Economy | Portnoff Financial LLC- Blog

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Economy

Economic Update for the Week of 5/16/2014

Inflation as measured by the CPI was up 0.3% in April, up 2% for the year. Most of this was from rising food and energy costs which does not help economic growth.

Housing starts moved up to 1,702,000 units per year on expectations of 980,000 and was mostly from multi-family housing; single family housing starts barely moved. This surge is likely from a return to building after the Winter and given other statistics on housing such as mortgage applications for purchase, there is not much to be very optimistic about here.

New Federal Housing Finance Agency (FHFA) Head Eases Mortgage Rules. The new FHFA head Mel Watt outlined his view that FNMA (Fannie Mae) and FHLMC (Freddie Mac) should encourage lending to less-qualified borrowers by easing recently tightened lending restrictions. Watt wants them to accept lower down payment loans and take other measures aimed at making it easier for people to borrow money to buy homes as if this strategy worked out well the first time. Sure, why not make it easier for less qualified buyers to purchase a home AFTER the market has rebounded over the last few years! This is not going to end well...

Household debt climbs to $125 billion in Q1 of 2014. Mortgages accounted for $116 billion, auto loans $8.2 billion, and student debt increased $31 billion while credit card debt declined. The increase in mortgage debt reflects less foreclosures rather than new mortgages and we all know that student debt is exploding having doubled since 2007. The decline in credit card debt reflects consumers reluctance to spend which will keep economic growth stymied. 

I am planning to host a FREE Educational Seminar about Social Security benefits and Advanced Claiming Strategies in the coming weeks. Topics would likely include: 

  • The Role of Social Security in your Retirement Plan
  • How Social Security Works
  • Boosting Benefits
  • When to Apply: Strategies for Maximizing Lifetime Benefits
  • Coordinating Spousal Benefits
  • Women & Social Security
  • Taxes on Social Security Benefits
  • Other Social Security  Programs (Dependents' Benefits, Maximum Family Benefits, Disability Benefits)
  • How Medicare & Long-Term Care integrates with Social Security
  • How and When to Apply for Benefits
  • History and Financing of The Social Security System

Please help me by taking the following anonymous survey so that I can plan a great event for you: https://www.surveymonkey.com/s/H7BYLVH

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eNewsletter for 5/17/2014

The unemployment rate has been declining however we have to look beneath the surface to understand why. I've been saying for quite some time now to expect declining unemployment but it's not because we are adding all that many jobs. There are two reasons; long-term unemployed are simply not being counted and Baby Boomers leaving the workforce at increasing rates (5.5 million over the last 6 years). With less people in the workforce, the rate goes down. The declining unemployment rate also does not consider under-employment. If you were making $120,000, lost your job and all you could find was a $75,000 job, then you are counted as employed even though the economic value of what you are making is substantially less. This also extends to all of these "jobs" that have been created over the last 5 years. Are these jobs high paying or low paying? If a job paying $100,000 is lost and replaced with a $30,000 job that was created, the unemployment rate doesn't change yet the economic value of that net job creation is less. Of the 273,000 private sector jobs that were created in April, nearly 55% were below the median wage, and a full 43% were in the three lowest income tiers.

Housing prices are moving higher but mortgage applications have been declining. Mortgage purchase applications were up 9% for the week of 5/9/2014 but down 16% from same time last year. Existing home sales were down for the 7th time in 8 months by 7.5% continuing this downward trend. Prices however have increased about 7.9% over the past year. This movement seems to be dominated by investors as about 50% of all purchases were made with cash. As prices rise, the investment aspect becomes less profitable and we'll see a slowdown in these investor purchases. Meanwhile new home sales dropped 13.3% for the year while new home prices increased 12.6% for the year. This is not a good outlook as a decline in new home purchases means less middle class jobs in the housing market and less demand for related professions such as carpenters and plumbers. Now that Spring is here, it is difficult to continue to blame the Winter especially given that this has been a weak trend for some time now. Don't expect any rebound anytime soon.

Fed Chair Janet Yellen reiterated her stance that the US economy is on track for recovery but that further weakness could hold it back. She also continued that short-term interest rates would remain low for a long time. FED stimulus has the intended purpose of reducing short and long term interest rates to encourage spending. By reducing interest rates on mortgages for example, the expectation is it will convince people on the fence of buying a home to do so. The problem is two-fold; first this is bringing future purchases into the present which leaves fewer people to purchase later and it only encourages people who are at the margins to move forward. This is why housing will continue to struggle.

A reasonable guide to the direction of the housing market lies in the difference between buyers and sellers. Someone who is selling a home to purchase a new home creates little demand as such moves are mostly lateral or because of a home upgrade. The biggest driver is new home buyers which are young people forming their own households which has been on the decline for reasons such as lack of jobs and high student loan debt. Net sellers of homes are generally older people who become sellers when they either move into a child's home, nursing home, or they die. Either of these events usually is followed by the house sale. So if we want to get a sense of net demand, we look at buyers who peak at age 42 on average and di-ers who sell on average at age 78 in the US.  

As we can see there was a peak around 2001, a decent  bounce from 2009 to 2013 and then a clear trend downward for years to come. In other words, past 2013 we should expect to see more people selling their homes than there are people to buy homes and when you have more supply and less demand, prices go down. And no amount of stimulus is going to create people that will need, want, and be able to buy homes. Its demographics, its baked in the cake, and we just need to be prepared for it and have reasonable expectations when it comes to home price appreciation.

Another warning sign: Margin Debt.

Margin debt (borrowing) to buy stocks spiked to new highs recently which also happened just before the 2000 and 2007 crashes. Stock market peaks seemed to correspond to peaks in real margin debt as we see here in 2000 and 2007. Currently the real margin debt is nearly at the level it was in 2007 just before the market started coming down. Those peaks seem to come after a sharp acceleration in margin debt which we are seeing recently. Definitely cause for concern.

Also it is interesting how the S&P 500 has been closely following a Theoretical Bubble Progression Model. We keep bouncing around these historical highs; the market hits the upward resistance, drops down a bit, comes back up to slightly new highs, but the progression of this is narrowing meaning that the dips are smaller and smaller and the new highs are also smaller and smaller. At some point in such a model it breaks down and that's when the bubble bursts. Unfortunately most people don't see bubbles until it's too late and these bubbles tend to burst much faster than they build. Trends like this simply cannot continue forever because eventually prices get excessive, demand dries up, and then prices come down. There is no exception in history! How long it can continue is another matter. Look at how the DOW ran up from November 1994 to January 2000 which no one debates was a bubble, and compare how the DOW has risen from March 2009 to April 2014 yet few seem to think we are in a bubble now? 

(Source: Yahoo! Finance, 2014)

Just remember that the bigger the bubble the bigger the burst. When we zoom out and look the DOW since the mid-90's, we see what is called a "megaphone" pattern marked by higher highs and lower lows. 

(Source: Yahoo! Finance, 2014)

If this pattern holds, it predicts the DOW going to around 17,000 by mid-2014 and then a drop to somewhere lower than 6,000 by around late 2016. So it is possible to have a few more good years with stocks but being prepared and braced for the worst case scenario is the prudent strategy.  

Chinese Purchasing Managers Index (PMI) came in at 48.3 showing continued contraction. AS China slows, they are letting their currency begin to devalue which makes exported good cheaper to the rest of the world. Just another sign that China is slowing and as they slow, supply chains in other countries will be affected.

You can't solve a debt crisis by adding more debt and hoping that the economy will improve and that the market will keep going up is not a strategy. We need to consider all of the warning signs and decide for ourselves how we will act and protect ourselves from the possibility that our hopes don't play out as we would like them to. 


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Economic Update for the Week of 5/9/2014

Mortgage purchase applications were up 9% for the week but down 16% from same time last year. Now that Spring is here, it is difficult to continue to blame the Winter especially given that this has been a weak trend for some time now. Don't expect any rebound anytime soon.

Fed Chair Janet Yellen reiterated her stance that the US economy is on track for recovery but that further weakness could hold it back. She also continued that short-term interest rates would remain low for a long time.

Euro zone Purchasing Managers Index (PMI) increased from 53.1 to 54.0 and reports of business activity increased across the Euro zone but prices remained a weak component as inflation is under 1%. While the Euro zone is not falling off a cliff, prices paid by manufacturers was soft indicating a lack of inflation. Much of this gain is due to exports, in particular to China which is showing signs of slowing down so this trend may not last long. So for now the ECB will hold off on any additional monetary stimulus however they have made it clear that more will be considered for June.

Japanese PMI tanked from 52.8 (above 50 means growth) to 46.3 a clear contraction. Consumers simply reduced spending after tax increases went into effect on April 1st. Japan wants people to spend more so they are driving inflation higher however they are also raising taxes because the government is basically bankrupt. The problem is that people don't have more money with which to buy stuff and/or pay taxes. Expect more stimulus from Japan which will drive their currency lower and still not help to bring their economy out of the hole.

In another sign of slowdown in China, Chinese companies have increased business to business lending because there is a lack of traditional lending sources. This is exactly what brought down Lehman Brothers. Companies borrow funds short-term and when the loans come due they cannot find willing lenders. This is causing corporate defaults, expensive loans, and brings China one step closer to a credit collapse. 

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Economic Update for the Week of 5/2/2014

288,000 jobs were created in April and the unemployment rate dropped below 6.5%. Labor force participation fell which helps to lower the unemployment rate however the birth/death adjustment which is the Bureau of Labor Statistics' guesstimate of the net number of jobs created by small businesses which are not included in their survey. Without this birth/death adjustment, we would have only added about 54,000 jobs. In other words the jobs created went from 54,000 to 288,000 based upon a guess that small businesses added jobs.

US GDP for the 1st quarter of 2014 came in barely positive at an annualized 0.1% on expectations of 1.1%. The weather is the scapegoat for these poor numbers so we'll have to wait and see what comes in for 2nd quarter to see if it is the beginning of a trend. The fact that FED stimulus tends to wear off about 6-9 months after, and that the FED began to taper in January, it stands to reason that we would see softening of the economy somewhere around mid-2014. At the Federal Reserve Open Market Committee meeting, the FED reiterated its view that the US economy is recovering slowly and thus they continued to reduce bond buying by another $10 billion.

Mortgage purchase applications were down 4% last week and 20% year over year which is consistent with the double digit drop in new home sales and decline in existing home sales. Prices however based on the S&P/Case-Shiller 20-City Home Price Index was up 12.9% for the year and up 0.8% for the month of February. Looking closer at the seasonal adjustment, without it, prices were flat. 

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eNewsletter 5/2/2014

I was recently quoted in MarketWatch, a Wall Street Journal online publication in the article, "Beware these IRA rollover mistakes" by Robert Powell. You can read the article at http://www.marketwatch.com/story/beware-these-ira-rollover-mistakes-2014-01-28?pagenumber=1.


Market Update

Stocks have been overbought for some time now and the recent sharp decline in January may be only the beginning of this massive bubble bursting. People, government officials, and economists alike are simply in denial about how bad things are and there will be an end to this craziness eventually. Year to date stocks have not really done much over all except the bounce around record highs. The trend has clearly shifted from an upward market to sideways. Typically after a run up the market will "consolidate" and level out until it either breaks up or down. This recent change in the trend could just be a pause on the way to more record highs or we could be setting up for a downward change in direction.

We've all been to a social gathering where after a while the first person decides to leave which causes other people to feel comfortable to leave and then shortly thereafter everybody clears out except for the usual stragglers. This is basically a description of "The Minsky Moment" named after Hyman Minsky, an economist who suggested that markets are inherently unstable. This is based on the idea that long periods of speculation tend to lead to crises and the longer the speculation the worse the crisis gets. So we can see markets going up until the first start to leave which is usually the "smart money" which causes others to leave and then we get a "Minsky Moment" like 2008.  If we look at past bubbles of almost any kind, we see two results: first, bubbles always burst, and second they tend to return to about where they started.

The U.S. Government has been putting in $2 Trillion in stimulus annually; $1 Trillion in deficit spending and another $1 Trillion in monetary stimulus (QE). Stimulus has been a huge tailwind in keeping the economy afloat and causing the financial markets to rise to all time highs. These tailwinds will become headwinds at some point when the stimulus is stopped and the deficit spending becomes unsustainable and our debt burden too high. For now it seems that Quantitative Easing has been working but may be showing signs of fizzling out as the stimulus is tapered.

Interest rates have finally began a meaningful rise from a low of 1.38% to over 3% and recently hovering around 2.6%. As the stimulus continues to be tapered, we are likely to see bond rates rise which is not good for long-term, intermediate term, and high-yield bonds. As the FED continues to taper, this means they will purchase few bonds which will likely mean a decline in demand. As the demand declines prices go down and yields go up.

Increasing rates will hurt the housing recovery, large purchases using debt such as cars, consumer spending on credit, etc. Once this happens, expect to see significant economic slowdown. Increasing rates will also make our ability to pay government debt more difficult. Then what does the FED do? Stimulate again to juice the economy again? The problem is the law of diminishing returns which says that the more you have of something (in this case stimulus), the less value we get from it. Think about that first cup of coffee in the morning; it wakes you up but you eventually get tired so you take another cup, but the second cup doesn't have the same effect as the first. I think we are getting closer to a point where it will be evident that the stimulus didn't work long-term and our ability to stimulate more will be hampered and the deleveraging and deflation will commence.

For bond investors this creates some problems. The stock market is risky so the conventional alternative is bonds however rising rates will hurt bonds. A typical intermediate term bond fund has a duration of about 4-5. Duration is a indicator of sensitivity to interest rates. A duration of 5 means that for a 1% increase in rates, you would expect a decline of about 5% in your bond fund. The conventional way to reduce this risk is to shorten your duration by going to shorter term bonds. Unfortunately the yield on short-term bonds is quite low and are still negatively affected by interest rate increases. The real question continues to be what the markets will do when rates start rising again and we see even lower or negative growth with this stimulus.

Recently housing has shown some positive price gains however it appears that almost half are cash sales which implies that it is speculators, investors, and financial institutions are behind these purchases. These positive gains could explain the recent surge in pending home sales last year. It's clear that sales have been going up and inventory has been going down which is typically a healthy sign for housing.

To understand where housing is going we need to look at demand; who is buying versus who is selling. When a person goes into a nursing home or dies, they become a seller by default. Therefore a great way to get an idea of where demand is headed is by looking at the number of buyers vs. dyers. People tend to buy their trade up home in the US around age 42 on average and die at age 79 on average. The projection clearly shows a greater number of dyers than buyers and thus the net demand for housing should begin to decline again starting next year. The decreased demand and increased  supply will push housing prices down. This is not for all housing however and does not apply to all regions. For example, those in the northeast tend to migrate to Florida as they age which could cause a net decline in demand to happen sooner than expected.

People don't buy homes based on prices or interest rates, rather they purchase a home based upon a payment which is determined by both prices and interest rates. With interest rates beginning to rise and if prices stay the same, payments rise thus housing will become less affordable unless median incomes rise substantially which doesn't seem to be likely anytime soon. US real (inflation adjusted) disposable income fell 9% in the past 12 months (as of June 2013). Consumer spending typically drives about 2/3rds of our economy. With disposable income falling, this means less money to spend, especially on discretionary items. Another warning sign. This certainly will not help housing. An increase in supply coupled with increasing interest rates is a recipe for declining prices which we will probably start to see in the not too distant future. In addition, the shadow inventory of homes continues to be the biggest hidden threat to the housing market. If the economy begins weakening again, the institutions that have been holding out for higher prices may finally begin to sell that inventory if prices start declining. Increased borrowing rates should also have negative impacts on car loans as well.

Traditional economists don't seem to understand why we are not seeing inflation despite the massive amount of money being pumped into the economy. The reason is that when an economy is at this stage of the cycle after a credit crisis, people don't borrow as much and banks don't lend as much. This slowdown in the fractional reserve system means less money in the economy which is the offsetting deflationary force to all the money printing.

The average bull market lasts nearly 4 years. If you take out the one extremely long bull market which lasted about 12 years and the shortest from 87. These bull markets are followed by an average 36% decline. The current bull market is over 5 years long. Volatility tends to increase at major long term tops such as 1966 - 1974. The first decline after 1965 saw a 26% decline, the second after 1968 was 37%, and the third after 1972 was about 50%. Take notice of the current secular bear market since 2000 which saw a 51% decline after 2000 and a 58% after 2007. So if the pattern continues and we see a third decline, it could easily be 65% or more.

Warning signs we're near a top:

  1. Margin Debt at $400 Million: Margin debt is approaching the 2007 peak at $430 Million and higher than the $390 million at the peak of the Tech Bubble in 2000. This suggests we are seeing more speculation and leverage in this bubble.
  2. Stock Buybacks close to 87%: Companies are aggressively buying back their own shares using super low interest rates. This has the effect of artificially boosting Earnings Per Share (EPS) because the number of shares outstanding has been reduced. Currently 83% of S&P 500 companies are buying back their own stocks which is getting close to the 87% it was in the 2007 peak.
  3. Corporate Profit as a percentage of GDP is above 11% and is at record levels. Fed stimulus via low interest rates has boosted corporate profits more than any boom in history. At the 2007 peak, corporate profits/GDP were 10%.
  4. P/E Ratios between 24 and 27: Most major stock peaks happen when P/E (Price to earnings) ratios are between 22 and 27 except for the extreme tech bubble when they reached about 45 and the peak in 1929 at 32 and these periods had the advantage of strong demographic trends and accelerating productivity from new technologies which we do not currently have. At the 2007 peak P/E's were 27. We're currently about 24 and moving higher.
  5. Market value of non-financial stocks divided by GDP ratio above 1.3: During major market peaks, this ratio tends to be between 1.0 and 1.5.
  6. 62% Bulls vs. 20% Bears: Many of the people that got scared out of the markets in 2008 have been returning since 2012. When Bulls vs. Bears gets to this level, that tends to suggest peaks although we did reach this level in 2010 before backing off back to about 40% Bulls. As everyday investors continue to pile in, we watch for the "Smart Money" to start exiting and when that happens, watch out!
  7. As January goes, so goes the year: When January is a negative month often that forebodes a negative year. After 5 years of a stimulus led bull market that is long overdue for a correction, this saying may be true this year.
  8. The second year of a 4 year presidential cycle tends to be bad for stocks.

Governments keep borrowing at below market rates to run budget deficits by purchasing their own bonds, companies buy back their own stock with super low interest rates to boost earnings per share, banks take QE stimulus money to boost their reserves in anticipation of the massive losses they expect when the economy turns back down and to speculate in financial securities with 30-50 times leverage causing margin debt for stocks to near and all time high; You tell me, are these signs of a bubble? Looking back I suspect all the "experts" will say we should have seen this coming. 


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Driving Your Taxes Ever Higher

Driving Your Taxes Ever Higher

I really don’t care for Flo. She is that all-too-cheerful lady that wants to sell you a particular brand of car insurance, one that she claims will save you lots of money. She would also like you to know that you have the option to plug a small device into your vehicle. This device monitors your every move for what is called usage-based insurance. If this device shows the company that you are a safe driver, then the insurance company will offer you a discount. Sounds like a good deal, right?

Unfortunately, Flo’s little device has other, less beneficial uses. A similar device, no longer optional, may one day help the government tax you based on how, when and where you drive your vehicle. Even George Orwell would have been shocked by this level of Big Brother-ness.

The Great Recession has led to many structural changes in our economy and how we behave. One of those changes has been in how we drive.

According to a recent study from the University of Michigan, Americans’ driving habits have changed dramatically in recent decades. The average driver travels 1,200 fewer miles per year than he did in 2005. We also use less gasoline per person than we have in nearly 30 years. The decline in miles driven and fuel consumption has meant a serious loss in revenue for local, state and federal governments.

The United States Highway Trust Fund was created in 1956 and is used for the construction and maintenance of the Interstate Highway System. The Trust Fund receives its money from the federal fuel tax. The tax on a gallon of fuel has been raised over the decades and is now over 18 cents per gallon of gasoline.

But the tax is not enough. The Congressional Budget Office estimates that the Trust Fund will be insolvent this year and will continue to be so for the foreseeable future. By 2023, the Trust Fund is expected to have a shortfall of nearly $100 billion.

The current mechanisms for funding transportation services are already failing. With Americans driving less miles and consuming less fuel the situation will only get worse. This means governments must find ways to gather more tax revenue from drivers.

The most straightforward solution is to increase the fuel tax. The problem with this idea is that the tax will be chasing ever-more fuel efficient vehicles that are being driven less. As a result, a tax hike is unlikely to meet funding needs. This is where the number crunchers will start getting creative.

Luckily for them, and unluckily for us, our friend Flo’s usage-based insurance device can be converted to a usage-based tax calculator. Currently, most use-based vehicle taxes operate as a type of sales tax. With more data, governments will be able to tax our vehicle usage in a multitude of different ways that would get around decreasing vehicle usage and increasing fuel efficiency. Heavy commuters might feel the tax pinch on how many miles they drive, whether they drive in cities or what time of day they drive. On the other hand, those with short commutes will not be able to escape taxes on vehicle speed, condition of the roads used, driving in high-volume areas, driving during harsh weather, etc.

By taxing a variety of usage patterns that are independent of miles driven and fuel efficiency, governments can supplement revenue from the fuel tax. The only way to avoid these taxes will be to turn in your keys.

Our change in driving habits is emblematic of how our behavior has shifted since the economic downturn. Traditional funding pathways for government services are falling behind. This means that we can expect our government to look for more creative and intrusive ways of taking our wealth to fund their services.


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Demographics Are in Good Spirits

Demographics Are in Good Spirits

The world seems to be running dry. Vintners are ramping up wine production, trying to keep pace with ever increasing demand. This means the bottles you are buying today could be significantly more expensive in the next couple of years. But before you run out to the store to load up on your favorite vino, take a minute to consider what caused the casks to run dry…and what might lie ahead.

Global wine production has slackened over the last decade as the industry tried to recover from a glut of supply in the mid 2000s. Some farmers, such as in California, turned their soil over to more profitable crops, with almonds and walnuts paying more per acre.

Meanwhile, demand has been growing at a healthy clip. The increase in consumption has come primarily from two nations: China and the United States. China's rapid economic expansion has given millions of consumers the access to the global wine market in a way that was absent just a decade ago.

It is somewhat excusable for the wine industry to have missed the rise in affluence of China's upper and middle class. It far less understood how the industry failed to anticipate the growth of wine consumption in the United States. Since 2000, U.S. wine consumption has doubled on a per capita basis, and the trend was right there for everyone to see.

The reason for America's growing thirst for wine is, unsurprisingly, demographics.

Based on data from the Bureau of Labor Statistics’ Consumer Expenditure Survey, spending on alcoholic beverages hits a secondary peak during a person’s early-to-mid-20s, and then hits a primary peak during a person’s early 50s. One may not think of 20-somethings drinking wine, but data from the Wine Market Counsel confirms that millennials, along with baby boomers make up the core wine-drinking generations. It also turns out that when you divide the U.S. population into five-year age groups the two largest categories in our economy are those aged 20 to 24 and those aged 50 to 54. Is it any mystery that U.S. demand for wine would grow to its current levels?

Demographics are a powerful force on our economy. Companies and industries that understand their consumers will do well. Harley Davidson smartly reorganized its business model, knowing that its prime consumer base was shrinking. The diaper industry is increasing production of adult products to serve aging populations.

On the other hand, those who ignore demographics do so at their own peril. The wine industry may have just missed a huge opportunity to sell their goods to two very large audiences. As millennials and boomers move past their mid-20s and mid-50s, respectively, they will develop a thirst for something else.


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Uncertainty Is the Only Certain Thing

Uncertainty Is the Only Certain Thing

Each morning we wake up with a set of assumptions: the sun will rise, our light switches will work and water will flow from our faucets. We expect roads to be passable and our government to keep our systems of law and commerce operating. While some things seem beyond question (the sun really will rise in the east), others are up for debate. What happens when the systems on which we rely become unpredictable?

As we head into October we’re facing increasing uncertainty on a number of fronts. In Europe there’s talk of yet another Greek bailout. The nation is now in its sixth year of recession, still struggling with debt repayment, high unemployment and a lack of growth. If that isn't bad enough, there are now calls for a Special Forces Reserve Union military coup. Meanwhile, the International Monetary Fund (IMF) expects Spanish unemployment to remain above 25% for at least the next five years. Spain’s real estate market is in free-fall, refusing to find a bottom. Today, the situation in southern Europe is no more certain than it was at the onset of the global financial crisis.

Back home we have our own worries. For months the members of the Federal Reserve Open Market Committee (FOMC) hinted that they would start to wind down the quantitative easing (QE) program. Then in late September, just when everyone thought the Fed would announce a start to the long-anticipated taper, chairman Ben Bernanke said the economy was not yet strong enough to stand on its own and QE would continue indefinitely. Naturally, this confused almost everyone. It was as if the Fed, which had been signaling a slowdown for months, came out and said: "Just kidding!" It appears the Fed has no idea how it will smoothly wind down QE. In its attempt to create more open communication and guidance with investors, it created more uncertainty, not less.

If market confusion isn't enough, the U.S. federal government decided to pile on at just the wrong time. We face yet another debt ceiling deadline in mid-October. Rather than attempting to agree on a sustainable and workable framework for government spending, our elected representatives instead have decided to play a game of political chicken. At stake is a shutdown of the federal government. While our expectations of government performance may be low, we at least expect it to remain open.

One of the bones of contention in the debt ceiling debate is funding for the Affordable Care Act (ACA). On October 1 the ACA goes live and it appears few people know what that means. In fact, a recent USA Today/Pew poll found that only 25% of the respondents claimed to understand the new health care law very well. Others don’t know how they will get insurance, much less pay for it. Given that obtaining insurance is now mandatory, this qualifies as a level of chaos.

Each of these trends and situations is weighing on capital markets around the world, causing volatility and a lack of direction. We expect the smoke to clear on some of these issues, like the debt ceiling and budget debates in the U.S. While this would likely give some relief to equities, such relief would only be fleeting, as there is always another worry right around the corner. That’s why we develop, maintain and consistently reassess our financial plans to make sure we’re taking the best direction possible given the facts on the ground today.


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Why Labor Day Matters

For many Americans, Labor Day represents the unofficial end of summer. It’s a day for last trips to the beach, and for firing up our grills to cook some burgers and hot dogs. The holiday represents a break between the craziness of summer and the beginning of fall, when we all take work seriously again. For whatever reason, we need a day off to make the switch.

But Labor Day wasn’t always just a day off at the end of summer. In the late 19thcentury, organized labor was gaining strength across the country. Unhappy with wages and working conditions, they staged protests and strikes that would often end in violence. As a way of easing tensions, local governments and a handful of states passed laws to recognize what unions were calling "labor day." In 1894, President Grover Cleveland signed the law that made Labor Day a national holiday as a way to honor the American worker.

Over the years, our workforce landscape has changed, and with it, the meaning of Labor Day. Just over 11% of workers are members of organized labor, roughly half the level of 20 years ago. Most of us are so detached from organized labor, and the origins of the national holiday, that we simply enjoy having the day off work.

Now, as our workforce changes, this is a three-day weekend that fewer of us are able to enjoy.

Chances are that if someone got a new job in 2013 he won’t be celebrating a day off on September 2. With part-time workers making up 77% of new hires in 2013, it’s just another Monday on the job. 

These jobs typically don’t provide paid leave for holidays, like Labor Day. In fact, many retailers have sales promotions to draw in customers that may have the day off. Big-box retailers and department stores will be scheduling extra workers to meet anticipated demand.

This shift to more part-time work is indicative of greater changes to our labor force. It means workers have to accept lower levels of take-home pay than they’re accustomed to. So they’ll have less to contribute to payroll and income taxes. And they’ll have less money left over to grow the economy with their discretionary spending. 

People drive our economy. Personal consumption expenditures account for nearly 70% of the nation’s gross domestic product, by far the biggest share of its components.

We follow predictable spending patterns, which are largely dictated by our age and stage of life. Even so, there are limits. We can only spend what we have and borrow as much as our income allows.

With more and more people having to settle for part-time work and lower pay, consumers will choose the necessities over the luxuries. They will also delay making the big life purchases of a home or a new car. These workers will have less money to save and invest in the stock market.

It may sound bleak, but it isn't. By spotting the movements in the labor market, we can anticipate how it affects the broader economy. We can look out over the horizon to spot the risks and target the opportunities in the market. This puts us in a stronger position to maintain and grow your savings and investments.

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Taking Off the Training Wheels

While we are managing our personal economies by spending, saving and investing, the Fed is managing the entire American economy. This is where the fight starts.

The Fed wants you to spend more, particularly by taking on loans. The best thing to do – from the Fed’s point of view – is to buy a new home. Many of us have other plans. We are trying to get our household balance sheets back to normal and save for retirement.

While you may be "fighting the Fed" it is important to understand that any potential change in Fed policy can impact your personal economy and your portfolio. Lately the Fed has been in the news a lot. My job is help you make sense of all the noise out there.

Federal Reserve Chairman Ben Bernanke recently announced that the Fed may begin to taper its quantitative easing program by the end of the year. In plain English, this means that the Fed might slow its easy money program that has kept interest rates at very low levels.

This sent investors scrambling, causing a sell-off in the stock market. If interest rates go up then it costs more to borrow thus slowing an already sluggish economy. After watching the markets react badly to the tapering talk, the Fed quickly responded by holding a press conference to assure investors and clarify its position. Such action will only take place if the right economic conditions are met.

So why this recent announcement by Bernanke? According to the chairman, the economy is showing real signs of strength, making quantitative easing less necessary. He can cite the rise of home prices and recovery of the stock market to support his case. But there are still cracks in the economic ship. A recent survey indicated that 76% of Americans are living paycheck to paycheck. Unemployment hasn't been under 7% since November of 2008 and is currently at 7.6%. The Fed can do what it wants to, and that’s what scares the markets.

We may once again be entering new territory. Just as nobody knew what was going to happen with unprecedented amounts of monetary intervention by governments and central banks, nobody knows what will happen when these programs stop.

The immediate fallout from Bernanke's announcement indicates that we may be seeing increased uncertainty and volatility in the markets. The rise of the markets from their 2009 bottoms have been based on investors knowing the Fed would print money and provide easy credit. With a Fed pullout looming, investors know that assets and borrowing costs will have to adjust. This adjustment period mean the markets might gyrate.

We knew this day was coming and have been talking about it for some time. We have formed a plan around these economic eventualities to help you achieve your goals of building wealth and economic security. We cannot change what the central bank does, but we can choose how we react to its policies. We are here to assist you by not only building your financial plan, but helping you stick with it in the face of more volatility and uncertainty.


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