In spite of the Federal Reserve’s attempt to crush the U.S. economy, it continues to grow nicely

From the Desk of Joe Rollins

I am not sure I ever recall a time when there was so much confusion about the U.S. economy. I have clients call daily to express their concerns regarding the extraordinary events and request a different approach to their investment philosophy. The truth of the matter is that the economy is actually quite strong, and the recently announced unemployment rate of 3.4% is the best in the U.S. since 1969. Think about that for a second. We have the best unemployment rate in the last 54 years, and yet the financial media only discusses the upcoming recession, and the negative aspects of the Federal Reserve increasing interest rates.

Keep looking up, Cameron… That’s the secret of life!

There is not a lot of news so I thought I would discuss the issue regarding employment and the upcoming recession as predicted by the Federal Reserve. I also want to discuss the ongoing so-called banking crisis in the U.S. but as a change of pace I wanted to discuss the most recent points raised in The Economist that a client furnished me with titled “The Lessons of America’s Astonishing Economic Record.”

R E T U R N S
I have a great many things I want to discuss, but first I must report that the month of April was quite satisfactory in its performance and the year-to-date numbers on the S&P 500 were quite spectacular. For the month of April, the Standard and Poor’s Index of 500 Stocks was up 1.6% and year-to-date for 2023 that index is up 9.2% which is absolutely an excellent return.

Joe, Dakota, and Ava helping Josh celebrate his 28th birthday!!
Hope it was a good one, Josh!

I also want to point out that the 10-year average on this index, even including the terrible year we had in 2022, is still a double-digit return of 12.2%. The NASDAQ Composite for the month of April was barely up at 0.1% but has a year-to-date return of 17.2%. The 10-year average of the NASDAQ Composite is quite a satisfying 15.1% per year. The DOW Jones Industrial Average was nicely up in April at 2.6%. Unfortunately, the year-to-date numbers are less satisfactory, at 3.5%. Once again though, the 10-year average on this Index is double digits, up at 11.2%.

The Bond market had a good month during April due to interest rates on government securities falling. The Bloomberg Barclay’s Aggregate Bond Index was up in April by 0.6% and for the year it is up 3.7%. As with the others, the 10-year index return over a 10-year period is 1.3%. As you can see the return on bonds over the last decade has been minuscule compared to the returns on stocks.

E M P L O Y M E N T
The big news of the week is that the Labor Department announced on Friday that there had been 253,000 new jobs added to the U.S. economy for the month of April. This came as a stunning rebut to the government’s attempt to destroy jobs and lay people off. They indeed revised the previous two month’s labor numbers down so that the average is roughly 222,000 new jobs added per month. For example, last year, the economy was adding roughly 524,000 new jobs per month, but that was a reaction from the pandemic and employers were hiring back their employees. The evidence is still clear that the economy continues to be strong despite the efforts of the Federal Reserve to destroy the economy.

Caroline trying to convince Reid that this is in fact their new home!

Employment numbers are actually quite good (a 54-year record). Once again, this month’s job openings were 9.59 million and the total unemployed is 5.6 million and once again, this month there are roughly two jobs for every unemployed person in America. One of the things that could be said is it is clear now that the demand for labor is easing as employers hire fewer people every month. But what is even more clear to me is that the supply of labor is getting increasingly scarce. When you have an unemployment rate of 3.4% virtually everyone that wants employment can be employed with ease. As an increasing number of people go to work, employers are having a challenging time finding qualified employees. Once again, the participation rate this month was 60.4% which means more and more U.S. citizens are actively looking for a job.

R E C E S S I O N
At the beginning of 2022, all the so-called experts pointed out that due to the interest rate increases by the Federal Reserve, we would suffer a severe recession in 2022. I countered that until you saw unemployment starting to soar you were unlikely to see a recession. Here we are, 15 months after those incorrect calls for a severe recession and we have yet to see any signs of one yet. There is no question that the economy is slowing down, but that is actually a good thing since it takes the pressure off the Federal Reserve to continue to increase interest rates. Unless we see unemployment start to move dramatically higher, I doubt that we will see a recession in 2023 either.

Proud mom, Ramani Damera, with her lovely children Sohan and Sonali. Sohan will be graduating from UC Davis next month! Congratulations!

One of the sad attributes of the volatility of the last couple of years is that certain clients have pulled their money from investment accounts and put it into cash accounts. For the first time in an exceptionally long time, cash is now paying a decent rate of return where you can get money markets that pay 4.5% to 5% annual returns. However, if you compare that with the performance of the Standard and Poor’s Index of 500 Stocks, which is up 9.2% for the year through April, a 5% money market account hardly compares. Once again, when investors start to view their investments on a short-term basis, they lose the long-term performance that these indexes provide. As mentioned above, each of the major indexes over the last 10 years had double-digit returns even with the 18% that the S&P 500 Index lost in 2022. The value of long-term investing is that the short-term problems get wiped out by the long-term horizon. You should never focus on short-term volatility in a long-term investment philosophy.

B A N K I N G
There seems to be a great deal of negative reaction from investors regarding the volatility of what is going on in the Regional Bank selloffs. First, I should make it clear that there is no economic threat to the U.S. economy due to this volatility. A great deal of it is centered strictly on the traders on Wall Street attempting to sell off these stocks for their benefit. As you have noticed, some of the Regional Bank stocks were down 40% in a week, but last Friday, they jumped back up 10%. This has nothing to do with the economic effects of the bank, but more to do with the act of trading by the short-term traders attempting to bring the stocks down.

Ava not letting the fear of striking out keep her from playing the game!
Go Ava!

For those of you who have not kept up with the ongoing crisis, it started innocently enough when the Federal Reserve began increasing interest rates in March 2022. The Federal Reserve has now increased interest rates ten times over the last 14 months, which is an all-time unprecedentedly large increase in rates. The Federal Reserve intended to starve consumers of credit so they could not buy houses, cars, or other sizable items. The theory was that if the Federal Reserve could make interest rates high enough consumers could not afford large ticket items, therefore the economy would slow and correspondingly inflation would go down. However, the effect of the rate increases was surprising to most. A bank by charter is required to keep the bulk of its assets in Treasury Bonds or zero-risk interest rate certificates. Many banks invest in these on a long-term basis, so they keep all their customer deposits either loaned to other customers or invested in long-term government securities, never investing short and lending long.

Client Lloyd King enjoying a night out with his son, Michael,
as he cheers on the Sixers!

As the Federal Reserve began increasing interest rates, the value of the bond portfolios owned by banks decreased. As we all know, bonds move inversely into interest rates. Due to the rapid and unprecedented increase in these rates, the bond portfolios of the banks were materially impacted. But the real news came when other financial institutions were able to offer interest rates to customers in the 5% range. Banks were unable to provide interest rates that high due to their long-term loan commitments to customers. Suddenly, cash became king in regional banks, as customers moved money out of these banks and into other financial institutions that paid higher rates of return.

There became a flood of money out of these banks because they could not compete with the higher rates of interest offered elsewhere. This, coupled with the serious deterioration of the bond portfolio created the issue of possible bank failures due to liquidity issues.

Three banks have failed, but in each of those cases, the Federal Reserve stepped in and made sure that no depositors’ money was lost. They also did something else that was even more important. In the period after the first two bank failures, the Federal Reserve pushed money into these banks with a $300 billion cushion.

All smiles from the Musciano-Howard clan –
Mia, Barb, Marti, Ally, Brittany and Mitch

The Federal Reserve wanted to make sure that these banks were well-funded and could manage withdrawals by customers. Essentially, at that point, the crisis was over. Banks had ample liquidity to meet the redemptions and the benefactor of all that cash was the Federal Reserve. While the short sellers on Wall Street continue to push this point for regional banks, there is really no crisis. These banks were stabilized by the government and even though they continue to have mass withdrawals in an effort by consumers to receive higher interest rates, it is unlikely that these banks will fail because of that action. Therefore, when you read every single day about the so-called bank crisis, just feel a bit of peace to know that truly it is not a crisis at all “If it bleeds, it leads” with the financial media.

D E B T
We have received many calls from clients concerned about the impasse regarding the Federal debt limit which comes due in July 2023. During my working career, I have witnessed many of these crises come and go. Back during the Clinton administration, the Republicans controlled both levels of the House and they pushed the government into default which created complete chaos in the economy. At the end of the day, what happened was that all the government employees were laid off, and the government shut down for some time. However, no employees lost any money since they were hired back and were paid their back wages from the time they spent laid off.

DeNay on her way to help celebrate a friend's marriage in style

While it is true that it may be a situation where the government cannot pay its bills, do not think for a second it is going to impact their ability to pay their debts. First off, one of the largest holders of government debt in the U.S. is the U.S. Social Security system. In addition, the government can print money whenever it likes, and if there is any attempt to reduce their credit, they are likely to manufacture the money necessary to keep their debts under control.

There may be a brief time when the government cannot pay its bills for a couple of months, but once again no debts will be left unpaid. I believe that this particular Congress is so polarized by their political differences that there are going to be difficulties regarding the debt limit whenever it comes up. But I have high confidence that they will compromise before the debt limit expires in July. Even if they cannot agree, no substantial damage to the U.S. economy will be done.

E C O N O M Y
It seems now in 2023 that the number of U.S. citizens has become increasingly concerned about the economy. In a recent poll, 4/5 of those polled believe that their children will be worse off than they were when they grow up. That 80% rate of people that are gloomy about the economy, is substantially higher than 1990 when only 2/5 of the American citizens felt that way. Roughly double the number of U.S. citizens are now questioning whether their children will be better off in the future than they are today.

Alexis shaking off tax season at Taylor Swift's Eras Tour in Atlanta

As mentioned above, a client sent me the article from The Economist titled “The Lessons of America’s Astonishing Economic Record.” This article basically points out that regardless of the pessimism from current U.S. citizens, the economic facts are clear that America remains the world’s richest, most productive, and most innovative economy. As the article points out, no one really comes close. The interesting facts in this article explain how strong the U.S. economy is compared to the rest of the world. As pointed out in the article from 1990, America accounted for one-quarter of the world's output of goods and services. Thirty years later, that share is almost unchanged even as China has gained economic clout.

With the huge run-up in China’s economic base, the percentage that the U.S. produces remains the same over the last 33 years. What is even more astounding is that the U.S. accounts for 58% of the G7’s GDP. If you think that the U.S. economy is deteriorating, that same percentage in 1990 was 40% of the level of the G7’s GDP. This fact alone indicates that the level of the U.S.’s GDP as compared to the richest countries in the world has grown substantially since 1990 and has not deteriorated as many would believe. Truly astonishing facts.

W O R K F O R C E
The article points out that one of the major reasons that the U.S. has held up its economic place in the world is that over the last 30 years, the number of workers in America has increased by 30%, while workers have only increased by 10% throughout the rest of the world. I also want to point out that due to the innovations of the American economy, if you would have invested $100 into the S&P 500 in 1990 that initial investment would be worth more than $2,000 today. They indicated in the article that the return would be four times higher than if you had invested in any other major country in the world.

Cecilia and Nathan smiling a-roar-ably while at the
Fernbank Museum of Natural History

One of the main reasons why the economy continues to be so strong compared to the rest of the world is the heavy influx of migrants into the United States. At the current time, immigrant workers make up 17% of the workforce, compared to only 3% of immigrants working in the Japanese workforce. Many countries are dealing with aging populations. Much has been written about the effects on the Japanese workforce and even the Chinese workforce which is getting older. It is astonishing to believe but even though the fertility rate in the U.S. has dropped, the average age in the U.S. is lower today than it was 10 years ago. This is due to the influx of migrants. While the rest of the world continues to age, the U.S. on average is getting younger. In China and Japan, an aging population is their biggest fear.

Caroline ready for the D2 Summit Finals in Orlando -
the D must stand for darling!

Everyone ignores the fact that the average income for Americans continues to be one of the highest in the world and it continues to grow. You see prosperity everywhere you look, and you just cannot ignore it. I drove from my office in Buckhead into Midtown to meet a client and I was astonished at the number of buildings under construction along Peachtree Road. The Midtown area in Atlanta exploded into high rises and large corporate tenants. Even though the construction of apartments continues to grow daily, it is still inadequate to keep up with the number of people that move into Atlanta.

If you want proof of this wealth being built in America, the Economist article points out that the income per person in America was 24% higher than in Western Europe in 1990. If you took that same measurement today, income per person in America is 30% higher than it is in Western Europe today. As pointed out in the Economist, the most important attribute of a country building wealth is the large workforce and productivity of that workforce. Basically, the larger the workforce and the more productive they are, the more the economy grows overall.

Mia with Josh- he still looks to her for advice after all these years
(but he now has to look down when doing so)

What is interesting in America is that the population of critical working-age 25 through 64 has risen from 128 million in 1990 to 175 million in 2022. That is an increase in the available workforce of 38%. However, compare that to Western Europe where the working age population rose 9% during the same period from 94 million to 102 million. As you can see the increase in the workforce population is dramatically higher in the U.S. than in the rest of the wealthy countries in the world.

From the analysis made by the Economist, the income median in the U.S. is increasing leading to salaries increasing. As more and more employees earn higher middle-class wages, they spend that money on consumer goods and services which increases our economy. As pointed out by the Economist, even though 80% of the population believes that their children will not be financially better than they are, the facts are quite different. If you read the analysis as pointed out in the Economist, the economy and its citizens are getting stronger, not weaker. With this ability to buy consumer goods and basically retire with adequate income, the outlook for the future of today’s children looks brighter than people expect.

O I L
One of the most astonishing facts is that the U.S. in the early 2000s imported roughly 10 million barrels of oil per day in net terms. As you know it became a matter of national security that we could not provide the amount of oil needed to run our country. In the case of war, if we were unable to provide adequate oil resources, this would result in a major detriment to the military front. However, due to learning about hydraulic fracturing and horizontal drilling, the U.S. oil industry turned around quickly to supply this need. The U.S. became a net exporter of oil in the year 2020. Even though we could completely fund our oil needs in 2020, the new administration decided to attack fossil fuels, and the U.S. has not been able to keep up with its energy needs since 2021.

The Florida sun proving every day can end beautifully!

C O N C L U S I O N
I must agree that the news on the U.S. economy has been unpleasant for the last 14 months. However, as I pointed out back in 2022, I did not think the recession was imminent and I still do not believe it will be. If we have a recession, it will be short and relatively modest. The Federal Reserve announced that the GDP was up 1.1% in the first quarter of 2023. You must understand that the first quarter when reading GDP is historically the weaker of the quarters. GDP is held up by severe weather in the U.S., particularly in the northern states, and GDP tends to increase substantially as you get into the more productive summer months.

I am not sure that the Federal Reserve will allow the economy to continue to grow. It seems to be their motto now that to make our economy better, they must destroy it. Hopefully, they will stop long enough to allow the economy to realign itself with the higher interest rates and begin to grow again.

Joe looking forward to discussing how we can help you
reach your goals and needs.

This year has seen extraordinary gains through only four months of the year so far. If the economy continues to accelerate as we go through the summer, then these numbers will be even higher at the end of the year. I projected a gain of 20% this year based on my read of the economy and so far, the indexes have kept up with the prediction. Now is a suitable time to come in and visit us and discuss your goals as well as your retirement plan. I just feel sorry for those investors that left the market and have missed this large run-up that has occurred so far this year. Remember, I warned you here first (numerous times).

As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal.  There is no assurance that any investment will be profitable.

This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future.  These statements are not guarantees, and undue reliance should not be placed on them.  Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations.  There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.

A Day to Rest After Tax Season

As is our annual tradition, Rollins Financial Advisors will be closed on Friday, April 21, to allow our staff a well-deserved holiday following a tough tax season. We will reopen with normal business hours on Monday, April 24.

If you have a matter that requires immediate attention while our offices are closed, please contact any of our partners:

• Danielle Van Lear - dvanlear@rollinsfinancial.com
• Eddie Wilcox - ewilcox@rollinsfinancial.com
• Joe Rollins - jrollins@rollinsfinancial.com
• Robby Schultz - rschultz@rollinsfinancial.com

Thank YOU for choosing us for your accounting and tax needs again this year. We appreciate your trust, patronage and support!

Are we finally going to talk ourselves into a recession?

From the Desk of Joe Rollins

Since the beginning of 2022, all the talk you hear in the financial press is about the upcoming recession. Many forecasts predicted we would have a recession in 2022, but alas that did not happen. As we rolled around to 2023, those same people said that we missed the recession in 2022 but clearly it was only a matter of time. As we finished March 2023, there is still no evidence that recession is forthcoming. But that all could change with a media blitz to convince us hard times are coming. As the saying in the media goes, “If it bleeds it leads.”

Penelope Lu Flores commending herself on arriving early and
getting her mom, Elizabeth, out of the end of tax season

Due to the normal pressures of tax season, I decided to cut this blog short and only cover the more compelling stories for this early spring season. I must reflect that the first quarter of 2023 was quite excellent. Even though the loud screams of the financial media told us that the world was coming to an end and breadlines would soon be forming on the streets, the S&P 500 Index had an excellent quarter up 7.5% for the quarter.

I wonder how few of those on Wall Street actually projected such a nice increase for the first quarter of 2023. While I can’t get into all the important issues, I want to discuss the current economy and the enormous pressure that the financial media is forcing on America with this call for recession. I also must cover the situation with the banks that went out of business during the month of March.

A day at the zoo is a day well spent! (Ava and Josh)

I want to cover those interesting subjects, but first I must cover what has become quite an excellent quarter. The Standard and Poor’s 500 Index stocks were up 3.7% in the month of March, and up 7.5% year-to-date for 2023. The NASDAQ Composite was up an excellent 6.8% in March and is up 17% for the year 2023. The DOW Jones Industrial Average was up 2.1% in March and is fractionally up 0.9% for the year 2023. All these Indexes performed very well during the first quarter of 2023.

Even the Bloomberg Barclays Aggregate Bond Index was up 2.5% for the month of March and was up 3.1% for the year-to-date. For the first time in over three years, it looks like the bond funds are now starting to become competitive with stock funds. While the Federal Reserve was increasing interest rates was not a good time to be invested in bonds, the time has come to review them and determine whether they should be a part of a portfolio.

Lauren Lukowicz out for Easter brunch with her mom

Almost every day I watch the financial news and virtually every other sentence uttered by the anchors revolves around the upcoming recession. What is interesting is that they have been discussing this since January 2022. So far, the recession has not occurred. However, there is a high likelihood now that public sentiment will in fact create the recession that the media has been calling for over a year now.

Take, as an example, a corporate executive who would be negligent in his duties if he did not begin to lay off people due to an upcoming recession. You hear famous entrepreneurs such as Jeff Bezos telling the public that they need to be careful and should not purchase a new car, new home or go on expensive vacations. Might it be possible that we talked ourselves into a recession when no recession actually exists?

It does not require much to turn the economy from positive to negative if suddenly consumers quit spending. What if, due to these misplaced fears, people decide not to purchase a new car, home, or go on expensive vacations? We might just in fact turn this strong economy into a weaker one and end up with the result that the media has been forecasting.

A “Penny” for your thoughts…

Once again, the news on the economy was quite good for the month of March. During the month of March, the U.S. economy added 236,000 new jobs which was pretty much as anticipated. More importantly the unemployment rate dropped during March to 3.5%. This is an extraordinarily low rate and is only one tick above the lowest ever recorded (not in wartime) at 3.4%. Even though the national unemployment is at 3.5%, the unemployment rate in some states is even quite lower at 2%. There is no question that the job market is extraordinarily strong and has not faulted due to the ever-increasing interest rates by the Federal Reserve.

What is more important is that even though the number of job openings has fallen, there are still 1.67 jobs for every unemployed person in the U.S. For the month of March, new job openings measured 9,931,000. The total number of unemployed in America is 5,839,000. As you can see, there are ample jobs for every unemployed person in America that wants to work. Every time I discuss the subject, it always goes back to the point of why there are not enough workers in America to fill the necessary job openings.

Carter and Josh showing Ava and Dakota why it’s called the Windy City.

There is a general belief that due to the enormous amount of government funding that we had in the Covid years there are a lot of potential workers that are not taking jobs because they still have money left over from the government. One of the ways that we know this to be true is that currently there are $5.6 trillion in money market and savings accounts in the U.S. alone. In recent months, those accounts have now been paying market rates that are attracting new investors to these money market accounts. However, this huge sum of cash is also fuel for the next run-up in the stock market. If interest rates start to fall and these money market rates can no longer compete, much of this money will flow out from the money market accounts into ordinary equities and bonds. This is a lot of fuel for a potential runup in the financial markets.

There was also great news in this more recent employment report. For the first time in years, the participation rate has increased and there were actually people looking for a job during March. If this is the case, more people are coming out and filling the gaps in the job marketplace. That is very much a benefit to the economy, because these people become consumers that were before only living off their savings. Maybe there will be a day soon that the public will all go back in unison, jobs will be filled, and every able American will become a tax-paying consumer that will increase GDP for us all.

Cecilia taking one for the team – Happy Birthday!

So, what is the actual state of the economy today? Even though they have been forecasting recession now for a year and a quarter, the Atlanta Federal Reserve forecasts the GDP will be up 2.2% (as of April 10, 2023) for the first quarter of 2023. While not a great increase in GDP, it is still a very long way from negative. Also, we should be reminded that the first quarter is typically a weak quarter for GDP, mainly due to weather and constraints in the northern states.

So, as we sit here today there are still no overwhelming signs of an upcoming recession. But as mentioned above, maybe this negative attitude of the media will force the country into recession due to consumers pulling back on products or services they normally would have purchased.

I have always been a firm believer that sentiment in the U.S. is extremely important for keeping GDP higher. If an employee is worried about their job, they are not likely to purchase a new car, a new house or go on an expensive vacation. It might just be that consumers will shut down the economy due to the fear of the unknown recession in the future.

Nathan and Cecilia Cmeyla cheesing it up outside of Truist Park!

The other answer may be that it is just political. The financial media, which clearly supports the current administration, will continue to talk down the economy until we get closer to the election cycle. At that time, they may pivot and comment about how great the economy is doing, and that greatness will be directly attributed to the current administration even though the economy was even stronger in 2019 before Covid. We went through a huge contraction in the economy due to Covid, and now we are getting back to where we were. This has been an enormous transformation in the economy, but it continues to be strong and, likely, will get stronger and not weaker as the months progress.

There is no question that the Federal Reserve has put tremendous pressure on interest rates. What is somewhat amusing is that with these increases in interest rates, the first bank to fall was one of their own. During March, we had the failure of Silicon Valley Bank in California and Signature Bank in New York. There were runs on these banks to remove cash just like it happened in “It’s a Wonderful Life.” If you are familiar with the classic Christmas movie, the people withdrew more money from the bank than its liquidity, and then the bank failed. Basically, that is what happened to these two banks.

Lauren and Jeff discovering “anything is possible
with sunshine and a little pink!”

Think about it in this fashion: a banker loans money to a local business on a 6-year loan at 6%. At that time when the bank made that loan, they were paying virtually nothing for customer deposits at their bank. So basically, the bank could take the customer deposits that they were getting for basically free and loan that money to the local business owner at 6% and make a nice profit.

Beginning in March of 2022, the Federal Reserve started a massive and too rapid increase in interest rates over a relatively short period of time. Suddenly, banks were required to offer higher interest rates on their deposits, in order to satisfy the public. However, the banks were constrained by the fact that they already had long-term money out at rates that would not allow them to pay higher interest rates on their deposits. At that time, the public saw what was happening, and made a major movement to remove their money from the banks.

Henry letting Lauren know he’s had enough fun at the Beltline

The evolution of technology has created the most powerful force in money today. With your iPhone you can move literally billions of dollars in minutes from one bank to another. You can be at the beach or somewhere other than home, but if you have access to an internet connection you can move money from one bank to another that is paying a higher rate of return. This is exactly what happened to Silicon Valley Bank. When interest rates began paying up to 4%, the bank was unable to meet the demand for money, leaving the bank to go to these higher rates.

It was quoted by the Federal Reserve that in one day, that bank lost over $100 billion in assets with money being transferred to larger and more stable banks. On Wednesday of that week, Silicon Valley Bank was forced to sell their bond portfolio of $20 billion to satisfy customer withdrawals. Due to the extremely fast increase in interest rates by the Federal Reserve, this bond portfolio had deteriorated in value and the bank suffered a loss after tax of $1.8 billion. When that news broke on Thursday, customers lined up to withdraw their cash from the bank thinking it would surely fail at this point. If the Federal Reserve had not closed the bank on Friday, it was forecasted that the entire liquidity of the bank would have been gone before the close of business on Friday.

Josh Portschy’s dog “Hank”ering for a Braves win!

The good news is that the failure of these two banks did not create losses to consumers. It is true that the shareholders lost all their money, and the bondholders probably lost theirs as well, but no depositor lost their money due to the insurance held by the banks. However, there was a general run-on banks after this event of people moving money out of smaller banks into larger ones or to money market accounts that paid higher interest rates. Once again, the Federal Reserve stepped in to protect the smaller banks and last week they loaned out over $380 billion to member banks, allowing them to keep their liquidity higher. It appears to me that the Federal Reserve, due to its swift movement, has stopped the outflow of funds from local banks and therefore the crisis that we had in March has probably passed us at this point.

The strength of the labor market for the month of March reported above will probably lead the Federal Reserve to increase interest rates one last time during its meeting in May. It is interesting that the futures in the bond market are actually forecasting that the Federal Reserve will cut interest rates later in 2023. It is very confusing to the public and certainly to me that the Federal Reserve would go ahead with an interest rate increase in May, if only a few months later they would be forced to cut it in the Fall of 2023. That is the proof to me that the Federal Reserve has gone too far and if they are forced to cut rates over such a short period of time, why would they just pass on an increase in interest rates at this time? I guess when they write the book a few years from now we will get a better insight into what the Federal Reserve is thinking.

Evan and Alexis making the most of a Monday – Go Braves!

All we know is that in the financial markets it is going to be a bumpy ride. This year, even though the first quarter was excellent, there is no guarantee that the coming quarters will be just as good. However, what is clear to me is that corporate earnings will never be as negatively impacted as financial media outlets forecast. Many of the companies have downsized their employment base and cut their expenses so profits will stay higher even if economic activity is lower. That is exactly what businesses should do. They should right size their expenses based on their projected revenue. During Covid, so many businesses overstaffed to meet the pandemic requirements. Now those days have passed, and it is time to right size their businesses for future profits.

I continue to believe that this year will be a positive one with profits around 20%. We are off to a great start with profits up 7.5% for the first quarter of 2023. Also, it is clear that the international markets are improving, and those markets are undervalued as compared to their U.S. counterparts. My recommendation is for everyone to remain invested and to increase investments where you can. We are at the time where you can make IRA contributions for 2022 and 2023. Everyone reading this post should contribute to their IRA’s annually without fail.

As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal.  There is no assurance that any investment will be profitable.

This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future.  These statements are not guarantees, and undue reliance should not be placed on them.  Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations.  There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.

“You are listening to either an economic illiterate or a silver-tongued demagogue.” - Warren Buffett

From the Desk of Joe Rollins

The above phrase was an excerpt from Warren Buffett’s annual letter to shareholders related to the 2022 year. Basically, what he is referring to is that the economics of his buyback program are correct and the Biden administration and other opponents of it have misunderstood them. What is shocking about this is that Warren Buffett has been a Democrat his entire life. He was a huge supporter of Hillary Clinton and has elected not to criticize Washington in the past. I guess all of that has changed and I will explain.

Joe with the Guest of Honor/expectant mother Elizabeth Flores

I have a lot of things I find interesting to discuss in this posting. The major headline in Barron’s recently was “What everyone got wrong about the economy and the ominous implications for the Fed.” I have been posting for the last year and a half that things were never as bad as they seemed and certainly were not as bad as the media led you to believe. I think we can now reflect on why the so-called experts got it wrong.

I also want to explain the economy and why it continues to be stronger than anticipated by virtually everyone. I also want to go through the numbers and tell you exactly how much each segment of the population pays in income tax. You would believe from the rhetoric of the administration that the rich do not pay their fair share and I can give you the exact numbers that prove to you that they do. I also want to explain why you should not be concerned about the debt limit or Taiwan. Most important of all, I have a solution that could have prevented the Ukrainian War from even getting started.

Client Stephanie King’s love of horses is more than just a hobby!

Before covering all of those terribly interesting subjects, I have to report on the stock market for the month of February 2023. Basically, this month was down a little from the incredibly hot January we had recently. Interestingly though, virtually all the growth segments of the markets were higher than the value components. That is an unusual turnaround where growth lost less than value during February. The strongest segments of the market were the small-cap growth stocks, which is a good sign. Usually, the small-cap growth stocks are the ones that will rally first if a market increase in forthcoming.

For the month of February 2023, the Standard and Poor’s 500 stock index was down 2.4%, but was still up 3.7% for the year then ended. Just for comparison, the 10-year return on this index was an annual increase of 12.2% even with the horrible year of 2022 included. The NASDAQ Composite stock index was down 1% for February but was up 9.6% for the year 2023. Its 10-year returns are 14.9% annually. The Dow Jones Industrial Average stock index was down 3.9% for January and is down 1.1% for the year 2023. Once again, its 10-year returns reflect an annual gain of 11.3%.

Bond funds are getting hit historically hard since the increase in interest rates continues to rise. The Bloomberg Barclays Aggregate bond index was down 2.6% for the month of February and is up 0.6% for the year 2023. Its 10-year returns are 1.1% annualized. As you can clearly see, bonds continue to be underperformers of the markets, and with interest rates likely to go higher, that will most likely impact bond funds negatively. Why anyone would want to buy bonds with interest rates rising is beyond my comprehension.

Josh introducing Ava to some greens she might actually enjoy

During the President’s State of the Union Address, he focused some of the speech on the negative impacts of companies buying back their own stocks. One of the points that he emphasized was that the oil and gas companies bought back stock rather than using the money to invest in production to keep gas prices lower. It almost seemed to be comic relief that the President was criticizing the oil companies after all he has done to limit oil exportation and production in the United States. However, he could not resist criticizing them for not investing more in future production even given the enormous restrictions that he has imposed to limit their growth. Clearly, he does not understand oil economics.

Basically, what the President was proposing was that he would quadruple the tax on corporate buybacks and encourage long-term investments. There is currently a 1% tax on buybacks, and he is proposing a 4% new tax to limit this repurchasing. In Warren Buffett’s quote above, he is saying that if you do not understand the economic positive implications of stock buybacks, you are either an economic illiterate or a silver-tongued demagogue. Unless I am reading that incorrectly, Warren Buffett is calling the President those exact names.

Robby and the lovely Caroline all gussied up for the
Daddy Daughter CKS Dance

I too have wondered why politicians criticize buybacks. If you think about it in its truest form, the people selling the stock back to the company must pay tax on that transaction. The company that is buying back the stock does not get to deduct the cost of the buyback. So, for revenue going to the Federal Government, it is a win-win. They collect the income taxes on the person who is selling the stock back, but the corporation does not get to deduct the cost of that buyback.

I would think that any reasonable politician after reviewing the economic effects of the buyback would agree with Warren Buffett that they do not harm shareholders and do not enrich the chief executive officers. What is incredibly interesting about this statement by Warren Buffett is that he appears to be openly criticizing the President and the party for which he has been a lifelong voter. I am not sure what that means for the political future, but rarely do you see Warren Buffetf saying anything political and certainly nothing politically negative.

I have asserted in these posts all along that I thought the media and Wall Street in general were overexaggerating the economic effects of the current economy. I wrote that there will be no recession in 2022 and still believe there will not likely be a recession in 2023 even though investors were being bombarded with statements to the contrary. I have gone back and reviewed some of the information I have previously written and came across the following fact that seem to be relevant.

DeNay, Alexis, and Lauren dressed in pink to celebrate the upcoming arrival of baby Penelope

In March 2022, Goldman Sachs forecasted that there would be a 20% to 35% of an economic contraction within 12 months. One of the most respected CEOs in America is the CEO of J. P. Morgan Chase, Mr. Jamie Dimon. In June, he was shouting to all the news outlets that the U. S. was in store for an “economic hurricane.” I guess he was wrong about that also. Even Bank of America predicted a mild recession would hit before the end of the year of 2022. To double up on this policy, the Federal forecast for economic growth for the year 2022 was going to be a meager 0.2% for the entire year. All these so-called experts in the field of economic forecasting were absolutely just “slam dunk” wrong. Not one of the predictions above came true and everyone in fact suffered a price.

It is almost a foregone conclusion that if you keep pounding the public with this negative economic forecast, sooner or later the public will begin to believe it. It is a self-fulfilling prophecy when those times come. If the public believes that recession is on the way, almost immediately they will start cutting back on employees, new construction and virtually everywhere else they can cut so that they can weather the recession that was coming. But what happened when the people realized that these predictions were false? Did you see even one of these so-called experts above come back with a correction of their projection? Not even one. Even a broken clock is correct twice a day.

Clients Wyatt and Beverly Foster enjoying the daffodils at Gibbs Garden

The Wall Street Journal said that, “The depressing outlook dragged down consumer sentiment and convinced roughly three-quarters of Americans by late fall that the country was already in recession.” Think through that statement for just a second. Three-quarters of Americans believed, due to the media’s reflection on the economy, that we were already in recession last fall, yet we are not even in recession now, five months later.

Many of the major financial publications are trying to explain why the economy has not fallen into recession yet. The biggest reason they quote is that the consumer continues to hold up the economy. I am not exactly sure as to why they find this concept so hard to understand. When you have 3.4% unemployment, that means virtually everyone that wants a job is working. Even the lowest-paid person still has to buy groceries, gasoline and various other consumables.

Each of those purchases by the lower-paid people produces Gross Domestic Product. When the lowest-paid person buys goods at the grocery store, the grocery store pays its employees, an electric bill and buys more products to sell. It is said that the velocity of money is seven times, which means it has been spent seven times before it has finally returned to the Federal Reserve. If everyone is working and everyone is consuming, why would these so-called expert economists not realize that you cannot fall into recession when the labor market is so strong?

Jose realizing that there is no chance of the
packages containing a PlayStation 5

The Federal Reserve has been surprised that their unprecedented increases in interest rates have not slowed down the economy dramatically. They thought that increasing interest rates eight times over the last year, and likely another time this March, would have dramatically slowed down the economy, but it has not. There are many reasons why the economy has not slowed but the overwhelming evidence is that a great many Americans are insulated from these rate increases. Back in 2008, most homeowners had adjustable mortgages. Now only 10% of homeowners have adjustable mortgages, and the vast majority of Americans have locked in low interest rates, so these increases have little or no effect on them.

It is true that higher interest rates have slowed the purchasing of new residences by the American people, but this is a short-term effect. As I explain to anyone who wants to purchase a home, if you are waiting for interest rates to come down, you are clearly making a mistake. By waiting, you have allowed the cost of housing to go up due to inflation and you are much better off biting the bullet and pay the higher rates with the hopes of refinancing in the future. Staying another year in an apartment where you are paying rent creates no economic benefit to you in any way.

Lauren and Mia thinking Friday lunches at Ansley Golf Club should become a regular occurrence

The biggest obstacle that the Federal Reserve cannot overcome is that many Americans continue to spend their savings to keep their lifestyle at a high level. We are only a couple of years removed from the enormous cash the government transferred to individuals and as every report indicates there is still over $5 trillion in money market accounts that consumers are pulling down to go out to restaurants, make purchases and even take trips.

History has indicated that if you increase interest rates, eventually you will throw the country into recession and therefore slow inflation. As I commented in the last posting, do you really think that the Federal Reserve is willing to destroy the economy to improve it? Given that this year is an election year, and we are only one and a half years away from a new Presidential election, I do not believe that the Federal Reserve has any desire to further hurt the U. S. economy.

What is even more baffling in this wacky U. S. economy is that the Atlanta Federal Reserve is forecasting GDP for this first quarter to be 2.0% positive. Since we are approaching the end of the quarter and the Atlanta Federal Reserve has been closer to right than anyone else regarding projecting the economy, it must be a huge let-down to the Federal Reserve that given all their extraordinary rate increases the economy continues to be positive and the employment market continues to be fully employed. Every employer I know is still seeking more employees to hire.

Erik, Danielle and Robby just excited to be out of the office!

One of the most favored phrases by politicians that you hear virtually every day is, “Make the rich pay their fair share.” I guess the politicians have never bothered to look up the correct information, otherwise they would not use that phrase so often. The facts indicate almost exactly the opposite.

Using the Internal Revenue Service’s own records, it indicated for the year 2020 that the top 1% of earners paid 42.3% of this country’s income taxes. That is a two-decade high in the share of taxes that 1% of earners paid. What is even more interesting is that the 1% reported 22.2% of the adjusted gross income of all the tax returns in the United States, but they basically paid double the income tax as their earnings. You can make no other assumptions looking at these statistics than to understand that the income tax rates in America are highly progressive already, and do not need to be further increased since the 1% pays the vast majority of taxes.

Pinewood Derby Car Champion of the World – Reid Schultz
(ok, maybe not world but he sure is cute)

But if you look at the numbers a little closer, the 1%, which reflects income above $550,000, had an average income tax rate of 26%. Those making more than $220,000 but less than $550,000, paid a tax rate of 17.5%. If you look at the next grouping between $220,000 and $150,000, the tax rate is 13.1%. Above $85,000 is 9.5%, above $42,000 is 6.5% and the bottom 50% of the taxpayers whose income was below $42,000 paid an average rate of 3.1% income taxes. I am not sure exactly how you can get a clearer definition of a progressive rate structure than these numbers indicate. These numbers do not indicate any social security tax, excise tax or fuel tax. This just solely reflects income tax. I hope that once and for all we could stop this argument that the wealthy do not pay their fair share.

I have been confronted by clients in recent months related to the fact that the Federal Reserve is now in excess of their federal debt limit. Some clients have expressed outrage that there might be a shutdown of government and we will default on our Treasury Bonds which are held around the world. I am not sure exactly why these clients are concerned about this situation since it is clearly academic and certainly not troublesome.

Let me give you an example of why this is not a problem. Imagine if you, as an individual, went through a troubling financial time and maxed out all your credit cards and did not have enough income coming in to fund your lifestyle, pay all those credit cards and you are facing ultimate default on all. But wait, due to the magic you have you can go down to the basement and print some new money which can then be used to pay off all your debts. Magic has been done, and even though you are above all your debt limits, you were able to pay off and satisfy all your creditors.

Cutest sister-in-laws - Carter and Ava Rollins

That is exactly where the United States stands today. Even though they do not have the congressional power to borrow more money to pay off their debts, they just conveniently go down into the basement and print more dollars and use that to satisfy them. You should never be concerned with these types of political shenanigans, since as long as the United States has the capacity to print money, it will do so when it is in danger of a credit default.

I have used this example many times before, but it bears repeating. People were always bewildered by the fact that Nazi Germany could fight a war around the world even though this county was a relatively small industrial power at the time. Basically, how they financed the war was to print more money and use that money to fund the war. It was believed that near the end of the war, their money had become so worthless that they were having to pay their soldiers daily because the value of the money could not keep up with the cost of inflation.

Proud soon-to-be parents Jose and Elizabeth – Congratulations!

A good example today is Argentina, which reports inflation exceeding 100% annualized. Yes, there is great danger to printing money to pay off debts. But due to the overall strength of the United States economy, the printing of several billion dollars of new money will have minimal effect on the currency.

I am always fascinated by clients that get concerned with the potential of China invading Taiwan, taking over Taiwan or, in recent days, providing military support to Russia in the Ukraine War. I think these fears are unfounded due to the economic effect of the relationship between China and the United States. China’s major export consumer is the United States. Why under any circumstances would they take the risk of overturning that economic relationship with relatively small ventures like taking over Taiwan or helping Russia with their war in Ukraine?

This does not have anything to do with the bullets that would be fired, it has everything to do with the economic effect. If China were to invade Taiwan today almost assuredly the United States would completely stop any type of economic relationship with China. It is extremely important for China to keep its population working and being paid to prevent backlash or violence from the population. If China did not have the United States as a consumer of its products, most assuredly there would be major unemployment and economic disaster to the Chinese population.

Ziming happy to be enjoying a meal outside of the office
– no fork and knife required

Think about the consequences of providing lethal military armaments to Russia. People are completely confused about Russia and its economic prowess. Russia after its breakup in 1989 is a relatively small country. The GDP of Russia is not as high as the GDP of Texas. It is a very small country economically, and certainly the economic consequences of this war are huge.

Think for a second of the generational long-term effects if it is true that Russia has lost 100,000 military troops in Ukraine. Firstly, you have to consider the demographics of how many babies will not be born in Russia due to the loss of manpower. Also, consider that these are the young men that provide workers for their industries and keep their economy moving. These men will no longer be available to do that work.

Some tailgating that even Ava could enjoy with Josh and Carter

Notwithstanding the fact that Ukraine has reduced Russia’s military capabilities by a significant amount and with Russia’s loss of manpower, the long-term economic effects for Russia are historic. Also, it is hard to fathom that if Russia does win the war in Ukraine, that would be a peaceful relationship. Does Putin himself even believe that due to the damage that Russia has done to that country, it could possibly be a country that they could govern?

Russia certainly does not have the manpower to maintain that country by military force and it is hard to fathom that the citizens of Ukraine would be loyal to the Russian government given the damage they have done. In Ukraine, you have entire cities that have been leveled and you have entire utility systems that are no longer functional. Who could possibly afford to rebuild that country other than the United States or China? Therefore it makes it even more improbable that Putin will be successful in his venture, given that even if he wins the war, he will not be able to govern the country. Putin has made a serious mistake.

As we move into spring in the United States, the economy continues to be strong, and employment continues to be even stronger. There has been a very strong start to the year with the economy and with the stock market. We are finally seeing some stabilization and growth and to this point there is certainly no sign of recession on the horizon. To create recession, the Federal Reserve would have to find a way to reduce the workforce by over 4 million people and force those people out of their jobs and into unemployment. So far, all we have seen are layoffs in the high-tech industries which puts highly skilled people back into the labor market who will quickly get brand-new jobs. I realize that the Federal Reserve is frustrated by their inability to create chaos in the economy, but that has more to do with the strength of the United States economy and less to do with the weakness of the rate increases.

New Rollins team member, Josh Portschy,
hitting the field with his brother

There will be a slowdown in the economy as we progress through the year 2023 by no other reason than the Federal Reserve will continue to force rates up to try to reduce the influence in the economy. However, it is my opinion that they are going to be unsuccessful in creating recession in those acts because the economy is just too strong at the current time to turn around so quickly.

As I mentioned in the last posting, the international markets are certainly strengthening, and we need to be invested. China has now reopened again from its shutdown from Covid-19 and Europe appears to have turned the corner, and there is unlikely to be recession in Europe. In fact, the economies around the world appear to be improving and I believe that bodes well for future stock increases.

Pi Kappa Phi’s newest member, Bailey Musciano-Howard

In the opening, I indicated that I have a solution that would have prevented the Russia-Ukraine War from even proceeding to begin with. It was rumored that Putin wanted direct access to the island of his territory in Crimea but had no access since Ukraine controlled all the roads between Russia and Ukraine. It seems to me that if Putin was a rational human being one of the ways that you could have satisfied both sides at the beginning of this war would have been to build a very nice four-lane superhighway, right down the middle of the highway to provide Russia direct access to Crimea. I know that it is a simple solution, but sometimes simple solutions have the potential to avoid hundreds and thousands of casualties and billions in properties destroyed.

One of the things I am currently seeing as a tax preparer is that people owe less income taxes than in the last few years. Due to the sharp correction in the stock market in 2022 we do not see the capital gains that taxpayers have been experiencing for years. What is interesting about this concept is that this is a direct hit on the revenue that the United States government receives. Roughly 45% of all the revenues that the United States government collects is from individual taxpayers. Since these taxpayers are paying less tax due to the market selloff in 2022, that will make the deficits worse than anticipated.

We are now 1.5 years away from a Presidential election and I have to think that sooner or later the Federal Reserve will indicate that they do not want to be a part of the political process and will announce that they are sticking with their current economic forecast and will wait and see what effect rate increases have on the economy before increasing again. Whenever that speech is given by Chairman Powell, where he concedes that rate increases will stay at current levels, you will see a dramatic increase in the value of the stock market. You cannot participate in that rally sitting in cash. I know people are excited that they can make 4% on a money market account now but they are oblivious to the fact that the stock market has already far exceeded that level through the first week in March.

Ziming and Josh taking a break from taxes

If you have an interest in coming down to visit with us, we look forward to seeing you. We are in the midst of tax season for our Firm, but I will have the time to sit down and review your portfolio, taxes, or anything else you might be interested in.

As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal.  There is no assurance that any investment will be profitable.

This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future.  These statements are not guarantees, and undue reliance should not be placed on them.  Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations.  There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.