Weekly Commentary August 25th, 2014

The Markets

What do Harry S. Truman and Hindu goddesses have in common? Both were invoked to describe Federal Reserve Chairwoman Janet Yellen’s speech at the Jackson Hole Economic Policy Symposium last week.

In her opening comments, Yellen confirmed the economy had improved and suggested more data was needed before the Fed could determine its path. She said:

“…our understanding of labor market developments and their potential implications for inflation will remain far from perfect. As a consequence, monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy.”

Afterward, some Wall Street professionals empathized with Truman, the 33^rd President of the United States and a native of the ‘Show Me’ state, who once lamented the lack of resolute economic advice available. Truman pined for a ‘one-handed economist’ who wouldn’t hedge by saying, “On the one hand… on the other hand…”

Barron’s reported on the speech saying, “In discussing the labor market… Yellen introduced so many qualifications that, instead of the proverbial two-handed economist, she more resembled a Hindu goddess with a half-dozen or more appendages.”

No matter what anyone made of Yellen’s remarks, she was in the catbird seat compared to European Central Bank (ECB) President Mario Draghi who spoke after her. Unemployment in the Eurozone stands at 11.5 percent compared to 6.2 percent in the United States. The range of unemployment across the region is quite significant, from 5 percent in Germany to 25 percent in Spain.

Investors and analysts may not have received the insights they’d hoped to gain about U.S. monetary policy, but it’s important to remember that one person’s hedging may be another person’s careful analysis.

mind the gap. Here in America, some of the most important gaps that need to be filled are in estate plans. It’s not enough to have a plan. You also need to make sure all of the components of your plan – from retirement accounts to investments to property – are properly coordinated. Often the gaps in estate plans are related to:

·         Beneficiary designations: Many financial assets – such as bank accounts, life insurance policies, brokerage accounts, annuities, and retirement accounts – give you the opportunity to name a beneficiary. Typically, assets pass directly to the named beneficiary regardless of instructions in a will. Consequently, it’s important to review beneficiary designations and make sure they align with the intent of your estate plan.

It’s also important to know the rules guiding investment distributions to beneficiaries. Generally, there are two possibilities:

o   Per stirpes distribution indicates if a beneficiary dies before the account owner does, the beneficiary’s share will go to his or her heirs.

o   Per capita distribution indicates each beneficiary receives the same amount. If a beneficiary predeceases the account owner, his or her share goes to the other named beneficiaries.

·         Joint ownership of assets: While joint ownership is common for spouses, joint ownership with children and other relatives has the potential to create some estate planning headaches. Forbes.com suggests estate plans should include “a will, revocable living trust (for most people), and financial and health care powers of attorney – which can accomplish all of the same goals as joint ownership, without the risks and complications.”

A 2013 survey of wealthy investors found nearly 72 percent of participants did not have complete estate plans. If you feel you fall into this category, you may want to schedule a meeting with us to assess your estate tax liability, determine your most important goals, and structure a plan that fits your needs. Once in place, you may want to review your estate plan regularly to ensure it is in line with current laws and regulations and that it still expresses your goals.

 

Weekly Focus – Think About It

“No matter what people tell you, words and ideas can change the world.”

--Robin Williams, actor and comedian

Weekly Commentary August 18th, 2014

The Markets

If you have young children or grandchildren, you may have read “Alexander and the Terrible, Horrible, No Good, Very Bad Day” by Judith Viorst. Well, that’s what last week was like on the European continent from an economic perspective.

Hopes of economic recovery were put on hold when gross domestic product (GDP) figures across the region showed no – nada, zero, zip – growth overall during the second quarter of 2014. First quarter’s growth (0.2 percent) hadn’t been all that impressive either, but at least it was headed in the right direction. The strongest second-quarter performers were Netherlands, Spain, and Portugal, according to The Economist. However, some of Europe’s largest economies (Italy, Germany, and France) contracted during the period.

Geopolitical unrest prompted the Euro area’s poor showing. Turmoil in the Middle East, violence in Ukraine, and sanctions against Russia have, among other things, led to a slowdown in demand for luxury goods that has negatively affected European economies. After delivering strong performance in 2013, the MSCI Europe Textiles, Apparel, & Luxury Goods Index was down more than 10 percent in the month of July and down 4.75 percent for the year. China’s anti-bribery and corruption campaign also has reduced demand for luxury goods, according to Bloomberg.

The Euro area’s economic growth (or recent lack thereof) has sparked fears of deflation in the region. The Economist offered this insight:

“Deflation would be particularly grave for the euro area because both private and public debt is so high in many of the 18 countries that share the single currency. Even if inflation is positive, but stays low, it hurts debtors as their incomes rise more slowly than they expected when they borrowed. If deflation were to set in, the effects would be worse still: when prices and wages fall, debts, which do not shrink, become harder to repay.”

Woes across the Atlantic put a shine on markets in the United States, according to Reuters. Major U.S. stock markets finished the week ahead and benchmark U.S. treasury yields finished the week at a 14-month low.

at a certain age, you begin to understand why your elders shook their heads at newfangled ideas like television, 24-hour convenience stores, automobiles, and buying on credit. Here are a few business and marketing trends that may change the way baby boomers think about things:

·         Where words fail, music speaks. Athletic shoe companies, fast-food retailers, and luxury brands are using digital music services to amplify their brand identities and engage with customers. For instance, a well-known cruise line’s playlist includes tunes with fun summer vibes, while a shampoo brand’s list embraces singing-in-the-shower songs.

·         Have a commercial with that commercial. A popular music identification app is helping television networks and advertisers connect with consumers’ second screens – their smart phones and tablets. The app’s logo appears during commercials and TV shows. If viewers interact with the logo, then the show or product has opportunities to re-market to viewers through their mobile devices.

·         It’s a meal ticket, literally. Some of the hottest restaurants around aren’t taking reservations anymore. They’re selling tickets in advance. It’s a business decision that eliminates the cost of last-minute cancellations which may lead to better prices for diners, according to experts cited by National Public Radio.

·         Want to attract a crowd? New and growing businesses have a lot of options when it comes to raising capital. If a business wants to borrow money, in addition to traditional sources, they can turn to peer-to-peer and social lending platforms. If a company wants equity investors, they may pursue equity crowdfunding. In fact, a recent study reported:

“Today, it’s apparent the crowdfunding phenomenon has indeed affected the VC (venture capital) ecosystem – as a complementary force. With thousands of consumer-oriented hardware campaigns looking for financing for everything from smart watches to beacon technologies, crowdfunding platforms… have provided VC investors with a valuable source for dealflow.”

Whether you’re a consumer or a businessperson, it’s important to remain aware of the ways in which the world is evolving and take advantage of opportunities that can make your life easier and/or your business more successful.

 

Weekly Focus – Think About It

“If your actions inspire others to dream more, learn more, do more and become more, you are a leader.”

--John Quincy Adams, Sixth President of the United States

Weekly Commentary August 11th, 2014

The Markets

During the dog days of summer, a triple dip – three melting scoops of frozen goodness perched precariously on a waffle cone – can be delicious. There are other kinds of triple dips that are a lot less welcome, though. Just look at Italy.

Last week, the Italian National Institute of Statistics released its preliminary estimate of productivity in the third largest Eurozone economy. It showed Italy’s economy contracted (again) during the second quarter of 2014. That puts Italy firmly in triple-dip territory, according to The Washington Post:

“The greatest trick the devil ever pulled was convincing Italy to join the euro. It hasn't grown since. After its GDP fell 0.2 percent, Italy is stuck in a triple-dip recession. Yes, triple: its economy started shrinking in 2008, relapsed in 2011, and now again in 2014. Although, at this point, it's probably more accurate to just call this a depression. After all, Italy's economy has contracted 11 of the previous 12 quarters. It's been enough to wipe out almost all its growth the past 14 years.”

Much of the rest of Europe is faring somewhat better than Italy, but growth is not robust. Reuters reported Germany’s economy, the largest in Europe, is expected to show stagnant growth during the second quarter of 2014 as the crisis in Ukraine and sanctions on Russia take their toll. German exports to Russia have fallen and German business leaders have said tens of thousands of jobs may be at risk.

All eyes will be on Europe during the next few weeks as second-quarter preliminary growth numbers are released. Experts may have their fingers crossed, hoping the unprecedented package of stimulus measures announced by the European Central Bank (ECB) a couple of months ago will offset the negative effects of geopolitical tensions. However, Bloomberg opined that policy changes often take a while to make a difference. In the meantime, European economies may be vulnerable to risks like geopolitical unrest in Ukraine and the Middle East.

quick! what’s the fastest growing country in latin america? Nope, it’s not Brazil. The gross domestic product (GDP) growth forecast for Brazil was lowered from 2.2 percent in January 2014 to 1.8 percent in June 2014, according to The Economist. That means Brazil is expected to grow more slowly than the United States this year.

It’s not Peru, “a country that has enjoyed Asian-style growth averaging 6.4 percent a year in 2003-13.” Peru’s growth has benefited from the country’s role as a major producer of gold and copper. During 2014, Peru dropped to second place in Latin America’s economic growth contest.

So, who’s in first? Here are a few hints:

·         It’s between Ecuador and Venezuela

·         It has a coastline on both the Pacific Ocean and the Caribbean Sea

·         It’s the second most bio diverse country in the world (In addition to having lots of butterflies, orchids, and amphibians, it has more bird species than Europe and North America combined.)

·         Americans of a certain age may remember it as the epicenter of the 1980s war on drugs (Think cartels and FARC guerillas.)

That’s right. Colombia’s economy is expected to deliver the fastest growth in Latin America during 2014 – and its vibrancy is unrelated to drugs. Like Peru, Colombia is a beneficiary of the commodity lottery. Its main exports are oil and coal whose prices have held up better than those of gold and copper in recent years. In addition, The Economist reported the country has benefitted from a variety of reforms and development efforts including:

“A law in 2012 cut onerous payroll taxes (while raising income tax on the better-off). The result is that formal-sector jobs are growing at 8 percent a year, while the large informal sector has started to shrink, which ought to boost productivity. Ambitious, albeit delayed, private-public partnerships in roads and railways should see investment of up to $25 billion by 2018.”

The country’s leaders also implemented a fiscal rule that has reduced the public-sector deficit to less than 1 percent of GDP.

Colombia’s economic growth potential is mitigated by the risks of its ongoing civil conflict. President Juan Manuel Santos was re-elected after campaigning on a promise to negotiate peace with FARC guerillas.

 

Weekly Focus – Think About It

“Positive anything is better than negative nothing.”

--Elbert Hubbard, American writer

Weekly Commentary August 4th, 2014

The Markets

Last week, investors took a long look at the crazy quilt of information and events around the world and decided they didn’t like what they were seeing.

Geopolitical tensions puckered a lot of seams: Conflict in Ukraine was embroidered with additional sanctions against Russia, difficulty investigating the downed commercial airliner in Ukraine, and escalating anti-American rhetoric in Russia. Violence continued to roil through Middle East and North Africa. In Libya, hostilities escalated, causing many western countries to withdraw diplomats and leading Tunisia to close its border with the country.

Financial and economic issues overseas, including ongoing issues with one of Portugal’s largest banks, and worries that European companies will be negatively affected by sanctions against Russia, marred investors’ views, too. In addition, controversy swirled around Argentinian bonds. In the midst of a legal battle over bond repayment, the country missed a June interest payment. The ‘credit event’ triggers a payout of about $1 billion for investors who hold insured Argentine debt.

Positive news in the U.S. offered some padding. The U.S. economy continued to recover and gross domestic product increased by 4 percent (annualized) during the second quarter which was a remarkable improvement after first quarter’s contraction. Reuters reported, “Consumer spending growth, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 2.5 percent pace… Despite the pick-up in consumer spending, Americans saved more in the second quarter… which bodes well for future spending.”

The Federal Reserve issued a midweek statement confirming economic recovery was continuing apace. It caused some investors to throw what one expert called a ‘taper’ tantrum. Barron’s said, “As the Fed's easy money policies reverse, people are forced to focus more on what they're paying for investments. If last week is any indication, investors didn't like what they saw in their portfolios.”

By Friday, U.S. markets had experienced their worst week in two years. As investors adjust to the idea of rising interest rates, markets may experience additional volatility.

Just as some science fiction novels describe parallel universes, the Congressional Budget Office (CBO) report entitled The 2014 Long-Term Budget Outlook described alternate realities for the United States, including futures that will be determined by the decisions of our policymakers today and in the future.

The CBO reported, “Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing its debt to soar.” A deficit occurs when the government spends more than it takes in. One consequence of recent deficits is the federal debt (the amount of money the United States owes its creditors) is now equal to about 74 percent of the U.S. economy’s gross domestic product (GDP). That’s the highest percent ever except for a short period around World War II.

If nothing changes – meaning laws governing taxes and spending remain the same, and the economy recovers as anticipated – deficits are expected to remain relatively low from 2015 through 2018. However, after that, the CBO projects government spending on healthcare programs and interest payments will grow and the federal debt could be 106 percent of GDP by 2039.

In an alternate universe, “certain policies that are now in place but are scheduled to change under current law would be continued, and some provisions of law that might be difficult to sustain for a long period would be modified. With those changes to current law, deficits, excluding interest payments, would be about $2 trillion higher over the next decade than in CBO’s baseline.” In that scenario, the debt of the United States balloons, swelling to about 180 percent of GDP by 2039.

A more attractive alternative requires deficit reduction measures. Depending on the amount of deficit reduction, the federal debt could diminish and be 42 to 75 percent of GDP by 2039. We can only hope the United States isn’t the country to answer an economic question recently discussed by The Conference Board: How high can debt-to-GDP ratios rise before crippling a nation?

 

Weekly Focus – Think About It

“The most difficult thing is the decision to act, the rest is merely tenacity.”

--Amelia Earhart, American aviation pioneer