Skip to main content
All Posts By

Evans & Company

The Merge in Crypto Can Change Your Life.

By Blog, Cryptocurrency, Investing, Markets, Press, Wealth Management

While the Internet and how we interact digitally are being disrupted, you can build transformative wealth.

Total read time: 9 minutes

I missed the boat on the most significant bull run in financial history. My financial expertise and insights were born & bred at large wealth management firms. I was conditioned to scoff at new economic ideas, like Bitcoin. Now, I have my firm. I’m integrating crypto market ideas into a traditional portfolio. And what an exciting time to do so. 

Introducing, The Merge. I’m not going to miss this ride. And when you’re done reading this, neither will you.

What did we miss?

To appreciate the potential opportunity ahead of us, here’s what we missed in numbers.

I learned about Bitcoin from a 22-year-old on rideshare in an Uber. He asked if he could run something by me after I told him what I did for a living. He bought “something” for $0.40, and the price was now $500. In other words, his $400 investment in Bitcoin became $500,000. He asked me if it was real. I had never seen anything like it. He was afraid to touch it. I said the only way to know its objective is to try to cash it out. By now, he knows it’s real. But when did he know it was real? Did he sell it at $500? Did he sell it in a panic during the Pandemic when it was $6,200? If so, he would have earned $6.2 million on a $400 investment.

What is Bitcoin?

You know what it is, but you probably don’t know how it works. To fully understand The Merge, you need to know. Bitcoin is a decentralized currency. The government does not print it. It’s not borrowed from a bank. In other words, there are no intermediaries between you and Bitcoin, as there are with cash. Intermediaries take fees and charge interest on money. They report large cash deposits to the government so that they can assess taxes. But when you turn your cash into Bitcoin, you can also liquidate your Bitcoin for money without any “middlemen.” A ledger is the only record of your transaction of the coin. It’s called the blockchain. And you are a number on the blockchain, not a name. You are anonymous.

The Birth of Ethereum

The heart of Bitcoin’s success is the blockchain. It allows every transaction to be anonymous. Every new transaction is a new link in the chain. The blockchain is designed, managed, and stored on large custom servers.

Three years after the birth of Bitcoin, a group of programmers figured this out. They created their blockchain. Unlike Bitcoin, they decided their blockchain would not be exclusive. They would create a blockchain that anybody can use to make their currency. It’s called Ethereum. It’s more than just a coin.

Unlike Bitcoin, it’s an ecosystem.

The Birth of Decentralized Finance (Defi), ICOs & NFTs.

Many apps and cryptocurrencies have been formed on the Ethereum blockchain. Decentralized Financial Applications (called “DApps”) are the most disruptive. In the same way, there are no banking intermediaries with Bitcoin. There are no merchant intermediaries with DApps.

To listen to music, we must go through a streaming platform. They charge a monthly fee and pay the artists a tiny royalty rate. With DApps, the artist can bypass streaming platforms entirely. You don’t need to apply if you need a loan. You can skip the bank to get a mortgage within minutes. There are “open banks” on the blockchain where you can “deposit” your currency. These crypto banks lend money against your “wallet” like a regular bank and pay you part of the interest.

The Ethereum blockchain has also been programmed to create smart contracts. These agreements are binding, like ones drafted by an attorney. These contracts allowed companies to raise capital to grow their company through their cryptocurrency. It’s called an Initial Coin Offering (ICO). In the contracts, they offer ownership in the company. And sometimes, it’s special offers, discounts, and memberships to coin holders.

Non-Fungible Tokens (NFTs) are similar. The asset behind the token is not a company. When you own an NFT, you own something unique. Artwork, music, memorabilia, or exclusive video. Owning an NFT gives you membership, special access to the artists, a share of the royalty, licensing of the underlying work, and even a percentage of the proceeds from selling the underlying asset.

Like a stock, you can buy and sell your ICO and NFT token to a third party, in a secondary market, like Open Sea. With Bitcoin and Ethereum, you buy and sell your coin directly from them on their blockchain.

Proof of Work vs. Proof of Stake

Everything I mentioned above has not gone mainstream yet. The electricity costs to manage high storage servers and mint coins for an ecosystem are too expensive and exhaust too many resources. It’s so bad that China had to stop crypto miners in their country. Minting coins and running servers were overwhelming the electric grid and creating blackouts. It’s also happening in California. The state has passed this cost on to taxpayers as a gas tax. The tax is the highest in the nation. Their mandate to be green energy independent will make it worse. But I digress.

Minting coins is called proof of work. When you pay cash for Bitcoin, you get a currency that is registered on its blockchain. But that’s one coin on one blockchain. Imagine multiple coins on one blockchain. Rising costs have become a barrier to creating currency on the Ethereum blockchain.

In response, programmers have created new blockchains based on proof of stake. With this development, you don’t need to mint a coin to be on the blockchain. The community on the blockchain validates your ownership. Once they do, the servers create a new link. This eliminates the rising costs and exhausting of resources of minting coins.

Solana is the blockchain responsible for this new development. The coin is widely known in the crypto market as the “Ethereum Killer.” Just like Ethereum, many applications can be created from it. This development has helped Solana win growing favor with ICO issuers and NFT creators. The coin has greatly increased in value.

The Merge

It was always believed that once a blockchain was created, it was permanent. For Ethereum to compete with Solana, they would have to merge their proof of work protocol with a proof of stake protocol. This is impossible.

So, we thought.

Turns out, by Sept. 13, 2022, the Ethereum blockchain will merge with proof of stake, eventually phasing out proof of work completely. 

This Transforms The Entire Crypto Market.

Bitcoin & Ethereum own 62% market share of the total crypto market. The Ethereum ecosystem of apps and cryptocurrencies is a big part of that percentage.

This merge doesn’t just affect the Ethereum currency but the entire ecosystem.

All the Decentralized Finance applications I mentioned above will start to accelerate their plans to launch and execute.  

And with this market share, Solana, and other coins like them, become a moot point and begin to lose value. Large investors like Elon Musk and Tesla are already pulling out of Bitcoin. The only cryptocurrency holding all the upside now is Ethereum, and all the coins are built on their blockchain.

My Thoughts

At the time of this writing, Bitcoin is currently $21,000. Ethereum is at $1,600. I believe Ethereum will one day surpass Bitcoin in price. Merging with a proof of stake protocol cuts costs and conserves natural resources. It is a profit and a sustainable environment investment opportunity. The only thing stopping Ethereum’s momentum is government regulators. But the nature of the crypto market makes regulation difficult. China already has a “digital currency.” The United States is taking steps in that direction. It may accelerate. The government can only regulate crypto markets by phasing out cash.

The only way around that is to hold cash in a different currency. My custodian partner allows my clients to buy and sell stock in other global currencies. This is what makes my firm unique in this area.

Next Steps

Go out and buy Ethereum. How much? Depends on your risk tolerance. It is still speculative by nature. If you’re feeling you caught a case of FOMO, good. Me and you both. I’m not going to miss these opportunities again. Neither should you.

Thank you for reading.

Whenever you’re ready, here’s how we can work together:

Subscribe to the Macro View newsletter

Take the Course: Build Your Portfolio in 30 Days

Your 30-Minute Portfolio Makeover

1:1 Client Discovery

Why you shouldn’t panic in a recession

By Blog, Inflation, Investing, Markets

Total read time: 7 minutes

In this newsletter, I will share why I don’t panic in a market downturn. I sleep well at night, and my clients do too. I used my training in quantitative economics to make investments based on a thesis of how I see the world. The result is three proven, time-tested insights to protect your portfolio in recession and the next.

In 2009 I took responsibility for managing my client’s portfolios. I found it challenging to get explanations and action steps on the Great Recession from the institutional money managers I hired. So I fired them and began to use macro thematic insights to create a foundation of stability in my clients’ portfolios that could weather a stormy market.  

Global Exposure through Property & Casualty Insurance Industry

In a recession, companies quickly lay off workers to cut costs and slash budgets across their business units like marketing and operations. Where they don’t cut costs, however, are the lines of insurance that cover the cost of settling lawsuits and protecting their assets such as plants, equipment, and real estate from human error and natural disasters. 

This protection is in the form of property casualty insurance.

The BRICs–Brazil, Russia India and China are some of the most rapidly growing economies in today’s world. This has led to an explosion of commercial real estate development and residential home values that have never been higher!

New assets need new liability coverage. 

The international financial markets are not as transparent when investing in global growth.  It’s difficult to find publicly traded companies. However, this makes sense if you’re also looking for risk-managed exposure across borders because insurers like AON Corporation (AFL), Chubb Corp.(CB), and Arch Capital Group Incorporated(ACI) all do business in these countries.

Please also note why I didn’t mention healthcare.

Health insurance (health care coverage) is a cyclical industry. A health insurer’s largest policyholders are small business owners and corporations. When the economy expands, there is an increase in premiums through hires. When they lose premium and sales, layoffs decrease sales. Property & Casualty insures cars, homes, boats, commercial buildings, events, and other properties and assets are typically non-cyclical.

Real Estate Investment Trusts (REITs)

Health Care/Assisted Living 

America has been aging for the last 20 years and assisted living facilities have rapidly developed across the country to meet this need. You’ll also find that they evolved into diverse facilities with various business models, locations, amenities, and specialized care, such as the disabled elderly and those with Alzheimer’s Disease as an example. You can invest in these facilities through a real estate investment trust (REITs), a publicly traded trust of pooled healthcare facilities where the rental income generated from these properties is paid directly to you, the shareholder. Omega Healthcare is one of the largest trusts whose price and rental income remain stable during recession cycles.

E-commerce & Warehousing

Another interesting play in the REIT space is to invest in warehouses that fulfill online orders. E-commerce was already becoming an integral part of our online user experience. Shopping on the Internet, on your phone, and at home accelerated delivery by the Pandemic lockdowns. In another dramatic paradigm shift, the remote work lifestyle was born. This also marks the beginning of The Great Resignation, where people demand more space and flexibility in their work schedules from their employers.  Due to this movement, many commercial buildings in New York City have become residential properties. People no longer want to go to the office every day when they can be productive at home. JPMorgan Chase has shuddered hundreds of branches across the country during the pandemic, and they’re not likely to return. 

With this said, I believe you will also find stability in the REITs market by investing in properties that are in the warehousing and fulfillment of online consumer products like Prologis, which has the largest e-commerce warehousing/fulfillment portfolio in the world.

“Household Name” Companies.

If you’re subscribed to my weekly newsletter Macro View™ I have spoken about redefining the notion of “investing in companies with products that you love and use everyday.” 

Because that is not an investing strategy.

Instead you should think about investing in companies that everybody loves and knows, and as it turns out, those companies have tthe largest percentage of individual investors than any publicly traded company. If you’re managing risk, you want as little volatility as possible, and individuals who invest in companies that everyone loves. Because when people love the company they tend to hold on to its stock, and not sell it in a panic. This characteristic tends to cause the volatility (the up and down up and down frequency) to become less than other stocks, even in a down market. They’re also the first stocks to recover when the market rallies upward.

Because here’s the dirty little secret: volatility is often caused by institutional investors like corporate pension plans, insurance companies, state retirement plans, endowments, and large private foundations who when they trade, do so in large volumes that move the market in a noticeable direction.

I invested in Apple Computer at $6.96 a share in 2007 because I believed that the iPod was just one of many products that would come out of this company, and I believe that there was no other company like it. They also operate on a proprietary technology platform which made it hard to replicate, making their products projectively indispensable.  By 2012 Apple stock was as high as $295 a share. I’ve also recently added Tesla to my portfolio. There’s a very large share of individual investors in that stock as well, and they have done two stock splits in the last 2 years, which I and my clients have benefited greatly from.

The growth in these sectors will continue to be strong in the foreseeable future, mostly driven by technology and growing global market share, which makes them long-term keepers in my portfolio. and Management’s ability to adapt to disruption.

Thank you for reading.

Whenever you’re ready, here’s how we can work together:

Subscribe to the Macro View newsletter

Take the Course: How To Build Your Portfolio

Your 30-Minute Portfolio Makeover

1:1 Client Discovery

Company Culture & Exits

By Blog

Retaining key talent is key in determining the value of acquiring your company.

Company culture is often cited as a key factor in successful exits. Employees who love coming to work, enjoy time together outside of work hours, who respect leadership, and feel valued can all be measured by the company’s retention rate, which could be as high as 90.00%, and on the low end below 70.00%.   And then there’s the “Value ROI”.  The average replacement cost for an employee with an annual salary of $125,000 can be as much as $312,500. So if a large corporation is acquiring your company,  you want your retention rate to be as high as possible. A high retention rate means a high return on investment per employee and productivity.

So how can you ensure your company culture is conducive to a successful exit? In this blog post, we’ll explore 5 ways to create a company culture that will help you achieve the highest valuation of your company at exit. 

 

1. Compensate your employees and establish financial incentives.

Company culture is formed at the top, good and bad. 

When I worked at Bad Boy Entertainment, Puffy wanted us to work just as hard as he did. Now I don’t remember anyone shying away from performing their best, but we were not equity holders in his company, so we didn’t have the same incentive. This was a big gap in an agreement between Puffy and the employees that often created a tense work environment. And pay did not always match the enormous scope of work for many positions.

If you care about work-life balance and financial incentives like bonus plans and stock options, you will have happy employees who don’t want to leave. If you are someone who traded in their family life for a corporate ladder for yourself, that could burn employees and cause them to leave. 

 

2. Encourage employee community building

In many situations at work, the best support is another colleague. Maybe they are in the same department, maybe not. 

When I worked at JP Morgan Chase as a banker, I loved running the annual 5k race at Jones Beach, competing against other branches, and meeting new colleagues outside office hours for weekend events with their families.  When I left the bank to go to UBS, it was very difficult, as if I was leaving friends behind. Still, my time there is memorable for the community I built there and all the amazing opportunities like taking additional financial courses the bank created for us to know each other. Even at UBS, there were plenty of personal development events. My most memorable memory is meeting self-help guru Brian Tracy.

 

3. Have a focus (Family, Finance, Health, Relationships)

At JP Morgan, it was about relationships via community events. At UBS, it was about relationships through professional development. But at other companies, like Bloomberg Media headquarters in New York City, it was about health. In their main lobby conference center, you can find healthy snacks, fruits, and vegetables available complimentary to all employees and guests.

Healthy employees are happier, more productive, less stressed, and make smarter decisions. Companies promoting healthy eating habits are promoting a holistic wellness focus to their work that keeps turnover low and retention high.

 

4. Hire managers who share a value ROI vs. performance ROI balance.

Founders at bigger companies will not know every employee, which is critical to hiring managers that share your values. Prestigious degrees and work experience will often be the shiny object when hiring, but not emotional intelligence, causing fractured, toxic employee-manager relationships.

If you flip this around and hire qualified managers with strong self-awareness, emotional security, and interpersonal skills, employees will feel connected, belong, and included. 

 

5. Innovate & Automate Internal Systems

I remember when the Internet was born, it was not unheard of to hire over 100 programmers and spend over $1 million to build a custom website. Today, you can build a website in a few hours, no code is required, just pay for $200 in annual hosting.

Regardless of industry, many internal business units of your company can adopt technology to make workflows less time-consuming, more convenient, and cost-effective. By saying this, I’m also implying that by automating many of your internal workflows, jobs could be eliminated. This is why I believe strongly in business plans that include a hiring strategy that works in parallel with your company’s tech roadmap. This is the best way to effectively manage human resources and prevent massive layoffs that could hurt office morale. For older, larger established corporations, adapting technology often leads to disruption, as old systems that don’t require so many resources are downsized, and jobs are lost. Kodak was once a large corporation, creating photography and film products and employing 80,000 employees around the globe. Technology in photography has evolved so rapidly that Kodak had to lay off over 70,000 employees over the last 20 years. Since Kodak went public in 2013, its highest stock price traded at $37.20, and today 9 years later, the stock price is $5.99.

On the other hand, automating as many internal systems as possible frees up not only your time but the time of your staff. It creates an opportunity for a culture that focuses on well-being and innovation. I believe Google is famous for this because when you walk into their headquarters in New York, there are whiteboards everywhere with Legos. The cafeteria has every sort of food imaginable. 

When you have systems in place that bring cost savings to your company in an innovative culture, you can always plan to do interesting new things cost-effectively by creating the corporate fruit basket and healthy outlets for expressing creativity and collaboration of new ideas.

Create a company that sets up employees to do their best work, and you will also become a company that’s not only valuable and attractive to work for, but a place that people want to partner with and investors want to invest in. This means low turnover and high retention that will become an increasingly important metric when it comes to talking about the value of your shares in an exit. 

I provide outsourced CFO services designed to help start-up and early-stage founders craft strategies that help them scale, keep control of their company, and build personal wealth. Here’s where you can reach me whenever you’re ready: 1:1 with Daniel Evans

Women, VC’s & Exits: 3 Key Insights

By Blog

It’s an unfortunate fact that women founders tend to raise less venture capital over time than their male counterparts, according to a recent article in the Harvard Business Review. And while it’s great to see the world of venture capital becoming more and more diverse, there are still systemic biases that sadly remain.

In short: potential investors essentially ask men to win and women not to lose.

Ladies, how many times have you been told: “How certain are you that you’ve addressed  the right market,” or “What’s your plan if you miss your mark?”

Meanwhile, men essentially get a pat on the back as soon as they walk in the door, “What’s your plan to capture market share,” or “Share with us your 3-5yr target goals.”

The difference is not exactly subtle.

These are just a few examples of challenges women face and are forced to overcome in both our society and culture. Like men, women should be encouraged and rewarded not just for their achievement and success, but for their ambition also.

But the situation’s not all gloom and doom.

Here are three exit strategy insights for women founders facing a disconnect with regard to attracting venture capital investors, and their ability to exit and liquidate the value of their company. opening paragraph(s) here

1. Your mission and values matter.

If your goal is to build generational wealth and make an impact on the world, you can do that in two ways:

●      build a company that makes its impact as an independently, privately held entity with generational successors

●      exit through a venture scaling hypergrowth model to be acquired by a large corporation or IPO

Both exits build wealth through your company stock. A venture capital path would lead to building your legacy as a personal brand, with less control over your company. In an acquisition, you risk losing your company culture and values altogether.

If your goal is to stay at the company and build an iconic personal brand with voting rights and board control through these exits, creating a “superclass” of shares at the start of your company would accomplish this goal.

2. Assess your business type and size.

If you’re building your business to generate positive cash flow and earnings, you’re squarely on the opposite side of venture capital on the income statement.

It’s the culture of venture capital to seek “venture scale” through hyper growth of revenue, also known as top line growth.

This often leads to a numbers game of growing revenue through “paid growth” to drive valuations high enough to create a strong perceived indication of future earnings, by “burning” through “runway” vs. internal cash flow. And by doing so, create a transformative return that can be liquidated by an IPO.

This is not to say you shouldn’t seek venture funding. These days you’ll now find more micro VC firms more open to pre-seed rounds with lower minimums that favor businesses seeking high ROI on programs that build brand loyalty, awareness, organic growth, and cash flow to fund these programs ongoing, which often take 7-10 years to scale, versus the high minimums of the past, which favor investing in companies owning proprietary technology, patents and other trade secrets that are highly scalable within 2-3 years.

 More recently, a growing number of women and diverse “first check” investors have entered the venture capital space, with lower thresholds and longer time extents.

3. Venture Capital is not the soul of entrepreneurship.

Venture capital was founded 75 years ago in 1946 to invest in speculative biotech and engineering innovation on behalf of wealthy families and institutional investors that would result in transformative exits within 2-3 years.

That same year, a woman from Queens, NY debuted a line of skin cream she made in her kitchen, funded out of her and her husband’s savings, and sold in their own store in Manhattan. Every day on her way to work, she’d give away creams to neighbors and local businesses and get feedback.

Two years later, she would establish what she called her “power base” of luxury retail accounts – one of them being Saks Fifth Avenue. She’d undercut her competitors by going to each store and doing makeup for them for free, handing out free samples and tutorials. Twelve years later, she launched her overseas line at a new account: Harrods in London.

Estee Lauder Companies later went public at $26 per share in 1995 at a valuation of $390 million, Issuing Class A shares to the public at one vote per share, and keeping Class B shares for the Lauder family at 10 votes a share.

 As of today, those shares are worth $315 per share – a 1,211% return for the public shareholders, and a net worth of $23 billion for the family with a 40% equity stake.

And to think in her first year of doing business, she made only a mere $50,000.

The soul of entrepreneurship is establishing an emotional connection with your customers, users, and/or subscribers because you’re building a company to make an impact for generations, not exclusively to scale within five years to make someone else rich. And while the times are different, human nature is not.

Women as founders are a force to be reckoned with. When net income losses narrow, an exit is not far off.

Conclusion

To clarify: I’m not implying here that women entrepreneurs should play in a separate sandbox from their male counterparts: the takeaway is that you can’t fit a square peg in a round hole, and what works well for some may not work for all. If venture capital is right for you, know what that means, pursue it, and confront the wall of systemic biases on your own terms. If it’s not the right fit, recognize that upfront and seek the capital you require elsewhere, because, believe me, it is available.

Exit on your own terms.

This is an excerpt from the book, “The Founder Centric® Plan: Exit on Your Own Terms” by Daniel Evans, a Pre & Post Exit Planning advisor to founders in farming, food, beauty wellness & fitness companies.

Cashin’ Out: How to create liquidity out of your startup’s stock. Four Steps

By Blog

One of the greatest rewards of the startup growth stage, is recognizing revenue. It means your company is making an impact with your customers. However, it does not always mean you’re able to pay your personal expenses. And if you’re raising capital, expect many investors to see you being compensated out of the investment proceeds as a red flag. They believe a livable salary will de-motivate you from achieving your benchmarks.

This makes no sense. Hundreds of millions of people go to work every day, because they are paid to do so. They do this without owning equity. You generated revenue and created traction without being paid. Here’s what you need to know about creating liquidity in your stock for yourself and your investors.

#1 Find the Right Investors.

Investors are generally risk adverse for good reason, but sometimes it can become madness. They take more equity than they should. They seek board seats, plural.  They will not want you take a salary but instead sell shares to them if you want liquidity.

Stay away from these people.

Find investors who believe in you, your vision, and want to help you, and build a relationship with you. Part of the belief is seeing you are compensated while growing the company, because it means you worrying less about paying your personal bills, so you can go 100% in on the benchmarks to create equity value in your company.

#2 Sell Shares to Your Investors.

After finding the right investors and meeting your benchmarks, you can approach your investors, and request that they purchase shares from you. Your company doesn’t have to be making tens of millions of dollars in revenue to cash out, but if you want to cash out to create greater financial security and keep going, it’s better to do so after you’ve scaled and been bought out by investors who understand the complexities of your company and have worked with you for a while, and your shares are worth more, and giving up less percentage.

#3  Tender your Shares in the Rapidly Expanding Secondary Market.

Private exchange firms like Equity Bee, Sharepost, and even Carta will allow you to list your shares in a private secondary market, where an accredited investor may purchase your shares in the same way that you and I would buy stock through E-trade or Fidelity. This provides liquidity for both you and the employees who have been granted stock options. Selling warrants on the private secondary market adds another layer to this. Warrants are rights to buy stock at a specific price. For example, you could sell the right to buy your stock for $1 per share so they can own the stock at a strike price of  $10 per share for example. This way you own the stock until the warrant is exercised at $10/share, and by the time it gets there if ever, you could be near an acquisition or pre- IPO stage.

#4  Be Acquired by a Corporation.

It’s not uncommon for larger corporations to acquire startups. If you believe you’ve done everything you can with the resources and funds you’ve been given, being acquired is a viable alternative, and your investors or CFO should be able to assist you in making this happen. When Google bought YouTube in 2006, many people thought the price was outrageously high. However, Google bought the company with its own stock, which was trading at $200 a share at the time. This is important to note since Google went public 2 years earlier at $85 a share. Making a purchase with its appreciated stock meant it was in the best interest of its shareholders (no dilution), including the founders. was a good move. YouTube was scaling quickly as being on the cutting edge of video streaming search but engaged in several copyright infringement suits at the time when Google made its offer. Today, Google stock is worth $2,800 per share, which means the YouTube founders’ shares would be worth more than $23 billion if they held on to them.

Everything we do as entrepreneurs today are VC centric, whether we know it or not.

It’s time to be Founder centric and have the roadmap to building the life you want to live, and do what you love, on your own terms.

By doing so, everyone wins.

US plans fiscal spending

By Press

Key takeaways

  • Proposed fiscal spending would give the US economy a multi-year boost, reversing decades of public underinvestment

  • New spending would kick-in as the Fed winds-down pandemic support to a growing economy

  • Bipartisan disagreements may disrupt government funds short-term, creating market volatility, though in the longer run, multi-trillion spending supports the global recovery

  • Tactically we underweight US equities, preferring pan-European stocks that have lagged the US recovery, and so offer valuations that are more attractive.

Over the coming months, the political noise surrounding US spending plans may create some market volatility, but should not distract from America’s solid economic recovery. As the recovery matures, and the Federal Reserve prepares to withdraw its emergency support, a far-ranging USD 3.5 trillion fiscal package would deliver an unusually stable investment horizon.

As the pandemic’s impacts fade, the US economy is returning to its longer-term growth path. We expect gross domestic product to expand 6.6% for 2021, 4.6% in 2022, and closer to its long-run potential of 2% in 2023. This suggests that while the best of the post-crisis growth is behind us, growth is also consolidating closer to its average over time. At a smaller scale, this pattern is visible in the evolution of consumer prices as the post-lockdown surge in spending and demand slows. Core US consumer inflation rose 0.1% in August compared with the previous month. This was the measure’s smallest gain since February, as the mechanical ‘base effects’ of re-opening hotels and airports gives way to more cyclical inflation, driven by wages and rents, for example.

These ‘normalizing’ indicators back expectations that the Fed is poised to wind down – or ‘taper’ – its emergency spending by reducing monthly asset purchases, possibly starting late this year, or early next year. As long as employment also enjoys a broad recovery, tapering would be followed by raising interest rates, beginning in 2023, perhaps to around 2.5% by 2026.

As the Fed’s support is gradually withdrawn, the US economy is set to receive a new boost

A new boost

As the Fed’s support is gradually withdrawn, the US economy is set to receive a new boost. The arrival of the Biden administration in January signaled a new ambition in US economic policy with the ‘Build Back Better’ strategy. President Joe Biden’s experience of the end of the Great Financial Crisis in 2008/09, combined with the pandemic and low interest rates, left the current administration determined to reverse decades of public underspending. The country now plans the most extensive overhaul of infrastructure and social welfare in generations.

In August, the Senate approved new physical infrastructure spending worth USD 550 billion for roads, bridges, rail networks and broadband connectivity, thanks to the backing of 19 Republicans.

The approval process for further spending will not be easy. In total, the Democrats have proposed spending worth an additional USD 3.5 trillion. The bill would transform America’s social infrastructure by addressing the country’s inequalities. By many measures, including life expectancy, obesity, murder rates, infant mortality and education, the US trails every other developed nation. The bill includes tax credits, child and family support, paid medical leave and care, free universal pre-school, and climate initiatives. Senate majority leader Chuck Schumer has said the green initiatives in the bill alone could cut US carbon emissions to 45% below their 2005 levels this decade.

Tax hikes

Proponents argue that revenue-raising taxes can pay for this by reversing many of the Trump administration’s cuts from 2017. The changes include lifting the top rate of income tax from 37% to 39.6%, plus a 3% surtax on gross income of more than USD 5 million. They would also increase corporate tax, proposing rates of 28% or 26.5%, from 21%. That compares with a 39% rate before the Trump era’s cuts. The plan also increases capital gains tax and broadens the definition of investment income. In total, taxes may raise as much as USD 2.9 trillion, which combined with estimated growth in the economy, raising a further USD 600 billion, would be enough to cover the spending proposals.

The Democrats’ narrow control of Congress, means they have a window of opportunity to pass legislation

The bill’s detractors, including former Treasury Secretary Larry Summers, argue that the spending would be inflationary, triggering a sharp interest rate response from the Fed. Republican Senator Chuck Grassley last week described the bill as “snake oil socialism,” saying it would “drastically change our way of life, expand government control of the economy and our lives, open our borders and redistribute money to satisfy socialism’s definition of equality.”

Congress is now entering a political process to hammer out the package, but the debate splits along partisan lines. The Biden administration, plus the Democrats’ narrow control of both the Senate and House of Representatives, means they have a window of opportunity to pass legislation, with or without Republican support.

The Biden administration can use a so-called ‘budget reconciliation’ process to pass the bill with the support of all 50 of the Democrats in the 99-seat Senate. Still, among Democrats, there are frictions over potential compromises. ‘Progressives’ see the USD 3.5 trillion bill as the minimum investment needed, and ‘centrists’ worry about inflationary effects and debt.

Debt and default

When Ronald Reagan left the White House in 1989, gross national debt stood at USD 1.5 trillion. Today, in the wake of the Covid pandemic, that figure is nearly USD 29 trillion, and counting, raising questions about its sustainability. Yet while the absolute level of debt poses some stability risk, it is now more affordable as the cost of servicing that debt as a share of GDP has fallen along with declining interest rates.

Still, Congress needs to approve any increase in spending that would breach the US’ debt ceiling, which sets a limit on the amount of money that the Treasury can borrow.

Without Congress’ agreement, Treasury Secretary Janet Yellen has warned that the US may find itself in a partial technical default on part of its debt in October. “Neither delay nor default is tolerable,” Mrs Yellen wrote on 19 September, with an “overwhelming consensus… of both parties is that failing to raise the debt limit would produce widespread economic catastrophe” of the government running out of money to pay its debt. Congress is scheduled to debate raising the ceiling this week. Republicans have rejected the request for bipartisan agreement and point to a procedure for the Democrats to push through the increase unilaterally.

Longer-term gains

The process of turning the Biden administration’s key spending bill into legislation and discussions around debt will prove noisy. The principle danger is that Democrats underestimate the difficulties in securing some Republican support, or alienate some of their own party. We expect this process to create some short-term market volatility.

We should keep in mind that eventual legislation by the year’s end would provide for trillions of dollars in infrastructure and social spending to boost an economy where the outlook for jobs and economic growth is already sound. For investors, that potentially provides a supportive longer-term environment for the years ahead. In the near term, it is difficult to see any great risk of a domestically-induced accident that would de-rail the world’s biggest economy.

The Fed advancing its horizon for a first interest rate increase, and global growth concerns, have driven the US dollar’s recent strength. If the world’s economic rebound were delayed, the US stimulus may create the conditions for another period of ‘US exceptionalism,’ and a stronger dollar. While the Congress’ stimulus debates may also further strengthen the US currency, the expected global recovery and rising US deficit should eventually weigh on the dollar.

Our investment stance continues to favor risk assets as US strength underpins the global rebound. Tactically, we underweight US equities because we believe that other regions, such as Europe and the UK that have lagged the US recovery, offer stronger growth potential at more attractive valuations.

1225 Franklin Avenue
Suite 325, Garden City
New York 11530

T: 516-495-7913