February 10, 2024 | CPI, China Owning U.S. Debt, Growth Companies and Understanding your Tax Phases

CPI

One of the main reasons I continue to believe the Consumer Price Index (CPI) will continue to decelerate this year is I don’t believe there will be as much pressure from the shelter index. In December, the median U.S. asking rent price fell 0.8% from the prior year to $1,964. According to Redfin, this marked the third consecutive monthly decline as prices dropped 2.1% in November and 0.3% in October. The rent price reflects new leases which means I believe this will have a larger impact as we progress through 2024. I believe there will be even less concern over rent increases going forward considering the number of new buildings in the U.S. with five units or more. Looking at the chart below you can see that the amount of completed buildings is near the highest level in over 30 years and the number of new buildings under construction is at levels we have not seen before.

China Owning U.S. Debt

I have heard people worry about China owning U.S. treasury debt. Over the last decade or so, it truly has become a very small concern. China now holds just $782 billion of our debt which trails Japan at $1.1 trillion. China still tops the UK, but the gap has been narrowing over the years as the UK now holds $716 billion of US debt. The next largest foreign holders of our debt are Luxembourg at $371 billion and Canada at $321 billion. With our debt now over $34 trillion, China owns just over 2%. Compare this back to 2013 when Beijing’s holdings peaked at just over $1.3 trillion and our debt stood at close to $17 trillion and you will see the concerns over China controlling our debt are currently overblown. Back then they owned over 7% of our debt. The main benefit here is China no longer could threaten dumping our debt and causing a major spike in interest rates. The downside is our debt has continued to grow and with less demand for our debt from China, interest rates are likely higher than they would be if China was actively participating in buying more of our debt. Remember like everything else these markets are based on supply and demand. If there is more demand for our debt, prices would go higher and since there is an inverse correlation, interest rates would go lower.

Growth Companies

I don’t like to invest in the expensive growth companies because of the risk that comes with them. People often forget how much value they can lose and how long the recovery can be. One great example of this is Microsoft during the Tech Boom. In 1999, Microsoft could do no wrong and they were one of the most exciting companies in the world. The stock hit a peak of a split-adjusted value of $59.96 per share in December of 1999. The stock then fell dramatically during the tech bust and financial crisis and bottomed out in March 2009 at a price of $15.15 per share. This resulted in a decline of about 75% over essentially a 10-year period. The shares would not reach the 1999 peak until October 2016, essentially 17 years after it reached the tech boom peak. While the stock has done well as of late, how many people are patient enough to hold through a 17-year period with no growth? Not to mention if you need income from your portfolio, that would have been a complete disaster. While tech is hot again, I still recommend people be careful as they often forget the lessons from the past.

Financial Planning: Understanding Your Tax Phases

Sometimes it feels like taxes only go up, but it doesn’t have to be that way. In fact, most people go through different tax phases during their lives. While you’re working, taxes seem high because you’re subject to 5 different taxes. You are taxed federally, on the state side, and you have Social Security, Medicare, and disability taxes withheld from payroll. Then when you retire, things change. You’re no longer subject payroll taxes, which in California is a flat tax of 8.75%, and some of your retirement income may be partially or fully tax-free. For many this is a period of low taxation which means you don’t need as much total income to produce your after-tax cash flow. Then in your 70’s, you may see your taxes increase again due to required distributions from retirement accounts and extra premiums for Medicare. By understanding these different tax phases over time, you can take advantage of your tax situation and create a plan to save taxes over your lifetime.