut down starting Sunday if a spending bill is not passed by congress. Keeping the government running has now become a common bargaining chip in an otherwise deadlocked congress, so investors are not particularly rattled by it like they used to be (it does not carry the same consequences as the debt ceiling). If the shutdown stretches on for months then concern will grow, but for now this is more symptomatic of the challenge to get things done politically (more on that in this week’s Details).
  
  
• I am reiterating my view that the current market environment is not favorable. While I have not gotten the “recession is imminent” signals, I do see more downside risk than upside in this environment. I would be more cautious if the data deteriorated further, and I would be more optimistic if corporate earnings, spending, and unemployment improved. At the moment, however, I think we are stuck in a wait-and-see mode.
  

The Details

The looming government shutdown is a symptom of the growth in political polarization over the last 50 years.

Since 1994, according to Pew research, Democrats and Republicans have pulled further apart, with much of that move happening between 2004 and 2014.

Of all the figures, however, it is the number of bills passed by Congress that stands out the most to me. Since 1973, the number of bills passed by Congress has been cut almost in half. While not a perfect proxy, this is a signal (to me at least) that negotiation across the aisle is getting harder and harder.

Why does this matter to investors? Well, investors and businesses are required to make long-term plans. When policy, especially tax and economic policy, are uncertain, making those long-term plans carries more risks. After a general downward trend in the 1990s, we have seen economic policy uncertainty climb fairly steadily, and, while not as high as it was during Covid, economic policy uncertainty has reached much higher levels than what we saw in the mid-1980s.

Beyond the social effects, political polarization has a secondary economic effect that investors are forced to care about. One study found that increases in political polarization resulted in lower long-term business investments and a subsequent economic drag in local economies. While investors have many variables to worry about, increasing political polarization is one that tends to pop up more and more. And, let us not forget, next year is a presidential election year, a difficult time for markets anyway.

While not a primary concern, it does behoove investors to keep one eye on politics (but maybe only one).

Chart of the Week

We haven’t talked about zombie companies in a while. As a refresher: in a nutshell, a zombie company is a business that does not earn enough revenue to cover the cost of its debt. Therefore, zombie companies require constant infusions of cash from investors to stay alive. In 2021, a report by Deutsche Bank estimated that around 1 in 4 US companies were zombie companies! There is lots to say about the disadvantages of so big a number in an economy, but suffice it to say it is generally bad. With rates moving higher and the Fed reversing its decade-long policy of easy money, we have begun to see many companies fail.

Bankruptcy filings have increased by about 20% over this time last year. And, while this may be a healthy signal that many zombie companies are finally on their way out, it is also a strong recessionary signal. Such a move tends to happen just before the economy begins to contract.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• It is Fed week, and markets see a mere 1% chance of the Federal Reserve raising interest rates this week. Core inflation posted around 2% last week (though figures accounting for everything are still high). The European central bank hiked rates by a quarter-point last week and hinted that more is to come. Of course, it is the commentary from Fed chairman Powell that will push markets around on Wednesday.
  
  
• Lawmakers are struggling to put together a budget plan between now and October 1 that would keep the US government from shutting down. This back-and-forth is considerably less dramatic for investors from the debt ceiling showdown earlier this year. By now, investors have grown used to brinksmanship from politicians and many investors shrug their shoulders on a government shutdown with a “been there done that” attitude. Unless a bill is passed by October 1, nonessential personnel will begin to be furloughed.
  
  
• After an initial run higher, stock markets have traded mostly sideways through the summer. This lack of direction is indicative of the mixed economic picture and, most importantly, the mixed outlook for corporate earnings. Retail sales post later this week, which could give investors some confidence as we move into Q4, and the all-important Christmas buying season. Without the Federal Reserve to backstop markets, it will need to be higher earnings to push stock prices higher. Until then, sideways and choppy markets are probably here to stay.
  

The Details

Should you add private investments to your portfolio?

The short answer is “maybe.” The longer answer has to do with your goals and, primarily, your time horizon.

Liquidity is an added risk when investing in private companies (or funds). Once you have put the money into the deal, you cannot get it back without a liquidity event — in essence, the company has to grow and/or find a way to cash you out.

In public markets, when a company is not doing very well, you can simply sell the stock and recoup some of your investment. In private markets, however, that option is not on the table. When a company is not doing well, very often they will ask their existing investors for more cash to tide things over. Of course, if the company goes under, you will have lost your entire investment.

Liquidity risk adds another risk, as well. For goals which require cash on a specified date — say, to fund your lifestyle for the year or to buy a vacation home — private investments create the risk that those funds are not available when you need them because the company has not yet had a liquidity event.

And, of course, there is the classic risk that the deal fails — a more common occurrence in private markets than in public.

In the end, whether private investments make sense in your portfolio is a function of many variables, all of which will be dictated by your goals and objectives. Without a proper understanding of what you need doing, we cannot have a proper understanding of which investments make the most sense to you.

Chart of the Week

One of the most reliable recessionary indicators over the last century has been the 10-year US Treasury yield minus the yield on 3-month T-bills. As you can see in this week’s chart, when this indicator is negative, a recession is not far behind. What we have seen recently is the longest inversion, and its extremity was only surpassed in the early 1980s. While other data continues to be mixed, this is an indicator that I put some weight in and it is flashing a warning sign. The “recession is imminent” signal is not the inversion, however, it is when this indicator moves back into positive territory. Once that happens, it is probably time to batten down the hatches and prepare for the storm.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• Last week’s job and inflation data tempered investor expectation of the economy. The unemployment rate ticked up to 3.8% and there were about one million fewer job openings than last month. Personal consumption expenditures — the Fed’s preferred measure of inflation — posted lower, and about in-line with expectations. Employment is usually the last economic domino to fall, and if this one is falling a recession may not be far behind. Factory orders reported a decline this month. This week’s data includes another look at the services sector, which is expected to continue its barely-above-breakeven trend, but otherwise this is a light data week.
  
  
• Euro-area GDP posts on Thursday, which will give us another read on the health of the global economy. China has been in a slowdown and is Europe teetering on the edge of recession, but GDP is expected to post at a slight expansion (0.3%). With global economies sputtering, as I have talked about for months now, investors may do well to consider getting defensive. If nothing else, hedging might make sense. As always, your goals and time horizon will govern the risks that are appropriate to take.
  

The Details

Last summer, I was having lunch on the shores of Lake Maggiore in Italy with a few other investment professionals, one of whom I had known for several years. A former CIO for a family office, he had left that gig to start some cryptocurrency projects, including a fund and a venture or two in the non-fungible token (NFT) space.

“Man, I’m excited to ask you something I’ve not been able to get an answer to,” I told him. “I’ve followed bitcoin since 2011, I read Satoshi Nakamoto’s original white paper, and I really think blockchain will be an important piece of the future, but I never did invest.”

“Why not?!” he asked with a smirk. He had made quite a bit of money, and he had only been in crypto for a few years.

[Keep reading at Enterprising Investor…]

Chart of the Week

When a country borrows in a currency they do not directly control, budget deficits and total borrowing becomes a very important consideration for investors. Now that rates have risen at an historically rapid pace, governments in the euro-area are feeling the squeeze. This week’s chart shows the large increase in the numbers of “risky” sovereign borrowers in the Eurozone. As the chart shows, current figures comparable to the debt crisis from a decade ago.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• The AI train continues rolling in markets, albeit at a much slower pace. NVDA — the bellwether of the space — posted stellar earnings, yet after an initial pop the stock began to fall. This is not uncommon as speculators tend to “buy the rumor and sell the news” (as the old saying goes). The broader S&P 500 rally also appears stalled, with prices swinging around in search of a catalyst to move higher or lower. In all, the summer has been a boring place for investors — a fact likely to change through the fall.
  
  
• The Federal Reserve had their annual gathering at Jackson Hole, WY this past weekend. Policymakers offered little new commentary on the path of rates and monetary policy. Markets have priced a 50% chance of one more rate hike in the US this year (and a 5% chance of two more). Looking at Europe, markets have priced a 55% chance of another quarter-point hike in September.
  
  
• The big news this August has been the dramatic economic slowdown in China. After a major developer bankruptcy, missed bond payments from a large wealth manager, and poor economic data (in at least one case Chinese authorities simply stopped publishing the data), investors are wondering how long the global growth train can continue with the world’s second-largest economy slowing so dramatically. Cracks are also beginning to show in the US, especially in commercial real estate markets, with borrowing costs skyrocketing and consumer’s pandemic savings nearly exhausted. All that said, consumers have remained strong, as has unemployment. So long as that is the case, I expect developed economies to continue growing.

The Details

By far the biggest challenge when investing is that we are forced to leave the realm of knowledge.

Knowledge is something we acquire with certainty, and, of course, investing is never certain. When investing, we are forced to combine our knowledge of facts, current events, and the past, with our estimate for probable (and improbable!) futures. These futures are what we use to evaluate risks and rewards, obviously seeking to minimize one and maximize the other. Of course, we can minimize risk by only investing when something is known, but that also means that there is little to no money to be made. When investing, risk is the only things that brings reward.

The key, then, is to build a portfolio of reasonable risks — risks that you can afford to take — and eliminate, as much as possible, those risks that you cannot afford to take. Which risks are reasonable will be informed by your goals, your time horizon, and your financial situation; meaning, of course, that what constitutes reasonable risks for you might well be unreasonable for me.

Personal evaluation of what it is you need doing is the lynchpin of this endeavor. Personalized portfolio execution is then the next requirement.

Because of this knowledge/risk dichotomy, I am extremely cautious of anyone who claims knowledge of what is next. We must always speak in probabilities, a fact that also requires us to stay humble and quickly update our views when we are wrong. You can easily go broke being “right” in this business.

In markets, be wrong and be wrong often, but have a plan for when you are.

Chart of the Week

Much has been made of the amount of borrowing done by the US government, and with good reason. Total dollars borrowed by US Treasury is at an all-time high. What is of most concern, however, is not necessarily the absolute value of dollars borrowed, but rather the cost to maintain that debt. Interest payments as a percentage of GDP have spiked dramatically, from 2.5% to over 3.5%. The speed of that change is historic, but the level has been seen before. The early to mid 1980s saw US borrowing costs move to about 5% of GDP. Of course, that came with considerable economic pain and took a decade to reverse, but the silver lining to all of this is that — for once — we are not in “unprecedented” economic territory.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• Earnings season has (mostly) come to a close, and companies have made about 4% less profit than this time a year ago. This is better than expected, but not good in general, as this is the 3rd quarter in a row of earnings contractions. With markets trending higher, we are seeing valuations get stretched in several sectors (looking at you technology!). On the upside, earnings are expected to turn slightly positive in Q3.
  
  
• This week we see data on retail sales (expected to grow 0.4% month-over-month), business inventories, housing starts, and industrial production. As a preview to retail sales: Target is expected to post its first quarterly revenue drop in six years. As I have mentioned (repeatedly), the economic data is fairly tepid, and markets appear to be range-bound for the time being. A firm catalyst is needed to push markets higher or lower. That may come in the form of a credit event, as there are strains beginning to show, both domestically and globally.
  

The Details

Let’s talk about the “off label” uses of life insurance I see circulating on social media.

On social media I often see some really bad financial advice (TikTok and Instagram seem to be the the main culprits — is anyone surprised?). Often, the facts presented are just plain wrong and would result in big trouble with three-letter agencies, like the IRS and the SEC, if it were followed (please don’t take advice from those videos). More often, however, I see people marketing “off label” uses of life insurance — under headings like “infinite banking” and it’s “rich man’s Roth IRA.”

While there are some legitimate use cases for life insurance as something other than life insurance, there are some things you should know.

1. Incentives. Life insurance often pays a commission to the agent of around 80% to 100% of the first year’s annual premium. The agent, therefore, has a very strong incentive to sell high-premium life insurance (whether it is a good fit for you or not). If you are planning on funding a policy for $10,000/year, just remember the agent is about to make $8,000 to $10,000 on that sale. This drastically changes the quality of the advice you get from these folks. (Interestingly, most annuities are subject to the same perverse incentives).
   
   
2. Costs. Life insurance is expensive when compared to other investment vehicles. Typically, insurers charge both variable fees and fixed fees. You’ll have a set annual fee (typically in the $100s), a “mortality charge” which is the actual cost of the life insurance (typically in the $1000s/year, and it gets more expensive as you age), a “load” which is the commission the agent receives on every premium payment, and then there is usually a monthly assessment for the first 10-years. When you look at the actual amount of cash that gets invested after fees, it is probably much less than if you just invested the money normally and paid the taxes.
   
   
3. Marketing Claims. Let me also dispel some marketing claims these social-media types like to bandy about.
   • “It’s a secret the wealthy use to get (or stay) wealthy.” No. Just no. I work (and have worked) with extremely wealthy people. Off-label life insurance is not a strategy they use for wealth creation or preservation. I have never seen it done because the numbers just don’t make sense.
     
   • “Infinite banking.” Also no. Paying big fees to loan yourself your own money almost never makes sense. There are more efficient ways of accomplishing something similar, like investing your cash and then using a security-secured line of credit with a bank, for example.
     
   • “It’s a rich-man’s Roth IRA”. This one is actually kind of true, but you still run into the cost issue. The idea here is that your investment gains are tax-deferred and when you go to make withdrawals, you actually take loans against your policy’s cash value instead — which are tax free “withdrawals.” Is it worth paying 3x to 5x the fees? Almost always not, but running the numbers might make sense.
     

In the end, I advise extreme caution when using life insurance for anything other than, well, life insurance. The misaligned incentives are enough to make me skeptical, but are also to fuel a massive marketing machine. While there are cases when “off-label” life insurance might make sense, those cases are much rarer than the social media “experts” make it sound.

Chart of the Week

When the Federal Reserve specifically mentions your concerts as an influence on the economy, and the Congress of the United States of America holds hearings on getting tickets to your concert, you know you’ve made it big. This week’s chart is a look at the resale value of Taylor Swift tickets versus other artists. As it turns out, tickets to a Swift concert were one of the best investments to make last year (that is, if you could get them!). Her current (and continually-extended) Eras tour is on its way to being the first $1 billion tour in history, and Swift is herself a breath away from joining the billionaire’s club — one of just a few musicians.

Whether you love her music or hate it, there is no denying that Taylor Swift has become an economic force.

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