What is contributing to market prices?
Enjoy this week's edition of the Planner's Beta
Beta (n) - climber's jargon that designates information about a climb This digest's purpose is to share observations, ideas, and treasures found this week which you may also find insightful. Sharing does not mean it's an endorsement. I am endorsing the pursuit of knowledge and exploration.
Federal Reserve's $3 trillion virus rescue inflates market bubbles (Reuters) - I've been sharing many articles about the Federal Reserve lately. I do this because the power of the central bank is immense, and the policies set by the Fed have far-reaching consequences. As this article illustrates, we see the effects of the Fed in the stock and bond market. If you are an investor in equities or bonds, you likely experienced significant gains after the March crash. Because the Fed has made borrowing money so cheap and cash so widely available, investors are scrambling to find ways to earn some yield (return). Companies are refinancing and issuing debt at meager rates. And investors are eager for new companies to list their stock publicly.
We will likely see more bubble headlines in the future. Remember, investors should have a financial plan. Their plan should be built upon their goals and values with risk tolerance, capacity, and needs dictating when and how to invest. The headlines should not dictate what to do with money; a carefully thought out financial plan should dictate such decisions.
Avoid Making This Strategic Mistake in a Recession (Harvard Business Review) - There are two business strategies. Be a cost leader or be a differentiator. Many business leaders are facing lower revenues due to the recession. Shrinking (or negative) margins will entice business strategists to cut costs and services. However, an expense-cutting strategy may not make sense for businesses that do not have cost efficiency in their DNA. During tough times, firms should look back to their core strengths and make the most of those strengths. Those firms which are differentiators should remain focused on what makes them unique. And cost-leaders should stay vigilant at squeezing every ounce of expense out of the value chain. For example, could REI compete with Wal-Mart like prices? More than likely, REI would fail at being a cost leader. And if REI tried to become a Wal-Mart of outdoor gear, they likely would alienate their customers. For firms who are differentiators (like REI), they should reduce expenses without taking away from the firm's uniqueness, and search for ways to improve the value of the firm's offering while not increasing costs in a meaningful way. In other words, differentiators should get better at what they are already best at doing.
What the Latest Purchasing Data Won't Tell You (WSJ). - A purchasing managers index (PMI), is metric market participants and policymakers use to understand the direction of the economy. A PMI collects individuals' sentiment in firms tasked with procuring inventory or labor to make their enterprise run. A PMI illustrates if business activity is increasing or decreasing. And the PMIs are conducted on a more frequent basis than many other economic metrics. PMI's are often seen as leading indicators of the economy; they provide a glimpse into where the economy may be heading. However, PMI's fail to capture the information needed to understand the full state of the economy. As noted in this WSJ short video, they fail to capture what is happening with small businesses. And small businesses reflect a significant portion of the economy. Additionally, some PMIs are globally indexed. A globally indexed PMI may not be appropriate for a policymaker or investor to base decisions related to a nation where COVID cases are increasing. A global PMI index could be based on countries reopening their economies with little growth of coronavirus cases. As with anything, understand what's behind the headline before coming to conclusions.
Flow Chart of the Month
Deciding whether to contribute to a Roth IRA or Traditional IRA is a common question for retirement savers. Assuming you qualify to add to these accounts, much comes down to your expected future income tax rates compared to your current tax bracket. The flow chart below illustrates how to tackle this decision.
Quote of the Week
"No one is useless in this world who lightens the burden of it to anyone else." - Charles Dickens
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