Market Musings Blog

Misconceptions About Social Security

Posted on 02.14.23 by Cascade in Investment

With political debates heating up, it is time to put to rest some myths about the Social Security program. We commonly hear that the trust fund will run out of money; that the trust fund has been raided by this or that politician; that individuals have a right to everything they paid in; or that current benefits will be cut. None of these are true. Let’s examine the program in more detail:

Social Security is made up of financial accounts kept at the US Treasury. Our taxes are paid into these funds along with interest earned from the securities owned by the program, and benefits are paid out. By law, the fund monies can only be used for benefits. No politician has ever “raided” the SS trust funds. The US government routinely borrows against the fund by selling it securities. But this is no different from an investor buying a Treasury note: the government is in that case borrowing from you, and you are repaid both interest and principal.

The fund works much like a corporate pension fund, taking in money while at the same time paying out money for benefits. It is a “pay as you go” system: young workers pay retirees’ benefits. SS was never designed to keep track of individual payments into the plan so those could be returned to you; it is a social safety net. It replaces more income for low income workers and less income for high earners. Actuarial calculations gauge how healthy the funding ratio is: SSA knows roughly who it will pay out to and for how long, and who is paying in. Currently, there is a surplus in the old age trust fund, but that is expected to disappear by 2035. The disability trust fund is fully funded and over a 75 year horizon will continue to have a surplus.

When the old age trust fund surplus runs out, there will still be enough money to pay all benefits at 80% of current levels. The fact that the benefit level does not match the current level is not due to any political party, law, or other nefarious behavior – in fact, Congress has taken action in the last few years to ease the funding situation for the trust fund and make it last longer. The real reason the trust fund surplus is declining is because people are living longer and drawing more from SS, and the retiring Baby Boom generation is one of the largest population cohorts this country has ever seen, while at the same time, there are fewer young workers who are paying into the system. This is a demographic and mathematical problem, and it will not go away until politicians decide to do something about it. Maintaining the safety net requires that taxes rise; benefits be means tested; retirement age be increased; or the cost of living adjustment be altered; or some combination of these. Declaring SS “off the table” is akin to subtracting from the retirement safety net that many depend on.

For further information, please see the following resources:

“10 Social Security Myths That Refuse to Die”, at this link:

https://www.aarp.org/retirement/social-security/info-2020/10-myths-explained.html#:~:text=Myth%20%235%3A%20The%20government%20raids,the%20federal%20government’s%20general%20fund.

“Actuarial Status of the Social Security Trust Funds”, at this link:

https://www.ssa.gov/policy/trust-funds-summary.html

“Top Ten Facts about Social Security”, at this link:

https://www.cbpp.org/research/social-security/top-ten-facts-about-social-security

It Matters What You Pay: Where are the Wall St. Darlings Now?

Posted on 11.21.22 by Michelle Rand in Investment, Personal Finance

It’s a good time to check in with some Wall Street darlings of the last few years. We found ourselves saying “no” to these stocks repeatedly, as they were retail investor favorites, reminding us of the late 1990s. Back then, dot-com stocks were all the rage and it didn’t matter what the company did, or how much it earned: somehow just the bravery of putting forth an unproven business idea was enough to get you capital. That’s not good enough for our portfolios. Companies need to be around for ten years or so, or be part of another company that’s been around for ten years or so, and making money is a must. We do not sign up for poor profit/loss ratios.

Today we’re going to check in with Beyond Meat and Carvana. Beyond Meat is a plant-based meat company that created sausages, burgers, and other meat-type foods from plant protein, flavorings, and additives. Several things have conspired against BYND. The first is the taste. Turns out, beef burger eaters are not so keen on pea protein. Second, the process of making plant foods is expensive. That makes the final product expensive – in some cases more so than chicken or beef. Third, BYND has a heavy-weight competitor called Impossible Foods that elected to remain private. It has more operating leeway and reduced prices across the board at one point, putting BYND at a disadvantage. Then, of course, BYND borrowed a ton of money. Debt is not a good thing when sales fall off.

The high price on this chart is $234. The current price is $13.28. That’s quite a fall from grace.

Carvana sells cars via an online platform that arranges for the customer to view the car, ask questions, make offers, buy insurance, finance the car, and have it delivered to his home. A kitschy part of the package is Carvana’s ‘vending machine’ that allows for on-the-spot pickup after a trial. Carvana has never made a profit and losses are taking a turn for the worst as expenses have skyrocketed.

The high price on this chart is $361. The current price is $7.06. This represents an historically horrific destruction of capital.

It is possible that neither of these companies will survive. Others are in the same boat, including several electric vehicle makers. For shareholders, the lesson is – it matters what you pay. For business owners, one lesson among many is – it matters what you spend.

Waiting for the Other Shoe to Drop

Posted on 09.23.22 by Michelle Rand in Investment

Sometimes the most difficult thing to do is nothing. Viewing the stock market over the last several days, maybe it’s easier than usual to do nothing since whatever you buy today is likely to go down tomorrow – but from our perspective, looking at ever cheaper prices it’s hard to pass up the opportunity to “buy low”.

Still, there’s a narrative that argues against our favored potential purchases lately: the housing stocks. That narrative goes like this:

  1. Housing stocks are cheap, yes, but earnings have yet to fall so they can get cheaper.
  2. Demand is strong and housing is underbuilt, yes, but cancellations are rising.
  3. Balance sheets are in great shape, yes, but will get worse before this is over.
  4. Dividends have gone up over the last few years, yes, but are still paltry.
  5. Earnings are strong now, yes, but will get worse.

The last argument needs better illumination from new data. We would like to see what happens to Toll, DH Horton, and others once earnings begin to fall.

So the waiting game is on. And that’s true of many segments of the market. We’d like to own more energy stocks; we’d like to own more industrial stocks; we might want another retail stock. But it’s better to stand out of the way for the time being.

Faith in the Fed?

Posted on 06.30.22 by Michelle Rand in Government Shennanigans, Interest Rates, Investment

Ever since the Federal Reserve was founded in 1913 as a result of upheaval in the wake of the 1907 banking panic, it has depended on the public faith to maintain its legitimacy. Yet throughout history that faith has waxed and waned, occasionally sideswiping markets.

What do we mean by ‘faith in the Fed’ and why is it important?

In the early days of our nation’s banking system, bank panics were all too common. These resulted in institutional failures, loss of depositors’ money, and general volatility that made it difficult for businesses to function long term. Banks needed a source of emergency reserves, and the public needed a reason to calm down when panics gripped markets. The Fed provides these benefits. With just a couple of objectives on its docket, it was relatively easy over time to trust that the Fed would be a backstop against crises.

Over time, however, the Fed has experienced mission creep. It is now responsible for price stability, employment, and currency controls – heavy burdens in our complex economy. Occasionally, these aims also become mutually exclusive. Recently history has shown that the Fed’s actions sometimes cause problems that it must then fix. Very low interest rates for long periods of time caused housing prices to de-couple from inflation and become more volatile. A willingness to create liquidity in bond markets muddled price signals and caused investors to take too much risk. And just recently, the Fed called inflation a ‘transitory’ phenomenon, when it wasn’t. The gradualist approach to hiking rates has some merit, but as inflation rages on, market participants are questioning the Fed’s credibility.

Chairman Powell has a chance – albeit slim – to be correct. If he is correct that a measured approach to raising rates will ease price pressures without spurring unemployment, the Fed can regain investor credibility. But if the Fed’s actions plunge us into another recession, its credibility will continue to erode, causing market volatility along the way. The route away from this erosion of trust is a reassessment of exactly what the Fed can and cannot accomplish, and perhaps a reversion to its original goals. Certainly, it should not be burdened with more tasks that its tools cannot allow it to achieve.

 

 

Another Leg of the Economy Bites the Dust

Posted on 06.13.22 by Michelle Rand in Interest Rates, Investment

Over the last several years, the US economy has benefited from low-priced money in so many ways. One of those is ready capital for start-up companies, which allowed those start-ups to sell products and services at a loss. Uber, DoorDash, Rivian, Carvana… the list is long.

Recently, Uber announced higher prices, which are rippling through the short ride ecosystem. This is just one example of the end of low prices from the host of new companies that provide services that some view as part of daily life. No more can these companies glide along by using cheap capital; they must produce profits. No profits, no access to capital.

These price increases will also ripple into the overall inflation numbers we are experiencing.

If you’re invested in money-losing companies, time to take a long look at those financials. How fast do they burn cash, and how much cash do they have now? Check to see if the company has issued debt: what are the ratings on that debt? What has the trend of losses been – less losing, or more losing? This is just a start. Looking at other competitors who are also hungry for the same business but have deeper pockets is the second round of investigation. You might believe you have a promising stock only to find out that some private company you never heard of is about to take over its market.

In a larger sense, a strangled start-up environment will slow US growth – so this becomes everyone’s problem, not just that of investors willing to speculate by funding these companies. The true test will come from the jobs picture at start-ups: when layoffs come, you know reality is dawning.