August 2022 Newsletter

Welcome to the August 2022 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.




Below is an update of our key stock market indicators.

Economic Outlook: The Leading Economic Index fell by 0.8% in June—declining for the fourth straight month. On a year-over-year basis, retail sales show a gain of 8.1%, which is 1% below the 9.1% increase in consumer prices. Therefore, the entire retail sales gain is not due to increased consumer demand—instead, it is caused by inflation. The July Federal Reserve Beige Book described most districts reporting consumer spending moderated in response to higher food and gasoline prices, which have the same effect on discretionary spending as a tax increase.

Monetary Policy: The Federal Open Market Committee (FMOC) raised the federal funds rate by 0.75% at their July meeting. The committee said their action at the next meeting in mid-September will be dependent upon the data that comes in between now and then, but some sort of an increase in interest rates is highly anticipated. Also in September, Quantitative Tightening (the Fed selling bonds in their inventory) will double to $95 billion a month. This will tend to drive mid- and long-term interest rates higher.

Valuation: The economy will find it difficult to show gross domestic production (GDP) growth in 2022, but the prospects look better for 2023. Later this fall, investors will begin to look forward to 2023 corporate earnings. Our expectation is the S&P 500 Index will see $240 of earnings in 2023. With a PE ratio of 18 to 20, the S&P 500 Index has the potential in 2023 to reach 4,800.

In the event market weakness develops in the weeks ahead, a successful test of the mid-June S&P 500 Index low could occur. This would have the potential to trigger a mid-term election year buying opportunity if internal technical conditions become favorable. If so, we will make an announcement to our clients and newsletter subscribers that the “market is attractive for purchase” at that time.



18th century Scottish economist, philosopher, and author Adam Smith featured in the August Lorenz newsletter.

Adam Smith

“Governments are without exception, the greatest spendthrifts (squanderers) of wealth and prosperity in society.”



Pop Quiz

If an investor retires with $1 million, how much in percent can they withdraw annually from the portfolio and annually increase the amount in dollars withdrawn to compensate for inflation and not have a significant risk of depleting the investments during their lifetime?

The answer is at the bottom of the newsletter.


June 2019 to June 2022 Unemployment Rate graph featured in the Lorenz August newsletter.










Unemployment Rates by Education Level, June 2022

Less Than High School Diploma5.8%
High School Graduate, No College3.6%
Some College or Associate’s Degree3.1%
Bachelor’s Degree or Higher2.1%

Average hourly earnings of all employees on private nonfarm payrolls were up 5.1% compared to a year ago.


Leading Economic Indicators (LEI)

The LEI for June dropped by 0.8%—the fourth consecutive month of a decline. Below are previous LEI results:

  • May decreased 0.6%
  • April decreased 0.4%
  • March decreased 0.1%
  • February increased 0.6%

The lower LEI over the past four months suggests weaker economic activity is likely to begin starting in September / October (six to seven months from the first down reading in March).


Gross Domestic Product (GDP)

The Bureau of Economic Analysis said the advance estimate for GDP decreased by 0.9% in the second quarter of 2022 compared to a decrease of 1.6% in the first quarter.


Q2 Real GDP graph featured in Lorenz August newsletter.

Annual inflation rose in June to 6.8% as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, which excludes food and energy, increased slightly to 4.8% in June.

The Federal Open Market Committee (FOMC) watches PCE core inflation more than the other inflation indicators. Here is a little bit of PCE core inflation history:

  • May 4.7%
  • April 4.9%
  • March 5.2%
  • February 5.3% (peak PCE core inflation this cycle)
  • January 5.2%

So—with April, May, and June PCE core inflation at 4.9%, 4.7%, and 4.8%—inflation is not dropping, but just holding steady. With results like this, the FOMC will continue to aggressively raise interest rates.

The nationwide median price of an existing home sold in June 2022 was 13.4% higher on average than last year according to the National Association of Realtors. The median price was $416,000—however, home sales have begun to slow as the inventory of unsold homes rose to a three-month supply.

Long-term inflation expectations can be estimated by measuring the differences between Treasury bond yields & TIPS real yields of the same maturities. Results are:

Bond MaturitiesAnnual Inflation Expectations
5 Year2.73%
10 Year2.53%
30 Year2.29%

This month’s estimated annual inflation numbers above are 14 basis points higher on average compared to last month.


The Public Debt as Issued by the U.S. Treasury, July 29, 2022




Important Dates in July

August 2012 – Voyager 1, launched on September 5, 1977, became the first man-made object to leave our solar system and pass into interstellar space—approximately 12 billion miles from our sun in August 2012. Pluto, a dwarf planet, is approximately 6 billion miles from the sun while the earth is only 0.093 billion miles from the sun.

August 6, 1945 – Uranium gun-type (Little Boy) bomb was dropped on Hiroshima.

August 9, 1945 – Plutonium implosion-type (Fat Man) bomb was dropped on Nagasaki.

August 14, 1945 – VJ Day or World War II’s Victory over Japan Day (August 14 in the U.S. and August 15 in Japan)

Black panther featured in the Lorenz August newsletter.

This black leopard, Panthera pardus, is eagerly awaiting his morning hug and a belly rub.

August 17 – National Black Cat Appreciation Day




The Stock Market


Bryn Talkington, Managing Partner at Requisite Capital Management, Dallas, TX, featured in the Lorenz August newsletter.

Bryn Talkington, Managing Partner at Requisite Capital Management, Dallas, TX

Bryn said on CNBC on July 21, “A 75 basis point (0.75%) increase by the Fed on Wednesday, July 27, is in the cards.” (She was right.)

Bryn continued, “I think investors are going to be frustrated all year long. The S&P 500 Index can go up if either or both earnings go up and or the PE Ratio goes up. But it will be really hard for the PE ratio to go up as long as:

  • The Fed is tightening the money supply
  • The Fed is reducing their balance sheet (selling bonds)
  • The Fed is raising short term interest rates.

Bryn also said, “Three things have preceded recessions since WWII: Oil prices spiking up, an inverted yield curve, and an aggressive Fed. And now we have all three.”

Bryn was warning investors that in her opinion this bear market has not yet hit bottom.


Stock Market Valuation

The closing low for this bear market so far was 3,667 on June 16.

There is some good news in the economy. Commodity prices have been coming down, including gasoline prices. But most of the news is bad. Leading indicators are down, and inflation is still very high. Until the Fed signals they are done raising interest rates, it is unlikely the stock market has a chance to maintain a rally.

Here are Lorenz Financials’ stock market predictions for this bear market’s final closing low.


Our best case is

YearEarnings/SharePE RatioApprox. S&P 500 Index High


But the worst case might be

YearEarnings/SharePE RatioApprox. S&P 500 Index High


The current Lorenz Financial prediction for the S&P 500 Index bottom for this bear market is 3,500 +/- 100. The S&P 500 Index closed at 4130.29 on July 29.


Monthly Performance of the S&P 500 Index















Recommended Action for Your Stock Portfolio

Perhaps in times like these, it’s best to recognize what you as an investor can control and what you cannot control.

None of us can dictate or even consistently predict whether the stock market goes up or down in the short term. So please do your best to not worry about what you cannot control. Let’s focus on what you can control regarding your family’s finances. For example, ask yourself these questions:

  • Does our family spending exceed our income? If so, use a budget to reduce spending.


  • Do we have excess debt? If so, increase the family income or decrease family expenses and permanently pay off all bad debt. All debt is bad debt except a fixed-rate, first mortgage on your home.


  • Do we have a large enough emergency fund? A family should have at least six months of family spending in a bank or credit union checking, savings, or money market account.


  • Do we have all the insurance we need? With a few exceptions, everyone should have the following insurance:



    Umbrella liability


    Homeowners or renter

    ID Theft Protection

    Disability income insurance is optional. Start Long-term Care insurance between ages 55 and 60.


  • Are we saving enough for retirement? If in doubt, get a financial plan.


  • Is our portfolio diversified? Is our portfolio low cost? Does our current portfolio match our risk tolerance? If in doubt, seek out a low-cost Registered Investment Advisor who can provide an investor with professional guidance.


Your financial “to do” list might be a little different than above, but the lesson is to focus on what you can control and don’t waste time or energy on what you cannot control.



    Federal Reserve Building featured in the Lorenz August newsletter.

    The Federal Reserve building in Washington, DC.

    The severe Panic of 1907 began when two bank managers speculated and suffered huge losses in a failed attempt to corner the market in the stock of United Copper. The speculators were managers at Heinze Bank. When the public found out, they began a run on Heinze Bank’s deposits. Later other banks fell victim to massive withdrawals from depositors. Eventually, the “panic” spread to all of the major banks. During the 20th century, only the Great Depression was more economically severe than the Panic of 1907.

    It took a few years for Congress to study the problem—but eventually, its members decided a federal bank was needed to coordinate and support the U.S. banking system. In 1913, the Federal Reserve Act was passed by Congress and signed by President Wilson. See the broad outline below of our Federal Reserve System.

    One primary responsibility of the Federal Reserve (the Fed) is monetary policy. The objective of monetary policy is “maximum employment with stable prices.” The other responsibility of the Federal Reserve is to be the U.S. bank regulator.

    The Federal Reserve System is made up of seven members of the Board of Governors each appointed by the U.S. President for a 14-year term. The terms are staggered, and Governors are based in Washington DC. The Chair of the Federal Reserve is one of the seven governors and
    has a four-year term as Chair.

    The other primary group within the Federal Reserve is the 12 Federal Reserve Banks. The regional Fed Presidents have a five-year term and can be re-appointed by the directors of each bank. The 12 Federal Reserve Bank headquarters and their geographic territories are shown below.

    Federal Reserve Bank locations featured in the Lorenz August newsletter.

    Missouri is the only state to have two Federal Reserve Banks. Each bank is independent of the other Federal Reserve Banks and of the Board of Governors.

    The policy decision arm of the Federal Reserve is the Federal Open Market Committee (FOMC). The committee meets eight times a year in Washington, DC and determines monetary
    policy. The committee is made up of the Chair, the other six Governors, the New York Federal Reserve Bank President, and four of the remaining 11 bank presidents on one-year rotating terms.

    Currently, the Federal Open Market Committee (FOMC) is focused on inflation as unemployment is below 4%. As part of its charter, the Fed can only lend money, it cannot give money away.

    The two anti-inflation tools of the FOMC are:

    1. Increasing short-term interest rates by increasing the Federal Funds rate. This is the rate member banks pay one another when they loan money overnight to each other.

    2. Quantitative Tightening. This occurs when the Fed is selling off bonds in its inventory. For June, July, and August, the plan is for the Fed to reduce its inventory by $47.5 billion per month. Starting in September, the selloff will double to $95 billion per month. This action will increase the supply of bonds, which will lower the price of the bonds which will increase the yield of the existing bonds. This will increase the interest rate of intermediate and long-term bonds.

    The U.S. Senate must confirm the appointment of the Fed Governors. The Fed Chair reports to the Senate Banking Committee and the House Financial Services committee twice a year. 



    OK, Now What Do I Do?

      When the breadwinner of a household is talking to a life insurance agent, the breadwinner will be presented with two broad scenarios: what happens to your family if you die prematurely, and what happens if you live.

      The latter scenario will suggest whole life insurance can be used for income in retirement. But during this discussion, it will never be brought up that Social Security income will provide some income assistance during retirement. President Roosevelt said upon signing the Social Security Act in 1935,

      “This social security measure gives at least some protection to our citizens. We can never
      ensure 100% of the population against 100% of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against poverty-ridden old age.”


      Therefore, one important step in financial planning is to confirm one’s income has been recorded with the Social Security Administration and to understand what level of income a wage earner can expect when they retire. Step one is, go to:

      Click on the “my Social Security” link. Sign in or create an account. Each person within a married couple will have their own account.

      Then print out your two-page summary (which used to be four pages) on your reported income and a projection of future benefits. The earliest you can draw Social Security income is at age 62 but this includes a permanent reduction. For those with a Full Retirement Age (FRA) of 66, drawing at 62 includes a 25% permanent reduction in benefits. For those with an FRA of 67, drawing at 62 includes a 30% permanent reduction. For every year a wage earner can wait to begin drawing, benefits will go up approximately 8% plus inflation. Not counting inflation adjustments, the maximum Social Security income benefit occurs at the age of 70.

      See the chart below to determine your Full Retirement Age.


      Social Security Full Retirement Age Chart featured in the Lorenz August newsletter.






      Bank of America Fined for Mishandling Pandemic Unemployment Benefits

      Source: The Wall Street Journal, July 15, 2022, page B10


      Federal regulators fined Bank of America Corp. $225 million for mishandling the distribution of unemployment benefits at the height of the pandemic.

      The Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau also ordered the bank to repay customers who were wrongfully denied access to their benefits. Bank of America had put anti-fraud filters in place to detect deceit, but the filters were overly aggressive and prevented thousands of out-of-work Americans from accessing their unemployment benefits.

      Bank of America had partnered with 12 states to distribute unemployment benefits before the pandemic. Today, Bank of America has exited this business except in California. The bank had no comment on the fines.



          The Bond Market


          There are two forces pushing inflation higher. One is the reduced supply of food and energy driving those prices higher. The other, labor, is in very short supply. This latter problem is leading some economists to conclude the only short-term answer to increasing the supply of
          labor is to dramatically increase legal immigration.

          Other economists now predict the 10-year note versus the 3-month T-bill will invert in the next couple of months. On August 1, the 10-year note is at 2.62%. Historically, this inversion has been a very reliable indicator of a pending recession.

          Vanguard has come out with a mid-year review. In it they believe there is a 50% chance of a recession in the next 12 to 18 months.


          The Federal Reserve and its Federal Open Market Committee (FOMC)

          The FOMC met on July 26 – 27 and voted unanimously to raise the short-term Federal Funds rate by 0.75% to the current range of 2.25% to 2.50%. In September, the Quantitative Tightening doubles to $95 billion a month.

          In the post-meeting statement, the FOMC said, “Indicators of spending and production have softened. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and higher transportation prices.”


          The U.S. Treasury

          The 10-year versus 3-month yield curve flattened significantly in July. The spread was 126 basis points (1.26%) in late June and declined to only 26 basis points at the end of July. We expect the 10-year versus 3-month spread will invert in the coming months as the Fed continues
          to combat very high inflation with additional rate hikes.


          Recommended Action for Your Bond Portfolio

          There have been no changes to our bond fund recommendations this month. Most bonds are not appropriate today because it is expected in the short to mid-term, interest rates will rise above today’s levels. As bond yields increase, existing bond prices decline. Our bond market
          recommendations, in order, only include the following:

          • Cash
          • U.S. Savings I-Bonds
          • Ultra-Short-Term U.S. bond funds



          Rule one: “Spend less than you make!” A family cannot pursue long-term happiness and build wealth over their lifetime by spending more than they make.

          Rule two: “Maintain a safe and liquid emergency fund of at least six months of family expenses.” An emergency fund should be kept in an FDIC insured bank’s or NCUA insured credit union’s checking account, savings account, or money market account.

          Rule three: “Permanently eliminate all bad debt!” All debt is bad debt except a fixed-rate, first mortgage on your home.



                      Pop Quiz Answer

                        If an investor retires with $1 million, how much in percent can they withdraw annually from the portfolio, and annually increase the amount in dollars withdrawn to compensate for inflation and not have a significant risk of depleting the investments during their lifetime?

                        First, it is important to recognize the dollar amount withdrawn from a portfolio each year needs to increase to keep up with inflation even if the percent that is withdrawn stays the same.

                        A safe number to annually withdraw from a portfolio in retirement is 4%. This is true whether a retiree has $50,000 or $5 million. In many years, a well-balanced and diversified portfolio will return more than 4%, so why is it a retiree can only withdraw 4% a year?

                        Let’s look at an example.

                        Let’s assume our fictitious retiree’s January 2022 balance is $1 million.

                        To keep the math simple, the annual amount withdrawn, 4%, is performed every January.

                        So, in January 2022, $40,000 is withdrawn ($1,000,000 x 0.04).

                        The January 2022 balance is now down to $960,000.

                        In most years inflation will be 3%, not the current 8%. So, the targeted amount to be withdrawn in January 2023 needs to be $41,200 ($40,000 x 1.03). 

                        If $41,200 will be drawn from the balance in 2023, and we will only withdraw 4%, the desired 2023 balance can be determined by $41,200 / 0.04 = $1,030,000.

                        Therefore, the January 2022 balance of $960,000 needs to grow in the next 12 months to $1,030,000. That is a growth of $70,000. $70,000 / $960,000 says the portfolio in 2022 needs to grow 7.29% to reach the target. And that is 7.29% after any taxes, commissions, transaction expenses, and financial advisor fees.

                        On average, we’re happy with suggesting the safe withdrawal rate from a retirement portfolio is 4%. An ultra-conservative investor might choose to only withdraw 3% per year, while a retiree who is willing to take on significant risk might withdraw 5%. But 5% is indeed precarious and we do not recommend withdrawing more than 4% each year in retirement.

                        Our other conclusion is most portfolios will need to remain significantly but not totally invested in the stock market throughout retirement to grow the portfolio more than the amount previously withdrawn.

                        Lorenz Financial has heard of some retirees thinking they can withdraw 10% every year from their portfolio. As per the math above, a 10% withdrawal rate will not allow a portfolio to last an average lifetime.