September Town Hall Webinar

Transcript: 

Thanks again for joining us today! Today is September 23rd for purposes of the recording. I'm Mike Hengehold and as usual Doug Johnson is with me. He of course is HCM’s investment guru.

First, because we don't have any time to waste today, to get the housekeeping out of the way, there is a Q and A box at the bottom of your screen. If it's not there, you can hover and it should magically appear. If you would like copies of the slides, they’ll be available, just let us know. We should have a replay of this call available sometime by early next week at the latest. 

Well, as I said, we don't have time to waste today. There's a lot that's happened since our last call and today I'm going to discuss everyone's favorite topic and that's taxes. You may recall that the administration published its wish list of taxes in June in something called the Green Book. Since then, just last week on Monday, it was September 13th, the House Ways and Means Committee, which is actually the Congressional Committee where tax laws originate, published its proposed plan. As expected, some of the most extreme positions that were in the administration’s screen book turned out to be negotiating trade bait and they’ve been eliminated, as the negotiation process is well under way. 

As a result, we are looking at something that's probably very close to what the final bill is going to look like if the Democrats can muster the votes. Now, if they can't get the votes on the bill that we're looking at today, then they will have to appease the Northeast Coast and the West Coast house members by offering them state and local tax deductions. And this is what people often refer to as the SALT deductions. The box has gotten themselves in is. the tax law as it's proposed is a soak the Rich Tax Law. The idea is, and it's been very true to its original promises from the President's campaign, targeting people with incomes over $400,000. The idea is we're going to tax wealthier people. Well, the problem is that the state and local tax deduction primarily benefits wealthier people. It's a difficult position to be in to restore this tax deduction when you're basically kowtowing to a particular group of congressmen while also raising the taxes on flyover states for people that have these same levels of income. This is the predicament they’re in. 

The obvious solution is to create some a phase out to give the state and local tax deduction to the majority of citizens by targeting again under this $400,000 to $500,000 threshold where everything seems to be settling. And, quite frankly, this is the way I think it's going to turn out and the reason I say that is there are a number of Congress people who have been on TV, they're absolutely hanging their hat on the fact that they are not going to vote for this tax bill unless they bring that deduction back home again. And so, we're going to get something with that phase out. This'll be something that hits all tax payers. And what that means is, as we begin our fourth quarter tax planning, we are assuming the rules as we know them, and then we're looking at the potential changes as that have been proposed, and right now this is not part of that. If in the last 30 days of the year, we get the state and local tax deduction given back to us, what that's going to do is change the marginal income tax brackets for a lot of taxpayers who would have been taking a standard deduction before and now, they would be able to itemize because of this additional deduction. Whether that would kick in for this year or next year, nobody knows. There are different dates, some this year, most next year, but that's something to be alert to that's primarily in the House. 

The Senate is a slightly different story. Obviously, for political reasons, most Democratic senators will fall in line behind the leadership and pretty much do what they're told, but there are a few centrists people like Joe Manchin in West Virginia and there's the Senator, Kristen Sinema I believe, from Arizona they tend to be a little more independent thinkers. They're in the news now about holding back on any commitments. And of course, with the senate being a 50-50 split right now, even if one senator chooses to vote, no, if one senator decides, if one senator decides things are moving a little too fast. And right now, that's Joe Mansion’s story. He says he would like to see this voted on next year, but that just causes everything to grind to a halt. Because obviously next year is an election year, the Democrats are not going to allow that to happen. Basically, what we can do is we can expect these key players to receive sweeteners to get them to come along, things that especially benefit their states. They'll get their arms twisted basically until they agree to go along with the pack. 

With all that said, what is likely to happen? Well, this is a little bit like the stock market in that it's impossible to predict, especially with those senators. But if I was a betting man, I would say that there will be enough compromises that are already on the table to get us a slightly more watered-down version of the bill that the Democrats will be able to push across the finish line this year on a strictly partisan vote. I just think there's too much risk. Too much election year risk, if they'd let this slip in the next year and they're just not going to let that happen. It's obviously impossible to cover the entire proposed tax bill in a few minutes, and to be honest, you wouldn't be interested in most of it anyway. What I want to focus on today are the proposed changes that would affect most taxpayers regardless of income level. And then I want to touch on the things that would require immediate action, even if they affect fewer taxpayers. Because HCM has clients across the whole spectrum, I want to make sure we get that covered. 

What's in the bill that will have an impact on many HCM clients? Well, there's one thing that stands out as being the biggest, and I guess really, the good news here is there's not very much. For the most part, the bill imposes most of its most draconian consequences as I said earlier on people making $400,000 or more, or people who own their own businesses, or people who have mega balances and retirement plans. But basically, pretty true to its word of increasing taxes on wealthier taxpayers. But there are exceptions and and that's where we want to start. The first one of the proposed changes that would affect all tax payers now, like immediately, things that people have to act on right away. The first is something called Backdoor Roth conversions. Now the term back door has a sneaky, nefarious essence to the name. In reality, all it means is that it's a Roth conversion that uses after tax funds rather than pre tax funds. And what would happen is that these conversions of after tax funds would be prohibited for all taxpayers. It doesn't matter what your income is. This cutoff though, it happens at the end of this year, people who still want to do this, the back door is still open if you wanted to do these types of conversions before 2022. The thing to know here is that the 1099-R, the conversion itself, has to happen in this year. It's important that you get your ducks in a row and get that completed if that's something that would make sense. There are reasons that this could make sense for people all up and down the asset scale and all up and down the income scale. If you're interested in knowing more about it, reach out to to us, give to your advisor or your CPA HG for some help. 

There is something that's not on the slide here with regard to the IRS, I just want to mention because it's a little inquisitive and you may see something about it and it also has to do with Roth IRAs. but the rules allow higher income people typically about $400,000 enough to continue to do Roth conversions of assets that had been deducted for another 10 years. And so, you scratch your head and wonder if this is so bad, why did they allow people to continue to do it for 10 more years? And the answer, like most things in Washington, is to follow the money. The process that allows Congress to pass these tax laws under a strictly partisan basis is something called Reconciliation, and Reconciliation is built around a ten-year budgeting process. Well, when people do these types of conversions, remember you're converting money that hasn't been taxed yet, that's a taxable event. And so, for people that know there's this 10-year window to do this, people who continue before the ten-year period runs out will in fact be triggering an additional tax liability. And as I said earlier, there are a lot of reasons why that might make sense. But from a budgeting perspective, the Ways and Means committee is building this into positive revenue in order to help this bill work in the reconciliation process. There are two different paths with regard to the Roths to be aware of, one's immediate and one's a little bit longer than the path. 

Next, are regular income tax rates. No surprise here, this has been the thrust of a lot of the conversation. Right now, the highest tax rate that we have is 37% That's going up to 39.6% if this bill is passed. That doesn't sound that terrible. Remember, where we're only imposing it on the highest income taxpayers. But one of the things that the bill does is it substantially lowers the income threshold where this highest rate would kick in. A lot of taxpayers who are in the 35% tax bracket now are going to find themselves in the 39.6% tax bracket overnight. Sort of like alligator jaws, they're opening up to get more taxpayers. They're increasing taxes on both sides of the abyss here. So, what to do? Well, find out if you're going to be in this situation and accelerated time into 2021 if you can capture the 35% or 37% tax bracket within something that would otherwise be taxed at 39.6% next year. 

Along the same lines: Capital Gains taxes. Now here's one where we really dodged the bullet, I suppose you might say, because the administration wanted to bring the top capital gains rate from 20% up to the ordinary income tax rate of 39.6%. So that would have been effectively a doubling of the tax rate and showed them no difference between capital gains and ordinary time. There's all sorts of things wrong with that. Nobody really ever expected that to happen. This was one of the trade bait things that and where the law has settled is that the capital gains rate is going from, if the laws passed in its current form, going from 20% to 25%. The capital gains rate has been higher than this in history, and the thing of it is this is a bit of a misnomer because anybody who would be paying this tax will also be subject to something called the net investment income which is an additional 3.8%. In reality, the capital gains tax is now 28.8% and that is the highest capital gains rate. I looked back to 1920 and all that period of time and except for a short period in the early seventies. and for anybody who remembers what the stock market was like in the early seventies, it wasn't pretty. It was one of those very long extended bear markets. You can push capital gains too far and potentially have unfortunate consequences. This higher tax rate would also kick in at these lower thresholds. For taxpayers today, you would have to have more income before the high tax rate kicks in, this is a lower threshold. Again, those alligator jaws are opening up to get more people. And here's the most important thing right now. There was a lot of talk about retroactive tax rates. This rate if the bill passes as is, will become effective last Monday. About the only way to wriggle out of it is if you have a prior binding contract you can rely on that. But otherwise for any any transactions that occur after September 13th they're going to be subject to the new higher rates. Remember, we talked about this as sausage making and this is something that nobody likes, is to know something like this dropped on retroactively. There are three main dates that are important in the law. This particular one which is the date when this was announced, the date of enactment, which certain other things will become effective on the date of enactment, and then a lot of rules are effective on January 1st, and then we talked about some of the things that are 10 years out and so forth. But those are the three important ones. I wouldn't be surprised to see this effective date compromised from September 13th to the date of enactment which sort of cuts the baby in half. But for planning purposes right now we can hope for better outcomes, but we have to plan around this because this is what we have today. 

The next thing I want to mention that is really relevant to HCM clients has to do with estate planning. This on a surface feels like, “Why bother mentioning this? It doesn't really apply to regular people,” but when you stop and think about it, this has more application than you typically think. The big thing that's happened is the estate tax exclusion which had been $11,700,000 per person, $22 million for a couple, is being cut in half. Same basic concept, but beginning next year, people that have roughly $6 million or $12 million for the couple will be exposed to potentially exposed to estate tax. Still, a pretty astronomical figure, doesn't really affect most people.  But in real life planning, what we see oftentimes is a couple where one spouse has passed away, they have their lifetime wealth tied up, and it's not uncommon to see people with several million dollars in a situation like that. if they were to transfer it this year, they would have that $11, almost $12 million exclusion. If they wait until next year, it gets cut in half. And so thinking about the end of this year around transfers is impatient. It's also important to think about what things could become in the future. Somebody who may have $2 or $3 million today, they're still working, they’re still saving. When you think about the miracle of compounding and think about what that might be in 30 or 40 years, taking action today allows future appreciation to accrue outside of one's estate. 

These are complicated, complicated thoughts, and it's why we've been encouraging people to start thinking about this for months, but missing some of these by just a relatively short period of time could cause your family to pay a significant amount in taxes. 

Doug: Hey Mike, just real quick. We had a tax question come in. I just want to address it now while we're on this topic. The question was, does the shutdown of backdoor Roths impact normal conversions from existing IRAs? 

Mike: Well, it depends what you mean by normal conversion. Remember, you can have two types of assets in a traditional IRA. You can have assets that have been taxed already. This will change that, or assets that have not been taxed; as long as you don't exceed the $400,000 threshold, those, as far as we can tell, are going to be available forever, based on this legislation. But if you have assets that you want to convert that have already been taxed, they that has to happen before December 31st of this year. I hope that clarifies the question.

Grantor trusts are a popular strategy that people use in order to again transfer assets to to the next generation while keeping some level of access to an income for themselves and grantor trusts after the date of enactment. Remember I said there are there three key dates that are coming up that are important. One, we talked about the capital gains here for the date of enactment, which says that if somebody's scrambling to put a grantor trust together because they know this window is closing, if this bill is signed into law, let's say on November 15, the grantor trust put in place and funded after that won't get the benefits that you were hoping to get. 

What we find in real life is people don't like to think about estate planning, they don't like to contemplate their own demise. And so they really dragged their feet on doing these kinds of things. Well, the jig is up. at this point. This is something that calls for action immediately. Now, one thing I want to mention that we did dodge the bullet on is the step up in basis rules. This was the one that I was really tooting the horn about several months ago when we did our first video on these things. That fortunately is not included in the bill, so people, beneficiaries will continue to get a step up in basis and that is a big win. 

S corporations, I'm just going to touch on this and say if people are doing businesses as an S corporation your taxes are going could go up in a very big way and you should be talking to your advisor or your CPA now. 

Big hitters. This is maybe more for entertainment purposes, but big hitters are people that make single people make more than $2.5 million, married people making more than 5 million. Again, this is truly the 1% or crowd. However, there is something buried in here that can catch a lot of regular people. It is not uncommon at all when people set up beneficiaries for their IRAs to name their spouse as a primary beneficiary and name their trust as a contingent or the successor beneficiary. This threshold for this big hitter tax kicks in at $100,000 for trusts. A lot of regular people that have trust as a contingent beneficiary when RMDs kick in may be running into this extra tax which is just an extra 3% on top of everything else. If all the taxes we've talked about kicked in, just federal income tax under this bill could be like 46%, almost 47%, something like that. If you're making $5 million, you're already getting a lot of advice. But if you have a trust as a contingent beneficiary, you need to be talking to somebody. 

What was left out. We’ve more or less touched on these things. We’ve gone through the elimination of step up, the SALT deduction, capital gains not being aligned with ordinary income, 199A that's inside baseball, and a wealth tax. There was some talk about trying to tax people who were just simply wealthy, if they have big assets. That has come through a little bit in mega IRA rules. We didn't really visit on those, but if somebody has an IRA with more than $10 million in it, the government's going to make you really take huge required distributions. If you've got big IRAs, you should be giving us a call. That's the quick summary for taxes. Obviously, if you have any questions, holler. Otherwise, now I'm going to turn the conversation over to Doug and pick up on market conversation. 

Doug: Thanks, Mike. Yeah, as we go through the remainder of the presentation and hash out what it is that might be affecting market through the end of the year. Taxes is obviously going to be a big part of that, and you've done a good job laying out the details of that it’s really just a wait and see at this point. One of the items that we've touched on in past presentations and I'm sure has been in the top of mind for a lot of people recently, unfortunately, is Covid. One of the things that everyone has been trying to grapple with recently is, how has the Delta variant changed the trajectory of the market, the economy, the covid conversation? And while that answer is pretty evident, we're going to take some time here to make it or to look and see if it's as obvious as we think it is. 

One of the things that we touched on in one of our communications was this, I don’t know if you want to call it a theory, but this idea that every major Delta based outbreak and even really, an Alpha or a Beta outbreak, really, that we've seen in developed countries regardless of vaccination status, regardless of vaccination type, has really lasted anywhere from 50 to 60 days, from trough to peak, and then it seems to just disappear. Now, there hasn't been a whole lot of medical research on this specific topic, but I've seen several Wall Street firms pick up on this observation and we here in fact noticed it as well. If you look at the cases, the new cases at least in the U.S., and let me bring my laser pointer out here, the most recent Delta outbreak started right around July 1st and peaked right around this time here which was roughly the beginning of September. It was roughly 60 days, same thing in the United Kingdom, same thing in India. And you remember when India had their outbreak, their vaccination rate was close to 8% of the total populations, so extremely low. The good news is it looks like in the US, we're starting to see the move down from this Delta wave and hopefully this will continue and allow us to get a little bit of of relief from this latest outbreak. You can see here, hospitalizations have started to turn over and then you've also seen people in ICU has flattened out significantly and has also started to turn down. Any reduction in Covid in the United States is going to be a positive because we have seen some significant deterioration in economic statistics based on this Delta variant and starting to show. So, here's TSA Checkpoint Travel. We've looked at this before. This is just a measure of airline travel and we've got a few lines on this chart, but the most notable ones are: you have 2019 which, as a baseline was a very normal travel year, a non-pandemic year. You have this red line which is 2021 or this year, and then you have this dotted line right here which shows a percentage of 2019, and then lastly, the blue line here is 2020. So, we can see the massive drop off here when Covid first started, a little bit of a recovery afterwards, and then just a flat line. In 2021, we had a pretty good ramp up here, almost to the point where we were close to 90% of the average we got in 2019. And then as Delta began in earnest, as we saw more mask mandates pick up, as we saw more restrictive measures taking place, we did see a distinctive drop here in air travel. Now, could that be from the Delta variant, or could it just be seasonal? Because if you look at the 2019 line here, they match up very well with a pretty distinct drop for whatever reason and air travel starting August 1st all the way into Labor Day and then it picks back up again. While we've seen that drop off, it could be Delta related, or it could just be a seasonal factor. 

Hotel occupancy, again, something that directly relates to to Covid. Same type of chart only this time we have the blue line as the median here, so this is the 2000-2020 average of hotel occupancy. Same story here. If you looked at this line for 2021 by itself, you would probably go ahead and conclude that the Delta variant was the reason for this reduction in hotel occupancy. But then you look at this median line and again you see this pattern, this seasonal pattern of drop off that, while we may look at this and say okay, this is 100% Delta, it also might not be. It may just be a seasonal pattern. As we see the delta wave hopefully starting to subside a little bit. and some of these economic goalposts or landmarks are not being met the way that we think they should, when we compare those to past years and how they've looked from a seasonal basis, it may not be that big of an issue now. 

There's been a lot of chatter in the financial media recently about the possibility of a market correction. Either a small one, we've gone almost 200 plus days without a 5% correction, though I believe we’ll tick that box this week depending on whether you want to look at intraday or closing levels, but then there's also some strategists who're calling for a bigger correction anywhere from 10 to 20%. Some of them are doing it more on the basis of the fact that we just haven't had one in a while and they're just adamant that it needs to happen, but others have a little bit more intricate thesis for this and one of those has been a gentleman by the name of Mike Davis from Morgan Stanley. He put together some charts that are very interesting, and he compares what we're going through right now to the economic cycle and basically states that coming out of Covid or the initial stages of it, that basically from the lows of March 2020 up to right around the beginning of this year was an early cycle recovery.  

Early cycle recovery has very distinct qualities to it. You've got things like small cap, cyclicals, value - performing very well; whereas, Large Cap quality and things like that, it's not that they don't perform well, but on a relative basis they trail a little bit. So here we can see this comparison here. You've got MSCI US Quality Stocks versus the Russell 2000 which just represents your small Cap numbers, and again on a relative basis when Small Cap is outperforming quality, this line is moving down sharply.  

Then as we get into what he terms a mid-cycle transition into the economy, you see a reversal of that. You see small cap, value, cyclicals start to stall a little bit and quality start to pick up as we get a recalibration, or the market or the economy almost takes a breather from some of the growth that we've seen. Another way to look at this is: equal weighted S and P 500 index versus Market cap weighted S and P 500 index. The index that we look at every day is market weight. Equal - you have a larger percent of mid and small cap in the portfolio. Again, early cycle recovery equal would be expected to perform better with the larger percentage of small and mid. We see that here and then as this mid cycle transition takes place and small and mid start to lag a little bit that relative performance shifts a little bit. From their basis, the call or the correction is more based on the cycle transition than anything ominous in the economy. Now one thing that they did point to which is worth paying attention to is that in their opinion PMIs, which is essentially a measure of economic activity, they think those are going to head low.  

I know there's a lot going on in this chart and may be hard to read. I'm going to try to walk you through it as best I can here and we're going to focus on these circles right here. This light blue line is the ISM Manufacturing Index - again measures US manufacturing outlook. Strong drop all the way into 2000. So again, this wasn't Covid related, this was just actually the economy slowing down. Now we saw a big ramp up here into the Covid market, then slowly starting to work its way back down again as we've peaked. Then PMI has paid, which is basically just an inflation indicator, is starting to work its way back up after dropping significantly. So, in their opinion, as PMIs head lower, comparing it to the year over year changes we've seen in the S and P 500, these lines match up pretty well right here. And as we've seen PMIs increase, the S and P 500 increases. When we see PMIs drop, the S and P 500 drops. Their expectation is that economic activity, as we go through this mid cycle transition, has to slow down in some capacity and as it slows down it will cause a little bit of a drag on the market. Now that's not necessarily our firm opinion, but it's certainly one that I've seen put out by several Wall Street firms and actually has some backing to it other than just the normal stuff of hey, we're due for a correction, so one has to happen.  

Now, inflation has been a real hot topic recently and at first the Fed came out and basically said hey, we think inflation is transitory. It's not a problem; it's going to go away eventually. They've changed their tune a little bit on that. Yesterday they mentioned that the transitory nature of inflation has become a little bit more sticky.  And as we see here, you've got two surveys here: core PCE and then the Empire Survey which is just price pressure components. I mean, here's a clear example of the stress that we're seeing in the supply chain and the fact that we're seeing prices across the board, wait times across the board, increasing significantly for pretty much any good and service that you can think of. If that inflation continues to stick around longer than the Fed wants, it may force them to be a little bit more aggressive with their tapering slash rate hike policy, and that could put a little bit of pressure on the market, and we will definitely touch on the Fed here in just a second. Some of you may be familiar with this chart we created. I've added a small box to it, but this is the tug of war that we've talked about over the past few months. You've got economic reopening, supply chain issues, money supply growth, stimulus, commodity, housing prices, everything that would be inflationary on this side, versus increasing debt levels and the disruption and demographic issues which is going to be deflationary on this side. These two are fighting it out right now and at first we really saw that in the 10yr. market. You had rates that spiked up earlier in the year up to as high as 1.8. Dropped all the way back down to 1.2 and is now settled out in the 1.35 range. It hasn't moved a whole lot. I've added the market to this box because I think you're going to start to see the market getting sucked into this tug of war between the inflationary and the deflationary side. And not necessarily that it's going to cause a correction or a bear market, but it could dictate the leadership that we see in the market. We've talked a little bit about this where before or at the beginning of the year, we had a very high conviction on a reflation trade. So, value, cyclicals, small cap, and that performed very well at the beginning of the year. And then as you started to see some of these deflationary pressures creep in, you started to see things like growth, re-assert itself as the leader. And now we've gotten into this back-and-forth pattern of one side leads one week, one side leads the other week, and who is going to ultimately be the winner here? I think that will dictate where you want portfolios to be allocated going forward. Now, all the while you have the Fed watching this situation trying to figure out what they're going to do, and then you also have the possibility of a stagflationary environment, which we will touch on here at the end.  

How has this all affected Equity's performance this year? Well, good news is everything's done pretty well. You can definitely though, see the distinct time periods of different performance. Here at the beginning of the year, green line represents small cap, purple line here represents value, and you can see a big, big lead in those asset classes. At the beginning of the year, we've had things like value down here, international, even the broad market overall. Let's fast forward all the way to the right side of this and what do we have? Everything has clustered up for the most part. Minus small cap and international, you've got growth, you've got value, you've got the market. When we talk about trying to figure out where that leadership is going to come from through the rest of the year, it's going to be important to figure out where that comes from because that will make a huge difference in how we internally choose to maybe tilt our portfolios a little. Earlier in the year, we certainly had a value bias. We still have a slight value bias, but as we started to see things change a little bit in the market over the past few months, we've added a little bit more growth into the portfolio to make sure that we're balancing out all our exposures as this uncertainty plays itself out. The good news is, as I said before, all the returns have still been very very strong. This is a question that we've gotten a lot over the past few days and it's going to be in the news. I don't want to discount it, but I'll just spend a little bit of time on it and give you my opinion of the whole thing. The house recently passed a bill to actually suspend the debt limit. It's not expected to pass the Senate. So, what happens then? It goes through a little bit more sticky process, and I don't want to get into the details, but the gist of it is, if the government were to shut down in October, or if they can't come to an agreement, there's actually two separate issues here. There's a forward issue which is the actual budget agreement and then there's the debt ceiling which is a backwards looking agreement. The Democrats are trying to roll the debt ceiling issue into the budget issue and by doing that, they will require an additional 10 votes from the Republicans in order to avoid a filibuster and quote unquote, have a bipartisan deal. The Republicans are saying we're not going to do that. You guys have control of everything and you can pass this if you want - be our guests. They're banking on the fact that this will be seen as a Democrat only bill and come reelection time, that they will be able to go to their constituents and say we didn't agree to this. This is not bipartisan on and on and on. So, if they can't come to an agreement, the government would effectively shut down on October 1st on a budget basis. If the debt ceiling cannot get resolved, you would see what's termed as a default, if no agreement can be measured there. Now here's what I'm going to say. This is a political game of chicken and confusion. This has happened in 1995, it's happened in 2010, and it happened in 2013. So, this is not a new issue, and if any of you are familiar with Shakespeare and specifically the play Macbeth, there's a part in that play where Macbeth finds out his wife is dead. It was a very famous speech, but the last few lines, at least from my opinion, while they don't directly relate to each other, can sum this up absolutely succinctly. It is: It is a tale told by an idiot, or idiots in this case, full of sound and fury signifying nothing. It is my opinion at least that this will get resolved in some form or fashion without causing major issues. And if it does cause major issues, they're going to be very short-lived and more or less they will be a buying opportunity than anything else. I mean, you can see it from this chart, the debt ceiling has been raised no matter who's in office. And it's been raised a lot since 1970. Again, this isn't a new issue and, in my opinion, this is going to get taken care of one way or another.  

Our favorite man, the Fed chair, Jerome Powell, just had his most recent meeting. They thought about tapering. Not yet time, he made a very wordy statement about conditions not yet met succinctly or something along those lines. But I think everyone's expecting the Fed to taper in November, but the market seems to almost be trying to call their bluff and saying hey, we'll let you go ahead and taper, but we're going to continue to act like this isn't going to happen. This will be an ongoing issue, but for now, most of the market seems to think that November is the time that we're going to see a taper. And as we see GDP forecasts into the future, this could be one of the reasons why they continue to delay the table. Q2 2001, 6.6 Very strong growth rates, but as you see the projections going forward 5.5, 3.9, 3.4, 2.9. Those are not very strong numbers going forward. And if the Fed really wanted to wiggle their way out of saying hey, we don't want to taper now, we need to continue to push this off, this would be ammunition for doing that.  

Another perspective in terms of people expecting a huge crash or this big correction. I've seen a lot of comparisons to 2000 in terms of tech and how it relates to the market. Back in 2000 the biggest five names had an average PE ratio of 60. Today, the biggest five have an average PE ratio of 29 4. Let me be very clear, that's still well above average, but it's almost half of what we saw in 2000. So, when we think of those projections, we certainly need to keep that in mind. And then one other thing is, when we look at bear markets or corrections, it makes a big difference whether or not you're currently in a secular bull market or you're currently in a secular bear market. And the reason is when you're in a secular bull market, which is the type of market that we're in right now, these corrections are shorter and shallower than what you get during secular Bear Market. Even if we do get some kind of corrective action over the next few weeks, and it's not accompanied by significant changes in the economic picture, we still think that it'll be an opportunity to add to equities, and we still like equities as it relates to fixed income. We think that anything that’s going to come out of this, again without a significant change in the economic picture is going to fall on this side as opposed to falling on this side. 

 We've got a lot of questions about fixed income recently, and I just wanted to touch on this triangle as a way to think about the different bond exposures that you may have in your portfolio. I call this the Bond triangle and what we have here is the three main pillars of fixed income. You've got income generation, you've got interest rate sensitivity, and then you have equity volatility offset. Maybe in the past you could find something that connects all of these lines together and you hold it in your portfolio indefinitely and you don't have any issues. Well, today, that challenge is a lot greater. A lot of fixed income assets can connect two of these dots, but they cannot connect all three at the moment. If you want income with interest rate sensitivity, things like high yield, emerging market debt, global macro which is some strategies that we've added recently. If you want income, but you want equity volatility offset as well, the only thing that's really going to do that as long duration government bonds. And if you want interest rate sensitivity protection and equity volatility offset, you need to look at something like cash, short duration bonds, and tips. As we look at our fixed income portfolio and realize that there's a stark difference this year and last year between equity performance and fixed income performance, we've made an attempt to balance as best we can in this triangle and make sure that we have asset classes from all of these sides in your portfolio to make sure that we're not exposed to any single one of these factors.  

I know we're right up against time here. I want to get to this because a lot of people will find this useful. What comes next? This is a question that we get a lot. We've laid out five scenarios here and what will in our opinion, perform well during these and what might not perform so well. Our base case - roughly a 32% probability here. We think covid becomes more manageable, either through increased vaccination or just the fact that the wave seems to be subsiding. We just learn to live with this a little bit better. Supply chain pressures will ease as things open back up. We see employment and economic growth re-accelerate, and we get a little bit of moderation and inflation. What performs well in that? We think value, small cap, and International can perform well there. Where you have growth and government bonds that might underperform a little bit in that environment. Now we're not there yet, but we think that's the highest probability-based cases. As we go through all these what you’ll notice is, we don't have a high probability to really any of these things because we think that there's still a lot of uncertainty out there to determine what might be the next step. The next scenario here's a deflationary one. So, you've got a 25% probability there, Covid evolves, you have a new variant, the vaccinations start to wane. Whatever it is, Covid becomes a mainstay in our environment, and one that is very disruptive. You get regressive measurements or aggressive measures remaining in place. You have supply chain issues to get worse, employment and economy slows, and you have rates dropping. In that environment, growth and duration outperform value, small cap, international. Almost the exact opposite of what you'd see in a base case scenario.  Stagflation 17% probability there. It’s pretty much the second scenario, the deflationary scenario, but you get inflation remaining strong and you get rates that actually start to move higher. What happens there? Really the sectors with pricing power are going to do well in that environment. Anything that can pass input costs along to the consumer and then commodities will actually perform pretty well in that environment. And then you have government bonds that will under perform.  Lastly, we've got the two that are a little bit of an offset here. I've got Going Live. When I say Going Live here is basically our basic, but it also puts in a sustained fed taper and tightening. If the fed tapers for one or two months and tightens twice, that is not sustained. That has happened in the past and the market has sold off and the Fed is balked and said, all right, we were just kidding. This is actually a sustained fed taper and tighten. In this environment, if they stick to it, you could see stocks struggle as the market begins to operate with what I call without a net. All right, so there is no fallback here with the Fed coming to the rescue. They pull their support out and fixed income could start to perform on a relative basis. Now that doesn't mean that fixed income is going to return 10% and stocks are going to return eight. This means that you could have two outcomes that are both negative, but on a relative basis you're going to get a little bit more protection on the fixed income side.  

And lastly, what I would call a policy error. This probably has a 1% probability of happening, but this would be the deflationary environment with sustained Fed taper and tightening. If this were to happen, I just write good luck because I don't think there's an asset class out there other than maybe cash that would help us in that environment. The Fed knows this, and they are not going to risk a repeat of a tightening into a slowing economy and kicking off that type of scenario.  

With that, we had one question come through that we can touch on real briefly here before we're done, and it was really related to the Evergrande situation in China. The question is, are we concerned about that? Are we concerned? Yeah, I mean anytime you have a major economy with a major company that essentially defaults not out of the blue, but has a lot of tentacles all over the place, it is cause for concern. I have seen a lot of comparisons to the Chinese Lehman Brothers. I don't know if it's going to be that severe because the People's Bank of China will do anything and everything they can to ensure that we don't see a systemic event take place like we saw with Lehman, but that's yet to be seen. There will be some fallout from this, but I don't think it's going to cause the same issues that we saw with Lehman Brothers.  

Mike, that's all the questions we have.  

Mike: Okay, well, wonderful. Just very quickly as we button up. Thanks everybody for participating. Our next call right now is scheduled for Thursday, October 21st. Of course, as always, if news breaks, we'll be scheduling something sooner. Also, the offer is always out there if you have any questions between calls. Need any help? Any of the tax things that we talked about, if you're not even sure if it requires any particular action. We're in the middle of tax planning season, so we're ready, willing, and able to help there. And if there's somebody you care about who could use a hand let us know. We want to be a resource for people that you care about as well. That does it. Thanks everybody! Bye bye.