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Commentary – 2019 4th Quarter


The Roaring Twenties got its name from the exuberant pop culture trends, such as jazz musicians, that define the decade, but the 1920s were much more than that. It was a decade that brought dramatic social change (women’s suffrage), political strife (prohibition/Nazi Germany), technological advances (penicillin), and economic turmoil (Black Tuesday). Albeit in different forms, these same topics are at the forefront as we charge ahead into the next version of the ‘20s.

“Roaring” is a great word for the state of the world a century later, but mostly in an irreverent, outrageous, everything-is-a-headline kind of way. Negative interest rates are portending economic breakdown and sending shockwaves throughout financial markets. Middle-class Americans would all but disappear if not for massive amounts of debt. And hundreds of billions of dollars of capital in the markets are tied to the lifespan of a group of random millennials (seriously, keep reading).

We’re Not in Kansas Anymore

The laws of economics have entered an episode of The Twilight Zone—one-third of all sovereign debt in the world is yielding a negative interest rate[1]. Japan is the biggest contributor to that pool, but the entire German and Dutch government bond markets now have negative yields. Even Ireland, Portugal and Spain, which just a few years ago were battling rising borrowing costs triggered by fears they might fall out of the eurozone, have seen big parts of their bond markets submerged below zero.

To make matters more complicated, the yield on a 2-year U.S. treasury bond surpassed the yield on a 10-year U.S. treasury bond for the first time since December 2006[2]. Before you can even consider the implications, headlines will blare, “BREAKING NEWS: YIELD CURVE INVERTS, DOOMING US ALL.” Well, not quite, but The Washington Post did run a story titled “Recession Watch”, complete with a photo of a Wall Street trader sobbing into his hands.

In short, investors today are losing money in a growing percentage of government bonds and make a greater return in shorter-term bonds—two concepts which challenge the very nature of financial principles. Five years ago, negative interest rates didn’t exist and today, there is over $17 trillion of capital tied up in what central bankers are calling “black-hole monetary policy.” Looking back at the 2-year and 10-year spreads, we can see that the yield curve has had sustainable inversions eight times since the early 1960s and led to a recession seven times. As investors look at number eight, it’s no wonder that confusion is spreading into panic.

This wasn’t supposed to happen. When Ben Bernanke started quantitative easing after the Great Recession, the plan was to ween the economy off the drug called “free money” after multiple rounds of inoculations. But of course, other central bankers, the geniuses that they are, liked the idea of intervention. Japan’s plan in 2015 was to make interest rates negative to spark growth. Over 4 years later, the economy is addicted and there is no end in sight.

As a result, the U.S. bond market is no longer the best house in a bad neighborhood: it is basically the only house still standing. U.S. debt accounts for 95 percent of the world’s available investment-grade yield, according to Bank of America. Translation: even though the Federal Reserve did a complete 180 on their “free money” policy, the floodgates are still open due to international investors pushing money into the U.S.

Make no mistake—these conditions do suggest a recession, but the issues of timing and severity are anyone’s guess. The good news, at least for now, is that most data does not indicate a threat of depression. It may seem trivial, but there are important differences between the two. Think about it this way: if your car is overdue for an oil change, a check engine light might come on and maybe your exhaust starts smoking. Eventually, if left unattended, the engine will completely seize up and require major repair.

At the end of a cycle, the “oil gets changed” by either a short, shallow recession or a long, deep depression. One can sometimes lead to the other, but typically depressions are marked by issues in underlying economic data. For example, unemployment rates, labor market strength, GDP growth, and manufacturing indexes were all contributors to what made the financial crisis such a pronounced downturn. Today, most of these indicators are still favorable, suggesting that unless financial conditions get drastically worse, any recession is likely to be short and shallow.

Some psychiatrists believe that naming your fears makes them seem less ominous. So, in the interest of mental health, try to remember that a recession is just a financial oil change.

Stuck in the Middle

Somewhere along the way, the American Dream changed from the ideals of freedom, democracy, and equality to an ethos of optimal consumerism. A house in the suburbs, white picket fence, 2.5 kids, and the obligatory fun-loving, photogenic golden retriever seems like an ideal dream. But consumer spending doesn’t comprise 70% of the U.S. GDP because we stop there. Of course not, we are Americans—we can have anything we want!

Flashy cars? Check. Family vacations? Obviously. Expensive dinners? This is America, isn’t it?!

Here’s the problem: while our mindset of what constitutes middle-class in America has shifted upwards, wages have been largely stagnant for two decades. From the Wall Street Journal

Labor’s share of domestic income has been declining since 1970 and has barely recovered in this expansion from lows last seen when the U.S. was pulling out of the Great Depression.

Employee pay and benefits as a percentage of gross domestic income fell to 52.7% in last year’s third quarter, for the fourth straight quarterly decline, according to data from the Bureau of Economic Analysis. It was as high as 59% in 1970 and 57% in 2001. If workers were commanding as much of domestic income as they did in 2001, they’d have nearly $800 billion more in their pockets, or $5,100 per employed American.

In an economy which has become global and obsessed with innovation, large corporations will go overseas for cheaper labor and use technology wherever possible to increase efficiency. Both trends have an impact on American’s wages, but as Americans, we will not sacrifice our dream! Naturally, the gap which is left ends up being filled by debt.

Consumer debt, not counting mortgages, has climbed to $4 trillion—higher than it has ever been even after adjusting for inflation. Mortgage debt slid after the financial crisis a decade ago but is rebounding. Student debt totaled about $1.5 trillion last year, exceeding all other forms of consumer debt except mortgages. Auto debt is up nearly 40%, adjusting for inflation in the last decade to $1.3 trillion. And the average loan for new cars is up an inflation-adjusted 11% in a decade. Unsecured personal loans are also back in vogue, with credit card debt up almost 10% over the last 4 years[3].

So, let’s take a minute to get back to basics with personal finance. We’ve all heard some of the cliché, self-evident rules such as “spend less than you earn” or “pay off your credit cards every month,” but neither of these offer any ability to benchmark your progress. Listed below are a few helpful ratios which underpin the core tenets of responsible financial planning. As 2019 draws to a close, run the numbers to see how you stack up, find out whether you need to catch up before the end of the year, and think ahead to how you can hit these targets next year –

  • Invest 15% of your gross (before-tax) household income
  • Contribute at least as much as necessary to receive your employer’s full 401(k) match
  • Your mortgage payment should not exceed 25% of your average monthly paycheck
  • Your total long-term debt payments should not exceed 35% of your average monthly paycheck
  • Calculate your average monthly paycheck (net take-home pay) and multiply by 3 to determine the minimum amount you should keep in a savings account

If you can stick to these principles, then the excess can be spent on whatever you choose. We call this “financial decisions dictating lifestyle.” The data suggests that Americans are going into debt to keep up with the middle class ideal, which is an example of “lifestyle dictating financial decisions.”


The debate of whether active management or passive management is the better strategy has been raging on for over a decade. You likely have questions, such as “what is the evidence to support each strategy?” Or “in what circumstance would one work better than the other?” Maybe even “what the heck does active versus passive mean?”

Here’s a quick crash course: advocates of the active approach contend that the ability to skillfully select investments can persistently lead to superior returns against the benchmark index, while their passive counterparts call their bluff. The original index, the Dow Jones Industrial Average, was started in the 1880s to quantify the performance of American industrial companies. Historically, investment managers would select stocks that they believed would perform well and compare their portfolios to the Dow or other indexes as more became available.

Today, indexes have become much more than a measuring stick with the advent of technology. Many investors (both professional and DIYers) choose to “buy the index” instead of picking stocks or hiring a stock manager. The amount of people who use this passive management strategy has been steadily climbing—funds that track broad U.S. equity indexes hit $4.27 trillion in assets as of August 31, giving them more money than stock-picking rivals for the first time ever. Funds that try to beat the market had $4.25 trillion as of that date[4].

The largest of these passive index funds is State Street Global Advisors S&P 500 ETF (ticker symbol: SPY). It represents over $250 billion, or about 3.5%, of the capital markets and money keeps piling into it. The fund is legally a trust entity and investors buy units of the trust in their brokerage accounts. But the SPY trust has an incredibly interesting and peculiar provision. Directly from the prospectus of the State Street Global Advisors S&P 500 Trust ETF –

“The Trust has a specified lifetime term. The Trust is scheduled to terminate on the first to occur of (a) January 22, 2118 or (b) the date 20 years after the death of the last survivor of eleven persons named in the Trust Agreement, the oldest of whom was born in 1990 and the youngest of whom was born in 1993.”

That’s right, the biggest ETF in the world is organized around a secret list of 11 individuals, aged 26-29, and upon their deaths the trust will be forced to delist, liquidate, and distribute its assets to unitholders.

SPY was the very first ETF in the United States, established in 1993, and the unit trust structure made the most sense at the time. Unfortunately, trusts are forced to have a termination date by law. Apparently, the creators of SPY decided to put out a call to many different Wall Street firms asking for people to volunteer their babies to be named in the trust document. Even more bizarre, SPY isn’t the only ETF set up in this way. Seven other funds are also set up as unit investment trusts and at least three of them include a provision relating to human lifespans[5]. Late stage capitalism at its finest!

We’re not knocking it—it works. The capitalist system just has a funny way of creating some ridiculous circumstances late in the cycle. And right now, we’re in extra innings.

We hope you enjoyed our comments. If you have any questions, please do not hesitate to contact us: 215-709-5100 or We welcome the opportunity to discuss our thoughts in greater detail. Thank you for your continued confidence in Planning Capital Management.

[1] Robin Wigglesworth, “Value of negative yielding debt hits record”, The Financial Times, 19 June 2019

[2] Christian Hubbs, “Why Does A Yield Curve Inversion Suggest A Recession?”, Seeking Alpha, 26 September 2019

[3] Ken Brown, “Families Go Deep in Debt to Stay in the Middle Class”, The Wall Street Journal, 1 August 2019

[4] Dawn Lim, “Index Funds Are the New Kings of Wall Street”, The Wall Street Journal, 18 September 2019

[5] Rachel Evans, “The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials”, Bloomberg, 8 August 2019