2022 – Q1 Explorations

Inflation, Invasion, Innovation

In Smokey and the Bandit, Burt Reynolds wins a challenge by illegally taking alcohol over state lines in a big rig[1]. It is a fun movie where truckers do as they please – trucking as a low-on-stress, big-on- adventure ride that leads to a solidly middle-class life. That was in the ‘70s.

Fast forward to today and truck drivers are constantly monitored within their cabs.  Every single one of the truck drivers from Smokey and the Bandit would have been fired: no seat belts, speeding, doing what they want when they want, and the list goes on. Nowadays, truckers are primarily paid by the mile,[2] which creates obvious material unpaid periods where they are essentially leashed to their rig and monitored for literally everything via cameras and sensors all over their truck. The compensation reward for the truck driver has also declined materially, over the last few decades,[3] with some calculating the reduction up to 50%.  It is no longer a middle-class job, when adjusting for inflation.

Inflation vs Innovation

In 2019, prior to Covid, there was a staggering 90% turnover rate in trucking[4]. Supply chain disruptions, Covid related government assistance, and a seemingly general shift in the way many are viewing their life-work relationship has amplified a shortage already in the making in long haul truckers. These influences have resulted in wage inflation not unlike that highlighted in chicken processing plants in our December 2021 Explorations. Recent headlines have Walmart offering $110,000  to lure truckers, though that presumably may be a teaser rate given some of the wage dynamics we have seen[5].

Will truckers’ pay revert to one necessary for a solidly middle-class lifestyle? NO!

“What if we can create a virtual driver who never drinks, never texts, and never gets tired?” is the second line of TuSimple’s Autonomous Trucking opening video[6]. TuSimple began operating heavy-duty trucks autonomously over an 80 mile “hub-to-hub” stretch between Tucson and Phoenix this past December in a series of test runs. It is reasonable to draw the conclusion that if wages continue to increase, then funding of autonomous trucking will increase as well – it is a supply / demand equation. Autonomous driving would result in roughly 500,000 jobs lost in the US alone[7].

It is worth noting that not only does this technological innovation (autonomous driving and all the tech that comes with it), lead to significant job loss, but also increased energy efficiency, as well as consistency and speed of delivery. Additionally, there is the hopeful safety benefits of robot vs. driver – large trucks were responsible for 10% of fatal crashes in the US in 2019[8].

Recent wage inflation is but a component of recent heightened inflation. Following, we will broaden out our analysis to attempt to answer the following questions:

  • Why was inflation not present over the last 35+ years?
  • Why do we have it now?
  • How does today’s environment compare and contrast to the late ‘70s?
  • How does Russia’s invasion of Ukraine play into inflation?
  • What role does innovation play in the conversation about inflation?

Why Was Inflation Not Present Over the Last 35+ Years?

There has been a multi-decade decline in real interest rates within the developed world that has primarily been due to the combination of aging demographics, increasing debt loads and massive innovation encompassing technology maintaining a lid on inflation. Globalization has also been a contributor to lower inflation simply by increasing the level of competition and the areas to which to source product.

As a population ages, there are a number of population characteristics that shift, leading to lower growth and inflation:

  • Fewer workers: The proportion of workers to population declines as a larger percentage of the population is in or approaching retirement age. One can see this somewhat reflected in the US Labor Force Participation Rate which has been in decline since the early 1990s. It is only somewhat reflective in that other trends are in play, such as more women included in the labor force and increasingly older people remaining in the work force. Nevertheless, the current trend means fewer people earning income and spending that income.
  • More savings: Older populations tend to save more as they approach retirement. It has been estimated that there will be a 25% increase in net worth per person in the US by the middle of the century simply due to population aging according to The Pew Charitable Trust[9]. This is capital that is not getting back into the economy.
  • Less spend: Older populations also spend less. The Bureau of Labor Statistics calculates that the average retired household spends 25% less than the average working household[10].

High government debt levels exacerbate the above characteristics, as more dollars go towards debt vs investment. This feels counterintuitive. Increasing debt, especially at lower interest rates, should create a supply / demand mismatch – meaning fewer market participants interested in buying from a counterpart that is (1) increasing debt and (2) lowering interest payments. However, aging populations save more, institutions are forced via regulations to hold government debt, and ultimately, the Fed can use their balance sheet to vacuum up any slack. The Fed has been doing exactly that aggressively over the last decade-plus due to a lack of growth and desire to generally support capital markets. For the US, we have the added benefit of being a reserve currency, which attracts even more capital to our debt. With low growth and low inflation, the yields necessary to meet investor demands also remained low. The flip side is that this same high debt is deflationary, as less capital goes towards public and private investments.

One simply needs to look at Japan and Europe, both ahead of us in terms of aging demographics and debt to GDP levels to note the above effects. Japan’s debt to equity ratio is 2.5: 1, while Europe is 1.5:1 as compared to current US levels of around 1:1 – they both had negative real yields prior to Covid.

Innovation is the ultimate deflator though. Innovation comes through creation of new products and services as well as methods to increase efficiencies. Innovation can be the result of seismic introductions to an industry, or it can be the culmination of a multitude of small progressions. The Shale[11] Revolution is an example of a single new innovation that catapulted the US to a lead global energy position. General increases in miles-per-gallon , on the other hand, is due to many little innovations (and some big ones, such as Tesla!) over time to eke out the number of miles we can drive per gallon as an example of increased efficiencies.

So Why is Inflation Now Seemingly Out of Control?

We have written about this previously so we will keep it short (May 2021 Market Commentary). Ultimately though, Covid shut down the economy temporarily. This was a massive deflationary event. The government quickly provided massive fiscal stimulus to its citizens. This was a massive inflationary event. Typically, supply and demand move together through recessions and recoveries. This time around, though, it was harder for supply to get back online. There were a variety of reasons, but a big one was Covid-related supply chain issues. It was also harder for supply to figure out new consumer trends (e.g., good vs services) due to Covid. Note the theme? A huge disruption due to a once in a century event creates a million ripples throughout the world.

While these events may feel like “once in a lifetime,” every time it seems like there is the potential for inflation to start declining, another event exacerbates it:

  • China’s Zero-Covid policy: China continues to shut down areas where there is even a single case of Covid – an extremely hard task given the dramatically increase contagion of Omicrom relative to earlier variants and viruses in general. This results in supply chains shutting down (e.g., trucking, shipping) which results in inflationary pressures.
  • Russian aggressions in Ukraine: as explained further below, Russia and Ukraine are significant energy and food contributors to the world.

It has proven to be quite sticky – or at least less transitory then was initially believed (though transitory was never given a time frame). Are we in a new paradigm or is it simply an extended temporary bout of inflation we are dealing with here? Read on!

So, Are We Now in the Stagflation ‘70s?

No! America looked very different back then as compared to now in many ways. Even when it comes to energy, where one can make a case for similarities in geopolitical events creating an energy crisis (e.g., equating the OPEC Oil Embargo to Russian aggressions in Ukraine), our reliance and production of energy is materially different now then back then. The following roadmap speaks to why inflation has been low over the last 35+ years:

1970s                     2022

Demographic     Young                   Older

Gov. Debt            Low                        High

Employment      Low                        High

Furthermore, when looking at both energy production and energy intensity (note Energy Sidebar), the two periods of time do not even compare. In fact, renewables and conservation efforts got a real start due to the two oil crises of the ‘70s[12]. It is a classic example of disruption leading to innovation.


Petroleum products, which are created from crude oil and other energy sources (e.g., coal, natural gas and biomass) go into everything. Beyond fuel, heating oil, and electricity, petroleum is used in asphalt, plastics, and synthetic materials that are in nearly everything we use. 

Energy Intensity measures the units of energy used per unit of Gross Domestic Product (GDP). It measures how much energy a society (or group) uses relative to their economic output. Energy efficiency is a major contributing factor, but there are others, such as more of a population moving to areas with relatively more moderate temperature, reducing heating/cooling costs (e.g., the general US migration west).

Energy intensity has dropped by half over the last 35 years and by roughly 70% over the last 70 years. It is a good trend!

Furthermore, individual spend has also declined materially[13]. The point is that while energy is a significant component of inflation and an important contributor to the economy, it has declined materially in its contribution to GDP growth as well as consumer cost.

Energy Transition -> Energy Innovation

Innovation has led to efficiencies in energy use, all while increasing the overall functionality of product – with the car being a perfect example.

And while the world has been transitioning towards renewables, we expect current events in Europe (e.g., Russia) to turbo charge growth of renewables over the next two decades. Based on a recent interview with Daniel Yergin, an expert on energy, it takes roughly 10 years to get a wind turbine functional with eight of those ten years spent on permitting. We imagine government will figure out a way to speed up the permit stage[14].


Where Does Inflation Go from Here?

According to Fed chair, Jerome Powell, in his Q&A post following the Fed March meeting, based on the data the Fed was watching, they had expectations for inflation to peak in Q1 2022 prior to Russian aggressions in Ukraine. It is important to note that the Fed may have the most data out there and many tools at their disposal, but one of those tools is not a crystal ball. It is an impossible job. So even without further disruptions arising due to Russian aggressions and China’s presumably misplaced Zero Covid policy, they may have been wrong. The point here though is that the Fed did believe, based on the information they were receiving, that inflation was topping out.

Since the beginning of the year, the Fed in general has become increasingly hawkish. Simply by communicating expected hikes over the remainder of the year they have succeeded in very quickly increasing interest rates that most businesses and consumers are already being charged. For example, the average 30-year mortgage rate has increased to 4.67% as of the end of March, a 50% increase from a quarter prior and ~70% increase from the bottom, experienced this past summer.

Furthermore, the Fed has communicated that they will reduce their balance sheet by roughly $100 billion a month. According to a conversation with a Prudential portfolio manager, every $500 billion in balance sheet reduction is similar to a 0.5% Fed fund increase. That means when combining balance sheet reductions with expected rate hikes, there is over 3% of yield increases expected!

It is worth noting that while the market is expecting these hikes in 2022, the bond market is already pricing in almost 4 rate cuts in 2023, expecting this tightening cycle to be aggressive but short[16].

Does Russian Aggression Spell Doom to Globalization?

We had written in the past of a move to regionalization from globalization. However, our views, which are largely based on a well-presented McKinsey report, was due to innovation rather than war. In the following GDP map, one can see the size of Russia relative to the world – Russia GDP is slightly bigger than Spain (in 2021 but probably not in 2023) and way smaller than Italy. It is why it is hard to see China fully siding with Russia even if they really want to. US based businesses will continue to source product from China if that is efficient. Globalization has definitely been a tailwind for lower cost products and therefore a dampener of inflation. We can see this dampener slow down as geopolitical tensions increase but it is hard to see China follow too quickly in the path of Russia given the quick reaction the West had to Russian aggressions, as well as the material and long-lasting consequences of those actions. China simply has too much to lose in its partnership with the West. It is also worth noting that China has not been involved in any sort of real war since 1979, while Putin has been pretty busy fighting with Russia’s neighbors and allies (notably Syria) since coming to power in 2000.[17] The consequences have been minimal until now.

It All Leads to Innovation!

Disruption leads to innovation. A vaccine was created in a weekend[18]. Then a year was spent testing efficacy and safety. The last major energy crisis led directly to increased research into renewable energy and other conservation and efficiency efforts.

Disruption results in disproportionate reward to the solver.  This creates, at least in a capitalist world filled with curious humans, a disproportionate focus on solving the problem. This results in innovation!

There will now be more capital and more political will thrown at the problem at hand: at speeding up approvals of renewables while solving existing technical hurdles, such as storage (e.g., batteries) and distribution challenges within the energy complex. 

Russia and Ukraine are also large exporters of food and food related materials. Unfortunately, third world countries will suffer real food scarcity and inflation. In New York City, where I live, I currently source many herbs in a garden sitting on my counter, with my honey and many vegetables coming from local rooftops[19]. Yes, these are first world luxuries, but they point to the massive innovations that are already rippling across the world.

Vertical Farming – Partly Hypothetical, Partly Real!


As mentioned, Russia and Ukraine are key sources of global energy and food. Global warming has already put pressure on both energy and food supply[21]. So, while we do not believe Putin via Russia did the world any favors, we do hope it will speed up innovation in both areas for the long-term benefit of humankind.

[1] Burt Reynolds actually runs interference in a Trans Am – a bit more aligned with his brand – but the movie is full of big rigs.

[2] Truck Driving Per-Mile Salary Explained – All Trucking; Higher Pay for the Long Haul | NACS (convenience.org)

[3] Why Truck Driver Pay Has Decreased by As Much As 50% Since the 1970s (businessinsider.com).

[4] “Why Truckers Are Rebelling” by Robin Kaiser-Schatzlein, NY Times, March 20, 2022

[5] Walmart Dangles $110,000 Starting Pay to Lure Truck Drivers – WSJ

[6] TuSimple: Autonomous Trucking – A Better Path Forward

[7] Automated trucks could cost 500,000 US jobs, researchers say | ZDNet; Self-Driving Trucks Could Replace 90% of Long-Haul Jobs – Bloomberg

[8] “Why Truckers Are Rebelling” by Robin Kaiser-Schatzlein, NY Times, March 20, 2022

[9] https://www.pewtrusts.org/en/trend/archive/winter-2018/as-the-world-ages-when-older-populations-become-the-majority

[10] A closer look at spending patterns of older Americans : Beyond the Numbers: U.S. Bureau of Labor Statistics (bls.gov)

[11] Shale drilling or fracking necessitated horizontal drilling among other huge innovations in order to extract oil and natural gas from areas once thought impossible. For more information: Shale Oil Definition (investopedia.com)

[12] The 1973 Oil Crisis is an interesting one. Syria and Egypt began what is known as the Yom Kippur war where they surprise attacked Israel during one of the holiest of Jewish holidays. Russia, as they continue to do now, supplied weapons prior and through the war to both countries. America, as they continue to do now, and some of their allies assisted Israel through the war, especially as Israel requested dire assistance (like Ukraine). America hesitated then came through. Saudi Arabia and most other oil producing Arab countries were outraged given their interest in removing Israel from the region and decided to place a total embargo on the United States and other countries that came to Israel’s assistance (Oil Shock of 1973–74 | Federal Reserve History). The price of gas jumped overnight.

[13] Natixis March Macro Webinar Slides show a drop from a 6% – 8% consumer spend on energy through the ‘70s to a more recent 2% – 4% spend through the end of Feb 2022. We are not at liberty to reshare the slides

[14] Via podcast interview with Ezra Klein

[15] https://www.visualcapitalist.com/visualizing-the-history-of-energy-transitions/

[16] Cliffwater Weekly Macro news

[17] Technically, December 31, 1999 – Perhaps that was the true Y2K threat!

[18] Pfizer and BioNTech’s Vaccine Was Designed in Hours Over a Single Day (businessinsider.com)

[19] Brooklyn Grange (brooklyngrangefarm.com)

[20] Is Vertical Farming the Future? (visualcapitalist.com)

[21] Between this fact, the point made above about the lack of real consequences to any of Putin’s aggressions over the last twenty years, and the more recent squabbling among the West, it did not seem so crazy for Putin to take the gambit he did. 20/20 hindsight of course seems to show he was wrong, but based on the last 20 years and even short-term capitalist reasons for Europe as opposed to America, it may not have been that crazy a plan. And it seems the world was as surprised as Putin (if he knows) at the terrible shape his conventional army is in – rotten throughout! Hopefully this applies to their nuclear complex as well, and we definitely hope we never get to find out about that one. Where he was totally off base was in believing the Ukrainians would greet Russia with open arms. Regardless of his army, the war was unwinnable because the population would have never ever folded – it is human nature.

Adapting Employee/ Client Connections During COVID-19

The top 4 things EVERY business owner should be doing

The COVID-19 pandemic has drastically changed the landscape of most all business operations. If you wish to survive as a business owner, we urge you to heed the advice of influential sage Sun Tzu in The Art of War: “adapt endlessly”. This calls for reshaping methods of communication to stay connected with employees and clients. Here are the top 4 things you should be doing right now to adapt those connections:

1. Embrace Virtual: If this was foreign to you prior to the pandemic, we’d bet that you’ve now been forced to speak into your computer screen. We’d also bet that you’ve found it’s quite effective. The rest of the world agrees and no matter what quarantine sanctions are lifted it’s not going anywhere.

Be patient with yourself, your employees and your clients and take the time to master the virtual meeting experience. Offer this as an option to your clients instead of a phone call and help walk them through it. Experts say that at least 70% of communication is non-verbal – we can’t afford to lose this! Embrace the new “face to face”, it’s in effect a huge positive.

2. Be Human: In the midst of constant emails re: “Changes Due to COVID”, it’s nice to be reminded that we’re all navigating personal and family changes at the same time. Go beyond the operation updates and talk about what it’s like to be homeschooling kids during quarantine, being stuck inside without access to the gym, or losing your routine and neglecting self-care.

Quarantine isn’t pretty and we need to be real about that. A simple outreach asking your clients and employees “how are you and your family?” is a welcomed change-up. Even a phone call might be a pleasant surprise after the magnitude of texts and email chains. You might even go as far as sharing tips on how to cope with some of our shared struggles – social media is a great place to engage the masses and keep it real.

3. Be a Resource: The news cycle on COVID-19 is something like we’ve never seen. It’s overwhelming and everyone is searching for reliable intel on the constant changes. As a business owner, your clients and employees naturally look to you as an authority. Take pride in that responsibility and make an effort to steer them to the facts. If possible, offer educational webinars on the pandemic changes that will impact them directly. Bring in experts to speak on your behalf. This is an opportunity to make your employees and clients feel cared for.

It would even be helpful to create an online space with trusted links and updates on the virus, to keep everyone informed with unbiased info and available resources. A great example of this in action is this COVID-19 Resource Page created by The Moose Consulting. If you’re already consuming all the latest news and how it’s impacting your industry, you might as well silence the static and deliver the facts to those who are already looking to you for answers.

4. Stay Social: We as humans are social beings in nature. A virus can’t change that innate yearning for social stimulation. What the virus has changed is how “social” now looks in our daily lives. People are actually having more in-depth conversations and hours spent on virtual “hangouts” than ever before. This is certainly a silver lining inside a gloomy experience, and we need to extend it to employees and clients!

Host a weekly social hour with your team and meet on video. No work, all play. Encourage everyone to share the best part of their week and give quarantine survival tips. When the daily office interaction is removed, we need to fill the void outside of conference calls and remember that we can actually laugh with the people we work with. Does anybody remember laughter?…cue Led Zeppelin and living room concert sing-alongs.

The Business Case for Financial Wellness in the Workplace

Employee Financial Wellness Stats

Source: 1) The MetLife Study of Financial Wellness Across the Globe: A look at how multinational companies are helping employees better manage their personal finances – Conducted by the Boston College Center for Work & Family from 2011. 2) Help Wanted? Employees and Financial Wellness Programs – Study conducted by LIMRA 2015.

Financial Wellness for Employees: It matters.

Inside the widespread uncertainty of a pandemic, comes the sudden urgency to plan and protect the things we may have previously pushed aside. For many, that includes personal financial wellness. And if you’re a business owner, that means you need to pay attention.

Now more than ever, employees are looking for your support as they navigate the future for themselves and their families. You might be surprised to know that financial wellness plays a major part in an employee’s overall job productivity and company loyalty. See stats below…

During a time when you need to keep you business afloat with confident employees, if you haven’t already offered access to financial resources and education, you can start now and do it all virtually.

Our team offers a customized Financial Wellness Series as an employee benefit to small business owners. It’s a simple setup that shows you are serious about employee appreciation and building value inside your work environment.

Here is an example of how we conduct our program and how it would look if you decide to take this time as an opportunity to do more good for your employees.

We follow a 3 Step Enrollment Process:

  • 1st – Our team will survey your employees based on dozens of financial topics to find which they collectively find most interesting.
  • 2nd – We will collaborate with you on the best time and frequency of each wellness session – available in person and via video conference.
  • 3rd – Our team will evaluate your employee satisfaction following each presentation, in order to consistently improve your experience.

Some of the topics we’ve received the most positive feedback on are:

  • Wealth Creation
  • Financial Goal Setting
  • Investment Basics
  • Planning for College
  • Predictable Income in Retirement
  • Protecting Your Income
  • Retirement Readiness
  • Understanding Stock Options & Strategies
  • Understanding Your Group Benefits
  • +Customized Presentations For Your Company

There has never been a more important time to take a step back and focus on doing what we can for each other as a community, neighbors, colleagues and employers. As we have always encouraged business owners to offer financial wellness, we do the same today but with an extra emphasis during this time of crisis, and because it just makes sense. If you’d like to discuss options to bring to your employees we’re here to talk.

Source: 1) The MetLife Study of Financial Wellness Across the Globe: A look at how multinational companies are helping employees better manage their personal finances – Conducted by the Boston College Center for Work & Family from 2011. 2) Help Wanted? Employees and Financial Wellness Programs – Study conducted by LIMRA 2015.

Tax Benefit Checklist for Families Caring for Children with Special Needs

2019 Tax Year

We’re providing below a checklist created by Thomas M. Brinker, Jr., LL.M., CPA Professor of Accounting | Arcadia University.  This is a great resource for double-checking your own circumstances against some key IRS provisions. This is general guidance and may not apply exactly to your situation. Make sure you talk to your own tax professional about how these apply to your family. 

Deducting the cost of a Special School or Institution

  • What is a special school?
    • Schools with programs to “mainstream” children with neurological disabilities (i.e., autism spectrum disorders)
  • What is deductible?
    • Lodging
    • Meals
    • Transportation
    • Incidental educational costs provided by the institution
    • Costs of supervision, care, treatment, and training
  • When can regular schools be classified as a “special school” for an individual?
    • Where School has special curriculum for neurologically disabled individuals
  • Private tutoring by a specially trained teacher
    • Therapeutic and behavioral support services (see Revenue Rulings 70-285 and 78-340)
  • Special education for children with dyslexia
    • Provided program enables children to deal with disability caused by medical condition (2005’s Letter Ruling 200521003)

Deduction for Medical Conferences and Seminars

  • Both transportation and conference fees deductible (per Revenue Ruling 2000-24)

Special Diet Foods

  • Generally, only the cost of special diet food over and above normal food (i.e., the premium; see Revenue Rulings 2002-19 and 55-261)

Prescribed Vitamin Therapy; Hyperbaric Oxygen Therapy; Chelation Therapy; Equestrian Therapy; Individualized or Group Art, Dance, Music, and Play Therapies; Summer Camps, etc.

Medical Travel and Transportation

  • For 2020 tax returns: 17 cents per mile (20 cents per mile for 2019)
  • Lodging costs (but not meals) up to $50 per day per person are deductible for the Taxpayer (TP) and one additional person if an overnight stay is necessary

Note: Un-reimbursed Medical Expenses are deductible only to the extent the TP itemizes their deductions (Schedule A) and they exceed 7.5% of adjusted gross income (AGI) as of 2020 (7.5% of AGI for 2019 was restored retroactively under the Taxpayer Certainty and Disaster Tax Relief Act of 2019).

Consider a FSA (Flexible Spending Account) Health Care Plan if ineligible for medical expense deduction!

  • The maximum pre-tax contribution is $2,750 for 2020 ($2,700 for 2019)

Impairment Related Work Expenses

  • Business deduction in lieu of a medical deduction for attendant care services at place of employment (ordinary and necessary expense to help in performing job)
  • Avoids AGI limitation imposed on un-reimbursed medical expenses

Expanded definition of a “qualifying child”

  • An individual with special needs can be older than 19 or 24 and qualify as a “dependent” for 2020 and 2019
  • No gross income limitation for a “qualifying child” (The “gross income” limitation applies to a “qualifying relative” and is $4,300 for 2020 and $4,200 for 2019….review ALL requirements!)

Note: Personal and Dependency Exemptions have been suspended (reducing the exemption amounts to zero) under 2017’s Tax Cuts and Jobs Act for 2018 through 2025. However, the definition of a dependent is still key for other deductions and credits such as the expanded child ($2,000) and dependent credits ($500). The Tax Cuts and Jobs Act increased the child tax credit from $1,000 to $2,000 per child and increased the refundable portion of the credit to $1,400. The Act provides a $500 nonrefundable credit for a qualifying dependent other than a qualifying child (i.e., a 17 year old child or a parent).

Credit for Special Needs Adoption Expenses

  • $14,300 for a child with special needs in 2020 ($14,080 for 2019)…regardless of adoption expenses
  • An eligible child is an individual who is under the age of 18, or is physically or mentally incapable of self-care
  • Must be a U.S. citizen or resident and requiring adoption assistance as determined by state authorities
  • Qualifying expenses include: legal fees, court costs, and other related adoption costs
  • The limit is per child, not per year (The credit is non-refundable with a carryover of 5 years)
  • Credit is phased-out for taxpayers with adjusted gross income exceeding $214,520 for 2020 ($211,160 in 2019)
  • The credit is completely phased-out at $40,000 above the threshold
  • The credit is claimed in the year the adoption becomes finalized regardless of actual expenses paid or incurred in the year the adoption becomes final for a “special needs” adoption.

10% Penalty Exception for Retirement Plan and Individual Retirement Account (IRA) Distributions

  • 10% penalty does not apply to a distribution that is less than or equal to the allowable medical expense deduction on Schedule A (regardless of whether the individual actually itemizes deductions) if the distributions are used to pay for the medical care during the year.
  • Penalty waiver only applies to taxable amount of the distribution. The income tax still applies to the taxable component of the distribution.

This handy checklist was created by: Thomas M. Brinker, Jr., LL.M., CPA Professor of Accounting | Arcadia University

Company Valuations in Context to COVID-19

From The Desk Of Our CIO… Joe Halpern, Chief Investment Officer

Having issued a COVID-19 Update just last week and with everyone in the world laser-focused on the spread and immediate effect of the disease, we figured it is a good time to discuss how businesses are generally valued and then circle back to how the virus truly affects those valuations.

Let’s start with a simple hypothetical paper company, we will call it Munder Difflin (“MD” – and yes, I finally got to watching “The Office;” don’t tell me the ending…).

If we decided that we wanted to purchase MD we may look at earnings over the last few years and infer a growth trajectory. If MD made $100K this year with a 10% growth rate for the next 5 years and then 5% thereafter and we necessitated a 15% return on equity, the valuation for MD may look like this:

Now let’s say we estimate that between disruptions and weak sales due to COVID-19 that this year’s earning would drop 50%, but that once contained we expect earnings to return to prior levels. In that case the valuation adjusts as follows:

As can be seen, most of the present value is due to the Terminal Value, which is simply all future expected earnings discounted to present value. Furthermore, a 50% drop in earnings this year has only a 4% negative effect on valuation ($988K as compared to $1.032 mil).

Following is the hypothetical base case as well as some other potential outcomes:

  • Base Case: A 50% drop in earnings where weak sales are simply lost rather than recaptured with the event isolated to the first year only.
  • Best Case: MD recaptures some of the losses in year 1, either later in year 1 or year 2. Valuation would drop less than 4% in that scenario.
  • Worst Case: Bankruptcy! MD cannot afford to navigate disruptions due to negative cash, lack of borrowing capability and client concerns (due credit concerns).
  • Recession Case: A longer period of depressed earnings due to disruption resulting in other cracks and weakness within the system.

Bringing it back to the virus, the Street initially believed that the outcome would look like our Best Case though there are increasing concerns that some combination of Worst Case and Recession Case may play out. Ultimately, the outcome is dependent on how the virus plays out and how much financial support is needed and provided to the most vulnerable companies to avert cascading negative scenarios of closing companies, supply chain disruptions and unemployment.

The graph below shows three scenarios that Vanguard put together on the virus’s effect on China GDP. All scenarios assume that business normalizes within the next half a year – which has been the norm in past outbreaks. This means Vanguard most likely assumes that the Virus is beat one way or another or, at the worst, is not beat but allows business to proceed.

Source: Vanguard Investment Strategy Group

Now we fully expect both the US and China to provide a high level of financial support to the economy. Ignoring the uncertainties and justified health fears, there is real risk to smaller companies who cannot afford to weather a three to six month period of true negative cash flows. If enough smaller companies go belly up it will tremor through the economy as well as exposing cracks that were not noticed prior. At the moment though, the graphic on right represents the general expectation of most institutional managers we have spoken to.

IMPORTANT DISCLOSURE: The information contained in this report is informational and intended solely to provide educational content that we find relevant and interesting to clients of Fountainhead. All shared thought represents our opinions and is based on sources we believe to be reliable. Therefore, nothing in this letter should be construed as investment advice; we provide advice on an individualized basis only after understanding your own circumstances and needs.

COVID-19 (Coronavirus) Update

From The Desk Of Our CIO… Joe Halpern, Chief Investment Officer

On Monday, February 24, world markets took a large one day hit due to fears that COVID-19 would become a pandemic. The S&P 500 dropped 3.35%, erasing gains for the year. We are at a moment in time in history where the “news cycle” is measured in seconds and the ability to understand what is verified, researched, and true is becoming more difficult to discern. Evidently similar disruption occurred with the advent of the telephone, among other technologies, leading to some disastrous misunderstandings (e.g., Spanish-American War).

With this in mind, we attempt to answer two items here:

  • Thoughts on risk of the virus as well as trusted sites to stay updated
  • Thoughts on risks of further global sell-offs

COVID-19 – A Pandemic?
The Centers for Disease Control and Prevention (CDC) has a good FAQ detailing COVID-19 which we expect will be kept up to date. We recommend using it as a primary source in understanding the current situation, best practices in prevention, and what to do if you think you may have the virus.

At a high level, the virus seems rather contagious, though with a death rate that we anticipate will continue to drop (currently 2.3% in China, though with a much lower rate within China outside of Hubei Province). Given two characteristics of the virus, one that there is a relatively long incubation period where the carrier is contagious, and two that most of those infected are asymptomatic or experience minor symptoms (81% – note above link), we speculate that the number infected is most likely grossly under-counted. The positive of this is that would mean a lower death rate. The negative of this is that the likelihood of a pandemic, meaning it spreads worldwide, is much higher.

As mentioned in our January commentary, biotech is already working on vaccines and medication to combat the disease. Our expectation is that, outside the worst-case scenario where the virus actually shifts and becomes more dangerous,  the death rate will continue to decline as we better learn the most effective path of treatment.

Financial Impact
We have spoken to a number of institutional managers and the general consensus is that while they expect short-term disruption, the market will rebound. Their primary thesis is that economic activity will eventually come back on-line. Their upside case is that quarantines are effective but even if they are not, eventually the quarantines will go away (downside is that it is a pandemic which results in no reason for mass quarantines). Once economic activity resumes, a majority of lost business is recaptured as well as future expectations which drives the bulk of equity valuation.

Source: Vanguard Investment Strategy Group

In our view, there is a worse downside risk than discussed which is that the virus exposes cracks in the economic system where certain companies cannot weather the disruption. Some of this risk is mitigated by what seems like unlimited capability to throw money at the problem by the governments of China and the US, essentially kicking the issue further down the road (e.g., high government debt levels, artificially low interest rates) – a conversation for another time.

We continue to closely monitor impact of the virus, its effect on the markets, and to analyze potential shifts or opportunities. Please feel free to reach out to discuss further.

The information contained in this report is informational and intended solely to provide educational content that we find relevant and interesting to clients of Fountainhead. All shared thought represents our opinions and is based on sources we believe to be reliable. Therefore, nothing in this letter should be construed as investment advice; we provide advice on an individualized basis only after understanding your own circumstances and needs.

To Buy & Not to Hold?

A Risk vs Reward Analysis

There are several products in the market that are considered “buy and hold”. These products typically have some characteristic that provides the justification for this consideration. For example, if a product has a surrender fee, it is typically considered a “hold” until the surrender fee has expired. A surrender fee is a fee associated with withdrawing funds in advance of the investment’s maturity date.

At Fountainhead, we do not view these products as default “hold” products. The first important item to note is that surrender fees are not necessarily a method by the product creator to extract additional fees from a client. These fees may be justified due to a lack of liquidity or some other quality relating to the underlying securities.

Second, regardless of the product creator’s underlying reason for the surrender fee, why wouldn’t we regularly analyze to ensure the product is still appropriate for the client? After all, both the characteristics of a strategy as well as a client’s needs are dynamic and necessitate constant monitoring and potential adjustment!

For example, several of our clients have investments in annuity products that provide a level of downside protection and upside performance on major market indexes (e.g., the Dow Jones Industrial Average or S&P 500). The product has become quite popular in the market place based on the ability to match a relatively defined exposure on behalf of the client.

Upon setting the planned exposure on behalf of the client, downside protection can be toggled up or down which will result in less or more upside participation. Protecting on an initial 10% decline over a three-year period may allow for 35% upside potential on the S&P 500 while protecting on an initial 15% decline may result in a potential 25% upside.

These products have surrender fees that range from 3% to 9% based on the individual company’s policies and when the client wishes to exit the strategy (the earlier you withdraw your funds, the more costly the surrender fee).

However, it would be a disservice to the client if we simply ignored the product until maturity due the surrender fee. The following is an example of one scenario where we thought prudent to explore exiting a position despite a 5% surrender fee:

Approximately four years ago, the client purchased a product with a five-year maturity date. The investment performance was linked to the S&P 500 (the major market index comprised of the USA’s top 500 companies) and provided full absorption of a stock market decline if the market declined 10% or less from purchase level over the duration of the five-year contract.

In exchange for the loss protection, the client can participate in the upside growth of the stock market, but only to the extent that the market grows 68% over that time, but not more. This limitation is known as “the cap” because the 68% is where you quite literally hit a ceiling on your return.

When analyzed recently, the price of the S&P 500 had increased 65% during the 4 years our client owned the contract. The characteristics that the product now provided the client were very different than inception. 

For one, since the loss absorption feature only triggers when the market declines below the original starting point, the client would now need to lose all 65% of its gains over the last four years before the product would provide ANY of that coveted loss absorption.

Furthermore, the current increase of 65% is very close to “the cap” of 68%. This results in a scenario where the client is limited to gain only 3% more over the final year of the contract (65%  68%) but is exposed to losing as much as 65% of the gains achieved from the first four years before any losses can be absorbed by the financial institution.

After reviewing the data, the client decided they wished to surrender the contract early and pay the surrender fee and other associated costs to exit (“exiting fees”). Their rationale was that the costs incurred to exit were reasonable to incur given the minimal upside potential and full downside risk the client was currently exposed to within the product.

The exit value for the client equated to approximately 11% per year of growth. In this example, it was the product characteristics that shifted materially from inception, not the client’s goals. The ability to analyze the product continuously and properly in context of the original intent and client goals allowed for the flexibility to recognize that a reset of exposure to better align with initial goals of a level of downside protection with modest upside participation was warranted. It also allowed for the understanding that the return characteristics were sub-optimal at the moment of analysis further pointing to a need to exit.

If truly considering all options, there is no such thing as a “buy and hold” product, at least at Fountainhead. External fees are either sunk costs or inputs and are analyzed along with all other elements of a position.

Ultimately, what we care most about is answering two specific questions: “Is the product still properly working on behalf of our client?” and “Is the exposure still appropriate for the client?”. Sometimes repeating simple questions leads you to find the new best answers.

[1] Note that these products are based on the price performance of the S&P 500, not the total performance resulting in giving up the dividend which is currently a touch below 2% annually.

End of Year Money Moves

Here are some things you might consider before saying goodbye to 2019 

What has changed for you in 2019? Have you started a new job or officially retired? Have you started a family? Have you made additional income that you were not expecting at the beginning of the year? Have you received a stock award? Have you received any inheritances? If notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and 2020 begins.

Do you practice tax-loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to reduce taxes by offsetting gains and/or income. You might want to consider this move, which may lower your taxable income generated by short-term gains.

In fact, you could even take it a step further; If you have more capital losses than gains, you can use up to $3,000 a year to offset ordinary income and carry over the rest to offset gains in future years. When you live in a high-tax state, this is one way to defer tax.1 Please be aware that these rules vary by state. New Jersey for example does not follow the federal loss carryforward rules, while New York does. 

If you want to sell a security to take a tax loss, it’s important to also understand the wash-sale rule. Tax-loss harvesting takes advantage of significant movements in the markets to capture investment losses and should be done with the guidance of a financial professional you trust.1 If you recall, last December the markets were almost 20% off their highs and down about 9% for the month. This extreme volatility in the 4th quarter last year was a perfect opportunity to lock in some losses which could have been used to offset the significant gains we have experienced this year. An active tax-loss harvesting strategy would have wiped out a large portion of taxable gains for 2019.

Tax efficient investing through tax loss harvesting is one of the few “riskless” ways to increase performance. You really need to consider your net investment return after taxes, as it is all about what you “keep” at the end of the day.

Do you want to itemize deductions? You may just want to take the standard deduction for 2019, which has ballooned to $12,200 for single filers and $24,400 for joint filers because of the Tax Cuts & Jobs Act. If you do think it might be better for you to itemize, now would be a good time to get the receipts and assorted paperwork together. While many miscellaneous deductions have disappeared, some key deductions are still around: the state and local tax (SALT) deduction, now capped at $10,000; the mortgage interest deduction; the medical expense deduction and the deduction for charitable contributions, which now has a higher limit of 60% of adjusted gross income.2,3 Have you looked into different strategies that will allow you to recapture your charitable deductions?

Could you ramp up 401(k) or 403(b) contributions? Contribution to these retirement plans may lower your yearly gross income. If you lower your gross income enough, you might be able to qualify for other tax credits or breaks available to those under certain income limits.

Do you have a C-Corp? Are you looking for ways to save money, reduce your tax burden and not be subjected to ERISA rules? Have you explored a defined benefit plan option but felt it doesn’t currently make sense? With the guidance of an experienced financial professional, you can implement planning strategies to reduce your income tax and/or allow you to offer the ideal benefit plan for key employee retention, without creating outside liability for you or your employee.

Are you thinking of gifting? How about donating to a qualified charity or non-profit organization before 2019 ends? Your gift may qualify as a tax deduction. You must itemize deductions using Schedule A to claim a deduction for a charitable gift.4,5

See that you have withheld the right amount. If you discover that you have withheld too little on your W-4 form so far, you may need to adjust your withholding before the year ends.

What can you do before ringing in the New Year? Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.

Life Planning for Your Child With Special Needs


One of the most challenging types of life planning is developing a strategy to care for a child with special needs. At Fountainhead Advisors, Marc Rock and Scott Silver have specific and very personal and professional expertise in this area.  They understand that parents of children with special needs require a financial strategy that is completely different from typical planning, and one that is customized to your family’s particular needs.

All parents want the best for their child, and will spend every dollar they have loving and supporting that child for as long as possible. But as parents – especially parents of a child with special needs – you worry that if you spend money today, there won’t be anything left for your child after you’re gone. Marc and Scott can help create a strategy that will enable you to enjoy your retirement, live the life you have envisioned for yourselves AND still have the means to support your child financially when you are no longer able to do so.

A critical step in the planning is to create a Letter of Intent for your child. This document essentially speaks on your child’s behalf, explaining in exhaustive detail who your child is, their abilities, what upsets them and what comforts them, what is required for their ongoing care and more. The letter must be updated every year, and is absolutely crucial to have on record in the event you pass away or for whatever reason are no longer able to care for your child. Add to this mix the complex landscape of navigating grants, government funding and other forms of assistance that may aid in your child’s care. It’s an overwhelming process, but we can help.

Marc and Scott are extremely skilled at pulling all of these diverse elements together, providing expert guidance and a compassionate and calming presence as they help you create a strategy for your child that will allow for adaptability as life’s events unfold.