July 22, 2019
Dear Clients and Friends,
Another quarter on the books and another positive experience for investors across asset classes from stocks, to bonds, to gold and beyond. The Federal Reserve again saved the day, by signaling its willingness to cut rates if need be. Low interest rates are to stocks what sugar is to cookies. There will be a day when the Federal Reserve takes away the jar, leading investors to reassess the prices of all manner of investments, but we are not there yet.
In my last letter I talked about the crop of IPOs coming to market and that professional service providers in the Bay Area were lining up to cater to the newly minted class of 2019. How have the IPOs fared so far? Some have done great, some have done ok, and some have done poorly, just as one should expect.
Of the headline IPOs, Beyond Meat is the outlier, up 162.5% from its first trade in April. It is also the only one that was not from the Bay Area and the only one that is not “tech.” The alternatives-to-animal-protein market looks promising and is good for the planet, so it is nice to see this company do well. In my opinion, there is too much enthusiasm baked into the stock price and with each PR announcement of yet another (fast) food distributor/restaurant adding Beyond Meat to its menu, the stock ticks up yet again. There are alternatives to Beyond Meat and intellectual property is thin, so I am not sure how long they can fend off the competition. They are also not profitable and it is not clear when they will be. At the same time, there is value in branding and perhaps that trumps my concerns. While I can’t justify the investment case, I am glad to be proven wrong if the stock price is even higher 6 months from now. We need more of these types of companies and stocks with sizzle attract the spotlight.
So what’s the IPO verdict thus far? Had you invested one dollar in each company at their opening trade, you would be up 34%, so I say that is a win. There are more IPOs to come, including big names such as WeWork and AirBnB. Additionally, we haven’t passed any lock-up periods yet, when insiders are allowed to sell. Therefore, the final verdict of the 2019 IPO harvest will have to wait.
One thing that has been a topic de jour in the financial and real estate industries, especially here in the Bay Area, is what affect these IPOs will have on the housing market. The consensus view – eagerly professed by most realtors I come across – is that there will be all this new liquid wealth pushing up home values. I am not so sure. The people with the biggest haul in the IPO, are the founders, institutional investors, and early employees. I imagine some of those already had the means to purchase a home. Secondly – from the seller’s perspective – wouldn’t it be a pretty good time to sell when the market is high, but softening, and is then suddenly flooded with new money? But the tricky thing with that is that more sellers means more supply and for every buyer there can ultimately be only one seller. So if the supply side is more excited than the demand side, the inventory of homes will increase and buyers will notice that they have a choice and negotiating power, which puts downward pressure on prices.
It is a complicated dynamic and lots of other factors are at play: length of the real estate cycle, economic conditions, mortgage rates, consumer confidence, legislation to increase urban density, tax law changes, etc. Therefore, my guess on where real estate prices will go is a good as anyone’s. But when too many people buy into the consensus view, it starts to lead to group think and dogma and it is healthy to consider all the angles. So far, the IPO wave has not translated into higher home prices – see chart of the 1 yr. home price index of the San Francisco metro area – but sales data lags by a few months and the IPO season is still young, so the jury is out.
As some of us venture overseas this summer, seeking out tropical beaches, turquoise waters, or foreign cultures, the question perhaps arises: “What if I could live like this every day?” It certainly comes up for me when I think about my own retirement. Increasingly, we see retiring abroad as a financial goal for our clients. We have been exploring real estate purchases in France, Spain, and Portugal. We have been advising on what to do with US based assets while living overseas, how to plan for liabilities in foreign currencies when your investments are denominated in dollars, and how to factor in medical expenses and Social Security.
It has been a lot of fun and I forecast that we will be doing more and more of it as time passes. Perhaps my foreign sounding name lends me some gravitas on this topic or perhaps it is a broader trend. Whatever the case might be, we are embracing it and are finding that where there is a will there is a way, irrespective of the size of one’s nest egg. In fact, we have penciled out a European retirement plan for a client that had much more slack (i.e. room for extras) than any US plan we could have come up with.
What are some of the key considerations that come up for clients wishing to retire overseas?
- The cost of living in many countries, even some in Europe, is lower than it is in much of the US. Moreover, many of these countries are desirable destinations irrespective of the fact that they are cheaper places to live. Furthermore, cheaper – even if it means less developed – doesn’t mean you are going to have to be roughing it, because you can “upgrade.” For example, if you live in Buenos Aires on $5,000 per month, you are eating well, you have air conditioning, you can access good medical facilities, and you have money to spare for travel.
- Depending on the country, you can get a mortgage on property, though it is not the easiest process. Some folks do not want to sell their US home, for the rental income potential, but also as a back up plan, in case they want to come back. To get a foreign mortgage, “boots on the ground” are helpful. The brokers that cater to expats are not necessarily the best route to go, because expats are often assumed to be less price sensitive, or lacking local knowledge, which is attractive to unscrupulous actors. In Europe, mortgage rates are very low and Americans might be tempted to compare their mortgage to a US mortgage rate and think they are getting a good deal, but that may not be the case.
- You cannot escape the reach of the IRS. As a US citizen you are taxed on global income. You will have to keep filing US tax returns and if you are making income or profits outside the US, the IRS will want a piece of the action. If you inherit property from overseas relatives and you rent it out before selling, you will have exposure just like you would in the US and the inheritance tax still applies to you, though at current exemption levels that is a non-issue for most people.
- You can have your Social Security direct deposited overseas in about 70 countries. And even if you can’t direct deposit your Social Security to a local bank, it is not hard this day and age to transfer money from your US bank. If you want to retire in North Korea or Cuba, you are not going to get Social Security and if you choose Belarus, Ukraine, Kazakhstan, or some of the other “stan countries,” you are going to have to jump through some hoops, which includes a visit to the US embassy every six months. But assuming that those countries are not on your short list of overseas retirement destinations, you should be fine.
Yield Curves, Recessions, and Volatility
We could talk about whether a (nearly) inverted Treasury yield curve – short-term interest rates exceeding longer-term rates – signals a future recession, how volatility in the stock market might pick up, and how economic growth may be nearing its peak. But it is summertime, and I should make way for your fun reading list, or perhaps no reading at all.
Wishing you a bright and slow-passing summer.
Jan Schalkwijk, CFA
JPS Global Investments