Things are Looking Up
KFM Update
We had over 50 participants for our 4th What Matters Most: Your Security educational webinar with Jeff Lanza. Cyber security is a growing and ever-present threat, and knowledge is the most powerful tool we can have. Our webinar was helpful as an ongoing effort to keep our clients both educated and alert to many of these threats.
Our guest speaker, Jeff Lanza, was an FBI Special Agent for over 20 years, during which he investigated cybercrime, organized crime, human trafficking, and terrorism. Jeff has lectured at Harvard and Princeton Universities and has written two highly reviewed books. He is also featured in a Netflix documentary about the FBI and he often appears on national television news programs where he talks about the growing threat of cybercrime.
Given his diverse background, Jeff provided us with education to protect ourselves in several different scenarios. We learned how to prevent cyber fraud, email hijacking, secure password storage, wire transfer fraud, preventing identity theft, and more. We received great feedback from participants on the webinar.
If you were unable to attend or would like to share this information with a family member or friend, please reach out to Wyatt at wyatt@kempfm.com to request a link and password. A handout with a lot of valuable information is also available and we would be delighted to pass that on to you if interested.
Capital Markets Update
Thank you for taking the time to read our Special Edition: Capital Markets Update sent to you via e-mail on Monday, March 13, 2023. We had the highest number of “clicks” recorded from this update and we hope you found it informative, useful and timely. If you missed it, click here to read the update. It is also included at the end of the newsletter.
For the first quarter of 2023, the Capital Markets have been quite resilient given the flow of news. Inflation continues to be the battle along with continued recessionary fears, and let’s not quickly forget on-going banking concerns. Despite all of this, you will notice an increase in your portfolio summary over the last quarter. This is the first quarter we’ve been able to say that since the fourth quarter of 2021. Congratulations on once again staying committed to your long-term Legacy Action Plan!
There have been some positives to note so far in 2023:
Interest rates as measured by U.S. Treasuries, have actually declined slightly since the beginning of the year.
Mortgage rates have declined slightly.
California broke a record for Snowpack and rainfall giving us more water than forecast for 2022-2023.
Inflation is lower, year over year, but still higher than desired by the Federal Reserve.
AI (Artificial Intelligence) has launched- allowing you to have your computers craft your Valentines Cards to your loved ones.
Covid numbers continue to decline.
World Baseball Classic drew more viewers in 2023 than ever before, leading to an exciting finale with USA losing a nail biter to Japan.
Despite the news of the day, our clients continued their pursuit of what matters most in the first quarter of 2023 as normal. We enjoyed hearing the multitude of stories throughout the quarter and look forward to many more as we progress through 2023.
While we do not hold the proverbial crystal ball, we do believe the capital markets will continue their recovery from 2022. While we wish that could go up in a straight line, we know that’s not how markets behave. As always, we encourage you to schedule an update meeting with your KFM Team should you have any concerns over the current environment. We enjoy the opportunity to reconnect and review your Legacy Action Plan together. We also enjoy putting the news of the day into proper perspective as it relates to your personal Legacy Action Plan.
Please contact Kate by phone, 714.257.0800 or go to our scheduling page: kempfm.com/schedule to schedule your next meeting. We look forward to connecting soon!
Legislative Update
In December of 2021, Congress raised the debt ceiling to $31.4 trillion. On January 19, 2023, the U.S. hit that cap. Measures taken by the Treasury Department to ensure the country does not default are expected to run out in late June or early July, so Congress has their work cut out for them. This issue will require a solution soon, and the markets will be closely watching to see when and whether Congress will raise the debt limit.
Both parties have been clear as to their position on the matter:
Democrats say they will only support a clean debt ceiling increase, no strings attached
Republicans will request that a debt ceiling increase be paired with significant spending cuts to get the federal deficit under control
You might recall the 2011 debt ceiling battle. It was rough, but eventually Congress agreed to raise the limit, and the markets stabilized shortly thereafter, as they do... but it is not a history lesson anyone wants to repeat.
We hope the added unease about the banking system’s stability will persuade a timely decision so there will not be any further uncertainty created in the financial markets and economy. While there is not yet a clear path to a solution, leaders on both sides have maintained that they won’t let the country “default” and have already started sitting down to discuss the issue a few months before the deadline. As always, markets will be watching closely, hoping the debt limit standoff doesn’t go on for too long, so we can avoid a repeat of what we saw in 2011.
Cryptocurrency Watch
Kemp Financial Management does not advocate or advise digital currencies for any of our clients, but in case you follow it in the news, creating a better regulatory structure for cryptocurrency is another issue attracting bipartisan support. Interest is high on both sides of the aisle for legislation to increase investor protections and clarify which regulator has primary authority over cryptocurrency. Bankruptcies in the crypto space and the collapse of cryptocurrency exchange FTX last fall have pushed this higher up the priority list. The goal will be to gain clarity on which regulator has primary authority over cryptocurrency. We’ve already started to see some movement on the issue: the House Financial Services Committee has established a subcommittee on digital assets, and the Senate Banking Committee held the first hearing on crypto issues in February. Time will tell if lawmakers can pass a bill sometime in 2023.
Thanks for reading our quarterly update. No matter what, “Things are looking up!” We look forward to seeing you soon!
Special Edition: Capital Markets Update
Perhaps the news of the day has crept into your thinking, possibly questioning “what’s happening now”. With over 60 years of combined experience, this is not the first time we’ve been through “times like these” nor will it be the last. We are hopeful the following financial update will put some proper perspective on how your KFM Team is currently viewing the most recent current events.
Federal Reserve Induced Banking “Concerns”
In its quest to “return to normalcy”, the Federal Reserve has most recently created an unintended banking “concern” through the radical increase of the Federal Funds Rate in its attempt to curb inflation. In so doing, the banking industry has been hit hard with collateralized assets (Government Bonds) declining in value as interest rates have been increased by the Federal Reserve. On Friday, August 26, 2022, Jerome Powell (Chair of the Federal Reserve) warned his fight against inflation would bring “some pain”. When questioned what that meant, he clarified: “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” We now have “pain”.
What’s the main problem?
This may be oversimplification, but it is the reality of what’s happening: when interest rates go down, bond values go up and when interest rates go up, bond values go down. After the financial crisis in 2008-2009, banks are required to hold more collateral against their deposits. The largest amount of collateral is generally US Government Bonds. Because interest rates have gone up over approximately 400% in the last 13 months, the value of those bonds have declined. It is true that if you hold your bonds to maturity, you will get 100% of the bond value. However, if you are forced to sell the bonds to cover the cash demands of your clients, you could be forced to sell them at a loss.
In the case of the most recent bank failures, that’s precisely what happened. Depositors recognized the value of the collateral was less than the actual monies on deposit. To eliminate the risk, depositors made withdrawals in excess of the collateral held by the bank, which eventually wiped out the banks’ value entirely.
How does this impact you?
Our clients do not maintain cash accounts in excess of Federal Deposit Insurance Corporation (FDIC) limits outside of our management. It is highly unlikely that you need to worry about your cash or a run on your bank. You may have family and friends that have cash in excess of FDIC protection and if so, they should make sure each account is protected within FDIC limits. Limits are based upon registration types like; individual, joint, trust. It would be wise for people with excess values above their protected limits look for additional banks to hold their excess cash to provide peace of mind and protection.
The cash you maintain through your custodial accounts is safe and you should not be concerned about cash instruments held in your accounts.
We believe the largest impact of this most recent turn of events is certainly going to be increased volatility. You know that we request you put “blinders” on during market turbulence. We DO NOT hold the proverbial crystal ball and we do not know what is going to happen in the capital markets on any given day. This means, “doing nothing” and “staying the course” is the right action to that volatility. What we do know is that capital markets turn most likely turn positive when we least likely expect them to do so.
What about inflation?
We believe the events of the last 10 days may possibly be the beginning of the end of inflation. This is not a prediction or “crystal ball” theory, but a realization that the banking “concerns” will no doubt lead to a slow down in lending, which will lead towards a slow down in the economy, which will lead (probably) to reduction in work force, which will ultimately lower inflation. Many are submitting we have just entered “deflation” due to the banking concerns. Time will tell as to who is right, but it does not change our position on how our clients are invested. Instead, we look forward to better times ahead.
Covid
We, your Kemp Financial Team, believe nobody got Covid right. Politicians, economists, business leaders, business owners, real estate agents, automobile producers, etc. etc. etc. When the pandemic first hit, we were told to go home and do nothing. Instead, we turned to the internet, and we bought things. We bought things manufacturers believed we wouldn’t. So much so, manufactures slowed their production. We even sold and bought houses, which needed things, like appliances and new roofs, hot tubs, decks, pools, new tables and chairs, 3-day blinds that took 6 months. We went crazy buying things when producers stopped producing. While we were buying things, the stock market, as measured by the S&P 500, dropped 34% and job losses escalated by the millions, yet we kept buying things.
We’ve heard it described as a “rolling recession” which actually makes sense. If you did well during Covid, you probably are not doing well currently, and vice versa. The best illustration of this is hospitality, travel and leisure- completely decimated during Covid. Today, making reservations at your favorite restaurant is a must. Hotels and airplanes are full. Prices are higher for both hotels and airplanes are the highest they’ve been in years. And we are paying for it regardless. Why? Because we were holed up in our homes for months.
Our theory is actually quite simple. Nobody got Covid (and the economics behind it) right on the front side. What makes us think anybody will get the economics behind Covid right on the backside? We don’t think anybody has gotten it right or will get it right. Many will tell you they did, but we would doubt their sincerity.
What is happening is a return to normal. After watching interest rates at historic lows for so many years, we never believed we would see the 10-year treasury yield above 4% in the remainder of our careers. We said we would only get to 4% interest rates when the economy was running on all cylinders and it needed to be slowed down. While the economy has been running well, we would not argue the reason we’ve seen rates that high is because of a runaway economy. We would simply say we are here because Covid and the inflation that ensued put us here. What’s happening now is an equalization of sorts as we continue to return to normal on the backside of Covid.
It's not different this time!
What is different to this market decline is the cause, inflation and the Federal Reserve’s quest to “squelch” it. Like all capital market declines, we know with certainty “this too will pass.” All market declines are followed by recovery! We get rewarded when the recovery occurs! We were hopeful the recovery started at the beginning of this year, but the most recent events have given pause to that recovery at least for now. But don’t ever lose hope, because we know with certainty, the recovery is coming.
Thank you for your continued tenacity through the events of the last several days and weeks. We continue to encourage patience and long-term thinking as we ride through the daily gyrations of the capital markets. The plan we have created with you is still in place and we encourage you to pursue what matters most, making the most of your time as we take care of your financial well-being.
We’ve had an uptick in update meetings in the last few weeks, and we’ve enjoyed getting caught up with many of you. If you would like to meet sooner than your next scheduled update meeting, please contact the office or visit our website to schedule. If you have friends and family that are concerned about their financial well-being during these times, we are happy to assist them any way we can. Perhaps just looking over their shoulder to make sure they are okay, or simply providing some encouragement that things are going to be fine, we are happy to help.
Thank you for your ongoing trust and confidence. Please feel free to call if you have any questions or concerns any time. Until then, keep pursuing what matters most.