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Economic Update for the Week of 6/29/2012

More bailouts in Europe. The European Commission has pledged to allow the direct bailout of private banks without affecting government debt. The new European Stability Fund (ESM) will be able to provide funds directly to the banks however it will come with the requirement of following a regulatory body that has yet to be created. The effect is an erosion of national sovereignty over a country's own banks. While the markets have rallied on this news it is likely to be short lived and doesn't go into effect until later in the year in which time we might see further problems. At least the bailout of their banks comes with conditions. They must have learned from our mistakes!

In big news, the Supreme Court upheld most of the Affordable Care Act which will allow for greater access to insurance, increased taxes on pharmaceutical and medical device companies, and the requirement that all purchase health insurance. The financial implications are partially a transfer of wealth from young to old because it is primarily men ages 18-35 that don't purchase health insurance because they don't use it. By forcing these young people to buy insurance or pay a "tax,” the result of which is an immediate decline in the standard of living for this group. This will make it that much harder for these young people to spend money in the economy such as buying homes so I think we will see some unintended consequences from this decision.

New home sales were up and the Case/Shiller Home Price Index was down less on an annual basis. Existing home sales dropped a bit as did mortgage applications. What we seem to be seeing is a stabilization in the housing market possibly due to the record low rates and higher rents which is forcing renters to re-evaluate purchasing a home. My concern is what will happen when The Fed can no longer keep rates as low as they are and/or when we see the banks begin to dumb their shadow inventory on the market. For now things seem to be looking up however I do not anticipate any major recoveries just yet.

Stockton California has called it quits citing their high cost of pensions and benefits. The city of North Las Vegas Nevada has declared a state of emergency with regard to their pension payments being too high and to continue the payments would result in massive layoffs of public safety workers. Vallejo, CA went through bankruptcy but kept their pensions intact although they still struggle to this day. I think this is just the tip of the iceberg with respect to municipal bankruptcies.

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