In a time where many meetings are still being canceled or postponed, it was great to see many of you in person at Straight Talk in September. The touch-and-go nature of fall meetings and the format in which we held ours, in-person and an online version, is a microcosm of what the economic outlook looks like as a whole. Many aspects of the economy, such as business travel, are working toward “getting back to normal,” but it’s unclear what normal means anymore. Organizations can save money and reduce risk by having virtual conferences. Consumers are used to more and more daily items being delivered – many like seeing new releases in the comfort of their own homes instead of going to the movies. The labor force participation rate still hasn’t recovered^[1]. Many things were upended by pandemic shifts, and it’s still not clear how the dust will settle. 

The biggest thing on many minds is the inflation rate and whether or not this is expected to persist. Jerome Powell still thinks the inflation pressure we’re dealing with will settle down, but it is unclear when that will happen^[2]. Supply chain disruptions have persisted longer than anticipated earlier this year^[3]. That combined with the fiscal stimulus of the last 18 months and increasing demand is causing prices to spike. Once persistent inflation becomes an expectation, it can often become a self-fulfilling prophesy as businesses start to raise prices anticipating higher input costs. Higher inflation expectations can drive down valuations in equities as future expected cash flows are discounted at a higher rate. Inflation typically has an outsized impact on growth stocks because interest rate assumptions cause discounted cash flow valuations to be much lower for growth stocks as their major cash flows are expected to occur farther into the future^[4]. Also, because labor force participation hasn’t caught up to pre-pandemic levels, we’ve seen times where fewer people were looking for a job than job openings^[5]. This causes upward pressure on wages as employers are required to offer more to hire and retain talent, which then can exacerbate the severity of inflation. If inflation persists, the Fed may not have any choice but to start to raise rates once again earlier than originally anticipated^[3] . 

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^[1] Labor Force Participation Rate. FRED. (2021, September 3). Retrieved October 1, 2021, from https://fred.stlouisfed.org/series/CIVPART. 

^[2] Davidson, K., & Timiraos, N. (2021, September 30). Powell says Fed Faces ‘difficult trade-off’ if inflation doesn’t moderate. The Wall Street Journal. Retrieved October 1, 2021, from https://www.wsj.com/articles/powell-says-fed-faces-difficult-trade-off-if-inflation-doesnt-moderate-11633017666.

^[3] Timiraos, N. (2021, September 29). Powell says supply-chain bottlenecks could lead to somewhat longer interval of high inflation. The Wall Street Journal. Retrieved October 4, 2021, from https://www.wsj.com/articles/powell-says-supply-chain-bottlenecks-could-lead-to-somewhat-longer-interval-of-high-inflation-11632934764?mod=article_inline.

^[4] Zucchi, K. (2021, September 8). Inflation’s impact on stock returns. Investopedia. Retrieved October 4, 2021, from https://www.investopedia.com/articles/investing/052913/inflations-impact-stock-returns.asp.

^[5] Long, H., Fowers, A., & Dam, A. V. (2021, September 8). Why America has 8.4 million unemployed when there are 10 million job openings. The Washington Post. Retrieved October 4, 2021, from https://www.washingtonpost.com/business/2021/09/04/ten-million-job-openings-labor-shortage/.

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Ben Tiller, Principle Financial Officer

None of us can disagree that cryptocurrencies have grabbed investors’ attention. What is a point of discussion is whether they are suitable for most investors. Let’s start with a general overview of cryptocurrency. According to Investopedia, a cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.^[1] Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. The first blockchain based cryptocurrency was Bitcoin. It was launched in 2009 by an unknown individual under the pseudonym Satoshi Nakamoto. As of March 2021, there were over 18.6 million bitcoins in circulation. It is capped at 21 million coins. While Bitcoin is the most well-known cryptocurrency, there are many others such as Etherum, Litecoin, Cardano and Dogecoin.

The rapid rise in these currencies’ values – and the publicity surrounding them – have increased interest in them. But they remain a speculative investment. Cryptocurrency has a low correlation to other assets which is a motivation for adding to portfolios, however, it also does not have a store of stable value, so it can decrease for no apparent reason as well. 

An advantage of cryptocurrency includes being easy transfer between parties. Transfers are secured by the use of public keys and private keys that have timestamps and other proof of work systems that eliminate the need for third-party financial institutions and their fees. The technology built to accommodate digital assets may provide an easier and more efficient way to handle transactions. Many experts see blockchain technology having potential uses such as online voting and crowdfunding, as well as lowering transaction costs by streamlining payment processing.^[2]

Disadvantages are many. Currently crypto has very limited use. Tesla was one of the few major companies that accepted Bitcoin for purchases – until this May, when Elon Musk announced they would stop accepting it for payment due to concerns over its energy usage. According to the Cambridge Center for Alternative Finance, Bitcoin currently consumes .55% of global electricity produced, or roughly equivalent to the annual energy draw of small countries like Malaysia, Sweden, or Chile.^[3]  Some of this energy is renewable, but much of it is not, so this can be a concern for clients who favor low-carbon assets. Since cryptocurrencies are not issued by any central authority, they are theoretically resistant to government interference or manipulation. But the United States Securities and Exchange Commission is currently reviewing how to regulate them. This could result in over-regulation that will make the currencies difficult to trade or under-regulation that could make them more subject to fraud and illegal use.^[4]

As a financial professional, part of your job includes managing your emotions and those of your clients.  Studies show that clients are more likely to buy risky assets after a sharp rise in their portfolio.^[5] Unless their risk tolerance and investment objectives have changed, it is not in their best interest to increase the risk in their portfolios. You need to make sure neither you nor your clients get swept up in the fever surrounding cryptocurrencies. We suggest you review some materials provided by product sponsors.^[6]

At this point, The Leaders Group views these as highly speculative instruments which make them an unsuitable choice for most clients. We will allow you to invest in cryptocurrencies for yourself, but not make any recommendations to clients. Be assured, we will continue to monitor digital assets and are open to adding them if we determine they are in the best interest of clients.

Jane Riley,
Chief Compliance Officer

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^[1] https://www.investopedia.com/terms/c/cryptocurrency.asp

^[2] https://www.jpmorganchase.com/news-stories/could-blockchain-have-great-impact-as-internet

^[3] https://cbeci.org/

^[4] https://www.wsj.com/articles/crypto-needs-regulation-but-it-doesnt-need-new-rules-11623007528

^[5] http://www.aleprevitero.com/wp-content/uploads/2021/05/FinancialAdviceRiskTaking_20191115.pdf

^[6] https://www.capitalgroup.com/advisor/insights/articles/how-talk-clients-about-bitcoin.html; https://seic.com/knowledge-center/why-we-currently-dont-buy-bitcoin-or-any-other-cryptocurrency