Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “Should I be worried about inflation?” Before we cover this topic, let’s remember that inflation, which is the gradual increase in prices for goods and services, is healthy for an economy. Inflation is needed, but only to a certain extent. The opposite effect is deflation, which means prices are declining over time. Imagine if the price of a car was expected to decline a year from now. You would be motivated to postpone that purchase since it would be less expensive. Systemic deflation wouldn’t be good for our economy.
So should you be worried about inflation? The Federal Reserve Bank has a goal of maintaining a 2% rate of inflation over time. Not only does inflation entice people to make purchases today instead of waiting, increasing prices on goods or services allow companies to potentially increase profits and give employees raises. These are normal conditions in a healthy economy. However, inflation deteriorates the purchasing power of money. You may know that a cup of coffee cost about 25 cents in 1970, but it’s certainly much more than that today. This devaluing effect of inflation is one of the primary downsides.
When a central bank, such as our Federal Reserve Bank, increases the supply of money through stimulus programs, it can decrease the value of our money. Since there’s more money in the system, it creates greater demand for goods and services, thus helping an economy that may be in a weak cycle. Greater demand leads to higher prices and you can then see the dots connect to higher inflation. For someone that owns assets that can appreciate, such as stocks, commodities and real estate, inflation may lead to gains on those assets. For someone with more cash assets such as CDs, money markets and bonds, inflation may lead to less purchasing power.
Overall, the Federal Reserve Bank has tools in their toolbox to fight inflation if they feel it’s too high. If you’re concerned because you have large amounts of cash assets, it may be time to speak about ways to hedge the risk. If you have a question about this topic or have a question for next month’s video, please send it to DTroyer@MonetaGroup.com. Thanks for watching and we’ll see you next month.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.
There’s no summer slowdown at Moneta! From personal finance to investment strategies and market movements, a number of our team members have been busy offering their thoughts in key national and industry publications throughout the month of July.
Check out the media highlights below for our expert insight:
Brooke Hunady, CFP® and Partner, provided personalized advice in reporter Alessandra Malito’s ‘Help Me Retire’ column about factors to consider before retiring early.
Our CEO and Chairman of the Board Eric Kittner discussed his personal experience paving a career path. Eric also touched on considerations for young professionals entering the field and factors driving industry consolidation.
CFP® Maggie Rapplean spoke with reporter Carla Fried on best practices to follow when starting a retirement fund. Specifically, Maggie emphasized the importance of identifying a healthy savings rate and automating contributions.
CFP® Kristi Borglum explained why a 529 savings plan is often the most effective option for parents who are saving for their children’s higher education needs. Kristi detailed the plan’s benefits and flexibility at length, including how the funds can be distributed if they are ultimately not needed for college expenses.
In this piece, Partner Patrick McGinnis described how Moneta leverages advisor technology to optimize workflows and enable the team to focus on cultivating client relationships.
Drawing on his client-facing financial planning experience, Advisor Brian Hires provided an in-depth explanation on how to weigh the pros and cons of paying off a mortgage or investing those funds.
Advisor Amanda Schmidt offered insight on proper credit card usage guidelines for students who are new cardholders. She explained how to compare cards and addressed ways in which international or immigrant students can establish credit despite the challenges they may face.
Aoifinn Devitt, Chief Investment Officer, joined host Nicole Petallides in a live segment to discuss best practices for long-term allocation. Aoifinn also analyzed Moneta’s various portfolio models and trends she’s watching in the market.
Partner Diane Compardo outlined the IRS’ recently announced plans for more stringent tax enforcement and their potential implications for the future of the tax system.
Moneta CIO Aoifinn Devitt launched her new video series “Moneta Moment” to help keep you updated on the world of investments.
In her first episode, Devitt discusses the recent movement in bond yields and what this means for the fixed income allocation in your portfolio.
Compardo, Wienstroer, Conrad & Janes has significant experience guiding multi-generational families through successful wealth transfers. Our staff of diverse professionals stays informed to help you make better financial decisions. We serve Family Office, Professional Athletes and Family CFO clients. You can visit our website here.
The SPAC sensation continues to grip markets. There were 248 SPAC IPO transactions last year, up from 59 in 2019. The count for 2021 already exceeds 300, with many more in the pipeline. Some of the well-known names that have already gone public include DraftKings and Virgin Galactic. Celebrities are even getting in on the act. But is this a well-overdue democratization of early stage investing? Is it good news for retail investors? Are the risk rewards too good to be true?
I sat down with Peter Early, who is Head of Business Development at Exosa, a next generation fin-tech platform for B2B institutional finance, to discuss SPACS (Special Purpose Acquisition Companies) – primarily, what kind of opportunity these “blank check” companies present for retail investors.
Listen to the full podcast here:
***
In the podcast, we start by setting out the SPAC landscape and looking at the three main parties: the investor that purchases units in the SPAC, the sponsor and the acquisition target.
The investor may purchase units of a SPAC at the IPO Price or in the open market at a discount or premium. The investor remains entitled to its pro rata share of the trust account, which will be based on the IPO price. This acts as a “floor” or as downside protection. If the investor elects to redeem its shares upon an acquisition transaction, or the SPAC “times out” and fails to execute a transaction within a specific time period, the investor will at least receive its share of the trust plus a modest rate of interest, as it is invested in government bonds
The real upside on the transaction lies in the warrants that the investor obtains upon a business combination, which will have significant divergence in value based on the success of the underlying company.
Acquired Company:
When a SPAC executes a merger, the investor has the right to become a shareholder of the combined company. Certain companies perform well after acquisition and others struggle, and indeed there are statistics that between January 2019 and June 2020 SPACS lost 12% of their value within six months of the merger 40% of 2020 SPACS lost an average of 32% post-merger. It is important to remember, however, that while these numbers look stark, they are not, arguably, that different from typical market volatility especially in more speculative, early stage or high growth names.
Sponsor:
The sponsor’s role in the SPAC is a crucial one – they are paid a promote based on a percentage (usually 20%) of the transaction, and Peter argued that while a conflict of interest can be present in this role it is no different from a typical investment banking fee in an IPO, and that given the aim is usually to purchase a target at a significantly higher valuation than the SPAC this fee diminishes as an overall percentage once the transaction is executed. For some market observers this fee is unpalatable, however, and recent deals have sought to reduce the conflict of interest and ensure less shareholder dilution.
Other participants – the SPAC mafia and celebrities
We spoke about the other participants in this market – which include both highly sophisticated institutional investors such as hedge funds (termed the “SPAC mafia”) as well as large institutional groups which may provide the PIPE (Private Investment in Public Equity) financing in order to get the actual deal done. I asked whether retail investors should be concerned that they might be at a disadvantage relative to these experts. Peter suggested that the involvement of these highly sophisticated investors can provide some comfort that scrutiny and due diligence are occurring at high levels, but that obviously piggybacking on this work should not be encouraged.
As far as the involvement of celebrities Peter commented that this area was no different from other asset classes also seeing a wave of exuberance today (e.g., growth stocks and cryptocurrency). He argued that their popularity was capitalism at work – a natural response to an attractive risk/reward and cheap optionality.
A New Frontier?
Peter’s view is that SPACs should be viewed as simply a vehicle to go public, and should not be viewed through the ultimate success of the acquired company. He conceded that the disclosures required for a SPAC were far less prescriptive than those required in an IPO – for example projected earnings can be used, a company can go public even the IPO window is closed in markets and management may sell a greater share of the company while avoiding a lock-up period. He also pointed out that because the mechanism allows companies to go public earlier than, say, via an IPO, that they can be used as a public proxy for late stage venture capital. This might give support to the democratization of early stage investing and making it more accessible to a wider range of investors.
The process of assessment of the company post-merger can be a complex one, as can the monitoring of the exercise of warrants. Peter suggests that it can be time consuming and difficult to manage passively. These are all factors to bear in mind for investors when investing in SPACs.
The SPAC sensation continues to grip markets. There were 248 SPAC IPO transactions last year, up from 59 in 2019. The count for 2021 already exceeds 300, with many more in the pipeline. Some of the well-known names that have already gone public include DraftKings and Virgin Galactic. Celebrities are even getting in on the act. But is this a well-overdue democratization of early stage investing? Is it good news for retail investors? Are the risk rewards too good to be true?
I sat down with Peter Early, who is Head of Business Development at Exosa, a next generation fin-tech platform for B2B institutional finance, to discuss SPACS (Special Purpose Acquisition Companies) – primarily, what kind of opportunity these “blank check” companies present for retail investors.
Listen to the full podcast here:
***
In the podcast, we start by setting out the SPAC landscape and looking at the three main parties: the investor that purchases units in the SPAC, the sponsor and the acquisition target.
The investor may purchase units of a SPAC at the IPO Price or in the open market at a discount or premium. The investor remains entitled to its pro rata share of the trust account, which will be based on the IPO price. This acts as a “floor” or as downside protection. If the investor elects to redeem its shares upon an acquisition transaction, or the SPAC “times out” and fails to execute a transaction within a specific time period, the investor will at least receive its share of the trust plus a modest rate of interest, as it is invested in government bonds
The real upside on the transaction lies in the warrants that the investor obtains upon a business combination, which will have significant divergence in value based on the success of the underlying company.
Acquired Company:
When a SPAC executes a merger, the investor has the right to become a shareholder of the combined company. Certain companies perform well after acquisition and others struggle, and indeed there are statistics that between January 2019 and June 2020 SPACS lost 12% of their value within six months of the merger 40% of 2020 SPACS lost an average of 32% post-merger. It is important to remember, however, that while these numbers look stark, they are not, arguably, that different from typical market volatility especially in more speculative, early stage or high growth names.
Sponsor:
The sponsor’s role in the SPAC is a crucial one – they are paid a promote based on a percentage (usually 20%) of the transaction, and Peter argued that while a conflict of interest can be present in this role it is no different from a typical investment banking fee in an IPO, and that given the aim is usually to purchase a target at a significantly higher valuation than the SPAC this fee diminishes as an overall percentage once the transaction is executed. For some market observers this fee is unpalatable, however, and recent deals have sought to reduce the conflict of interest and ensure less shareholder dilution.
Other participants – the SPAC mafia and celebrities
We spoke about the other participants in this market – which include both highly sophisticated institutional investors such as hedge funds (termed the “SPAC mafia”) as well as large institutional groups which may provide the PIPE (Private Investment in Public Equity) financing in order to get the actual deal done. I asked whether retail investors should be concerned that they might be at a disadvantage relative to these experts. Peter suggested that the involvement of these highly sophisticated investors can provide some comfort that scrutiny and due diligence are occurring at high levels, but that obviously piggybacking on this work should not be encouraged.
As far as the involvement of celebrities Peter commented that this area was no different from other asset classes also seeing a wave of exuberance today (e.g., growth stocks and cryptocurrency). He argued that their popularity was capitalism at work – a natural response to an attractive risk/reward and cheap optionality.
A New Frontier?
Peter’s view is that SPACs should be viewed as simply a vehicle to go public, and should not be viewed through the ultimate success of the acquired company. He conceded that the disclosures required for a SPAC were far less prescriptive than those required in an IPO – for example projected earnings can be used, a company can go public even the IPO window is closed in markets and management may sell a greater share of the company while avoiding a lock-up period. He also pointed out that because the mechanism allows companies to go public earlier than, say, via an IPO, that they can be used as a public proxy for late stage venture capital. This might give support to the democratization of early stage investing and making it more accessible to a wider range of investors.
The process of assessment of the company post-merger can be a complex one, as can the monitoring of the exercise of warrants. Peter suggests that it can be time consuming and difficult to manage passively. These are all factors to bear in mind for investors when investing in SPACs.
