Bob’s Journal for 2/25/21

Some Notable Events That Grabbed My Attention This Week

I’ll answer a few more questions this week that were raised by a number of listeners during the subscriber teleconference we had two weeks ago. (A replay is available here.)

Question 1: I was planning to delay Social Security benefits until at least full retirement age. Since the Social Security trust fund will run out of money soon, should I claim benefits earlier while money still is available?

A new official estimate of when the Social Security trust fund will run out of money will be issued by the Social Security trustees sometime in March, April, or May. But it is almost certain the report will project the trust fund will run out of money several years before 2034, the date estimated in last year’s report.

But that doesn’t mean you should change your Social Security strategy.

Congress will have to act in the next few years, and changes must be made to Social Security. But I believe those already retired and within a few years of claiming benefits, perhaps as many as 10 years from claiming benefits, will be protected from benefit cuts. Those with very high incomes might be exempt from this protection, but I think other beneficiaries and near-beneficiaries won’t see benefit reductions.

Indeed, one of Joe Biden’s campaign proposals was to increase benefits across the board for anyone who has been receiving them for 20 years or longer.

Claiming benefits earlier than planned will reduce your lifetime benefits. In my latest book, Where’s My Money: Secrets to Getting the Most out of Your Social Security, I encourage most people to wait to claim so they maximize lifetime benefits. The difference for my readers will be $100,000 or more during their lifetimes. The potential changes coming to Social Security aren’t a good reason to forfeit these benefits.

Even if I’m wrong and some of the benefit cuts are imposed on those receiving or close to receiving benefits, it’s better to have benefits reduced from the higher amounts due by claiming later than the lower amount received by claiming earlier.

Question 2: Are bitcoins or Ethereum good retirement investments?

Digital currencies, or cryptocurrencies, have been making headlines. Bitcoin’s price increased rapidly the last few months and recently topped $50,000 before retreating.

Supporters of the digital currencies frequently say they are like gold or are good alternatives to gold for those who want safety and inflation hedges.

The digital currencies, especially Bitcoin, do have some similarities to gold. They are portable, liquid and private. Bitcoin has a limited supply hardwired into its code. The digital currencies also are becoming more widely accepted.

The digital currencies themselves are fairly secure, because it is very difficult for anyone to hack the code. But most people have to use one of the coin exchanges to make transactions in digital currencies, and the exchanges have a mixed record on security. So, unlike gold, the infrastructure for digital currencies isn’t as established.

Bitcoin also has a limited history. We can’t know how over time it will respond to inflation, economic growth, geopolitical crises and other factors. So, it’s impossible to say at this point that bitcoin is a reliable alternative to gold for those who want a safe haven or store of value in different circumstances.

We do know that the market for the digital currencies is very small, which means the prices are very volatile and a small number of investors can move the market. We’ve seen that recently with the price of bitcoin and other digital currencies soaring after a few billionaires and celebrities announced that they’ve been buying.

The digital currencies are largely unregulated at this point. That’s likely to change in the next few years. It is hard to know how the regulations will evolve and how that will change the behavior of investors who were attracted to the unregulated nature of the currencies. Those investors might sell.

I think the recent price increases in bitcoin and other digital currencies are due mostly to the easy-monetary policies of central banks. There’s a lot of money flowing through the global economy, and investors are looking for new ways to profit when interest rates are near zero and stocks are highly valued. It looks like a lot of the price action in bitcoin is the result of investors moving money from gold to bitcoin.

The bottom line is that it’s too early to say the digital currencies are a reliable store of value or an alternative investment. They aren’t mature and have a limited history. But investors who set aside a small portion of their portfolios for aggressive investments should consider taking a position.

Question 3: Should I own physical gold and silver or own it in some other way?

We received a lot of questions about gold and similar investments. Longtime readers know that I have been expecting higher inflation and recommending gold for more than two years, and we’ve done well with that recommendation.

How you want to own gold depends on your reasons for buying it.

I am recommending gold as a way to profit from higher inflation and lower paper currency values. I anticipate we will sell the gold when inflation is high enough and the central banks decide they have to reverse course and fight inflation.

For this purpose, an exchange-traded fund (ETF), such as iShares Gold Trust (IAU), is the best vehicle. The ETF is liquid, because it is traded on the exchanges just like a stock. The ETF owns physical gold. It can negotiate low prices for buying, storing and insuring the gold. The price of a share of the ETF closely tracks the price of gold without large spreads.

Some people want to own gold or silver to be prepared for a collapse of the dollar or civil unrest. They’ll want to own physical gold or silver in either coins or bullion, so it is accessible to use for purchases and trades.

Buying physical gold and silver usually is less efficient and more expensive than buying shares of an ETF. You also have to pay to have the metals delivered and have to worry about storage and insurance. Those are reasons why physical ownership isn’t a good way to buy the metals as an investment.

The Data

New unemployment claims declined to 730,000 in the latest week. That is the lowest number since Nov. 28. The previous week’s claims were revised lower to 841,000, which is 20,000 claims lower than the number initially reported.

Continuing claims fell by 101,000 to 4.42 million. That’s the lowest level since March 21.

Economists say it is possible the declines occurred because people in Texas and other areas that were hit hard by recent winter storms weren’t able to file their claims.

Despite the decline in claims for traditional unemployment compensation, claims under the special pandemic unemployment compensation programs increased by one million for the week.

The total number of Americans receiving some form of unemployment compensation increased by more than 700,000 to beyond 19 million.

Here is my update about housing prices and sales.

The Corelogic S&P Case-Shiller Home Price Index reported that prices increased 1.3% in December, following a 1.4% increase in November. Over 12 months, prices have increased 10.1%.

The Federal Housing Finance Agency (FHFA) House Price Index had similar results. It reported that prices increased 1.1% in December and 11.4% over 12 months.

Existing home sales increased by 0.6% in January from December’s level, according to National Association of Realtors (NAR). Sales increased 23.7% over 12 months.

This was the highest existing home sales rate in January since 2005 and the second-highest January sales rate since NAR has issued the report.

The NAR reports that the inventory of homes for sale is very low with the estimated months-of-sales inventory of homes for sale at a record low.

New home sales increased by 4.3% in January from December’s level and were 19.3% higher than 12 months earlier. In addition, reported sales for the previous three months were revised higher.

In the last eight months new home sales have been the highest since 2006.

Pending home sales in January declined 2.8% from December. That’s the fifth consecutive month of declines in pending home sales. But pending home sales were 13% higher than 12 months ago. January 2021’s pending sales were the highest for the month of January.

NAR reported pending home sales are declining because there aren’t enough homes for sale to meet the demand.

Consumer Confidence, as measured by The Conference Board, increased to 91.3 in February from 88.9 in January. But January’s measure was revised down from the first-reported 89.3. The February level is a three-month high.

Durable Goods Orders increased by 3.4% in January. The growth of orders in December was revised higher to 1.2% from the first-reported 0.2%.

Core capital goods orders, a measure of business investment, increased by 0.5% in January. December’s growth in core capital goods orders was revised higher to 1.5% from the 0.6% initially reported.

The PMI Composite Flash Index for mid-February increased to 58.8 from 58.7 at the end of January. This is a six-year high for the measure.

The manufacturing segment of the index hit a record high of 59.2, compared to 57.1 in January. The services component also increased to 58.3 from 54.8.

The Leading Economic Indicators index increased by 0.5% in January, and December’s index was revised higher to a 0.4% gain from a first-reported 0.3% advance.

The Dallas Fed Manufacturing Survey showed a sharp increase in activity in February. The General Activity Index derived from the survey jumped to 17.2, from 7.0 in January. The Production Index was 19.9 in February compared to 4.6 in January.

The Richmond Fed Manufacturing Index held steady in February at 14.

Gross domestic product (GDP) growth in the fourth quarter of 2020 was slightly better than first estimated, according to the second estimate of fourth quarter GDP. The economy grew at an annualized rate of 4.1% instead of the first estimate’s rate of 4.0%.

Under this estimate, GDP decreased 3.5% in 2020, the largest annual drop since 1946.

The Markets

The S&P 500 lost 0.16% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 1.12%. The Russell 2000 increased 1.31%. The All-Country World Index (excluding U.S. stocks) declined 1.14%. Emerging market equities fell 3.85%.

Long-term treasuries lost 3.40% for the week. Investment-grade bonds fell 1.31%. Treasury Inflation-Protected Securities (TIPS) declined 0.91%. High-yield bonds dropped 0.09%.

In the currency arena, the U.S. dollar fell 0.94%.

Energy-based commodities increased 3.32%. Broader-based commodities rose 3.34%, while gold gained 1.54%.

Bob’s News & Updates

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