Michael Joyce, Agili PresidentClick here to watch our latest video, Agili Market Insights: Fourth Quarter 2021 Views. A full transcript of the video featuring Michael Joyce is below.



Hi, this is Michael Joyce from Agili, Your Personal CFO. And I’m pleased to share with you our thoughts and commentary for the Fall of 2021. A lot of people say that we live in unprecedented times – and indeed, in many cases, it is. I think in some cases you can say that we always live in unprecedented times. Sometimes the media or pundits say something is unprecedented even though it’s not. It just hasn’t happened recently or not during your attention span. An example of that is with the masking and social distancing initiatives that were put in [place] in the pandemic when a lot of those occurred during the Spanish Flu pandemic of 100 years ago.


But what is unprecedented is the amount of liquidity that is really worldwide. A lot of this liquidity was established by monetary and fiscal policies of various governments. And with monetary policy, central banks and the Federal Reserve have been adding to the money supply for a decade or more, using tactics that have never been used before.


And in more recent times, there’s been a number of fiscal policies that have created a lot of liquidity. We can point to earlier this year in the United States, there was a stimulus package that was enacted that was $1.9 trillion. And if you add that to the $900 billion stimulus package from just a couple of months before that, that provided more household income than all the household income that was lost during the pandemic.


So, when these households had these helicopters dropping money on them, what did they want to do with it? Well, they wanted to spend some of it. They wanted to not only use some of the pent-up demand but also to buy things that they wanted. [This] created a lot of demand for various goods and services.


At the same time, we had a lot of supply disruptions, notably with the supply of labor, but really with a lot of other things. You can look at Europe to the supply problems with energy, and the energy shortages that are going on there, and a lot of other things.


When I went and had Econ 101, again, I learned that when you have your aggregate demand increasing as with the demand from households for the goods and services, but aggregate supply diminishing, that creates scarcity. And scarcity means higher prices. And we’ve seen that in inflation. Again, in Europe with energy. We’ve seen it in the United States, if you go to the supermarket or try to buy a car, or try to buy practically anything, there are higher prices because of the scarcity.


And a lot of this has also ended up in asset prices. We have very high asset prices right now. But also a lot of it, with the inflation, has caused – where we’ve seen inflation come in which the Fed so far has said will be transitory. But if it is more persistent than the Fed believes it will be, then what will happen is interest rates will rise. And if interest rates rise, that means the stock market can’t trade at 22 times earnings. Valuations will have to come down; long-term bonds will do poorly; other asset classes will do poorly in that type of scenario.


The caveat is there’s a limit on how interest rates can go because we live in a global investing environment. So, if interest rates in the United States go up, they can’t get too far out of whack with the rest of the developed world. If you are an institutional investor in Germany or Japan, where your sovereign debt rates are about zero, 1.7% or 2% on U.S. treasuries is going to look like a very attractive yield. That will attract investment which will keep a lid on interest rates.


We’ve also talked about how much liquidity is out there in money market accounts. There is still over $4.5 trillion in money market accounts. And valuations on the markets are not cheap. September was not a great month, but we’re still within spitting distance of all-time highs in the market.


You have situations where there are times to be aggressive and times to be cautious. When prices are low and pessimism is rampant and investors are running away from risk, that’s a good time to be aggressive. And that’s what we did during the Spring and Summer of last year, in the early parts of the pandemic, after there were big draw downs in the markets.


There’s also a time where valuations are high, which I would say is right now and enthusiasm is rampant, which I would say now is kind of a mixed bag. And investors are more risk-tolerant, which I would say is certainly the case right now. And typically, that’s a time to be a little bit more cautious. And by being cautious, I don’t mean, let’s sell everything – or let’s sell most of everything that we have. What I mean by being cautious is that if things have become over-valued, to trim some of those positions, to be a little bit more discerning with investment decisions, and to look for opportunities.


At some point there is going to be a correction in the markets. I don’t know what’s going to cause it, but there will be a correction and that will create an opportunity. But so far, with all the cash that’s out there, even if we have just a 2-3% drawdown over a couple days in the markets, investors are jumping in and they’re looking to invest in those dips.


Also, we have to keep in mind that there’s lots of cash on corporate balance sheets. And a lot of them are using that cash to buy back their own stock. A couple weeks ago, Microsoft announced an initiative to buy back $60 billion worth of their own stock. That’s more than the valuation of most public companies, so that will create some support for the stock market as well.


There’s also been a lot of talk about taxes, especially more recently. In the past couple quarters, we’ve talked about a couple taxes or proposed taxes that might impact investors. Most notably, the increase in the long-term capital gains tax and also the increase in the corporate tax rate. But the Ways and Means Committee came out with some proposals a few weeks ago to help pay for a portion of the $3.5 trillion social spending bill which is being contemplated and debated in Congress right now [at the time of this video]. I should say that we don’t know what’s going to be in there. Some of the things that the Ways and Means Committee came out with could end up not being in. They could add some things in.


But something that hasn’t been focused on that much are some increases on small business owners, the ones who typically have pass-throughs. A pass-through is a limited liability corporation, or a partnership, or an S-corporation. What a pass-through means is that the profits or losses from the corporation are passed through to the owner’s or shareholders’ personal income tax returns. And why that’s important is because the vast majority of all employment in the United States is with pass-throughs. They’re in companies that are limited liability corporations, or partnerships or S-corporations. The one that comes to mind would apply the 3.8% net investment income tax, which is currently applied to just investment income for certain people – it would apply it [the 3.8% tax] to pass-through income as well. When that occurs, that means there’s going to be less money to invest in a new plant, or new warehouse, or to hire new human capital. So, these are some things that are worth watching.


And right now, I would say, I have no idea what’s going to happen with taxes. We could see a sharp increase with taxes, we could see some more compromise where we could see some increase in taxes, but a more modest increase. And maybe nothing happens. At least, not right now. I think we’re going to know a lot in the next 60 days, maybe the next 90 days, and this is something that we will stay in touch with you [about], and we will keep you up to speed with developments in this area.


In the meantime, if you do have any questions, feel free to contact me or contact your financial strategist. And, I have to say, I’ve been very pleased to share with you our thoughts and viewpoints for the Fall of 2021. And if you do want to know more about our thoughts, you can go to our website, www.agilipersonalcfo.com, or follow us on Twitter. Thanks and have a great day!