Weekly Commentary November 25th, 2013

The Markets

Really?!

Okay. Okay. If you’ve been trekking through Siberia or Patagonia for about a year, then maybe it surprised you to hear the minutes from the Federal Reserve Open Market Committee meeting showed it expects to begin tapering Quantitative Easing (QE) in the coming months.

However, since the Fed has been telling anyone who will listen – telling them over and over and over again – that its intent is to slow the pace at which it buys bonds as the U.S. economy strengthens (and since most people haven’t been exploring the hinterlands where the convenience of modern communications may not be readily available), it’s difficult to understand why that information was so surprising that it pushed stock and bond markets significantly lower.

It might have been easier to understand market declines if they had occurred on Tuesday after the Organization for Economic Cooperation and Development (OECD) released its revised economic outlook. In his speech, OECD Secretary-General Angel Gurría said:

“The recovery of the global economy is progressing at a moderate and uneven pace. World GDP growth, which averaged about 4 percent per year in the decade up to the onset of the global crisis, is expected to reach only 2.7% in 2013, the lowest rate since 2009. While we expect global growth rates to move again towards 4 percent in 2015, the world will continue to be affected by the harsh social legacy of the crisis… The recovery itself is exposed to potential downside risks, including fiscal brinkmanship in the United States, unresolved banking problems in the euro area, the high debt burden in Japan, and financial vulnerabilities in some large emerging-market economies.”

Gurría also said, in the OECD’s long-term view, economic weakness was the result of investment remaining anemic, credit growth remaining subdued, trade growth gaining sluggishly, and growth in emerging economies faltering.

Regardless, the markets’ downward foray was short-lived. On Friday, the Standard & Poor’s 500 Index closed above 1800 for the very first time. Other U.S. markets moved higher as well.

an oh-so-brief brief on digital money… If you read or watched the news during the past few months, you may already know this, but there has been an explosion of interest in digital money. That’s the reason you may be hearing and reading about dozens of companies that are rushing to coin virtual currency that has real value. It just seems so 21^st Century, doesn’t it?

Odds are you’ve already used digital money. For example, you used it the last time you purchased something online. Digital money is what we use when we pay or are paid electronically. Think smart phones and credit cards. Digital money is not tangible; however, it is possible to convert digital money that is part of a large centralized banking system into paper money by making a withdrawal from an ATM.

In the United States, the Federal Reserve is responsible for maintaining the integrity of U.S. bills and coins by setting monetary policy. Digital currency companies offer a parallel currency universe; a means of transferring electronic money from one person to another without using traditional banking or money-transfer systems.

Digital money companies appear to be delivering American economist Milton Friedman’s dream, according to The Economist. Years ago, Friedman suggested the Federal Reserve be abolished and replaced by an automated system that would increase money supply at a steady, pre-set rate. He believed such a system would better control inflation, making spending and investment decisions more certain. The Economist article said:

“In theory, then, the system ought to keep a lid on inflation – making it attractive to critics of interventionist monetary policy of the sort practiced since 2008 by America's Federal Reserve under the label quantitative easing… It offers other apparent benefits, too. The currency can be used by anyone (unlike credit cards, for instance), anywhere. Transaction costs are also likely to be lower than those for traditional payment systems, though these are not in fact zero…”

The Economist goes on to point out a key difference between central-bank-controlled currencies (which often offer both bills and coins and digital currencies) and digital currency companies is the former are backed by a country’s regulations and laws; the latter are answerable to online communities using the currencies.

 

Weekly Focus – Think About It

“A business that makes nothing but money is a poor business.”

--Henry Ford, American Industrialist

 

Weekly Commentary November 18th, 2013

The Markets

If you found holiday songs or Beatles tunes humming through your head last week, it may have been your subconscious processing world and market events.

Over the river and through the woods/To Grandmother's house we go… Janet Yellen, current Vice Chairman and nominee to be the next Chairman of the Federal Reserve System, testified at her confirmation hearing before the U.S. Senate’s Committee on Banking, Housing, and Urban Affairs on Thursday. Her comments were widely interpreted as indicating that current stimulus measures will remain in place. This made investors happy and helped push global stock markets higher.

In the United States, the Dow Jones, S&P 500, and NASDAQ, all appear to be headed toward milestones. The Dow is nearing 16,000, the S&P is closing in on 1,800, and the NASDAQ is approaching 4,000.

You say you want a revolution/Well you know/We all want to change the world… China’s third plenum of the 18th Central Committee, which also is being referred to as a blueprint for reform, a reform manifesto, and the Decision on Major Issues Concerning Comprehensively Deepening Reforms, is ambiguously phrased, according to The Economist. However, it appears to encourage:

“…Experimentation in everything from trading rural land to the freeing of controls on interest rates. Barriers to migration will be further broken down and the one-child policy relaxed. A widely resented system of extra-judicial detention, known as laojiao (re-education through labor), will be scrapped.”

China’s leaders also promised to elevate the role of markets in the economy. That news helped push Shanghai Composite Index higher last week.

Have you been offered a lump sum distribution? Not too many employers offer pension plans anymore. You know, pension plans. The kind of retirement plans that employers used to offer; the type where employees generally didn’t contribute and the benefits they received in retirement were determined by their salaries, length of employment, and other factors.

If you’ve ever worked for a company that had one, it’s possible that the offer of a lump sum distribution may be headed your way. If you accept a lump sum distribution, you’re choosing to receive a pile of cash today instead of monthly or annual pension payments in retirement. Basically, you’re agreeing to take responsibility for investing the money and generating a stream of income during retirement so your employer doesn’t have to do those things.

Why are companies offering lump sum distributions? The Pension Protection Act of 2006 (PPA) established new accounting rules. Companies with pension plans must recognize their plans’ funded status on their balance sheets each year. Since balance sheets are scrutinized by analysts and investors, and lots of pension plans are underfunded, companies decided it was time to take action.

How underfunded are these plans? A Wilshire Associates report cited by Reuters found the difference between the amount that S&P 500 companies will owe to retired workers and the amount those companies have set aside to pay retirees is more than $1.5 trillion. How much is that? Well, if you took one trillion one-dollar bills and strung them end-to-end, the chain would stretch further than the distance from the earth to the sun!

Anyway, having an underfunded plan became a corporate finance headache. Two-thirds of companies that have pension plans are trying to limit the effect of those plans on their financial statements (69 percent) and cash flows (58 percent), as well as reduce the overall cost of their plans (41 percent), according to a recent Towers Watson survey. CFO Research in collaboration with Mercer said employers plan to do this by:

• Adopting more conservative investment strategies
• Transferring pension obligations to insurance companies by purchasing annuities
• Offering lump-sum payouts to retired and current employees

In many cases, accepting a lump sum payout rather than having income from a pension may have a significant impact on your retirement.

 

Weekly Focus – Think About It

“The average 401(k) account balance fell 34.8 percent in 2008, then rose from 2009 to 2011. Overall, the average account balance increased at a compound annual average growth rate of 5.4 percent over the 2007-2011 period, to $94,482 at year-end 2011… The median 401(k) account balance (half above, half below) increased at a compound annual average growth rate of 11.5 percent over the period, to $42,082 at year-end 2011.”

-- Employee Benefit Research Institute, June 2013 [12]

Weekly Commentary November 11th, 2013

The Markets

After last week’s surprisingly strong employment report, it’s almost possible to picture Ben Bernanke slapping trail dust from his leg, ducking his head, and saying, “Just doin’ my job.”

After all, running the economy is as laden with complications and unexpected events as a cattle drive. Richard Graboyes, an economist who was once the Director of Education for the Federal Reserve Bank of Richmond, wrote that driving cattle seems “arduous, but simple – walk some cattle from point A to point B. But, the endeavor is fraught with natural and human risks for both rancher and driver.”

Clearly, the head of the Fed and the head of a cattle drive face different challenges. According to The Federal Reserve System: Purposes and Functions publication:

“The Federal Reserve sets the nation's monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates. The challenge for policymakers is that tensions among the goals can arise in the short run and that information about the economy becomes available only with a lag and may be imperfect.”

Last week, the employment numbers seemed to support the idea the economy is gaining steam. According to Forbes, employers added more than 200,000 jobs in October, which was far more than economists had anticipated. The government continued to employ fewer people (employees furloughed during the government shutdown were still counted as being employed). There were 12,000 fewer government jobs in October, and 94,000 fewer for the year. The biggest employment gains were in the hospitality, retail, technical services, manufacturing, and health care sectors.

It’s not time to whoop and holler, though. The New York Times reported the labor force participation rate fell to 62.8 percent, which is a 35-year low. More than 700,000 jobs disappeared during October which was the largest monthly drop since the end of 2009. A smaller labor force can make overall unemployment rate appear to be lower than it is. Let’s hope the labor force isn’t like a herd of cattle that moves too fast and arrives at market a lot skinnier and worth a lot less.

if you were asked to compare teachers’ social status to that of other professions, how would it compare? Are teachers like doctors? Librarians? Social workers? Nurses? Local government officials? Web designers? Lawyers? Policemen? Engineers? Accountants?

Education and training have a profound effect on economies and individuals. In the United States, people who have graduated from college tend to earn more than those who have graduated from high school. Earning an MBA, JD, or MD can translate into significantly higher earnings over a lifetime. Clearly, becoming educated has a significant economic value.

What value, then, do we place on those who provide education? How much respect do we have for the people who teach and train us? As it turns out, the answer varies widely from country to country. According to the Varkey GEMS Foundation’s Global Teacher Status Index survey, which surveyed 21 countries to determine the status of teachers, people in China, Greece, and Turkey have the highest level of respect for teachers and their social standing.

So, how does the teaching profession compare to other professions? In the Czech Republic, Egypt, Switzerland, and many other countries, survey respondents said teachers have the status of social workers. In Brazil, France, Turkey, and the United States, people think teachers are roughly on par with librarians. The Japanese think teachers have the same status as local government managers. More than one-third of Chinese participants said teachers had the same status as doctors. According to the report:

“The U.S. ranked in the middle of the Teacher Status Index with a score of 68.0. Notably, the ranking of primary school teachers is at the higher end of the table and above all the European countries. U.S. respondents scored consistently across the different variables in the study, demonstrating moderate to positive respect for their teachers.”

As you might expect, the more respect a country had for teachers, the more likely people in that country were to encourage their children to enter the profession. Parents in China, South Korea, Turkey, and Egypt were most likely to encourage kids to become teachers.
 

Weekly Focus – Think About It

 “Education is the key to success in life, and teachers make a lasting impact in the lives of their students.”

-- Solomon Ortiz, Former U.S. Representative from Texas

Weekly Commentary November 4th, 2013

The Markets

Exceptional… exceeds expectations… meets expectations… needs improvement… unsatisfactory. It’s a rating system familiar to anyone who has ever received a performance review. Right now, the performance of inflation is not meeting expectations – and that may be a good thing.

Critics of loose monetary policy and rock bottom interest rates have had high expectations for inflation. That is, they have predicted inflation will rise. In March 2012, Martin Feldstein, a professor of economics at Harvard and President of the National Bureau for Economic Research, explained the massive liquidity created in the United States by the Federal Reserve’s easy money policies created a risk of rising inflation. A rapid increase in bank credit would boost the money supply and the rate of inflation unless the Fed raised interest rates in a timely way and on an adequate scale.

So far, low interest rates and unusually aggressive monetary policies haven’t led to higher inflation in the United States or other at-risk regions. The Conference Board’s Harmonized Index of Consumer Prices (HICP), an inflation measure, showed prices in the United States increased by 0.8 percent in September 2013. That’s slower than the 2.1 percent increase reported for 2012.

In the Eurozone, the inflation rate for October fell to 0.7 percent, which was the lowest in almost four years. A recent article in The Economist explained it like this:

“So, why haven't we had the inflation that some predicted in the wake of quantitative easing? The reason is that central banks are not the only, nor indeed the main, money creators. Money is usually created by the private banking system and that has been trying to shrink. If the money supply is a bath, then the central banks may have turned on the taps, but the commercial banks have pulled out the plug.”

That may mean, despite stable and falling inflation rates in some regions, we’re not out of the woods yet. As Mr. Feldstein wrote last March, commercial banks could begin to lend funds to firms and households. If that happens, “Loans could add to deposits and cause the money supply to grow. They would also increase spending by the borrowers, adding directly to inflationary pressure.”

 

how do your state’s taxes stack up? It all depends on who you ask and what types of taxes you’re considering.

The Tax Foundation’s State Business Tax Climate Index for 2014 reported the most tax-friendly states for business were Wyoming, South Dakota, Nevada, Alaska, and Florida. The least tax-friendly were Rhode Island, Minnesota, California, New Jersey, and New York. Every state has property taxes and unemployment insurance taxes, but those in the top ranks tend not to have one or more of the major taxes: corporate income tax, individual income tax, or sales tax. According to the Foundation, “Wyoming, Nevada, and South Dakota have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida has no individual income tax.” It is interesting to note three of the top states are among the least populated in the United States.

Kiplinger’s says that Delaware, Wyoming, Louisiana, Mississippi, and Arizona are some of the most tax-friendly states for individuals because they levy some of the lowest taxes in the country. California, Connecticut, New Jersey, New York, and Hawaii are far less friendly. All have high income tax rates and assess above-average property taxes, which puts them at the bottom of the list of tax-friendly states for individuals. According to state tax policy director for the Institute on Taxation and Economic Policy Meg Wiehe, who was quoted in Kiplinger’s, “Low tax revenues may give a state less money to spend on education, transportation, public safety, and other services important to you and your family... Low taxes don't necessarily lead to a higher quality of life.”

If you’re retiring soon or have already retired, then you may want to consider a move to Alaska, Wyoming, Georgia, Arizona, or Mississippi which have some of the lowest taxes for retirees in the United States. According to Kiplinger’s assessment of state tax laws, retirees may want to avoid Rhode Island, Vermont, Connecticut, Minnesota, and Montana which are some of the least generous with retiree tax credits.

If, after reading this, you’re considering a move to the Equality State (aka the Cowboy State), here are some other things Wyoming has to offer: Yellowstone, the Grand Tetons, Jackson Hole, and about 172 days a year with a temperature below freezing!

  

 

Weekly Focus – Think About It

“A lie gets halfway around the world before the truth has a chance to get its pants on.”

-- Winston Churchill, British Prime Minister