News & Insights

A new chapter in the history of American bank regulation began the night of Wednesday, March 8. That’s when Silicon Valley Bank revealed that the need to raise cash to meet customer withdrawals forced it to book $2 billion in losses on the sale of securities, leading it to look for more capital. Less than 48 hours later, regulators shut down the bank as it lacked sufficient liquidity to satisfy withdrawal demands. An incredible 96% of its deposits exceeded the FDIC insurance limit of $250,000 per depositor. Shockwaves rippled through the bank system. Clients asked us whether their banks were safe, even behemoth Chase.

Over the past 40 years, we’ve had the “Latin American debt crisis” in the mid-1980s, the “savings and loan crisis” in the late 1980s-early 1990s, the Global Financial Crisis in 2008-2009, and now this mini-crisis. Regulatory changes are made after each one, but we always end up back in the soup!  Many blame this crisis on changes to bank regulations in 2019, but in fact there is plenty of blame to go around.

The original “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act) was signed into law on December 20, 2019. A new bill dubbed Secure Act 2.0, was introduced in November of 2022 and signed into law on December 29, 2022. The intention of the law is to build upon the existing Secure ACT by improving retirement savings opportunities. The recently adopted provisions offer new benefits to employers and employees in order to generate greater participation in retirement plans. Secure Act 2.0 will be a rolling process, where enhanced features will be implemented over the course of several years. There are 90 provisions in the updated Act; we will cover some of the key retirement provisions that have the broadest impact.

Changes to Required Minimum Distributions

The Original Secure Act raised the age for required minimum distributions (RMDs) from Traditional IRA accounts and workplace retirement plans to 72 from 70 ½. Effective January 1, 2023, the age for RMDs has been further increased to 73 and on January 1, 2033, the threshold age for RMDs will be increased to 75. In addition, the penalty for failing to take an RMD decreased to 25% from 50% of the undistributed amount. The penalty is further reduced to 10% if the undistributed portion of the RMD is subsequently taken in a timely manner. As for RMDs from inherited IRAs, these were eliminated with the original Secure Act, the only requirement was that an IRA had to be liquidated by individual beneficiaries within 10 years of the date of the original owner’s death. Secure Act 2.0 lacks clarity whether annual RMDs will be reintroduced alongside the 10 year liquidation requirement. Finally, starting in 2024, Roth accounts in workplace retirement plans will not be subject to RMDs.

We are approaching the ten-year anniver­sary of Detroit’s 2013 bankruptcy filing. In light of 2022’s market downswing, as well as recent high inflation, this could be a useful time to brush up on the history of Detroit’s bankruptcy, as other distressed municipali­ties could find themselves in jeopardy in the future.

With over $15 billion in obligations at the time of filing, Detroit became the biggest municipality in U.S. history to file for Chapter 9 reorganization. Technically, that record still stands today, although in 2016 Puerto Rico began a process resembling bankruptcy, governed by a special act of Congress abbreviated PROMESA. States and territo­ries do not currently have an avenue for bankruptcy, but the path for cities is well established under Chapter 9.

In a reversal of a long, consistent trend, we just experienced a year where “value” stocks outperformed “growth.”  In 2022 the Russell 1000 Pure Value index lost 8% while the Russell 1000 Pure Growth Index fell 38%.

Though they are widely used, I’ve never been fully comfortable with these classifications.  To be fair, the labels serve a purpose, as people generally understand what they mean.  “Value” typically implies something along the lines of a company with a low price-to-earnings ratio or a low price-to-book value.  Growth, I think, is self-explanatory.  While conceding these can be useful labels, they ignore important nuance and can be misleading.

I don’t know about you, but I’d like to put 2022 firmly in the rear-view mirror. The war in Ukraine, inflation, the Federal Reserve’s interest rate increases, bear markets in both stocks and bonds, and the meltdown in the cryptocurrency markets have made 2022 a miserable year for investors.

However, this doesn’t mean we haven’t been working to make Provident a better firm to serve your needs, especially now that interest rates have risen above zero. In the investment community there has been an acronym, “TINA”, to describe the low interest rate environment over last decade – “There Is No Alternative” to stocks.

2022 is shaping up to be tough for investors. However, as the year draws to a close, focusing on short term market performance is not productive. Now is the perfect time to focus on your financial goals and re-evaluate your progress. It is important to take proper steps before year end in order to best position yourself for achieving your goals.

Required Minimum Distributions

If you are 72 or older and have a Traditional IRA or an employer-sponsored retirement plan such as a 401(k) or 403(b) and are retired, you must take a required minimum distribution (RMD) by December 31st each year. The IRS penalty for failing to do so is 50% of the required amount not withdrawn. In addition, an owner of an Inherited IRA that was inherited prior to 2021 is required to take a minimum distribution. The same December 31 deadline and 50% penalty apply to an Inherited IRA. Keep in mind that most custodians do not send out notices about the Inherited IRA RMD; it’s up to the owner in most cases to stay involved with calculating the RMD amount and making sure it is distributed. There is no need to wait until December to take the distribution and risk missing the deadline. The distribution amount is calculated by dividing the prior year-end balance of the account by an IRS estimate of your life expectancy. We calculate the RMD amount you need for your accounts with Provident.

Every couple of years we provide clients with an update on cybersecurity and overall data security. This update comes with two goals: to inform clients on our progress on these fronts and to share with you what we’re seeing in this ongoing battle.

Provident is in the early stages of a cybersecurity consultation with Charles Schwab and our IT partner, N2M Technolo­gies. This project isn’t undertaken as a result of any known problems; rather, it is a proactive effort to identify areas needing improvement. The bad guys keep getting better at hijacking data, so we need to keep improving as well.

I recently presented at the 70th BetterInvesting National Convention (BINC) held in Dallas from June 23rd to 26th. Provident has been a long-time supporter of BetterInvesting (www.betterinvesting.org) and owes its existence to co-founder Ralph Seger, a tireless volunteer and board member who thought BetterInvesting principles could be applied to managing investment portfolios.

I was a member of an investment club in the 1990’s but didn’t know much about the organization behind it that, at the time, was called the National Association of Investors Corporation (NAIC), later renamed BetterInvesting. At BINC each of the more than 300 attendees received a book written by former Detroit Free Press newspaper columnist Mike Wendland. The 2001 book, From little acorns grow: MAIN STREET MILLIONAIRES, was a quick read and a fascinating historical account of NAIC/BetterInvesting.

After languishing as a somewhat obscure instrument since its introduction in 1998, U.S. Series I savings bonds (“I Bonds”) started drawing meaningful attention last year thanks in large part to inflationary pressures and media coverage highlighting its substantial yield for a nearly risk-free investment. The first article I recall seeing was from the Wall Street Journal’s Jason Zweig in May 2021 pointing out features like the 3.54% annualized yield at that time, inflation protection, tax advantages, and the backing of the US. Government. Since then, given inflation readings that have only recently come slightly off 40-year highs, I Bonds purchased through October now promise a 9.62% annualized yield over the next six months. The attractiveness of a government guaranteed instrument generating such a high current yield has driven significant inflows to I Bonds over the past year, and the subject continues to pop up in conversations I have with friends and family. I felt an overview of I Bonds might be helpful for those who were either curious or perhaps remained unaware of their existence.

I Bonds look to be a reasonably attractive investment given the risk/reward tradeoff, but it is worth understanding both the basics behind the bonds and the details of how the variable yield is calculated. The bonds are available to U.S. Citizens, residents, and government employees and are subject to annual purchase limits. You can purchase up to $10,000 per person each calendar year electronically. Another $5,000 in paper I bonds can also be purchased each year using federal income tax refunds. There are ways to stretch the limits, for example, bonds can be purchased for spouses and children, and Treasury also allows the purchase for trusts and estates, which are essentially treated as separate individuals.

In Monopoly, another $200 enters the game whenever a player passes ‘Go’. Over time, the increasing money supply finds its way into property development. Something similar has played out in real life all over the world. Players have recycled a rising money supply into property. Now the game is suddenly getting tougher due to inflation.

Central banks printed enormous amounts of money during the pandemic, which they traded for bonds held on their balance sheets. The U.S. Federal Reserve’s balance sheet more than doubled from $4 trillion to over $8 trillion. The European Central Bank’s balance sheet nearly doubled to €8.5 trillion. The Bank of Japan’s balance sheet rose about 25%, which sounds moderate in comparison but is actually similar in magnitude because after many years of persistent debt monetization the BoJ’s balance sheet was, stupendously, about four times larger relative to GDP prior to the pandemic!