Daily Commentary

MarketMinder’s View: While this piece aims at GenX folks with aging parents in need of help, we find the broader lessons applicable for everyone who needs to plan for their own or family members’ advanced age. They all hinge on society’s widespread tendency to underestimate life expectancy, which can raise the risk of not being able to fund late-life expenses. This piece profiles people dealing with this, including folks who have had to help shoulder their parents’ late-life financial burdens, including in-home care, assisted living facilities and the high cost of clearing out the family home and preparing it for sale (which may entail renovations, mold mitigation and other unpleasant items on top of the emotional toll). If you have family who may need help in their golden years, start planning now, and don’t be afraid to have direct conversations about finances so that you can know in advance what your contributions may be and incorporate those needs into your own investment plans. And for everyone, when mapping out your retirement investment strategy, make sure you are correctly estimating and accounting for your actual life expectancy and that of your heirs, if your time horizon extends beyond your lifetime. Don’t get caught up with buzzwords like “conservative” or simplistic conventions about how much someone at a given age should hold in bonds. The right strategy for you should be based on your goals and needs over your entire time horizon, targeting the returns you need to meet them. Late-life healthcare costs for you or a loved one may be a big part of that.

MarketMinder’s View: Set aside a couple tangents and minor quibbles, and this piece shows why a repeat of 2022’s hot inflation is unlikely now despite high energy costs’ return. While conventional wisdom says oil’s spike then ignited an inflation fire, “There is another view, however, that places just about all of the blame for the surge in inflation on the rapid growth of the broad money supply, known as M4. It is certainly true that monetary growth was exceedingly high before the Russian invasion. It peaked at 15.5pc. If this monetarist explanation is accepted then it suggests a clear way forward for the Bank of England in the months ahead. The recent history of monetary growth is very different now. In the past year, M4 has grown only by 4.5pc. This suggests that any short-term surge in inflation reflecting the recent rise in energy prices will not be sustained and that inflation will fall back pretty smartly without the need for any increases in interest rates.” The article then notes double-digit money supply growth during COVID lockdowns coincided with supply shortages, which we think is salient and also downplays that all goods and services production was curtailed as money supply boomed. This created the classic inflationary cocktail of too much money chasing too few goods and services. So yes, we agree there are questions to ask about central banks’ reasoning back then, including why they downplayed money supply growth. But we also think this piece is wrong to downplay how high energy costs affect prices elsewhere. While it is fine to note high energy shows up in headline CPI (especially in the UK, where the price cap adds distortions), that doesn’t negate the substitution effects that help pressure other goods and service prices. That doesn’t mean society gets no inflation, but without red-hot money supply growth, you don’t get broad, lasting inflation outside energy.

MarketMinder’s View: This article illustrates a crucial point: If a security is marketed as “bondlike” yet offers yields orders of magnitude higher than Treasury bonds, then it is probably not actually bondlike. Meaning, it probably carries much higher expected volatility, which cuts against why people typically own bonds. Take the newfangled ETFs explored here (which include some actual funds, so we remind you MarketMinder doesn’t make individual security recommendations and features this for the broader theme only). Called autocallable funds, they “are a type of structured note, a form of debt usually issued by a major bank. Their return is typically tied to the performance of at least one stock or market index. They pay their stated rate of income so long as the underlying asset doesn’t fall more than a predetermined percentage by certain dates. They also return their full principal value if the target asset is at or above a prespecified level at maturity.” So what is the catch? If the underlying asset drops below a certain threshold, you lose the payout and take the principal hit. “Owning one of these funds puts you in the position of insuring against a moderate-to-severe decline in stock prices. Like an insurance company, you get to earn a premium for providing that coverage. That’s why these funds can offer regular monthly payouts at 12%, 14% or even 19% annualized rates. But those yields aren’t fixed. So the payout rate can change over time. Is there a catch? Yep. You assume 100% of the risk that the underlying stock or index might go down—and stay down—by a lot. The net result of all this complexity is that losses tend to be infrequent, but when they come they can be severe.” While these funds are new and have limited performance history, backtesting (an imperfect but useful exercise) shows they would have been hammered in 2008’s global financial crisis. So this is sage advice: “If your financial adviser recommends an autocallable ETF, simply ask: What happens to my income and principal if the underlying stock or index falls by 50% and stays down? The answer needs to have numbers in it, and if the numbers don’t have minus signs in front of them, your adviser is misinformed.” And always remember: High interest payments compensate for high risk. Let your goals and needs drive your asset allocation, not yields.