Weekly Commentary January 26th, 2015

The Markets

There may be potential for a reality television program starring central bankers and the making of economic policy. It could be called, ‘The Real Central Bankers of the European Economic Community.’ Just imagine the last two weeks’ episodes. Two weeks ago, the Swiss National Bank shocked markets by unpegging its currency and sending the value of the Swiss franc skyward.

Affairs last week were less unexpected. The European Central Bank (ECB) finally made up its mind and committed to a new round of quantitative easing (QE). There was no exchange of rings embedded with multi-carat precious gems, but the ECB pledged to buy 60 billion euro of assets (public debt and government bonds, primarily) every month from March 2015 through September 2016. That’s quite a leap from the 10 billion euro of assets it was already buying.

The Economist pointed out Germany’s Bundesbank wasn’t thrilled about the commitment and insisted on an agreement that would limit its risk:

“When the ECB conducts monetary policy by lending to banks, any risk of losses is, as a rule, shared between the 19 national central banks that actually execute the policy, according to “capital keys,” which reflect their countries’ economic and demographic weight in the euro area; the Bundesbank’s for example is 26 percent whereas the Bank of Italy’s is 17.5 percent... But, QE will be conducted in a quite different way… each of the 19 national central banks, which together with the ECB constitute the Eurosystem, will buy the bonds of its own government and bear any risk of losses on it.”

Sure, it’s exciting, but let’s not lose sight of the reason behind the ECB’s decision. After watching the U.S. Federal Reserve Bank, the Bank of England, and the Bank of Japan engage in QE, the ECB decided it might be just the thing to reflate the Eurozone’s economy. Global markets seemed to think it’s a pretty good idea, too. Many finished the week higher.

last week, in switzerland, a big mac cost $7.54. The Economist invented the Big Mac Index in 1986 as an entertaining way to assess whether currencies were at the “correct” levels. The index uses purchasing power parity (PPP) to measure one currency against another. PPP is the idea that exchange rates should adjust so the same product (in this case, a hamburger) has the same price in two different countries when the price is denominated in the same currency. After updating the Index on January 22, 2015, The Economist reported:

“Two trends have dominated the world of burgernomics over the past six months: currency markets have bubbled like potatoes in a fryer as the oil price has fallen to finger-licking lows and central banks have cooked up new monetary stances. The currencies of commodity exporters have been burnt while those of big importers have sizzled. Meanwhile, the end of quantitative easing in America has supersized the dollar, whereas the mere prospect of it in Europe has made a happy meal of the euro.”

Since a Big Mac in the United States cost about $4.79 last week, the Swiss franc was quite overvalued. That’s not the case with currencies elsewhere, though. Here are the prices of a Big Mac in a few key locales:

 

Norway          $6.30

Denmark        $5.38

Brazil              $5.21

Australia         $4.32

Euro area       $4.26

Mexico            $3.35

China              $2.77

India               $1.89

Russia             $1.36

 

It should be noted the Big Mac Index is not a perfect measurement tool. The price of a burger should be less in countries with lower labor costs and more in countries with higher labor costs. When prices are adjusted for labor, the Swiss franc is not the most overvalued currency in the world, the Brazilian real is.

Visit our Blog at www.triad-fs.com to read past weekly Triad Wealth Reports (click on the Blog tab along the top of the page)

 

Weekly Focus – Think About It

“The hardest skill to acquire in this sport is the one where you compete all out, give it all you have, and you are still getting beat no matter what you do. When you have the killer instinct to fight through that, it is very special.”

--Eddie Reese, USA Olympic Swim Team Head Coach, 2004 and 2008

Weekly Commentary January 20th, 2015

The Markets

Central banks have been full of surprises lately, but not too many people saw this one coming. For aficionados of the board game Clue, here’s the gist of it: Thomas Jordan did it in Switzerland with monetary policy.

Last week, Swiss National Bank (SNB) Chairman Thomas Jordan told the world the SNB would no longer cap the value of the Swiss franc at 1.2 per euro because the policy was no longer needed. The decision triggered an exceptional response. The Economist reported:

“Currencies don't normally move that far on a daily basis – 2-3 percent is a big shift. The exception is when a country on a fixed exchange rate suffers devaluation; then a 20-30 percent fall is a possibility. But a 20-30 percent plus upward move is almost unprecedented. That, however, is what happened to the Swiss franc on January 15^th…”

The SNB’s decision roiled global financial markets. The Swiss market lost about 10 percent of its value on the news and U.S. markets slumped, too. Anxiety was particularly acute in central Europe where many people hold loans and mortgages denominated in Swiss francs.

The SNB currency peg was introduced just three years ago, when things were grim in the euro region, and money was pouring into safe-haven Switzerland. The value of the Swiss franc increased significantly, making Swiss exporters – watchmakers, chocolatiers, luxury goods manufacturers – far less competitive. The SNB’s solution was a currency peg.

So, how does a central bank maintain the value of its currency? Well, among other things, it prints money (in this case, Swiss francs) to buy more of the peg currency (euros). Today, with the European Central Bank expected to begin a round of quantitative easing that may reduce the value of the euro, the BBC speculated the Swiss could no longer afford to maintain the peg.

Motives aside, the move may have produced results the SNB didn’t anticipate. An expert cited by the International Business Times said, “The Swiss bank thought that by removing the cap and activating a negative interest rate, the currency would weaken. In this case, the surprise is going to bite them back.” Did it ever.

good news for anyone in retirement or retiring soon: The amount of savings needed to cover health insurance premiums and out-of-pocket care expenses fell for a second straight year, according to the Employee Benefits Research Institute (EBRI).

Okay, get ready for the governmental alphabet soup! The savings needed to pay Medigap premiums, Medicare Part B premiums, Medicare Part D premiums, and out-of-pocket drug expenses (if you retired at age 65 in 2014) was estimated to be:

For men:

·         $64,000 (50% chance of savings covering all expenses)

·         $93,000 (75% chance of savings covering all expenses)

·         $116,000 (90% chance of savings covering all expenses)

For women:

·         $83,000 (50% chance of savings covering all expenses)

·         $106,000 (75% chance of savings covering all expenses)

·         $131,000 (90% chance of savings covering all expenses)

For married couples:

·         $147,000 (50% chance of savings covering all expenses)

·         $199,000 (75% chance of savings covering all expenses)

·         $241,000 (90% chance of savings covering all expenses)

That’s 2-10 percent less than the savings needed in 2013. How is it possible these estimates are moving lower? Retiree spending on healthcare has dropped, according to U.S. News & World Report:

“A flood of 77 million people from the baby boomer generation have been turning 65, the age of Medicare eligibility, since 2011. These younger enrollees have been a leading factor driving down the rate at which health care spending is increasing, because the younger boomers tend to be healthier than older enrollees and therefore use fewer medical services… Also contributing to the slowdown are changes in the way medicine is being practiced, the lingering effects of the Great Recession, and the shift in usage from high-priced prescription drugs to less costly generic alternatives.”

EBRI’s estimates use Congressional Budget Office and Centers for Medicare & Medicaid Services projections regarding future premium and health care cost increases. These projections for spending growth have slowed in recent years.

 

Weekly Focus – Think About It

“As a player, it says everything about you if you made the Hall of Fame. But, then again, boy... there's something about winning a Super Bowl.”

--Terry Bradshaw, American football player and NFL analyst

Weekly Commentary January 12th, 2015

The Markets

You may be enjoying the economic benefits of gas prices around two dollars a gallon, but last week investors were skeptical about the effect of low, low oil prices on companies’ performance during 2015.

For the first time since the financial crisis, the price of crude oil dropped under $50 a barrel last week. That’s less than half of its value just six months ago and one of the fastest drops in the past 30 years. Investors weren’t thrilled with the change. The Standard & Poor’s 500 Index (S&P 500) fell, marking the first time the index has moved lower during each of the first three days of a new year since 2005. Barron’s described the effects of lower oil prices like this:

“In the U.S. alone, oil’s precipitous drop has had a sizable impact on expectations for corporate profits: Analysts have cut their fourth-quarter earnings forecasts for S&P 500 energy stocks by more than a quarter since the end of September while total S&P 500 earnings forecasts have come down by more than 7%... But here’s the thing: Such plunges haven’t been bad for stocks – or the U.S. economy, for that matter. Since 1984, oil has experienced three similar drops and each time the S&P 500 traded higher 12 months later.”

Investors were plagued by mood swings last week. Their outlook improved when the Chicago Fed’s Charles Evans indicated Fed rate hikes shouldn’t start until 2016, which is later than consensus suggests. Many analysts believe the Fed will begin tightening monetary policy (by raising the Fed funds rate) sometime in mid-2015. Investor optimism was tempered when Friday’s employment report didn’t deliver as expected. At the end a volatile week, the S&P 500 was lower.

Across the pond, European Central Bank (ECB) staff presented various models for buying 500 billion Euros of investment-grade debt during 2015. No commitment was made, but expectations the ECB might introduce fresh stimulus measures in late January helped push European government bonds lower.

beware indirect ira rollovers: the rules have changed. There are a lot of reasons an investor might want to rollover an IRA. If it’s something you’ve been thinking about, talk with us. There are numerous tax implications that should be considered prior to taking any action.

In general, there are two ways to rollover an IRA. Investors can choose a direct rollover or an indirect rollover. Direct rollovers, which are also known as trustee-to-trustee transfers, are pretty straightforward. The funds move from one custodian to the other and the IRA owner never touches the money.

Indirect rollovers are the potential source of trouble. Typically, with an indirect rollover (aka a 60-day rollover), a check is sent to the IRA owner. The owner cashes the check and, as long as he or she deposits the funds in another IRA within 60 days, the assets continue to qualify for special tax treatment.

In the past, IRS rules allowed investors to rollover each IRA they owned once a year. In recent years, some investors tested the limits of indirect IRA rollovers by rolling over multiple IRAs. In essence, they took 60-day personal loans from their qualified accounts. The issue came to court last year:

“In the Bobrow case, the court held that Mr. Bobrow, a tax lawyer, was taking advantage of the 60-day rule for each IRA. He had done a series of rollovers from separate IRAs and had use of his IRA funds for almost six months. The court essentially said, “No more of this nonsense.” Mr. Bobrow lost his case and that changed the interpretation of the once-per-year rule for everyone. The court said that the rule applies to all IRAs, not to each one separately. The IRS agreed and changed the rules in March.”

If you rolled over more than one IRA during 2014, don’t panic. The IRS provided relief for rollovers completed during 2014 when the old rules were thought to apply.

 

Weekly Focus – Think About It

"Many men go fishing all of their lives without knowing that it is not fish they are after.”

--Henry David Thoreau, American philosopher

Weekly Commentary January 5th, 2015

The Markets

“…bubbling crude; oil that is, black gold, Texas tea.”

The decline in oil prices accelerated during the fourth quarter of 2014. The main culprit was a supply and demand imbalance. Increased production in the United States, which is currently the biggest oil producer in the world, means there is an ample supply of oil. However, slowing growth in China and other countries, along with relatively warm winter weather in the United States, has lowered demand.

Oil prices are also affected by expectations. The Organization of Petroleum Exporting Countries’ (OPEC’s) fourth-quarter decision to maintain production levels and market share (rather than lowering production and pushing prices higher) has created an expectation that prices may remain low for some time.

Low oil prices are expected to be a boon for the world economy, consumers, and countries (like India) that are heavily dependent on oil imports. However, low prices are a detriment to countries that are heavily dependent on oil exports and could result in financial crises and geopolitical upheaval. The Economist reported analysts believe Russia needs oil to be priced at $100 a barrel to meet its 2015 budget. Venezuela, which was in financial trouble before oil prices fell, needs oil at $120 a barrel to finance its spending, and Iran needs prices even higher, at $136 a barrel.

Big trouble in Russia

Like Mentos^® and soda pop, a currency crisis fizzed up in Russia during the fourth quarter. The Economist said:

“In the world of central banking slow, steady, and predictable decisions are the aim. So when bankers meet in the dead of night and raise interest rates by a massive 6.5 percentage points it suggests something is going very wrong. It is: the Russian currency crisis many feared is now a reality… and the mood in Moscow close to panic. Russians are right to worry: they are heading for a lethal combination of deep recession and runaway inflation.”

Retailers have begun re-pricing their goods daily and ruble jokes are proliferating, according to The Moscow Times. One example, “I’m investing my life savings in the Euro.” “Don’t you mean Euros?” “No, just one Euro. It’s all I can afford.”

Déjà vu Greece

The potential for a Euro crisis reared its ugly head (again). Greek markets took a decidedly pessimistic turn when the country’s government decided to hold elections. At issue are promises Alexis Tsipras, presidential candidate of the Syriza party, made about rolling back austerity measures and cancelling a portion of Greek debt. If Tsipras is elected, Greece might leave the Euro.

Signs of volatility in U.S. markets

Markets sparked and popped a bit in the United States during the fourth quarter. Investors, who had been unconcerned about the possibility of short-term market volatility for much of 2014, had a change of heart during October – the same month the Federal Reserve ended quantitative easing.

The Chicago Board Options Exchange's Volatility Index (VIX), which is also known as Wall Street’s fear gauge, rose into the 20s (above its long-term historic average of 19.6) for several days. Stock markets experienced big swings, too, and then things settled back down. The VIX shot higher for a few days in December, as well. Experts say these microbursts may continue into 2015.

 

 

When you were younger, you may have heard older relatives marvel over the high cost of everything from automobiles to aluminum foil. It’s worth taking a look back, once in a while, and acknowledging exactly how significantly the world has changed.

Let’s begin by picturing the United States at the beginning of the twentieth century. One-quarter of households had running water and outhouses were more prevalent than flush toilets. Few people owned homes. Less than 10 percent of households had gas or electric lights, 5 percent had telephones, about 1 percent owned a car, and nobody owned a television because they didn’t exist yet.

 

Approximate household income:  

 

·         1901: Average household income was about $750 a year. Almost 96 percent of households had income earned by men, 8.5 percent had income earned by women, and 23 percent had income earned by children.

·         1960-61: Average household income was about $6,691 a year. Almost 34 percent of women were working and 83.3 percent were men. Almost 39 percent of heads of household were craftsmen and machine operators, and 27 percent were professionals, managers, or proprietors.

·         2013: The mean after-tax household income in the United States was $56,352.

 

Approximate household expenses:

 

·         1901: The average family spent about $769 a year: $327 on food, $108 on clothing, $179 on housing, and $155 on anything else. On average, households spent 2.5 percent more than they earned. Just 19 percent of families owned homes; 81 percent rented.

·         1960-61: The average family spent about $5,390 a year: $1,310 on food, $561 on clothing, and $1,590 on housing. Almost three-fourths of Americans owned cars. Fifty-three percent of families owned homes.

·         2013: Mean household spending was about $51,100: $17,148 was spent on housing; $9,004 on transportation; $6,602 on food; $3,737 on utilities, fuels, and public services; $3,631 on healthcare; $1,604 went to clothing; and so on. About 64 percent of households owned homes.

 

It’s true. Times really have changed.

 

Weekly Focus – Think About It

"A bird doesn't sing because it has an answer, it sings because it has a song.”

--Maya Angelou, American author and poet