Bitcoin, Tax Increases, and Inflation

In this episode of Cut Through The Noise, Anthony Saffer, CFP®,CKA® and Alex Okugawa, CFP®, CEPA®, CKA® tackle the hottest topics in financial markets, financial planning, and life, including:

• Is there a shift from growth stocks to value stocks? – Since September of 2020 we’ve seen outperformance in Value stocks, are we starting to see a regime change?
• Should I invest in Bitcoin?? – Bitcoin has skyrocketed at the beginning of 2021, is it the future or this a bubble?
• Should I be concerned about inflation in the future?- Inflation expectations have increased over 2%, how should I set expectations?
• Should I prepare for tax increases? – With proposed tax increases by Joe Biden and a Democrat controlled senate, what should we expect?

Watch Here:

Audio Version Here:

Show Notes:

• Why are economy and stock market so different?
• Coinbase
• Joe Biden: Potential Tax Proposals
• Fed 2% Inflation Expectations

Charts Mentioned:

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Full Transcript:

Is there a shift from growth stocks to value stocks? [00:15-01:30]

Alex: Okay Anthony, so the first question we have here is “Is there a shift from growth stocks to value stocks?

Anthony: Growth stocks have had a huge run as we know over time and that’s where people are investing really. As we know over time and that’s where people are investing based on the future growth of the company. More so than value stocks where they’re trying to buy at an “On Sale” good buy.

So these growth stocks have outperformed in the United and we’ve seen more of a shift we’ll put some charts up since September. Now, is it enough time to see a change in trend? Probably not we don’t know exactly that that’s going to happen. However, the answer to that, like always remains diversified. We tend to tilt towards the value side because over the long term, they do tend to outperform.

Alex: Yeah, I think the biggest takeaway here as well, you brought it up is just that diversification principle, right Just because growth stocks have done well in the past doesn’t mean they’re going to continue to do well in the future. And it doesn’t mean that we’re necessarily seeing a regime change right now. We need to be prepared for both situations, something to be aware of.

Should I invest in Bitcoin? [01:30-03:21]

 

Anthony: Okay, so next question for you, Alex. And speaking of diversification, “Should I invest in Bitcoin?”

Alex: Yeah, so hotly debated topic. This was popular if you remember back in 2017 really popular search. Died down a little bit since then, but we’re still seeing new all-time highs in the price of Bitcoin. The truth is it’s still a very ambiguous area. You have people who are like they preach about it. Like it’s the gospel. We still don’t know a lot about Bitcoin. We still don’t know a lot about Bitcoin. What is this blockchain technology? What is this blockchain technology? How does it run? Is it the future? Personally, I don’t really know. I don’t have a strong conviction necessarily either way. But these are the questions that I think about.

This is when we talk about Bitcoin and the value of Bitcoin. How much do we say a Bitcoin is worth right. How much do we say a Bitcoin is worth right. We always think about it in terms of dollars, right? because that’s what we’re used to and that’s what we’re kind of pegged to.

Anthony: But a proponent of Bitcoin would say, “Well, okay, if we get to that point where it is used as a currency, then that can flip right. And therefore there’s speculation in it.

And you know, there’s a lot of people that say “Well, you know, the dollar used to be pegged to the gold standard and we’ve since gone away from that So the dollar isn’t pegged, anything. My question is well what’s Bitcoin pegged to? It’s not pegged to anything. So there’s a lot of questions around it again it’s not something that I would say it’s a slam dunk either way. If you have a strong conviction about it, definitely do some more research.

I would be cautious of investing in things like Bitcoin ETFs. When you dig down into the details, you tend to pay quite a hefty premium for that Bitcoin ETF. So if you are going to buy Bitcoin, try and do it directly through Coinbase or something like that.

Anthony: Yeah, very complex. Got to do your research.  

Should I be concerned about inflation in the future? [03:22-04:45]

Alex: All right, the next question we have here is should I be concerned about inflation in the future? Which I guess in a way, can be related to Bitcoin.

Anthony: Yeah, so inflation expectations have actually increased now above 2% they were lower than that. Something to be aware of. The highest since November of 2018. If the Fed when they rearrange and kind of manipulate the interest rates. They’re targeting about 2%, so 2% itself is not a bad thing, But it’s something to be aware of as far as it increasing the expectations that go along with that. 

We’re in a lower inflationary environment right now. So when we invest, we want to be thinking about okay, are we increasing as per those expectations? Or do we maybe have a deflationary environment still or where at least remains more stable because different things potentially go well?

Alex: Here’s the thing too when you think about planning, when we do financial plans for clients, we tend to target inflation in that 3-4% range, which to some folks seems high right? In recent years, that is high 3-4% inflation. But we also know what inflation has been in the past and we’d rather be on the side of being cautious. If inflation is lower in the future that’s great than be on the side of being too aggressive, inflation running rampant, and all of a sudden you’re purchasing power going down significantly.

Anthony:  Right we’d rather be more conservative with those projections.

 

Should I prepare for tax increases? [04:45-06:38]

Anthony: So next question, “Tax increases, should I prepare for tax increases now that Democrats control the Senate as well? And Joe Biden has proposed this tax increase.

Alex: – For sure, well, I think it’s important to know. It looks like the Senate is going to be split 50/50. So Harris would be the tiebreaker in that case. It’s important to note that because it means it’s going to be harder to get an “extreme” bill through. An extreme tax proposal through because we have a split Senate. So that makes the chances of anything extreme going through, slightly smaller. The other thing too is what’s getting a lot of attention on the increase in taxes has to do with folks that are making over $400,000. If I recall correctly, basically what happens is those that are over $400,000 essentially, have an additional layer of self-employment taxes tacked on to those making over $400K.

So that’s really who these proposed or at least initial talks of tax increases would impact the most, but it also comes back to rolling back some of the tax cuts that were rolled out under the Trump Administration.

Anthony: And as with any bills, especially tax bills. What’s put out there on the campaign trail could look very different when it comes out. Good or bad and so we don’t know where that’s going to go. It does require us to have our antenna up to say. Okay. Now, maybe there’s more of a chance of something getting passed through. We need to do proper tax planning. Integrate that with your financial plan.

Alex:  Well specifically people like let’s say in California high property tax States. So you know, right now, what happened is under the Trump Administration. They capped state & local income taxes as a deduction to $10,000 previously, it was “uncapped” so you know, if that gets rolled back that’s going to be a big boost and a big win for California residents and those that live in high property tax States.

Anthony:  In a tax savings away as far as California or residents go.

Alex: Well good. These are great questions. We hope you found this helpful. Again, this is our segment Cut Through The Noise. As always. If you have questions that you would like us to answer, give us a call. Drop us an email at admin@onedegreeadvisors.com we look forward to talking with you.

 

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