Enlightenment - A Herold & Lantern Investments Podcast
Enlightenment - A Herold & Lantern Investments Podcast
Navigating Trump's 2025 Administration: Market Shifts, Tariffs, and Investment Strategies
February 18, 2025
Season 7 | Episode 6
In this episode, we explore insights from industry leaders Jeff Bezos and Jamie Dimon on the importance of innovation, risk-taking, and navigating bureaucratic challenges in business. The discussion extends to the implications of tariffs on various market sectors and emerging investment products like registered indexed linked annuities for retirement planning.
• Jeff Bezos emphasizes ease of use and scaling failure in business
• Jamie Dimon critiques bureaucracy and remote work culture at JPMorgan
• The potential impact of tariffs on the technology sector discussed
• Overview of registered indexed linked annuities and their appeal to investors
• Encourages learning from successful leaders to enhance career and investment strategies
** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.
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And now introducing Mr Keith Lanton.
Keith Lanton:Good morning. Today is Tuesday, february 18th just a little bit past halfway already the second month of 2025. Just been over almost four weeks and over a month almost since President Trump has taken over at the White House and certainly that is a big effect on financial markets and rotation into stocks as well as asset classes that may be more aligned with his policy. So we're going to talk a lot this morning about the financial markets. We're going to start out talking more macro, more big picture, about some of the great minds. Specifically, we're going to talk about Jeff Bezos and his thinking about how he built his company and how he thinks about investing. And then we're going to switch gears to just comments just recently made last week by Jamie Dimon, ceo of JP Morgan, and you'll see how his commentary aligns very closely with thinking of Jeff Bezos. So two very successful business leaders with a different way of getting to the same point on their thoughts about running companies, businesses and perhaps how you want to think about your business and your career. And then we'll talk about tariffs, of course, and how to negotiate your portfolio with respect to tariffs, why certain sectors of the markets may be performing better than others and perhaps that's tariff-related, and then we will talk about Barron's and their Up and Down Wall Street column, which is entitled how the Market Learned to Stop Worrying and Love Tariffs. For those who are wondering why the markets keep going up if we may start to experience tariffs with, some would argue, could it impede economic growth or be inflationary We'll talk about what's going on this morning. We'll talk about what's going to take place this week, and then we'll switch to the cover story of Barron's, which talked about the structured products, specifically registered, indexed, linked annuities and what those are, how they work, whether or not they may or may be right for your portfolio, and, if we have time, we'll talk about a few other sectors of the market that perhaps warrant your attention.
Keith Lanton:So let's start talking about how Jeff Bezos thinks, his thought processes on building a great company, his decision making with respect to macro thinking, and Jeff Bezos has said that any framework's power and its utility in terms of how it works hinges on just the three key points, and anyone who uses Amazon which is just about everyone will know that one of the key factors when using Amazon and perhaps what keeps us coming back is what he would call his number one factor, which is ease of use. How easy is it to use, how intuitive is it and how often are you likely to use it? And very often, when you're looking at a website, many people will say that's a great website, but it's not intuitive. It requires too much thought. You know use. Take a look at Amazon, see how easy and intuitive it is and use that as your benchmark. So obviously, amazon's been very successful at creating an easy-to-use platform. Obviously, amazon has been very successful at creating an easy-to-use platform. How applicable is it? Is it widely applicable? In terms of how scalable is the ease of use? How scalable is the website? How scalable is the app? And he says it needs to be clear. Does the framework clarify or does it muddle the situation? If you find yourself being confused, even a little bit confused, then perhaps there is some improvements that need to be made.
Keith Lanton:He talks about scaling. If you talk about bold visionaries, you talk about a company that began as a company that was a bookseller and many folks back then said well, barnes Noble is a really great bookseller and these guys are selling books online, turning them into digital products. That's all nice and good, but how big of a market is selling books? Well, jeff Bezos showed us he wasn't just thinking about books. That was just a starting point. And he says that everything needs to scale. But he says, importantly, not only do you need to scale your business, you also need to scale your failures, your experiments. If the size of your failures is not growing, you're not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of their size if they have multi-billion dollar failures. He said, of course he's not looking to fail. They're not taking on projects because they think they will fail. We will work hard to make good bets, but just the law of averages, not all bets will ultimately pay out. The good news for the shareholders of Amazon is that a single winning bet can more than cover the cost of many losing bets.
Keith Lanton:He also said, when you're talking about failure, there are two types of failure and, not to confuse them, there is experimental failure, and that's the kind of failure that you shouldn't be happy with but you should learn from and you should be able to leverage that failure into future successes. And then he says there's operational failure. And what's an example of operational failure would be, for example, if Amazon builds up their warehouses and the warehouses are a disaster things aren't getting from point A to point B. That's not good failure, that's bad execution, that's bad failure.
Keith Lanton:He also said that in business, when you are experimenting and experiencing great success and great failure, the difference between, let's say, amazon's business and, let's say, most games and businesses comes down to probability and game probability. Is that the difference? For example, when you think about baseball, he says, is in baseball you have a truncated outcome, in other words, there is a maximum benefit that you can experience in baseball, when you are at bat, the best you can do is that you've got the bases loaded and you get up and you can knock in four runs. But when you think about business, there is a long tail distribution of returns because every once in a while you can step up to the plate and not score four runs, which is a rare occurrence, but you can score a thousand runs if you're able to execute and turn something into a tremendous success. And if you think about Amazon, he says that AWS, which is Amazon Web Services, and Prime are all examples of bold bets at Amazon that worked. You could even argue that the recent buildup of the warehouses, which was expensive and controversial, and now many of you may see those warehouses in your neighborhoods and now that you're getting delivery of items in one day instead of going to the store, that these were areas where there were tremendous successes. If you want to think about failures, well, you can think about Amazon's foray into mobile phones and to compete with Apple. Many of us don't even remember at the time. It got lots of attention. The Amazon Fire Phone was a failure, but very few people talk about it. You could also argue that their foray into color tablets, while not arousing success, has not really unseated the iPad.
Keith Lanton:He goes on to say that you need to wander, you need to be able to let your mind go into different places and to explore and experiment. He said wandering is an essential counterbalance to efficiency. You need to employ both, and what he means by that is the biggest needle movers, the things that will be the things that customers don't know to ask for, things that nobody is asking you for. So if you're in a meeting and someone says, well, no one's ever asked that, that doesn't mean it's a bad idea. Steve Jobs would say the same thing about the iPhone. No one asked for an iPhone. Most folks were very pleased and happy with their flip phones. At the time, motorola had a phone called the Starlink. Nokia had phones that were flip phones that the public was in love with. Then came the BlackBerry. Folks loved their BlackBerry. Folks loved their BlackBerrys. They were called CrackBerrys. Who would ever switch from a device that they were so addicted to? And yet Steve Jobs came up with a product that no one was asking for. That was super successful. And he says the same about Amazon Web Services.
Keith Lanton:Again, back to failure. Most large organizations embrace the idea of invention but are not willing to suffer the string of failed experiments necessary to get there. In other words, in order to get to great success, you need to experience failure. Again, the goal is not to fail, but the goal is to be willing to fail and to make intelligent bets, understanding that some may not work out, but more will hopefully work out than fail. It also requires he does acknowledge, acknowledge some good fortune and luck.
Keith Lanton:And what he also goes on to say is that in decision making, when you can do analysis, you should do it. But he does point out that when you can't do analysis and you must make a decision without analysis or you must make a decision where the analysis is not clear, that your most important decisions are always made with instinct, intuition, taste and heart. He said all of my best decisions in business have been made with those factors, not with analysis. And he says there are two types of decisions. He said there are type one decisions which are one-way doors, and those are decisions that must be made methodically, carefully, slowly and with great deliberation. If you walk through and don't like what you get to see on the other side, you can't get back to where you were before. Those are decisions you got to be really careful about.
Keith Lanton:But he says most decisions aren't like that. Most decisions are not irreversible, they are reversible. They are two-way doors, meaning that if the decision you make or the business decision you make or the product line that you choose to go down that path doesn't work out, it is reversible. And those decisions obviously need to be made with a lot of thought, need to sometimes be made with your gut, but you can't get too wrapped up in the analysis. You obviously want to do your homework, but what he says is that you're going to get 70% of the way there before you make a decision. In other words, you need to get to 70% confidence. He goes on to say if you're looking to get to 90% confidence before making a decision, it's taking you too long, your company is becoming sclerotic and slow. You need to make quick decisions in order to be successful. And if you're making a type two decision, meaning one that can be reversed, make that decision once you have enough information, but not nearly perfect information, because he says that the smaller companies, your competitors, they will be able to make those decisions much more quickly than you can and, at the end of the day, you will lose market share, you will lose success and you will potentially drive away some of the great people within your organization who will get frustrated with the slow decision making.
Keith Lanton:So let's change gears and stay on this topic. But let's talk about Jamie Diamond, who was written up in Barron's, who sounded off on some topics that are relevant to the very recent or the today. He talked about remote work, he talked about bureaucracy. He talked about remote work, he talked about bureaucracy, and he had an internal town meeting in Ohio and his remarks were possibly leaked, but made it to the financial press. Some might suggest that perhaps he's not unhappy with the fact that these remarks became public. But, either way, his remarks are out there and we can talk about them. Remarks are out there and we can talk about them. And he talked about how his company has been operating lately.
Keith Lanton:So here is JP Morgan CEO Jamie Diamond, the largest, most successful bank, arguably in the United States, if not the world. But he is frustrated the way things are going at JP Morgan, even after they've announced great earnings, great results, because he's not looking backwards, he's looking forward and he talks about today slow moving decision makers and layers of checkpoints seeping into different parts of JP Morgan, and he says that that is a process that's been building for two decades. He wondered whether employee training courses about legal and compliance issues are sucking up too much time and offered an open invitation for employees to send them ideas how the bank the bank less bureaucratic. He thinks the bank, while it is filled with people who are quote-unquote nice to each other, probably overdoes it with collaboration. That's not something you hear about very much in the workplace.
Keith Lanton:And he said don't get me started on remote work. Again, this is his opinion different scenarios for different companies. He says that he's had it with remote work. He said I've been working seven days a goddamn week since COVID and I come in and he says where is everybody else? And what really gets him going is that on Fridays, he says, which is a popular remote work day, he has trouble getting in touch with people. He said don't give me that blank. That work from home Friday works. I call a lot of people on Friday. He says that slows down efficiency, creativity and creates rudeness.
Keith Lanton:What he also said is what's creeping into the culture at JP Morgan is bureaucracy, and this is something again going back to Amazon and Jeff Bezos, he says how many of you taking training classes think that they are a waste of time? How many of you taking training classes think that they are a waste of time? How many of you taking compliance classes think they are a waste of time? He says bureaucracy is also centralizing too much. Everything's got to be documented too much and it's creeped in in a million different ways and it's keeping us meaning JP Morgan from being a great company. He said we're going to grow, we're going to expand, we're going to invest, we're going to take care of our people. We're just going to put a little bit of discipline in place, do our push-ups, sit-ups and eat our spinach. That's it, so two successful business leaders, both with similar themes in terms of how they run their companies Obviously each does it with their own unique style but perhaps things that we can learn from them in order to make our careers, lives, investments better.
Keith Lanton:All right, let's talk about the world that we're in today, and that is a world where there's lots of headlines, lots of talk about tariffs, and if we think about tariffs, perhaps we can think about why certain things are taking place in the marketplace and why the threat of tariffs are affecting certain segments of the market and perhaps your investments. Two articles from Barron's specifically addressing tariffs. One is about the effect that the chip tariffs could have on the marketplace and the fact that chip tariffs could threaten the artificial intelligence sector of the market, which has obviously been one of the sectors leading the market, and how that could be a factor that could negatively affect the market if we were to see tariffs on chips. And perhaps, if you think about it, that's one of the reasons why perhaps you are seeing such tremendous investments now by companies like Microsoft and Meta, and Facebook, which is Meta, and Google. Perhaps one of the reasons that they are spending so much, so feverishly is that they recognize A, they need to move fast on artificial intelligence and, b, they may need to move a little bit faster because perhaps they are thinking that if there were tariffs put on chips like companies like NVIDIA chips, perhaps this investment would be less worthwhile. So, hey, let's get this artificial intelligence stuff done now, before there's a potential for tariffs. Perhaps that's one of their thought processes.
Keith Lanton:Obviously, we don't know, but there is a significant threat looming on the horizon, barron saying that President Trump, in terms of artificial intelligence, may snatch defeat from the jaws of victory with a fixation on chip tariffs. Trump foreshadowed such tariffs last month during a speech to House Republicans. He said the US would impose tariffs of 2550 or even 100 percent on chip imports to increase domestic semiconductor manufacturing. Later that week, after meeting with NVIDIA CEO Jensen Wang at the White House, the president characterized the session as a good meeting, while adding that eventually we're going to put tariffs on chips Markets. Breathed a sigh of relief when, later last week, trump announced his plan to study reciprocal tariffs, but made no mention of chips.
Keith Lanton:On the surface, it might seem logical that a large tariff would incentivize domestic production of advanced chips, but the reality is there's no way to divert production here into the US over the next few years, given the lack of capacity. Because chips factories can't be created out of thin air. It takes roughly four years to build a new fab at the cost of $10 to $20 billion. Money and time aren't the only factors, though. Technical expertise is needed. Taiwan Semiconductor Manufacturing, also known as TSMC, has proven it can make chips that meet the requirements of top designers like NVIDIA and Apple. About 90% of the world's most advanced chips, including processors inside mobile phones, ai graphics processing units and personal computer chips, are made in Taiwan by Taiwan Semiconductor. The net result of a large tariff would be a significant tax on chips that would be passed on to customers. It would reduce or even eliminate the funding of large AI infrastructure projects. Perhaps that's one of the reasons that large technology companies are spending aggressively on AI right now is because the potential is that if these tariffs were enacted, they might be forced to pull back or spend more in the future if they chose not to pull back.
Keith Lanton:Now let's stick with the theme of tariffs. Barron's talked about the tariff-proof dividend stocks, and if you're thinking about areas of the market that may be rising and you may be saying why is this sector of the market doing so well? Well, maybe perhaps because that sector of the market is more immune let's call it from tariffs and trade wars, and you need to do your homework when you're thinking about what sectors of the market may be immune from tariffs and trade wars, and you need to do your homework when you're thinking about what sectors of the market may be immune from tariffs and trade wars. Let's take an individual who's certainly in the news, elon Musk, and one of his companies, tesla, which, for example, assembles all its vehicles in the United States. So the thought process may be that this is a company immune from tariffs, but if you do a little bit of digging, you'll realize that a substantial portion of the parts in a Model 3 or a Model Y come from Mexico and Canada.
Keith Lanton:So for investors who are doing a little bit more homework, they may discover that companies like financials, which have been on a tear for various reasons, one of which may be they are relatively tariff-proof. At least, that's the way they look at the moment on top of the fact that certainly the Trump administration may be more regulation light than the previous administration, other areas of the market that may have less tariff effect or implications are consumer staples, consumer services, as well as real estate management companies, reits, especially ones with domestic operations, and utilities, which have certainly been on a tear for a couple of different reasons. So a couple of stocks that Barron's talked about companies like Anali NLY, which is a mortgage REIT, starwood Properties STWD, which is also a REIT managing portfolio of properties, philip Morris International, symbol PM, 3.6% dividend yield, 75% of analysts covering it rated a buy, but its low tariff risk, counterintuitively, comes from the fact that it has limited US business and manufacturing. And then, of course, there's a slew of utilities companies like AES, northwestern Energy, dt&e, to name a few, that have above average dividend yields and domestic operations. Speaking of tariffs, well, you could say to yourself well, market's certainly doing well despite the threat of tariffs. What's going on here? Barron's, in the up and down Wall Street section, did talk about the fact that the market perhaps has learned to worry less and is somewhat embracing, or someone even say, loving tariffs, as long as they are measured and not too draconian. So markets appreciate, at least at the moment.
Keith Lanton:Tariffs have been mainly used to achieve geopolitical aims. So markets appreciate, at least at the moment, tariffs have been amazingly used to achieve geopolitical aims. So far, president Trump has been careful to limit the immediate consumer impact. He carved out energy in his proposed tariffs on Canada, and he also carved out aluminum on his proposed tariffs to Canada as well. Last week he talked about the possible reciprocal tariffs. Those were also greeted positively by debt and equity markets. Investors may take comfort that reciprocal tariffs will be a lesser evil than universal tariffs. After all, reciprocal tariffs are just placing tariffs on countries that are tariffing our goods, so these tariffs would basically even the playing field. Arguably, if you're going to tax our items at 10 percent, well we're going to tax yours at 10 percent, markets reacting favorably to that logic. But markets remain concerned. There is still a working assumption that President Tariff or President Trump will eventually hike tariffs substantially, as promised, and that would or could pressure stocks and bonds, not necessarily directly related to tariffs.
Keith Lanton:But another factor taking place is that Elon Musk's Department of Government Efficiency has been working on whittling down federal payrolls to slash the budget deficit, lots of attention getting paid to the firing of federal workers, as well as the fact that many federal workers have been encouraged to accept buyouts. So, as of last count, 75,000 workers accepted buyouts. That's about two and a half percent of the federal workforce, which would represent a savings with these folks no longer working, of about $15 billion out of the total $650 billion of federal worker compensation. So, if you want to put that into perspective because one of the big reasons to do this, obviously, is to reduce the deficit in order to possibly free up room to do other things, like cut taxes so, again, what do you have to do in order to cut enough spending to make a dent or to make a difference? Well, if you were to look to save $100 billion right now we're at about $15 billion with these federal worker buyouts but if you were to save $100 billion right now we're at about $15 billion with these federal worker buyouts but if you were to save $100 billion, which is one-tenth of the $1 trillion cost-cut that Elon Musk thinks he can deliver, well, you'd have to sack one-quarter of the federal workforce or not 75,000, but 750,000 employees to get close to $100 billion in savings, and right now we're just at $15 billion in savings. If you're looking to reach that $1 trillion goal that Mr Musk has laid out there, well, that would require a 30% reduction in non-defense spending, and that is excluding entitlements like Social Security, medicare and Medicaid, so we're assuming those stay in place. You also need to cut defense outlays by 15% and a 15% cut in social spending as well. As for tariffs, some would argue that the best case scenario is the tariffs could raise $200 billion, many suspecting that the tariffs would more likely result in about $100 billion if President Trump were to put into place many of the tariffs that he's threatening but has not yet implemented. If he put those in place, you'd be looking at about $100 billion $200 billion if he went stronger and more aggressively than what is currently anticipated.
Keith Lanton:Another factor affecting the deficit is, of course, interest expense. Currently, interest expense we've talked about this before running at over $1 trillion annually in terms of our expenses, just for interest. On the deficit, keep in mind, we're running about a $2 trillion a year deficit, so about 50% of our deficit that we're experiencing, could be argued, is due to interest. The problem is that the deficit is growing every year because we're piling $2 trillion on, but we're also experiencing the problem that lower-yielding treasuries that are out there are rolling off and we are replacing them with higher-yielding treasuries. So if you look at the average interest rate that is being paid on treasury debt. Right now it's 3.28%. So if you were to look at all the treasury debt outstanding at all different maturities, current cost to the government for all that interest is about 3.28%. Let's say 3.3% by 2028, if we're going to assume that rates stay about steady from where they are now, not going up or down, we'd be at about 3.9% by 2028. And if we look at where we were a couple of years ago when rates were ultra low, we were at about 2%. A couple of years ago, when rates were ultra low, we were at about 2%. So it is more than likely but not a foregone conclusion that the interest cost on the debt will continue to rise as the debt continues to rise and as the interest that we pay on that debt continues to rise. And this is all the more reason why, potentially, we need some spending, like Elon Musk is doing at the Department of Government Efficiency. But we may need to do that more aggressively if we're going to get our debt under control and possibly consider other ways of reducing the debt as well. At the same time, there are policies being proposed that could potentially be adding to the debt. So you've got to weigh all these different moving parts and see where it all comes out when you make your investment decision, partially based on what's going to happen with interest rates, which certainly affects what's going to happen with other asset classes like equities.
Keith Lanton:All right, let's take a look at equities this morning, see where we're at. Right now we are looking at a slightly positive open to the financial markets Dow futures up about 79, s&p futures up 24, nasdaq futures up just over 100 points. Pre-open gains in mega cap stocks which drove the index last week have supported the upward bias. Treasuries this morning experiencing some selling. The 10-year is up about four basis points to a 452. The two-year yield is up about two basis points to a 428.
Keith Lanton:We did get some commentary from some Fed governors this morning. Fed Governor Bowman, which is a FOMC voter, said, assuming the economy evolves as expected, I think that inflation will slow further this year. And then we also had Fed Governor Wallace, also a FOMC voter, said he favors holding rates steady, adding that his quote baseline view is that any imposition of tariffs will only modestly increase prices and in, but something that perhaps won't continue. We'll see if that is the general consensus from the Fed, but getting some further insights from one Fed governor there on his view of tariffs. All right, let's take a look at a couple of different stocks in the news this morning Broadcom, symbol AVGO, saying that they are interested in Intel's chip design unit. Also, taiwan Semi we talked about them already this morning. How they make 90% of their chips in Taiwan is interested in Intel's factories. Those are US factories. Perhaps some of the thinking behind getting domestic production going, but again, keep in mind domestic production is going to take years and know-how. That out this morning. So are seeing increased interest in some of Intel's assets here in the US. We'll see how that affects their stock price.
Keith Lanton:Tesla in the news this morning Some suggesting that China could delay Tesla's approval for its autonomous driving technologies. The Financial Times reporting that. Times reporting that. Also speculation that the Chinese may use Tesla as leverage in negotiating with the Trump administration, knowing that Elon Musk is close to the administration and therefore they have leverage with at least potentially with Elon Musk and ancillary with President Trump, by pressuring Tesla, who has extensive operations in China. Constellation Brands symbol STZ up about 11 points this morning 7%. Berkshire Hathaway, which is run by Warren Buffett, disclosing updated portfolio positions in a new 13F filing, showing they have a new position in Constellation Brands about 5.6 million shares.
Keith Lanton:Taking a look overseas, we had strength in Asia-Pacific markets yesterday. When the US is closed this morning, those markets are mixed. European markets also up on Monday. They are relatively flat as well this morning. Crude oil up about 40 cents a barrel. Natural gas down about 10 cents. Gold this morning moving higher up to 29, 28 an ounce. Goldman Sachs out this morning raising their forecast for year-end price of gold to 3,100 an ounce, perhaps behind some of the upward move there but perhaps increasing uncertainty with what's taking place in the Middle East and Ukraine.
Keith Lanton:In geopolitical news, bloomberg reporting that German Chancellor Olaf Schlaes says the EU will retaliate against tariffs but hopes to make a deal with the United States. New York Times reporting that the Trump administration officials will meet with Russian officials in Saudi Arabia this week to discuss ending the Ukraine war. Officials in Saudi Arabia this week to discuss ending the Ukraine war. Ukraine President Zelensky says Ukraine would never accept a peace deal. It didn't help negotiate. Financial Times reporting that Ukraine rejects President Trump's demand for 50 percent of rare earth minerals, but the Ukraine is willing to negotiate for a better deal. New York Times reporting that Congress is struggling to find votes to avoid a government shutdown on March 14th, as Democrats warn not to count on votes from their party.
Keith Lanton:Opec out saying they are considering pushing back planned monthly supply increases, perhaps one of the reasons oil is up modestly. This morning, nato Secretary General Mark Root saying the members will need to increase defense spending to considerably more than 3% of GDP. This is as the US participation in NATO becoming less defined and Reuters saying that Taiwan is mulling, purchasing arms from the United States worth billions of dollars. Apple in the news reports that the Syria, which is expected to be overhauled, is experiencing some bugs. That's part of Apple's artificial intelligence initiative.
Keith Lanton:What do we got going on this week? Relatively quiet. We do have earnings season winding down. About 40 S&P 500 companies are reporting this week, perhaps the biggest of which is Walmart WMT on Thursday to give us insight into what they're seeing with the lower-end consumer. On Wednesday, federal Open Market Committee releases the minutes from its late January monetary policy meeting. Friday, s&p Global releases manufacturing and services PMI. I expect it to come in relatively flat from where they were the previous month slightly down, but not significantly. Also on Friday, national Association of Realtors reporting existing home sales for January. Expectations are for a rate of 4.13 million homes sold. That would be about 100,000 fewer in December In 2024, existing home sales hit their lowest level since 1995.
Keith Lanton:All right, going to move on, talk a little bit about some Barron's articles. So Barron's over the weekend talked about a product that's been getting a lot of attention, especially for folks who are approaching retirement, and these are annuities that blend stocks and bonds. These products promise the best in terms of returns from stocks and bonds, but they also provide protection, and this product is wrapped into one wrapper. You get this protection by giving up some of the upside, so you got to be cognizant and aware of what you are purchasing. There are also lots of expenses associated with these products, but that doesn't mean they're not appropriate for certain investors or even many investors. You just have to fully understand what it is you're getting into. So one of the segments of the market that is pouncing on these types of annuities are retirement investors. We're only available to wealthy investors working with private bankers that add access to investments that tie your upside performance to the stock market and provide a customized cushion for losses. But lately these once-exclusive investment arrangements, known as structured products, have gone mainstream in the form of an annuity and currently retirement investors are putting record amounts of money into these products. Are putting record amounts of money into these products.
Keith Lanton:These products are known in the industry as registered index linked annuities or RILAs, r-i-l-a-s. These investments drew $65 billion in sales last year. That's up 59% from 2022. A fee-only advisor stating in Barron's that these products give people peace of mind, knowing they need to participate in the stock market when facing the end zone of retirement. He goes on to say it's easier to withstand ups and downs in your 40s, but if you don't want deep losses and a major sell-off just as you're retiring, rylers can provide some protection against that type of possibility.
Keith Lanton:Like all annuities, registered index linked annuities are complicated insurance products. They are not for everyone. What's going on with these products? Well, behind the scenes, the insurers who sponsor these annuities are investing in bonds and they buy options tied to, let's say, stock indexes to create various combinations of downside protection with upside potential. Unless you're an options expert, you have no way of knowing how much, let's say, stock indexes to create various combinations of downside protection with upside potential. Unless you're an options expert, you have no way of knowing how much profit insurers are making by selling these annuities because you could potentially structure these on your own if you're sophisticated enough.
Keith Lanton:With most registered index-linked annuities, there are no defined fees, but the costs are baked into the caps of the returns that you're earning. You're also suffering liquidity, or I should say illiquidity or liquidity limitations, so you have to be able to withstand holding these products till maturity. Exiting these products before their end could be very costly and is not recommended. Now, make no mistake, these aren't products that guarantee you no losses. You can lose money in registered index annuities and, as I said, you often can't dump the product for years without being penalized.
Keith Lanton:To understand registered index linked annuities, it helps first to consider the most basic design, which is a product with a buffer of your choice, generally ranging from 10% to 50%, and a cap on an index performance, not including dividends. So let's give an example of a registered index-linked annuity. Here's one from Jackson National. Big name for this product Jackson National's MarketLink Pro Advisory 2 registered index-linked annuity. Because there are so many of these different structures, there's all sorts of complicated names, but how does this specific one work?
Keith Lanton:Well, it's a 20% buffer tied to the S&P 500 with a cap of 12.75%. So how does this work. Well, if the S&P 500 is up 10% after the first year, well, you get a gain of 10%. But if it's up 20%, your gain is capped at that 12.75%. You can only participate up to 12.75%. So you participate in the first 12.75%. Up 3% you're up 3. Up 10, you're up 10. Up 15, you're up 12.75. Up 50, you're up 12.75.
Keith Lanton:But now we're talking only positive scenarios. Let's go to the downside. If the S&P loses 500, well, in this example the insurance company eats the loss and you get a 0% return. In other words, your investment stays intact. If the index loses 25%, though, the insurer absorbs 20% of the loss and you get dinged with a 5% loss. So if the index is down 50%, meaning the S&P is down 50% obviously a big drop doesn't happen very often, but not impossible Insurance company would be on the hook for the first 20,. You'd be on the hook for the remaining 30. So, buffer but no guarantee of loss.
Keith Lanton:A less popular version of a registered index annuity is a protection with a floor rather than a buffer. What does that mean? With a floor, let's say you've got a floor of 10%, the market's down 15%. Well, what that means is that you are on the hook for the first 10% of the floor and the insurance company's on the hook for the next 5%. If the market's down 8%, you're down 8%. Market's down 9% you're down 9%. Market's down 10%, you're down 10%. Market's down 11% well, you're down 10% and the insurance company is down 1%. But that's a way of reducing your risk in this scenario. But you have to be willing to accept the first 10% of loss because if the market's down 50%, well, you're down 10%. The insurance company, in that that example, is down 40.
Keith Lanton:So these products are very popular with investors who are looking for tax-deferred growth. Because these are not the most tax-efficient products. Some investors own them in their IRA, but since you are getting tax deferral, that makes a lot less sense. Keep that in mind. But if you take the money out before age 59 1⁄2, just like an IRA, you will suffer a 10% penalty. So these products generally make a lot more sense outside of a retirement account because they are already tax deferred.
Keith Lanton:Brokers or insurance agents and the commission products come with surrender charges, so there are certainly expenses for these products. These surrender charges can extend for as long as seven years. So if you pay, if you pull your money out early. You may pay a charge that declines over time, but can be very steep in the early years. So, while a lot of people need growth to achieve their retirement plans, products like registered index-linked annuities may be appropriate. For investors who are willing to give up some of that upside, don't need to swing for the fences and get returns of 20%, 30%, 40%, 50% in any one year, but want to limit their downside, these products may make sense. You just need to understand the ins and the outs of these products before jumping into them.
Keith Lanton:That's everything I've got.
Alan Eppers:Thank you for listening to Mr Keith Lanton. This podcast is available on most platforms, including Apple Podcasts, Spotify and Pandora. For more information, please visit our website at www. heraldlantern. com.