Robo-Advisors, Inflation, Strategic Petroleum Reserve, Debt, Gold, SBUX, Tesla, Housing Prices, & Annuities

History shows robo-advisors failed to live up to the hype!

When robo-advisors first came out years ago, people asked if I was worried about my career. I said no because I do believe that investing can be very complicated and a good advisor is worth it. I’m happy to report that has been the case. Robo advisors have only accumulated one trillion dollars in assets, that is only 2% of the entire $50 trillion advisory market. JPMorgan Chase and Goldman Sachs both dropped their robo-advisor programs because their clients didn’t feel the low cost provided what they needed. Low costs were the initial selling point for robo-advisors but today most have added some human interaction. With that costs have increased and these hybrid services can now cost around 0.65%. In my opinion, that is still not a great option because you won’t get a personal advisor and instead you will be left with a team of people who really don’t know your situation. The biggest problem I have seen with the robo-advisors has been when things get difficult, investors have no one to talk to and they end up selling at the wrong time. When it comes to performance, I think most investors have found that the lower fees did not produce the results they had hoped for. Over the last five years, the best performing robo-advisor based on a 60/40 portfolio was Sofi Automated Investing with a 7.8% annualized return. Schwab pulled up the rear with their Schwab Intelligent Portfolios showing a five-year annualized return of only 5.8%. It’s important to point out these numbers are only if the investor stayed in the program for five years straight. Sometimes automation can be great, but there are just certain areas of life such as your health and financial well-being that you need a good professional on your side to talk to when you need. 

 

A look into the history of inflation data 

Whether we’re talking about the CPI or the PCE, it seems no one is happy with how inflation is reported. I tell people your personal inflation is the most important inflation to understand as it is based on what you’re spending habits are rather than looking at someone else’s. A good example is a college student has far different expenditures than a retired senior. The Bureau of Labor Statistics released its first CPI number in February 1921 and that report included data going back to 1913. Time has changed consumer inflation as spending and prices have changed overtime. From 1935 through 1939, food represented 33.9% of a household’s expenses, today it is only 13%. During the depression, apparel was hard to come by and it was 11% of a paycheck. Today it only represents 2.6%. Many items are not comparable as time and style has changed. For example, cars and radios weren’t common enough to be included in the earliest years and now radios have become a dying product. There are some items though that we can look back over history and come. In 1913 round steak was 22.3 cents a pound which is equal to about $7 today. This would be below the price of $8.25 in the month of May. Butter was hard to come by and cost 38.3 cents a pound. That would be around $12 a pound in today’s dollars versus the May average of around $4.60. I will agree the CPI and even the PCE are not the best or should I say an exact measurement that people may want, but keep in mind the Bureau of Labor Statistics surveys metro area businesses and households collecting 94,000 prices and 8,000 rental housing unit quotes per month. So while it is a difficult task to take on, it is not just one person throwing out numbers but an accumulation of a lot of data that has been compiled for over 100 years. There will never be a perfect system for measuring inflation, but as of now they have not been able to find a better way to calculate it.

 

The Strategic Petroleum Reserve has remained at low levels

Oil currently trades around $75-$78 a barrel but the uneasiness in the Middle East should cause concern about the level of our Strategic Petroleum Reserve (SPR). The government used part of that reserve back when oil was $100 a barrel to try and keep the price of oil low, but they have never tried to replace it. We are currently sitting at a 41 year low on the SPR and I have to ask excuse the language, What the hell are we doing? Yes, the United States is currently pumping a lot of oil, but if there were a worldwide supply disruption that would then increase the price of oil around the world. The current administration should’ve been taken advantage of the low prices. We have had oil low for quite a while now and should have been buying a little bit at a time. For some reason the administration has chosen not to do that. I think this is a mistake and I do believe that if we don’t do something soon, we have the potential for some major problems with our energy security here in the US. 

 

The US government is issuing too much short term debt over long-term debt

We have said many times that we’re not that concerned with the overall debt of the US government because a true balance sheet shows we will be OK. However, that doesn’t mean that the current way we are financing that debt is correct. What concerns me is we are issuing too much short term debt versus long-term debt and that in the future the country will be at the mercy of short term interest rates to finance our large debt of $36 trillion. What should be happening is the government should be issuing more longer-term debt to lock in lower rates, just like you would on a mortgage. The concern is if they were to do that, it could cause long-term rates for consumers to increase. What appears to be happening is that the Federal Reserve will cut interest rates and short term rates will fall, but there should be a spread of around 2% from a short term rate to a 10 year treasury. If short term rates fell to a reasonable 3% that would put the 10 year treasury around 5%. It could cause some short term pain, but that’s far better than having a big portion of our $36 trillion debt in short term maturities. If short term rates were to skyrocket so would the interest cost and that would create more problems.  

 

Why is gold hitting new highs?

Last week gold surpassed $2500 per ounce, which is an all-time high for the precious metal. Many people thought with high inflation in 2021, 2022, and 2023 gold would have appreciated then, but it actually did very little as the ETF GLD was up just around 10% from the beginning of 2021 through the end of 2023. Something else that moves gold is the strength of the US dollar, which is starting to decline. The reason for the decline in the US dollar is because it does appear that interest rates are coming down. This generally leads the world to buy more gold. 2024 has been a great year for gold as it is up over 20% and while it may have some more appreciation going forward, you will still not find it in our portfolio. I still think there are some good value companies out there that are paying good dividends and that will outperform gold.

 

Can Starbucks (SBUX) hold on to the recent 25% jump in their stock price?

After the news that Starbucks hired Brian Niccol, the CEO from Chipotle, was released, the stock climbed 25%. The question is… can that higher stock price last? Under Brian‘s management at Chipotle, the stock climbed over 700%. Prior to being the CEO of Chipotle, he was the CEO for Taco Bell. They say being at the right place at the right time can help. When he first took over Chipotle, the company was having reputation problems, customer traffic issues, and their stock was struggling from the E. coli and norovirus outbreaks. He came in when the stock was trading at extreme lows and while I believe he did a great job, there was a lot of negativity priced into Chipotle’s stock. It’s important to understand how much larger Starbucks is and what a different business than Chipotle it is. It operates with 10 times as many stores, a large international business, and it has a packaged food business. I do believe that Brian Niccol has taken on a large order with his new role at Starbucks!

 

Tesla may be further ahead in self driving then I was aware of

On October 10th of this year, Tesla will be holding a robotaxi event for investors. I have said before that the Cruise division from General Motors and the Waymo division from Alphabet are far ahead on public testing for their driverless cars compared to Tesla. I recently saw an article in Barron’s that showed data from Tesla that their software has accumulated over 1,500,000,000 miles. The question is will the government accept this software data or not. The government has come down very hard on both General Motors and Alphabet, let’s see how they handle Tesla. 

 

The million-dollar home is just not as special as it used to be 

Living in San Diego many “normal homes” have surpassed the $1 million mark, but nationwide that trend has also been increasing. In 2023, 7.6% of US homes had a value of $1 million or more. In 2024, that number has now climbed to 8.5% of US homes. That is nearly a 12% increase for $1 million or higher homes. I just don’t see how the price of homes can keep increasing at such a pace when incomes are not keeping up and affordability continues to remain a major problem.  

 

Could a potential overbuild of apartments help with housing prices?

We have talked many times about the potential overbuild of apartment complexes and now as more projects are finishing, it appears we are finally seeing an impact on pricing. In the month of June, more multifamily units were completed than in any month in nearly 50 years. This is leading to more recent concessions as 33.2% of U.S. landlords offered at least one rent concession. This was up from 25.4% last year. The increased supply also led to a decline in the median asking price for apartments in one- to three- bedroom units in the month of July. This marked the first decline since 2020. According to Redfin data, the median asking rent price for a studio or one-bedroom apartment fell 0.1% to $1,498 a month; two-bedroom apartments decreased 0.3% to $1,730; and units with three bedrooms or more, were down 2.4% to $2,010. I believe this is a major positive as it could help control home prices if renting is a more cost competitive option. It should also be a huge benefit to inflation as CPI has continued to see a major negative impact from high shelter costs.

 

Can Annuities Lose Money?

Annuities are often associated with high fees and limited growth, but in exchange they come with guarantees like lifetime income and downside protection. This begs the question “can they lose money?”, and the answer is “absolutely”! There any many types of annuities and depending on how they are structured and the underlying investments, they can and do lose money despite being conservative. We met with someone this week who purchased an annuity three years ago for about $580,000. Now, even though the market has gone up during that time period, the annuity is worth less than $560,000, not including any surrender charges. How could this product lose $20,000 when most of the market overall is positive? Well, this was a variable annuity which means the account value is invested in a variety of mutual funds. When the annuity was purchased, the agent selected some funds that didn’t do too well. On top of that this annuity came with an income rider that includes an additional fee that is deducted from the account balance, further hurting performance. This rider comes with a separate income base that grows at a non-compounded 5% per year, and at annuitization will pay out 3.5% of the income base for life. Basically, this means even if the account balance itself doesn’t grow, guaranteed income can still be available from this income base. However, when you look at what this translates too, it does not seem attractive at all. This guy purchased the annuity when he was 58. If he starts collecting lifetime income at 65, he will be over 86 years old before he gets back the money he put in when he was 58. Technically this income is guaranteed for life, but with the fact that a low-interest checking account would have better performance over 30 years, the “guaranteed” benefit loses most of its appeal.

 

Companies Discussed: Brinker International (EAT), Intuitive Surgical (ISRG), Cisco Systems (CSCO)