Have Fun Storming the Castle
Summary:
Treussard Joins WISE Board: Dr. Treussard joins Women Investing in Security and Education, aiming to empower women and girls through financial education and connect them with leading women in finance.
Trees Don’t Grow to the Sky: Amidst an "everything goes up" market, a reminder that discipline in investing remains crucial.
Tax Strategies for Investors: Innovative approaches can offer strategic ways to navigate the tax landscape.
Investment Strategies for the New Cold War: We encourage a thoughtful approach to investing in a world where geopolitical tensions mirror those of the Cold War.
We just watched The Princess Bride as a family… again! We love that movie. An informal survey of our household reveals our favorite line is Billy Crystal’s “Have fun storming the castle!” It also seems like the perfect title for today’s entry.
Tear Down the Pink Wall
First off, I am thrilled to share that I have joined the Board of Directors for WISE (Women Investing in Security and Education), whose mission is “to provide opportunities and expertise for the financial education of women and girls.”
WISE does two all-important things:
It puts on financial-education programs to empower women and girls at all income levels
It hosts events with leading women in finance — like Katy Sherrerd and Jane Buchan who were together on Tearing Down the Pink Wall in 2020 — to help women at every stage of their career envision lasting success for themselves in the financial profession.
Katy is my former boss, mentor, and now advisor to Treussard Capital Management, which is a great source of pride (She was one of Barron’s 100 Most Influential Women in Finance when I worked for her). Jane is one of the most influential people in the world of alternative investing (think “hedge funds”). When I was just a baby in this profession — working for the Ziff family during the Financial Crisis — I went to an “alts” conference where Jane spoke about her business, the fund-of-funds business. This was a time when funds of funds were at a real crossroads: For every professional due-diligence-driven fund run by top talent, you could find a fly-by-night “feeder fund” run by a shiny guy in a shiny suit, whose sole purpose in life was to shovel unsuspecting Euro-bucks into Bernie Madoff’s money incinerator. Listening to Jane from the audience, it was plain as day that she sat firmly atop the former hyper-professional class. She was smart, cool, and owned the space cold. Having experienced first-hand the impact of putting people like Katy and Jane in front of audiences who aren’t in it for the shiny suits, I am humbled to be involved with WISE. I say, if we’re not going to storm the castle, at least let’s tear down the pink wall!
Trees Don’t Grow to the Sky… Right?!?
An old Wall Street adage goes like this: “Trees don’t grow to the sky” (Simply put, things don’t go up forever. It’s the antidote to Crypto-land’s “number go up”). While this wisdom has served generations of investors well, some periods test your faith. We’re seemingly back to an “everything goes up” world recently, and it’s easy to lose your head and let discipline slip when that happens. But letting discipline slip is a dangerous thing in investing. Always has been, always will be. In the meantime, for those watching the game at home:
NVDA continues to run and give short sellers the nosebleed of a lifetime. The firm beat earnings by about $2B last quarter, so naturally it added $250B of market value in response (That’s 30 times the incremental earnings if you’re willing to annualize the $2B to a full year; the largest post-earnings dollar market capitalization pop ever). It’s now a $2 trillion company. That’s one tall tree!
Interest rates are creeping back up (The 10-Year Treasury rate is right around 4.2%, when it was at 3.9% at the end of December) in a year that was supposed to deliver lower rates. And inflation (INFLATION! Run!) is drifting up again after two years of everyone in central banking doing their darnest to make it go down. Eech… In fact, Torsten Slok at Apollo – a very astute student of the economy – is now predicting that the Fed won’t cut rates in 2024. That would quite the reversal. But maybe.
Finally, a red-hot US economy is conspiring with a rally in US stocks and higher interest rates on our bonds to lure foreign investors to our shores and make the US Dollar strengthen again. I guess it’s time to plan your European vacation (again!) or go see Tokyo, while a US Dollar gets you a sweet 150 Yen a piece.
Storming the Fortress of Tax-itude
While US tech stocks continue to print gains that will have to be realized at some point (assuming some degree of luck), it doesn’t hurt to study strategies that could help reduce tax bills when they pop up. Those tend to fall into two categories: Embedding losses that can be harvested along the way or pushing gains and income into “friendlier” parts of the tax-code forest. Here are some examples from recent press coverage.
Bond Fund for Long-Term Capital Gains. Jason Zweig, one of the greats at the Wall Street Journal, recently highlighted that lots of bond mutual funds are sitting on bonds with embedded losses (you know, from those interest rates going up lately…).
As these underlying bonds get closer to maturity (or if rates come down), prices should appreciate and so should bond funds. That appreciation could then be taxed at the long-term capital-gains rates, as opposed to ordinary income. Depending on your situation (where you live, etc.), that could make a decent difference in your after-tax return. Interesting.
That said, it’s worth remembering that owning bond funds and owning bonds directly is not the same: bond funds negate the cash-flow structure of bonds (i.e., bond funds become a bundle of “bond risk”) so depending on what you’re after, this may not be a “universally” good idea. But point taken.
Synthetic T-Bill ETFs for Long-Term Gains. This one is a little more complicated so hang in there (or skip ahead… it’s OK if you do). Treasury bills are a fundamental risk-free building block for investors (i.e., unless the US government defaults, you know exactly what you’re getting and when, which is great). Less great is the fact that all gains are treated as (highly taxed) “ordinary income.”
Step one: Pretend you’re a nice Ph.D. financial engineer working at an ETF company. As Bloomberg reported on recently, if you create a synthetic “risk-free” forward position using long and short options, the old “no-free-lunch” rule implies that you get the same return as T-bills. Nothing about taxes here, just a math-y fact that there are ways to get the same return as T-bills using things (options) that aren’t T-bills themselves.
Step two: If you put those options inside an ETF vehicle, then you get to harvest losses within the ETF and you get to hand the positions with gains to a counterparty outside the ETF (a very important quirk in the tax code that explains why ETFs have taken off relative to their older siblings mutual funds). Suddenly, the ETF company doesn’t realize gains or income within the vehicle itself.
Now back to the real you, the investor. If you personally don’t sell the ETF, you delay any taxable event as well. And if you sell past the one-year anniversary of when you bought, what you get are long-term taxable gains, not the dreaded “ordinary income.” If you’re in a state like New York (and a city like New York City) that taxes long-term capital gains fairly aggressively, the benefit is something but not huge. If you live in a place that leaves you mostly alone when it comes to long-term capital gains, then it could make a fairly sizeable difference.
How Will America Win the New Cold War?
I grew up in Western Europe in the 1980s. When I tell you that America owned the cultural sphere, it really really did. Why am I telling this? Because it was mission-critical from a geopolitical standpoint. The Cold War had to be won, and pop culture was a key weapon when the enemy was a cultural oppressor to its own people. Fortunately, our nation was in a mind frame to naturally and organically own the airwaves (possibly with some help from the CIA).
On that thread, not only did we watch Princess Bride recently, we also watched Footloose (We were on a family vacation, what can I say?). Watch Footloose again, please. It’s a fabulous movie. It has a lot to tell us about fault lines in this country, but more importantly, it’s a Cold War movie über alles: Dancing boy from freedom-loving Chicago moves to a foreign place that’s culturally ruled by local authority figure who’s decided that dancing shall be forbidden. But the children want to dance. They want freedom! Through happy-warrior bridge building, the boy convinces the adults — including the cultural overlord — that the children can dance again. The world is a better place, everything is “good” again. I can’t help but fantasize that Mikhail Gorbachev got a bootleg VHS of Footloose, watched it one evening late at the Kremlin when nobody was around, and that’s how the Cold War was won.
Seems to me that we are right back to where we were in 1985, at least as far Cold Wars are concerned. I am also not convinced that we are in the right head space to win the PR culture-war like we did then (Taylor Swift likely being a noteworthy exception and the most effective happy warrior we have). Now, it is possible that we don’t need to “win” this Cold War and that the “other side” will lose it all on their own (here and here). And it is also my sincere belief that neither we nor the world can afford for America to “lose” or retreat from the world. But unfortunately, thinking that the unfathomable cannot happen is not a viable place to inhabit in my line of business. I have been thinking a lot about the investment implications of this what-if (like the fact that Chinese consumers seem to be favoring homegrown phones over the All-American iPhone). If you’re curious to discuss, drop me a line.
In the meantime, thanks for reading. I know we pack it in. So thank you! And feedback always welcome.