The calendar has changed to 2021, but in reality, not much else has. The whole world needs vaccines and that will take all year to deploy. The business models of technology-focused companies will continue to get stronger even though we will be ‘back to normal’ by the end of the year. Bonds have zero to negative yields, the Fed continues to print money and the wealth gap is a major concern. Savings durability and reasonable investment growth remain the primary focus for every individual and investor. As always, there are both concerns and many reasons to be optimistic.
Where are we now?
This may be the year when universal basic income (UBI) finally arrives in the United States on a large scale. While the tech sector continues to thrive, it employs just 2% of US workers. The gains are going to a smaller number of people, which is increasing the wealth gap. Massive bailouts were needed last year to bridge the gap between the haves and have nots.
As a result, the supply of US Dollars increased dramatically last year from $17 Trillion to $21.7 T (27% increase). We can either redistribute that wealth through taxes or print more money to support those who need it. Historically, we’ve achieved this redistribution through tax rates that were as high as 90% (in the 50’s). Right now, we are choosing to print more money to support those who need it.
One major challenge with this form of support: UBI is paid upfront, whereas Social Security is paid after decades of contributions. We have had a type of UBI recently with the pandemic checks of $1200, $600 and possibly $2000. To continue UBI we will have to continue expanding our money supply because we don’t currently have any reserves to pay UBI.
The risk with printing this much money is inflation. Many argue that as long as growth continues there is no risk of inflation. We have seen a substantial increase in the price of homes, equities, education and health services over the past few years. The government has not recognized this as official inflation. At the same time, technology is deflationary and puts many people out of work. We will need UBI for a large number of people as unemployment benefits do not last long enough.
The new administration in the U.S has plans for major government spending initiatives in broadband access, education, supply chain resilience, energy transition, infrastructure like roads and bridges, climate change actions and health care coverage. Hopefully, these programs will bring many jobs for many people who need them. In the meantime, technology-oriented businesses continue innovating and increasing their revenues at a remarkable pace.
Where to allocate new capital
Markets often perpetually seem as though they are too high or too expensive. For context, markets spend roughly 80% of the time at or near their all-time high prices. During periods of growth, investors benefit from investing early and often. In order to get over current prices, one can consider what those investments might look like five years from now. The attractive areas for investment today are the funds and companies that focus on the following areas both in the US and Internationally:
- Public cloud
- Digitization of finance
- Artificial intelligence
- Battle for attention (advertising and entertainment)
- Digital health care
The trends that came to the forefront in 2020 are not going to disappear even after the world is fully vaccinated. Once you use digital signatures, you don’t want to go back to printing, signing and scanning forms. There are both time savings and cost savings in using digital signatures. This is a positive-sum business model, but it’s not anywhere near its potential adoption rate. For example, the state of MA does not yet recognize digital signatures for annual LLC filings.
Zoom is the overwhelming favorite remote video conferencing brand of founders and investors surveyed by NFX, which bodes well for the stock as well as for remote working. Strong brand quality is an excellent way to ensure long-term business success. Zoom benefited greatly from the shift to remote work and we don’t see their story ending here in 2021.
Liabilities based investing
In order to make the right family wealth decisions, we have to answer the question: “what is the right allocation for me?” We answer that question with a liabilities based investment approach informed by annual expenses.
Essential and discretionary expenses are a driving factor behind future financial stability and growth. We compare future expenses to current assets and future income to better understand the risk profile of a family wealth strategy. With higher expenses comes a greater need to guarantee the protection of family capital. Conversely, low expenses allow for greater risk-taking ability and the opportunity to achieve higher returns in the future.
As we look ahead to 2021, we know that any number of unexpected scenarios can unfold. It helps to plan for various scenarios by keeping a protective reserve in mind while investing for growth.
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