Looking Ahead, Taxes, Big IBM Change

Looking Ahead

Anyone holding cash in money market funds for the past year has enjoyed a nice, consistent, risk-free interest payment courtesy of the Fed’s high-interest rate policy. For cash, money market funds pay about 5%. Looking ahead, the futures market expects the Fed to cut rates by 1% this time next year. 4% risk-free on cash one year from now is still a very nice rate of return for a liquid asset. The Fed cannot really afford to pay these rates along with its many other liabilities. In short, rate cuts are inevitable. Many are now looking at the 10-year treasury, wondering if it’s wise to lock in these rates before they fall to less desirable levels.

Skepticism about the U.S. Government’s currency management often drives investors towards gold and bitcoin. Notably, Bitcoin didn’t rally with other risk assets on Tuesday following positive inflation news, underscoring its dependence on global and domestic turmoil for narrative and price movement. Don’t fret if you’re a pro-Bitcoin investor. There are still plenty of indications of global dysfunction.

Technology is once again the dominant theme in equity markets for 2023. What I find interesting over time is how much “tech” as a theme permeates all sectors. Many top companies from the Information Technology sector have been reclassified into other traditional sectors, almost as if they are graduating. The communication sector ETF inherited Facebook and Google years ago, while the consumer discretionary ETF inherited Amazon. The financial sector ETF inherited Visa and Mastercard this year, and to take this a step further, the largest position in the XLF financial sector fund is Berkshire Hathaway. Berkshire is 50% Apple stock, which officially makes Apple a top three financial sector company in its own right. Additionally, Apple was the largest positive performance contributor to the financials sector this year and a gift to those investors who also had to endure the banks mismanaging their balance sheets while losing deposits to money market funds. 

All of these companies started off classified as information technology. It’s getting harder each year to separate “tech” from “the rest” or the “new economy” from the “old economy.” This shift has been happening for a while now. This is why we spend so much time writing about and focusing on technology as an investment factor. Aside from critical macroeconomic factors like changes in globalization, inflation, interest rates, currencies, central bank stimulus policy, demographics and conflict, nothing impacts our modern world more than the rapid invention and implementation of new technologies.

Land Value Tax

Land Value Tax continues to gain coverage and momentum after a great write-up in the NYTimes. MA recently implemented a new 4% additional income tax on people earning over $1 million per year, effective in 2023. Meanwhile, Florida and Texas, states with 0% state income tax, continue to see record population growth. The problem with taxing wealth and high income is that it’s mobile. In fact, this MA tax already assumed via a study that 35% of the new incremental tax base would move as a result. Since land cannot move and most land is owned by millionaires, almost by default, the more effective approach would be to tax the land and not drive our most talented executives and entrepreneurs out of the state. My original post on Land Value Tax from earlier this year can be found here.

IBM’s Big Change

IBM recently ended its 401k matching plan, replacing it with a defined benefit plan. This might seem like an excessively dull topic, but it has BIG implications, so I recommend sticking to the end despite the buzzwords and retirement jargon.

Defined benefit plans were initially popular because they provided retirees with a guaranteed income stream independent of the general market. They were ultimately phased out because they were too expensive and complicated for companies to operate. For example, we have clients who still earn pension income from defined benefit plans from companies they stopped working for decades ago. It’s somewhat surprising to see a resurgence.

401ks replaced defined benefits by outsourcing the investment committee function to each individual participant. Each retiree must choose their own investment mix. 401ks eventually were dominated by large diversified pools of index-style investments, and, over time, they have become heavily focused on the S&P 500 alone.

401ks have a regular automated buying function where tens of millions of employees put a portion of their paycheck directly into the S&P 500 every month. It’s unclear how many of IBM’s 280k global employees are US-based, but at least 100,000 is a fair assumption. With the change of this plan, this represents roughly 100,000 fewer automated buyers of the S&P 500. IBM is the first mover, so this is not a significant change yet for capital market activity. However, if other corporate retirement plan executives take note, especially those with large employee bases, millions of regular S&P 500 buyers could leave the market. Supply and demand dynamics influence all markets, and less buying demand will have an impact if this becomes a trend – something to be aware of.