Client Newsletter 2Q23
Dear Ambassador Family,
Spring is here and tax season is officially behind us! Let’s dive into the second quarter of 2023.
If you recall from my January newsletter, we have been cautious and on the defense. This remains true, especially as current events unfold.
I also urged you to take on a strategy of emotional clarity. I would love to see you continue to seek out expertise and reflect on your family’s long-term needs and goals.
Investment Update
We added precious metals to your investments in the quarter. Two reasons include:
- Increasing secular trend overseas of abandoning the dollar and trading in local currencies instead, and
- Cyclical factor as Fed gets closer to ending the tightening cycle. Precious metals potentially offer diversification from the risk of a declining US Dollar as well as possible resurgent inflation with subdued growth or even recession (stagflation).
For those who can afford it, Roth IRAs might offer an attractive savings vehicle, especially after Congress passed nearly 4,000 pages of tax code changes at the end of 2022. Here are a few potential reasons you might want to set up a Roth IRA right away:
- Start Your Clock Early
The IRS stipulates that five years must pass between the tax year of your first contribution before you can withdraw the earnings in a Roth IRA tax-free. Keep in mind that are age restrictions for penalty-free distributions. - Compounding is Gold
Time in the market is key, which can potentially lead to compounding earnings. Roth IRA funds grow tax-free! - It’s Ready for Roth 401(k)
If you contribute to a Roth 401(k) and plan to roll it over at some point, you will need a Roth IRA set up. Why not open it now? - Consider Roth Conversions
Did you know there are no income limits on Roth conversions? If you have a traditional IRA, you are eligible to convert those funds to a Roth account. This can be a good tax strategy. - Remember Ordering Rules
Roth IRAs follow a “first in, first out” (FIFO) rule. Your contributions are available tax and penalty-free, but this does not include converted dollars or earnings.
Special Topic Q&A: Are my Dollars Safe?
So, what is all this talk about “de-dollarization”?
The US Dollar has been (still is) the world’s leading currency that global central banks use to backstop their economies. Many central banks recognize that their citizens do not trust their own governments. Governments tend directly or indirectly to manipulate their own currencies (for instance, when they spend more money than they earn, nationalize privately owned property). Think of a currency’s value as a vote of confidence (or lack thereof).
Of the world’s major currencies (US Dollar, Euro, UK Pound, Japanese Yen), the US Dollar used to be the currency of choice. Untouched by war with a couple hundred years of legal, fiscal, and economic stability, the US Dollar was a safe haven for people abroad who did not trust their own governments.
Is this the immediate end of the US Dollar?
The US Dollar still comprises 6 of 10 units of global central bank reserves. However, the trend is going lower as countries begin to trade with each other in other currencies. Peter Earle at the American Institute for Economic Research cites several recent examples of such deals. China and Brazil will ditch the dollar in favor of yuan-real settlements for trade. India and Malaysia are also shedding dollars in favor of using their own currencies for trade. Talks about developing regional or even a BRICS (Brazil Russia India China South Africa) settlement currency also are developing. In the meantime, foreign central banks continue to add to their gold reserves.
Will this all happen overnight?
Possible but unlikely near-term. Keep in mind that there is (not yet) a new currency alternative that is as liquid and large as the US Dollar. It is said that the total world supply of gold would fit in 2 Olympic-sized swimming pools. None of the other major developed market currencies have enough liquidity or credibility to supplant the US Dollar. The Chinese yuan might be accepted for bilateral trade, but the reality of capital controls and lack of institutional track record impede it (for now) from being the new choice for most central banks. Perhaps a new currency backed by the BRICS might come into play, but not yet.
How might this impact my nest egg?
Regardless of the pace of this process, de-dollarization does have implications. Interest rates in the US are unlikely to decline to levels even 5 or 10 years ago. Foreign demand for US Dollars (and debt) will be less than the past. Either government spending will have to fall, taxes rise, or else interest rates would have to be high enough to attract investor interest to invest in US Treasuries. Potentially, this might also limit upside on US-based assets (stocks) and possibly make foreign-currency assets relatively more attractive to investors.
What are we doing?
We have brought in precious metals into your investments. Over time, they potentially hold value and appreciate in US Dollar terms if these trends continue. While we would not be surprised to see fits and starts (profit taking), any further progress toward debasing the US Dollar as the world’s currency might stoke further demand for alternative currencies. Precious metals might fit that category.
What about holding physical precious metal?
Our investments focus on the liquid funds that trade daily on a financial exchange and correspond to the price of the underlying precious metal.
Some people feel comfortable holding their precious metal physically. Collectors love historical coins and have the potential of strong price gains if they hold a rare artifact.
It also entails risks. For instance, you cannot go to most stores and transact in gold or silver. You can only go to a broker (or jewelry exchange shop) to exchange it for dollars with which you could actually transact.
You also should have physical security (safe at a minimum) to ward off potential thieves.
Transaction costs on physical metal can be very high. For instance, basic silver coins in the recent past require you pay a premium of at least 5-12% to the underlying metal in addition to the base price.
We recently heard a quote for physical gold in an IRA with a commission of 8-12% just to buy into it, then the same commission to liquidate. (Imagine what the cost might be if one ever wanted to sell out.)
Our stance has been to seek solutions for our clients that offer targeted exposure with the most transparency and lowest cost possible. That is why we invest the way we do.
Investment Security in Light of Recent Bank Failures
You might have questions in light of headlines about recent bank failures. (See also the TD Ameritrade site.):
- How are my investments protected?
Your investments are managed by AWM and are custodied at TD Ameritrade. Your securities belong to you. The SEC’s Customer Protection Rule prevents firms like TD Ameritrade from using your assets to finance their own proprietary business except when the client has margin agreements in place.
To be clear, your investments still can go up and down in value depending upon how they are invested. When we talk about “protection”, this refers to what happens if a financial institution were to fail.
When it comes to cash held in your investment account, we have opted to keep that in an FDIC-insured account (FDIC insurance up to $250,000 per account per client).
- Isn’t TD Ameritrade like any of the banks that recently failed?
No. Banks can take your deposits and invest them in loans and other securities for their own profit. Banks fail when depositors pull all their money, but the bank does not have sufficient time to liquidate investments made beforehand.
In contrast, custody banks like TD Ameritrade are prohibited from taking your investments and investing them for their own benefit.
- Then what is my biggest risk at TD Ameritrade? Do I have any insurance in that event?
The biggest (though unlikely) risk would be major fraud leading to bankruptcy (such as MF Global or FTX) and where client assets go missing.
Even in that extreme event, your investments would still have insurance coverage from SIPC. You can refer to the TD Ameritrade website link above for more information. It is noteworthy that in over 50 years of history, investors have recovered 99% of their investments in failed brokerage cases under SIPC supervision.
- What should I do about my money in the bank?
Presuming your bank is a member of the FDIC, in the event of bank failure, you are insured up to $250,000 per depositor per insured bank, based on ownership category.
Closing Thoughts
We did see some recovery in the early part of 2023, especially compared to 2022, which was brutal to most investments. I do not believe the risk of a recession is gone and the second half of 2023 will likely be very difficult.
As we review each of our client’s portfolios, we keep in mind your individual needs and circumstances in order to help provide stability to your needs and goals.
Sincerely,
Petr Burunov, CFP®
President / Wealth Strategist