Ladies and gentlemen, the weekend! In this space each week, Greg and I share some of our favorite articles, notes, and graphics from the past week along with our commentary. Please feel free to provide feedback and forward along to others if you enjoy. We appreciate you taking the time to read. 

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Peak Inflation Watch

“Let’s start with the latest source of angst: headline consumer prices at the headline level (CPI) set a new 40-year high via a 9.1% year-over-year increase through last month. The good news, such as it is: the core reading of CPI (which strips out food and energy) eased to 5.9%, a six-month low.

Historically, core CPI has proven to be a more reliable estimate of future inflation vs. the headline measure, but there are caveats. First and foremost is the question of whether inflation has entered a new era and so the relationships of the past several decades no longer apply.

Meanwhile, it appears that the Federal Reserve is going to err on the side of caution in its battle to tame inflation and continue raising interest rates, perhaps at a faster pace. Fed funds futures are now pricing in a roughly 85% probability for a 100-basis-point rate hike at the July 27 FOMC meeting.”

The 9.1% annual inflation number was eye-popping. Expectations were bad, and the angst only grew when the White House Press Secretary started downplaying it the day before the release.

That is back-to-back weeks of data releases – historically low unemployment and historically high inflation – that should push the Federal Reserve farther out onto the ledge. Expectations (via the futures market) have moved from a 0.75% increase at month-end to a 1% increase. There is no FOMC meeting in August which gives them a moment to pause after the next policy decision (meeting July 26-27).

Crossroads

“Amid signs of slowing growth, the economy has reached a crossroads on key issues: Will we see a recession or a soft landing? Will Russia's scheduled "maintenance" shutdowns of a key natural gas pipeline endure long enough to hurt Europe's economy? Will longer-term Treasury bond yields be more affected by inflation or by slowing economic growth?

We don't know when we'll have the answers, but some clarity may emerge later this month. Second-quarter earnings season begins soon, potentially providing clues about the strength of the economy and how well companies are positioned to deal with it. July developments around the Nord Stream pipeline may tell us more about Europe's access to natural gas later this year. And while another interest rate increase is expected at the Federal Reserve's July 26–27 meeting, markets are looking forward to hearing what Fed Chair Jerome Powell has to say about the economy at his post-meeting news conference.”

Charles Schwab’s Liz Ann Sonders has a nice lengthy review and preview of the most pressing matters that markets are sorting through – the labor market, corporate earnings, Russia/Ukraine spillover into the European economy, interest rates, and the sudden rise of the US dollar. It’s a cautious tone and outlook, but one that is grounded in fundamental data. 

Bequest Allocation and Bequest Location

“Your bequest allocation is what portion of your assets will go to which parties, upon your death (or upon the second death of you and your spouse). And the bequest location concept is analogous to asset location. That is, after deciding your bequest allocation, it’s wise to take some time to think about which assets should be used to satisfy which parts of your bequest allocation…

First things first: tax-deferred accounts are the ideal asset for giving to charity because the charity doesn’t have to pay any tax on the money, whereas any individual would have to pay tax as distributions are taken from the account.

And for the opposite reason, the Roth accounts should go to a human rather than to charity. That is, a charity has no reason to prefer [tax-free] Roth dollars over tax-deferred dollars, whereas your kids (or grandkids) definitely would prefer Roth dollars.”

This is a good simple recap of minimizing tax outlay for the beneficiaries of an estate, especially if there is a charitable bequest in the estate plan. Tax-deferred assets should be prioritized to the charitable beneficiary (through beneficiary designations on IRA/401(k) accounts) then taxable and Roth assets to tax-paying individual beneficiaries. 

Per a recent Gallup opinion poll, inflation has risen to the most important problem facing the country after being a non-factor for the better part of 35 years.

Thanks for reading. Have a great weekend!