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WashingtonWise Investor: Episode 48


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Can D.C. Chaos Halt the Bull Market?

The long-running bull market is facing pressures as Congress continues to flail against complex issues that threaten the economy.

As Congress continues to struggle with a quartet of complex policy issues, it’s no exaggeration to say that the bull market and the economy are at risk. On this episode of WashingtonWise Investor, Randy Frederick, Schwab’s managing director of trading and derivatives, joins host Mike Townsend to discuss how the market might react, how investors could prepare for potential market disruptions, and how there might be opportunities for investors even as the risks to the market grow. They also talk about the rising popularity of cryptocurrencies, the role of crypto in the economy of the future, and whether greater government scrutiny of digital currencies will eventually help increase the confidence of ordinary investors.

Mike also offers updates on the SEC chairman confronting the reality that his ambitious regulatory agenda may take longer than he hoped and how two surprise resignations could reshape the Federal Reserve as the central bank heads into a critically important year. 

WashingtonWise Investor is an original podcast from Charles Schwab.

If you enjoy the show, please leave a rating or review on Apple Podcasts.

Click to show the transcript

MIKE TOWNSEND: As we head into October, Congress is continuing to wrestle with four huge, complex issues―an infrastructure bill; a second economic package focusing on climate change, health care, and social programs; a bill to a avert a government shutdown by temporarily funding government operations for a couple of months; and legislation to suspend the debt ceiling and avoid a catastrophic default by the United States.

All four issues have potentially significant ramifications for investors and the markets. All four issues have been dominating the headlines for months. And all four issues are finally reaching key decision points that I think it’s no exaggeration to say could impact the economy for years to come.

Many investors are growing increasingly anxious about how all these issues may play out―and what impact they might have on the market. But are there opportunities out there for investors?  

Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation’s capital and help investors figure out what’s really worth paying attention to.

Over the past few months, I’ve devoted a lot of time to this quartet of outsized policy issues that have dominated Washington since last spring. But as I record this, we are in the middle of what might be the most consequential week of the past six months.

My colleague Randy Frederick, Schwab’s managing director of trading and derivatives, will join me in just a few minutes to discuss how the market is reacting to these developments and how investors might find opportunities amidst the chaos.

But before I bring on Randy, let’s do a quick rundown on the state of play with each of these issues.

Two of them are, on their own, relatively uncomplicated, at least in theory.

Both the House and Senate are expected to pass a bill to extend government funding for a few weeks―there’s a good chance they will have done so by the time you are listening to this. The risk of a government shutdown now is low. But as happens most every fall on Capitol Hill, a temporary extension of funding just kicks the can down the road a bit.

Lawmakers will still have to figure out how to pass the 12 appropriations bills that fund every federal agency and every federal program for the remainder of the fiscal year before that new deadline. It won’t be easy. But, for now, it looks like that will be a battle for another day.

And the House is slowly but surely moving toward passing the infrastructure bill. That vote is scheduled for September 30, though it could slip into October. The legislation would put about $1.2 trillion towards roads, bridges, waterways, airports, the electrical grid, and other infrastructure projects around the country. The bill is broadly popular with voters, it garnered 19 Republican votes in the Senate just a few weeks ago, and it would give President Biden a much-needed win after a rough few weeks. While some progressives in the House want to wait to approve the bill until after the larger budget reconciliation package is finished, momentum towards passing the bill now continues to build. Whether it passes the House by the end of this week or takes a bit longer, it seems virtually certain that it will happen eventually.

But the other two issues are much more complicated. The $3.5 trillion economic package is nowhere near ready for either the House or the Senate to consider it. Last weekend, House Speaker Nancy Pelosi said it was “self-evident” that the size of the entire package will have to be reduced significantly to have any chance of winning the support of moderates in the Senate.

But there is no agreement yet on exactly how much smaller the bill needs to be. And the process of reducing the size of the package will inevitably leave many Democrats disappointed if the issue they care about most—whether it be climate change, health care, immigration, tax code changes, or some pet project that they have long championed—ends up on the cutting-room floor. Already, numerous lawmakers are saying they will vote against the entire package if their priorities aren’t included. Given all the haggling that will have to go on, it’s likely going to be weeks before there is another version of the spending bill put forward for the House and Senate to consider.  

And Democrats and Republicans remain in a high-stakes stalemate over the debt ceiling. On Tuesday, Treasury Secretary Janet Yellen announced that she expects Treasury to run out of cash to pay its bills on October 18, setting for the first time a hard deadline for Congress to raise or suspend the debt ceiling or trigger a potentially catastrophic default.

Republicans are saying that because Democrats control the House, the Senate, and the White House, it should be the responsibility of Democrats to use the budget reconciliation process to approve a debt ceiling increase without any Republican support.

That goes against long-standing bipartisan precedent. The two parties have traditionally bickered about which one was more responsible for increasing the debt, questioned why we have a debt ceiling at all, and complained about having to take an embarrassing vote to allow more debt to accumulate―but they have always managed to avoid default by voting for it in the end.

Democrats are continuing to insist that the two parties need to work together to increase the debt ceiling for the good of the nation’s economy and the stability of the financial system. Republicans so far aren’t budging. Democrats insist there is no Plan B, but it’s beginning to look increasingly likely that they will have to use the time-consuming and cumbersome budget reconciliation process to get this done before the deadline.

For now, the stalemate continues, while the market grows increasingly concerned that we may be heading into the uncharted waters of default.

On my Deeper Dive this week, I want to explore how investors should be thinking about this unusual coming together of multiple policy and political debates in Washington that could impact the markets. Are there opportunities to take advantage of uncertainty?

To discuss that, I’m pleased to welcome back to the podcast Randy Frederick, Schwab’s managing director of trading and derivatives. Randy, thanks so much for being here.

RANDY: Great to be with you, Mike.

MIKE: Randy, I want to begin with the standoff between Republicans and Democrats over the debt ceiling. We’ve seen market volatility in the past whenever there is uncertainty about when and how Congress is going to be able to raise or suspend the debt ceiling, and that volatility has historically increased the closer we got to a potential default date. So how concerned do you think the markets are right now about this?

RANDY: You know, this debt ceiling issue is one of those things that I’ve been saying for weeks probably isn’t getting enough attention. And that belief is based on how the markets have reacted in the past, when Congress has used this issue like a political football.

While the debt ceiling has been raised something like 80 times since 1960, when one side of the aisle refuses to cooperate with the other, usually due to some other legislation that they’re trying to block, markets tend to get very volatile. In 2011, which is probably the best example, when it looked like Congress might not raise the debt ceiling, the S&P 500® fell about 7% during the month of July. And then, even after a deal had been reached in early August, Standard & Poor’s downgraded the U.S. credit rating from AAA to AA+, and that was the first and only time that’s ever happened, the S&P 500 fell another 10% before stabilizing.

Another example was in 2013, when Congress failed to approve a budget before the fiscal year ended on September 30. The government shut down on October 1, more than 800,000 federal employees were furloughed, and national parks were closed. Now, those services that were deemed essential were left open, although workers’ pay was delayed for two weeks. Equity markets dropped 2% rather quickly and didn’t really start to recover until rumors leaked that a new budget and debt ceiling deal had been reached.

When some members of Congress refuse to vote for any legislation that involves raising the debt ceiling, while at the same time Treasury Secretary Yellen publishing op-eds explaining the dire consequences associated with that stance, yes, it concerns me a great deal. If this happens again, equity markets will likely pull back, and volatility will rise as we approach the October 18 deadline—that’s when Secretary Yellen says the government will run out of money.

As you know, Mike, the Fed does have a crisis management playbook, which outlines the steps to take in the event that deadline is actually reached. So, if the unthinkable happens and U.S. Treasuries go into default, the impact to U.S. credit and the economy would be catastrophic. I believe equities would quickly sink into a very severe bear market.

MIKE: I hear you, Randy, but despite the fighting on Capitol Hill, I remain optimistic that Congress will avoid that fate. So let me ask you a further question about the potential impact. Back in March and April 2020, there was a brief but significant market downturn as the pandemic really started to take hold. Many people saw that as just a blip in the middle of the longest bull run in history. But there is also a sense among many investors that the market was and is overly frothy. Is this debt ceiling situation something that could bring the bull market to an end, or will it likely be just a short-lived pullback if it is resolved relatively painlessly?

RANDY: While some people might consider the pandemic bear market in the spring of 2020 just a blip, I don’t. Yes, it was caused by an unexpected, even exogenous, event, but it qualifies as a bear market by virtually any standard. While it was unquestionably the shortest bear market in history, at only 33 days in length, the S&P 500 fell almost 34%; and that’s well beyond the typical 20% threshold which most people consider to be a bear market. And if you look at the Dow Jones Industrials, it fell about 36%.

But, as you said, whether you believe we’ve been in a bull market since March of 2009 or since March 2020, either way, the market has come a really long way. The S&P 500 is up about 560% and about 100%, respectively, from those two dates.

Now, when you say that some investors may be worried that the market is overly frothy, usually that means there’s a concern about valuations, or high P/E ratios. Now let’s talk about that― price-to-earnings ratio is a really fairly simple concept. It’s the price of the stock divided by the annual earnings of the stock. Or in this case when we’re talking about the S&P 500, it’s the price of the index divided by the aggregate earnings of the component stocks.

According to my calculations, the average P/E ratio of the S&P 500 since 1948 has been about 18. Since the 2008 financial crisis ended, it’s been about 25. Today it is around 26.5, so that’s really not too far above average. And when the economy was essentially shut down and most companies were experiencing huge losses in the spring of 2020, the P/E ratio fell all the way down to about 17. But as the market began to recover in April, stock prices shot up well before earnings began to recover, and the P/E ratio went all the way up to 26 by August. That was just about the time that the S&P 500 got back to its pre-pandemic high.

You know, the thing about P/Es is that they’re really more of a measure of investor optimism or sentiment; they’re not really a very good market timing tool. Now here’s a case in point: The S&P 500 has risen about 28% since last August, and valuations have been high the entire time. In fact, the P/E ratio peaked at around 31 in February of this year, and frankly, the S&P 500 is up like 18% since then. I mean, if high valuations were bad, how could you explain such a bullish trend?

As I mentioned, it’s actually come back down to about 26.5 now because, really, Q2 earnings were strong. Remember that a P/E ratio is just a fraction, and while the price of the S&P 500 is in the numerator, if you have strong earnings in the denominator, that can bring the ratio down. If there was a time to be worried about valuation, it was probably back in February, not now.

So back to your original question of whether or not this debt ceiling issue could bring the bull market to an end. I’d say it’s pretty unlikely, unless the U.S. does the one thing it’s never done before, and that is default on its debt. If that happens, it would be more than just the end of the bull market.

Assuming that doesn’t happen, and the U.S. credit doesn’t get downgraded again, I’d say the more likely scenario is just a market pullback, maybe even a correction, and I think that would be probably commensurate to how close to the deadline Congress is willing to push it.

MIKE: Well, Randy, right now, I think it’s pretty unlikely the U.S. will default on its debt, but if there’s the potential for a market pullback and higher volatility while it gets sorted out, what would be the best way for investors to prepare for that?

RANDY: As I’ve said many times in the past, selling everything and going 100% into cash is just never a good idea. But for investors who are concerned, you know, they might consider taking a few profits off the table, slightly increasing their cash allocation. And if the market does decline, well then there could be an opportunity to put that cash back to work once an agreement is reached.

Another possibility is to use, maybe, some protective strategies, like stop orders, which can help cut losses in the early stages of a decline. But probably the most important thing to do is to ensure that they have a well-diversified equity portfolio that also includes non-correlated asset classes like bonds, commodities, and maybe even some international stocks. That way if part of their portfolio declines, the rest will either hold steady, maybe even increase a little bit to help cushion the blow.

MIKE: Well, Randy, let’s change gears a little bit to another piece of recent news. Last week saw a major announcement from the Federal Reserve that they anticipate reducing the scope of their bond-buying later this fall, and there was also an indication that interest rates may start to rise as soon as a year from now. So what are the implications of this news for the housing sector, which has been booming? Or the auto sector, which has been struggling with rising prices and supply chain backlogs?

RANDY: You know, from most investors’ perspective, a year away is a long time in the future; but to the housing or auto sector, I mean, that’s like tomorrow. Housing market cycles tend to be really long. In fact, the current housing bull market began in 2012. At the moment there’s a housing shortage almost everywhere, and specifically in starter homes. Certainly, higher interest rates would make housing more expensive overall, but it also might help cool the demand so that prices don’t continue to rise at the current exponential rate. Unfortunately, that won’t be of any benefit to young people looking to buy their first home.

The same is true in the auto sector where the timeline from concept to production for a new car model is usually like four to five years. Now, I think everyone is aware of the semiconductor shortage and how it has drastically cut new car production. A huge shortage of new cars has caused a sharp spike in used car prices and brought on shortages there, too. I’ll share a personal story. In July of this year, I sold one of my cars for essentially the same price I paid for it three years ago. That really hasn’t happened since World War II, when auto production was halted for three years.

Low interest rates have also contributed to high demand for new cars, but the pandemic was probably a bigger factor. Not only is there a trend in people moving out to the suburbs and exurbs, where public transportation is not readily available, but also more people are taking road trips for vacations because the pandemic has kept them off airplanes and certainly cruise ships. Carmakers have actually done quite well in the post-pandemic era, but with the accelerating evolution into electric vehicles, they’re also faced with making enormous investments in the future. I do think these trends will eventually stabilize, but not until the semiconductor shortage is resolved and new car production gets something back to normal. Building more semiconductor capacity is a long, slow process, and most auto industry experts are saying that could be a year from now, if not even longer.

MIKE: Randy, you touched on a couple of sectors there, so, let me ask you another sector-related question. It appears that the long-awaited infrastructure spending bill will become law, well, soon. So what sectors stand to benefit?

RANDY: Given how all-encompassing this bill is, it will probably have a far-reaching impact on the market. However, the two sectors that would be the most obvious beneficiaries of any infrastructure bill would be Industrials and Materials. And that’s because, frankly, infrastructure typically involves lots of concrete and steel, and it needs heavy machinery to process and move that concrete and steel.

MIKE: So how long does it usually take when there is a big bill like this before the impact is really felt in the market?

RANDY: Well, historically, the markets actually try to front-run any big initiatives, and this infrastructure bill is no exception. While both of these sectors have been mostly moving sideways for about the last four months—and, in fact, they’ve even slightly underperformed year-to-date—they’ve both outperformed the S&P 500 since the pandemic bottom in March of last year. Now, Schwab does put out sector ratings, and we currently have a “market perform” rating on both of these sectors, but of course that doesn’t mean there might not be some opportunity if this infrastructure bill does eventually get passed.

I know you’ve said many times that infrastructure is one of those rare items that enjoys bipartisan support, and yet, somehow, Congress has been unable to get it done for over a decade. I believe that uncertainty explains why these sectors have not made any real progress at all in Q3. I think we’d all cheer the passage of an infrastructure bill, although I’m not sure where the labor is going to come from to do those projects. But, you know, that’s probably a topic for a different discussion for a different time.

MIKE: Randy, let’s conclude with a topic that I know you spend a lot of time on, and that’s cryptocurrency. Personally, I’ve struggled to understand what all the fuss is about. It seems pretty clear that I’m not buying my Starbucks with Bitcoin anytime soon. But I also admit to some FOMO about cryptocurrency―fear of missing out. Should ordinary investors care about this?

RANDY: You know, Mike, even if you don’t fully understand the crypto industry—and don’t feel bad because it’s really not that easy to understand—and even if you have no interest in owning anything crypto related, you should care about it. And, you know, whether we like it or not, it is changing the industry—investing, and frankly the whole financial landscape, in ways almost no one could have imagined just a decade ago.

In just the 12 years since Bitcoin was first launched, the crypto industry has grown from one unique concept on the fringe where finance and technology meet to more than 12,000 unique products and uses and, amazingly, over $2 trillion in overall market cap. That’s pretty staggering when you think about it, especially for an industry that operates largely in an autonomous and unregulated space. I mean, $2 trillion is still small compared to the $38 trillion aggregate value of all the stocks in the S&P 500, but it is greater than the market cap of Pepsi, Boeing, McDonalds, and Home Depot combined.

I think to really understand what all the fuss is about, you have to think of cryptos, and Bitcoin in particular, as what many people refer to it as—digital gold. Now, let’s do a little history lesson. Way back between the years of 1848 and 1852, when the California gold rush first hit, more than 300,000 people moved out to the West Coast, and virtually all of them were seeking a short-cut to easy riches. No doubt some of the earliest settlers and those who either worked the hardest or were the luckiest probably became wealthy. However, history also tells us that was a fairly small number that actually hit it big. In fact, those who benefited the most were the ones that sold shovels and mining equipment and supplies like Levi’s.

The same is true of Bitcoin. Those who bought it in the very early days, when very few people had even heard about it and even fewer expected it to increase sharply in value, could’ve earned several thousand percent on their money. I’ll share another personal story. I bought a small amount of Bitcoin way back in 2017 for around $2,300, and if I had timed it perfectly and sold it in April of this year, I could’ve gotten $64,000. And that’s a return of over 2,600%. But you know what, not many of us are that lucky; I wasn’t either. I sold way too soon. But just like the shovels and the Levi’s, companies like AMD and Nvidia and several others, which sell some of the semiconductor chips and servers that are used to mine Bitcoin on the other hand, you know, they’ve done really well. Obviously, I’m not specifically recommending these two stocks, but as this industry continues to evolve, it’ll touch many parts of our lives, and there will be plenty of opportunities beyond simply owning cryptocurrencies directly.

And finally, while you may not have any intention of using Bitcoin to buy your morning Starbucks, you actually can—although, frankly, I’m not so sure why you’d want to. You see, despite their name, the IRS actually treats Bitcoin and other cryptocurrencies as property, not currency, for tax purposes. And that means any time you spend Bitcoin to purchase a product, you may also be liable for capital gains taxes if the Bitcoin you just spent is converted into more dollars than you spent when you acquired it. Starbucks makes the conversion process available, as an accommodation to their customers, with a partnership with a company called iPayYou, which uses what’s called a Bitcoin wallet to pay for the purchases. But Bitcoin is so volatile, I personally would not want to buy a $5 coffee today only to find out tomorrow that I’d paid $8 for it because Bitcoin jumped in price.  

MIKE: Well, as you might imagine, there’s a lot of interest here in Washington in cryptocurrency. And I would say there has been a noticeable uptick in the past few weeks of tough talk about cryptocurrency coming from financial regulators in Washington, like SEC Chairman Gary Gensler. He’s been describing cryptocurrency investing as the “wild west,” and he said earlier this month that the space is “rife with fraud, scams, and abuse.” He’s pushing for cryptocurrency trading and lending venues to be registered with the SEC so that the regulator can provide more investor protection. So would that legitimize cryptocurrency in the eyes of investors and perhaps attract more mainstream investors?

RANDY: You know, Mike, I love this topic because I think this is one of the great ironies of our time. As I’m sure you know, cryptocurrencies aren’t issued by a central bank or a government, and they aren’t considered legal tender anywhere except in the small country of El Salvador. In fact, they’ve been officially declared illegal in China, including all cryptocurrency mining, and any kind of business transactions, they can’t be done in cryptocurrencies. Several other countries like Russia, many of the South American countries, they’ve either banned or sharply restricted cryptocurrencies.

One the one hand, cryptocurrencies were originally created in order to allow for easy peer-to-peer payments without the need for a third-party intermediary like a bank. But because of their high volatility, complete lack of investor protections, as you mentioned, and they’ve been used for all sorts of illicit things, in order to gain credibility that it desires, the industry, frankly, is … they’re going to require the one thing they sought most to avoid, and that is federal oversight.

While there was a misguided perception by some people in the crypto community that because Gary Gensler is a cryptocurrency expert, he would take a light touch to the industry when he became the SEC chairman. Now that perspective could not have been more wrong. In fact, it was his expertise that allowed him to illuminate the many risks, the holes in the system, and all the things that need to be regulated.

Without a doubt, strong regulatory oversight would drive more mainstream adoption, and the introduction of SEC-approved mutual funds and ETFs would too. The industry is certainly ripe for more investor protections, because right now, frankly, there just aren’t any.

MIKE: Well, as you noted, one of the interesting things going on here is the push and pull between cryptocurrency essentially being created as an alternative to regulated currency and financial markets, yet desiring some kind of stamp of regulatory approval to help its legitimacy. So is this a “be careful what you wish for” moment for the cryptocurrency industry?

RANDY: You know, I think it might be helpful to think about what could happen based on what’s already happened. So let’s take China again as a good example. China first began to crack down on cryptocurrencies way back in early 2018. Essentially, they shut down all the cryptocurrency exchanges and threatened to ban all mining operations. Those actions sparked a 60% downturn in the price of Bitcoin, because at that time, China was mining about 90% of all Bitcoins.

Jump ahead to May of 2021, Bitcoin dropped 40% when China officially banned all financial institutions and payment companies from doing any business transactions in cryptocurrencies. At that time, it was estimated that nearly half of all crypto mining was still being done in China. A couple weeks later, China officially banned mining altogether, and that sparked another 16% downturn.

Most recently, in late-September, China reiterated, that, hey, all mining is banned and, officially, all cryptocurrency transactions of any kind are now illegal. That resulted in about a 13% decline. I mean it’s quite clear what China’s doing here. Their actions are not driven by some green initiative, or anything else, but their desire to, frankly, maintain control over their currency. Back in April of this year, China actually launched a test version of a digital yuan which will be controlled and issued by, as you might expect, the People’s Bank of China. And frankly, the Chinese government just doesn’t want any competition, so it effectively outlawed it. China has long sought for the yuan to be used for far more international trade than it currently is, which is only about 4% of all global trade.

Now, the dollar on the other hand, is the currency in which about 88% of all global trade is currently done. And while I don’t think Gary Gensler will attempt to outlaw cryptocurrencies outright, like China has done, I do think he wants and needs to have much greater control over it, and he’ll use the much-needed desire for greater investor protections as his justification for it.

Now, current estimates say that as many of 80 different countries around the world are exploring the idea of launching what’s called a CBDC, or a central bank digital currency. And I think the U.S., too, will launch a “digital dollar” sometime in the next few years. While the Fed, the Treasury, and the SEC have all sort of remained noncommittal on this topic, Fed Chair Jay Powell recently said, “It is more important to do this right than to do it fast.” And, to me, that means it’s not a matter of if, but rather when, the U.S. develops its own digital dollar.

Now, I won’t try to predict whether or not that means the end of Bitcoin, but I think it’s fairly reasonable to assume that the world won’t be able to sustain several thousand different digital currencies or an environment without investor protections.

MIKE: Well, Randy, great insights, as always. Thanks so much for your thoughts on all of this. It’s going to be an interesting few weeks here in Washington and for the markets. Thanks for helping us make a little bit of sense of it all.

RANDY: It was my pleasure, Mike.

MIKE: That’s Randy Frederick, Schwab’s managing director of trading and derivatives. He’s a must-follow on Twitter―you can find him @randyafrederick.

Finally, on my Why It Matters segment, I like to note something interesting that is happening in Washington that may have been below the radar screen and explain why I think it’s important. This week, I’ve got two things to mention.

First, over the last several months, I’ve been talking about the new SEC chairman, Gary Gensler, and his ambitious regulatory agenda that includes a host of issues with potential real-world implications for individual investors.

Well, last week Gensler acknowledged, maybe in the slightest way, that perhaps his agenda is going to move a little slower than he had hoped. He said that it might take until early 2022 for the agency to propose updated rules for what public companies have to disclose to investors about the risks that climate change poses to their business. That’s a bit slower timeline than he had indicated over the summer, when he said he expected those new disclosure rules to be proposed this year.

Gensler also acknowledged that the workload for SEC staff has contributed to the delay.

So why does the difference of a few months matter? Well, one of the things I always remind investors is that the wheels of government bureaucracy turn very slowly. And even when you have an ambitious leader at the top of an agency like the SEC, it’s hard to make the wheels turn any faster. The whole process to make a new regulation or update an existing regulation is designed to be very, very slow, with lots of time for building consensus, getting public feedback, deliberating over the final details, and then, if and when a rule is actually approved, plenty of time for companies to update their systems and processes to ultimately comply.

Earlier this month, Gensler testified before the Senate Banking Committee about his regulatory agenda. Over the course of the hearing, Gensler touched on about 20 different regulatory topics that he wants the agency to focus on. He discussed the gamification of stock trading; rules to reduce conflicts in the equity markets; shortening the amount of time it takes for settling trades; examining whether there are steps that could improve the resilience and efficiency of the Treasury market; tougher cybersecurity rules; cryptocurrency; special purpose acquisition companies, or SPACs; public company disclosure, not only in the climate change area, but also with regard to human capital, diversity, and executive compensation. And the list went on. In his prepared remarks, he said 13 different times that he had asked SEC staff to prepare a report, make recommendations, or develop proposals on an issue. That’s a lot of work, and it may be that Gensler’s busy agenda is spreading staff too thin.

We’ll continue to follow all these issues in the months ahead, as we think many of them will be relevant to individual investors. But it’s important to remember that nothing moves quickly in Washington, especially the regulatory process.

Finally, one other issue to note. On Monday morning, we heard about the abrupt retirement of Eric Rosengren, the long-serving president of the Federal Reserve Bank of Boston, who will leave office on September 30. Rosengren, who has been at the Fed in various capacities since 1987, and the president in Boston since 2007, was set to retire at the end of his term next June but accelerated his timing due to health concerns.

Later on Monday, Robert Kaplan, the president of the Federal Reserve Bank of Dallas, announced that he, too, would retire early, on October 8. Both Kaplan and Rosengren had come under scrutiny recently when it was disclosed that they had made significant trades in stocks and other investments in 2020, when the Fed was focused on its responses to the pandemic. While the trades did not violate any Fed rules, the appearance of a conflict of interest was hard to ignore. Indeed, Kaplan, in his resignation statement, said that the trading situation had become a distraction to the Fed’s work.

Last week, Chairman Jerome Powell said that the Fed would be reviewing its ethics rules regarding financial activity by its members. But the two bank presidents involved in the trading are now both about to be gone. It’s an abrupt change at an important time in the Fed’s work.

Seats on the Federal Open Markets Committee, the body that sets interest rates, rotate on an annual basis among the regional bank presidents. The Boston president will be on the committee in 2022, while the Dallas president will have that role in 2023. So whoever fills these two positions will have an important voice in the Fed’s monetary policy development over the next two years.

The two regional banks’ respective boards of directors will be tasked with selecting replacements, with approval from the Fed’s Board of Governors in Washington.

With the Fed heading toward tapering its bond-buying program and then beginning to raise interest rates over the next two years, those two seats will be especially important. There also will be outside pressure to improve diversity at the top levels of the Fed system. The two appointments will be very closely watched.

Well, that’s all for this week’s episode of WashingtonWise Investor. We’ll be back with a new show in two weeks. Please take a moment now to follow the show in your listening app so you don’t miss an episode. And if you like what you’ve heard, leave us a rating or a review. Those ratings and reviews really matter—they help new listeners discover the show.

For important disclosures, see the show notes or, where you can also find a transcript.

I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and keep investing wisely

Important Disclosures

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Investing involves risk, including loss of principal.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see

Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.

There is no guarantee that execution of a stop order will be at or near the stop price.

Correlation is a statistical measure of how two investments have historically moved in relation to each other, and ranges from -1 to +1. A correlation of 1 indicates a perfect positive correlation, while a correlation of -1 indicates a perfect negative correlation. A correlation of zero means the assets are not correlated.

Digital currencies, such as bitcoin, are highly volatile and not backed by any central bank or government. Digital currencies lack many of the regulations and consumer protections that legal-tender currencies and regulated securities have. Due to the high level of risk, investors should view Bitcoin as a purely speculative instrument.

All corporate names are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

Currencies are speculative, very volatile and are not suitable for all investors.

Supporting documentation for any claims or statistical information is available upon request.

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