Tag Archives: financial advice

The Typical Household, Now Worth a Third Less

My Comments: You have read my posts before where I talk about income inequality  (the HAVES vs. the HAVE NOTS) and how if left unchecked, could result in social chaos in this country. Probably not in my lifetime, but definitely affecting the lives of my grandchildren. It’s an issue that demands discussion among ourselves and those who profess to be politically motivated.

Economic inequality in the United States has been receiving a lot of attention. But it’s not merely an issue of the rich getting richer. The typical American household has been getting poorer, too.

The inflation-adjusted net worth for the typical household in 2003 was $87,992. Ten years later, in 2013, it was $56,335. This is a 36 percent decline in very few years, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially.

The Russell Sage study also examined net worth at the 95th percentile. (For households at that level, 94 percent of the population had less wealth and 4 percent had more.) It found that for this well-do-do slice of the population, household net worth increased 14 percent over the same 10 years. Other research, by economists like Edward Wolff at New York University, has shown even greater gains in wealth for the richest 1 percent of households.

For households at the median level of net worth, much of the damage has occurred since the start of the last recession in 2007. Until then, net worth had been rising for the typical household, although at a slower pace than for households in higher wealth brackets. But much of the gain for many typical households came from the rising value of their homes. Exclude that housing wealth and the picture is worse: Median net worth began to decline even earlier.

“The housing bubble basically hid a trend of declining financial wealth at the median that began in 2001,” said Fabian T. Pfeffer, the University of Michigan professor who is lead author of the Russell Sage Foundation study.

The reasons for these declines are complex and controversial, but one point seems clear: When only a few people are winning and more than half the population is losing, surely something is amiss

5 QLAC Questions and Answers

My Comments: QLAC? What the heck is a QLAC?

By Jeffrey Levine / July 18, 2014

On July 1, 2014 the Treasury Department released the long-awaited final regulations for Qualifying Longevity Annuity Contracts (QLACs). These new annuities will offer advisors a unique tool to help clients avoid outliving their money.

The QLAC rules, however, are a complicated mash-up of IRA and annuity rules, and clients may need substantial help in understanding their key provisions. To help advisors break down the most important aspects of QLACs, below are 5 critical QLAC questions and their answers.

1) Question: What are QLACs?
Answer: QLACs, or qualifying longevity annuity contracts, are a new type of fixed longevity annuity that is held in a retirement account and has special tax attributes. Although the value of a QLAC is excluded from a client’s RMD calculation, distributions from QLAC don’t have to begin until a client reaches age 85, well beyond the age at which RMDs normally begin.

2) Question: Why did the Treasury Department create QLACs?

Answer: Prior to the establishment of QLACs, there were significant challenges to purchasing longevity annuities with IRA money. The rules required that unless an annuity held within an IRA had been annuitized, its fair market value needed to be included in the prior year’s year-end balance when calculating a client’s IRA RMD. This left clients with non-annuitized IRA annuities with an inconvenient choice to make after reaching the age at which RMDs begin. At that time, they needed to either:
1) Begin taking distributions from their non-annuitized IRA annuities, reducing their potential future benefit, or
2) Annuitize their annuities, which would obviously produce a lower income stream than if they were annuitized at a more advanced age, or
3) “Make-up” the non-annuitized annuity’s RMD from other IRA assets, drawing down those assets at an accelerated rate.

None of these options was particularly attractive and now, thanks to QLACs, clients will no longer be forced to make such decisions.

3) Question: How much money can a client invest in a QLAC?

Answer: The final regulations limit the amount of money a client can invest in a QLAC in two ways: a percentage limit; and an overall limit. First, a client may not invest more than 25 percent of retirement account funds in a QLAC.

For IRAs, the 25 percent limit is based on the total fair market of all non-Roth IRAs, including SEP and SIMPLE IRAs, as of December 31st of the year prior to the year the QLAC is purchased. The fair market value of a QLAC held in an IRA will also be included in that total, even though it won’t be for RMD purposes.

The 25 percent limit is applied in a slightly different manner to 401(k)s and similar plans. For starters, the 25 percent limit is applied separately to each plan balance. In addition, instead of applying the 25 percent limit to the prior year-end balance of the plan, the 25 percent limit is applied to the balance on the last valuation date.

In addition, that balance is further adjusted by adding in contributions made between the last valuation and the time the QLAC premium is made, and by subtracting from that balance distributions made during the same time frame.

In addition to the 25 percent limits described above, there is also a $125,000 limit on total QLAC purchases by a client. When looked at in concert with the 25 percent limit, the $125,000 limit becomes a “lesser of” rule. In other words, a client can invest no more than the lesser of 25 percent of retirement funds or $125,000 in QLACs.

4) Question: What death benefit options can a QLAC offer?
Answer: A QLAC may offer a return of premium death benefit option, whether or not a client has begun to receive distributions. Any QLAC offering a return of premium death benefit must pay that amount in a single, lump-sum, to the QLAC beneficiary by December 31st of the year following the year of death.

Such a feature is available for both spouse and non-spouse beneficiaries. In addition, the final regulations allow this feature to be added regardless of whether the QLAC is payable over the life of the QLAC owner only, or whether the QLAC will be payable over the joint lives of the QLAC owner and their spouse.

QLACs may also offer life annuity death benefit options. In general, a spousal QLAC beneficiary can receive a life annuity with payments equal to or less than what a deceased spouse was receiving or would have received if the latter died prior to receiving benefits under the contract. An exception to this rule is available, however, to satisfy ERISA preretirement survivor annuity rules.

If the QLAC beneficiary is a non-spouse, the rules are more complicated. First, clients must choose between two options, one in which there is no guarantee a non-spouse beneficiary will receive anything; but if payments are received, they will generally be higher than the second option.

The second option is a choice that will guarantee payments to a non-spouse beneficiary, but those payments will be comparatively smaller than if payments were received by a non-spouse beneficiary under the first option. Put in simplest terms, a non-spouse beneficiary receiving a life annuity death benefit will generally fare better with the first option if the QLAC owner dies after beginning to receive benefits whereas, if the QLAC owner dies before beginning to receive benefits, they will generally fare better with the second method.

5) Question: Are QLACs available now
Answer: Yes…and no. Quite simply, the QLAC regulations are in effect already, but that doesn’t mean that insurance carriers already have products that conform to the new IRS specifications.

To the best of my knowledge, and as of this writing, QLACs exist in theory only.
It’s likely, however, that in the not too distant future, QLACs will go from tax code theory to client reality. Exactly which carriers will offer them and exactly which features those carriers will choose to incorporate into their products remains to be seen.

But make no mistake: QLACs are coming (or here, depending on your point of view). If such products may make sense for clients, it probably makes sense to reach out to them now and begin the discussion.

Increased Consumer Spending Driving Strong Economic Growth In USA

USA EconomyMy Comments: On Thursday, July 30 the market dropped 300 points. The blogosphere and media were all a chatter about “was this the start of the correction?”. Who knows ?!?

It illustrates why those of us who profess to be financial advisors are more in the dark than you are. Here we are talking about a looming market correction, one that will happen, and the longer it takes to start the more violent it is likely to be. And here I am this morning, coming to you with good news about the economy. Seems totally weird, doesn’t it?

What has to be remembered is that the markets are always forward looking. I want to invest my money before it goes up, if at all possible. If I think it’s going to crater, I’m taking my money out. At least that’s the plan, unless you use some of the approaches favored by us at Florida Wealth Advisors, LLC.

What this headline tells me is that when the correction happens, it will be relatively short term and though perhaps dramatic, it will not be systemic.

Jul. 31, 2014 / APAC Investment News

Summary
• The Bureau of Economic Analysis is reporting 4 percent growth in the second quarter, a strong rebound from the first quarter.
• Consumer spending in both durable and non-durable goods is up. Both exports and imports also rose, along with most other indicators.
• This economic growth should provide some upward pressure for markets, at least in the short term.

The United States has struggled to fully recover from the 2008 Financial Crisis. While stock markets have rebounded, unemployment has remained high and economic growth has been tepid. New data points to the U.S. economy growing a solid 4 percent in the second quarter, however, propelled by an increase in consumer spending. This should help stabilize markets and perhaps even push them higher.

With consumer spending accounting for roughly 2/3rds of America’s economy, any increase in consumer spending should come as a relief for those concerned of yet another slowdown. Still, stock markets hovered in place following the release of the data on Wednesday, likely over concerns about the Fed’s next move with interest rates and the continued wind down of its asset buying program.

Consumer Spending On The Rise
According to the Bureau of Economic Analysis consumer spending increased a solid 2.5 percent in the second quarter, up from 1.2 percent in the first quarter. Durable goods, which includes automobiles, appliances, and other similar goods, increased by an astounding 14 percent, compared with an increase of just 3.2 percent in the first quarter. Non-durable goods, which includes food and clothing, increased by 2.5 percent. The BEA presents its numbers in seasonally adjusted annual rates.

Automobiles have been performing particularly well as of late, even while General Motors is still feeling the fallout from a major scandal and many automakers are suffering a rash of recalls. There were some fears of a major slowdown following the economic contraction in the first quarter, but for now it appears that the feared slow down hasn’t materialized.

Ford did suffer a decline in sales in June, falling some 5.8 percent YOY. While this may not seem like good news, the drop was not as bad as expected. Meanwhile, General Motors sales rose 1 percent even in spite of the bad publicity from the ignition scandal, and Chrysler posted a solid 9.2 gain.

Growth Being Driven By Other Factors
Besides consumer spending, other areas of the economy have also performed well. Exports rose by 9.5 percent, following a sharp decline of 9.2 percent in the first quarter. This suggests that the global economy may also be growing. Imports also rose 11.7 percent, compared with an increase of only 2.2 percent in the first quarter.

Investment in equipment rose 7 percent, while investments in non-residential structures rose by 5.3 percent.

Interestingly, federal government consumption actually decreased by .8 percent, suggesting that the rise in spending is being driven by private businesses and consumers. This should come as a welcome sign given the government’s high debt burden. Simply put, the American government likely couldn’t afford to drive up consumption even if it wanted to.

Strong Economic Growth Should Re-enforce Markets
For now, strong economic growth should keep markets buoyant even with many factors exerting downward pressures. Sanctions on Russia, tensions in the South China Seas, political infighting in Congress, the possible fallout of the Fed curtailment of its asset buying program, and numerous other factors have created jitters. Strong economic growth can counteract these downward pressures, at the very least.

Meanwhile, as stock indexes have surged to all time highs, there have been some concerns that a bubble may be building. While stock markets have been performing well, the economy in general seemed to be suffering from sluggish growth, suggesting that something besides actual economic performance has been driving stock prices upwards. Now, however, economic growth finally appears to be in line with the rising stock market indexes.

So long as the economy continues to grow, markets should remain stable. Of course, the economy itself could quickly swing back into contraction. Government debt levels remain high, profits can evaporate over night, and consumer sentiments can change quickly.

Further, as the economy continues to grow, the Fed will almost certainly continue to cut back its stimulus measures, and eventually even raise interest rates. This, in turn, could slow economic growth. Meanwhile, stagnant wages, continued high unemployment, high debt levels, and other factors could eventually pose a threat.

THOUGHT FOR THE WEEK – July 30, 2014

house and pigMy Comments: I’m involved in a philosophical conflict these days between those on one side who believe there is a universal truth that says investment skill trumps traditional permanent life insurance every time.

On the other side is someone who believes permanent life insurance trumps traditional investment methodologies. They argue vehemently that permanent life insurance will result in a better outcome for everyone. Both sides of this argument have a built in bias that is difficult for the average consumer to recognize and compensate for.

I’m loath to attribute “universal truth” status to either position. Life insurance and credible investment strategies have roles to play in almost everyone’s life. It’s only when you fully understand a client’s thought process, value system, and where they are in life are you able to help them determine whether life insurance is appropriate, what kind to buy if it is, and how much coverage is enough.

Here is a thought from a trusted colleague with a valid perspective on this question.

By Gene A. Pastula, CFP

When compared to other investment options for liquid assets for medical emergencies, the creation of a large asset from small deposits (life insurance) is a most desirable alternative.

Those who say that life insurance is a bad investment are not relating to real life.

Since everyone dies, we know exactly what the end result of a life insurance program is going to be. Because we don’t know when any individual will die, we don’t know how efficient the program will be.

* Walt purchased a $1,000,000 life insurance policy at the age of 47 and died from a brain tumor at age 53. Does anyone disagree that, no matter what Walt paid for it, he made a good “investment” buying that policy… an IRR of about 92% per year?

* Sharon purchased the same kind of policy at the age of 63 and died at the age of 93. After 30 years of paying premiums… an IRR of about 4.5% per year. Should have put her money in a mutual fund. Who knew?

When you sell life insurance for a living, you must concentrate on the “need”. That is what all the critics of insurance focus on. How expensive is it, and do you really “neeeed” it? You will sell only to those clients to whom you can effectively point out that the individuals untimely death will leave a significant deficiency in the financial condition of those he/she leaves behind. Then you must be convincing, and good at motivating them to take action to “purchase” the policy so the money will be there “in case” they die.

On the other hand, if you are a financial planner or investment advisor you can clearly see the value in your clients’ portfolio and to their family of having a portion of their assets “invested” in a life insurance policy. And the way you can tell if it is a good value is to know when the insured will die. Only then can you calculate the rate of return. In most cases the tax free rate of return is about 4.5% if one dies at age 93 and much greater (8.5%/yr.) if you are lucky enough to die at 85 and EVEN GREATER (24%/yr.) if you are EVEN LUCKIER and die at 75… well, hopefully you get my point.

Now consider the risks of Critical, and Chronic Illness that (in many cases) occur before death. Just think of the rate of return on your money if you are lucky enough to have a heart attack or kidney failure or need a lung transplant after only 10 or 15 years of owning and paying for that policy. That is assuming your advisor was wise enough to make sure the insurance you were “investing in” contained an acceleration rider to access a portion of the death benefit while you are still alive and needed some big bucks to cover the cost of that lung transplant.

An additional comment from TK: Among my resources at Florida Wealth Advisors, LLC, are people like Gene Pastula, and his company, Westland Financial Services. They believe in the value of committing a portion of their clients’ portfolio to an insurance policy that creates large assets just at the time it is needed, no matter when that may be. And yet… if it is never needed, the heirs will think of them as a hero for doing such a good job of protecting the portfolio. Life does not move in a straight line; it has ups and downs. Who knows what is going to happen next. Whatever it is, a major health issue could cause great damage to their portfolio just when it was about to make great gains in the upcoming bull market.

Stocks Will Rise And The 3 Trades You Can’t Make

My Comments: Once again, the question of a market crash raises its ugly head. And once again, no one has a clue when it will happen.

And once again, as I tell my clients and prospective clients, it really doesn’t matter if you have your money where it can grow regardless of when and how severe the coming crash.

The author includes among his 3 Trades… something you CAN participate in if you have access to the tactical approach to investing that I recommend for all my clients. Some of you know what I’m talking about. The rest of you will have to call or send me an email.

By Lance Roberts   Jul. 18, 2014

I wrote recently that stocks spend 5% of their time hitting new highs while the other 95% of the time investors spend in the market has been making up losses. This is shown in the chart below.
I make this point as I saw a flashing banner across the bottom of the TV screen stating the markets have hit 14 new highs this year alone. While this sounds like an amazing feat, it is actually just a function of being in record territory. For example, assume a dragster sets a record in the 1/4 mile of 7 seconds. The next driver that runs the same strip at 6.999 seconds sets a new record. So forth, and so on. There are two important points to take away from this:
1. When the markets are at a record level, it only takes infinitesimal advances to set new records.
2. Records are attained when previous extremes have been breached which is generally a later stage event.

However, while logic would suggest that current market levels are getting extreme, the “exuberance” created by current price momentum fuels additional gains. As the ongoing “bullish meme” from mainstream media sources and analysts continue to feed individual’s “confirmation biases” the “fear” of “missing out” blinds individuals of the rising risk.

Dr. Robert Shiller recently penned an interesting piece at Project Syndicate stating:
“In recent months, concern has intensified among the world’s financial experts and news media that overheated asset markets – real estate, equities, and long-term bonds – could lead to a major correction and another economic crisis. The general public seems unbothered: Google Trends shows some pickup in the search term “stock market bubble,” but it is not at its peak 2007 levels, and “housing bubble” searches are relatively infrequent.”

Dr. Shiller is correct. The general public seems “unbothered” by the rising risks in the markets despite a variety of warnings recently:

Janet Yellen during in the Federal Reserve’s Semiannual Monetary Policy Report to the Congress: “The Committee recognizes that low interest rates may provide incentives for some investors to ‘reach for yield,’ and those actions could increase vulnerabilities in the financial system to adverse events…In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk.”

Stanley Druckenmiller and Carl Icahn via the CNBC Delivering Alpha conference:
“I am fearful that today our obsession with what will happen to markets and the economy in the near term is causing us to misjudge the accumulation of much greater long-term risks to our economy” – Druckenmiller

“You have to worry about the excessive printing of money. You have to be worried about the markets.” – Icahn

Yet, despite these warnings individuals, as shown below, are as heavily allocated to the markets currently as they were prior to the financial crisis. (Note: there are more charts in the original article which I am not adding here. If you need to see them, here is a link to the original text: http://seekingalpha.com/article/2322275-stocks-will-rise-and-the-3-trades-you-cant-make )

Furthermore, while individual investors are fully allocated to the equity markets, professional investor sentiment has rocketed in recent weeks to astronomically high levels.

While excessive bullish sentiment, low volatility, and a perceived blindness to risk are certainly noteworthy; “irrational exuberance” can drive markets higher in the short term for much longer than most expect.

There is currently a belief that there is no recession on the horizon, that markets are “fairly valued” based on the current interest rate environment, and there is “no other option but stocks.” While these views certainly bolster the near term perspective of being long the equities, which will continue to drive asset prices higher, it is important to remember that each of these dynamics can, and do, change much more rapidly than investors can generally react to.

The chart below shows the annual change in GDP, 10-year interest rates and the S&P 500. It is important to note that prior to every recession that was an instilled belief that “no recession” was on the horizon. It is worth remembering that Alan Greenspan and Ben Bernanke both stated that the economy was doing well…just before it wasn’t.

It was in 1996 that Alan Greenspan first uttered the words ‘irrational exuberance’ but it was four more years before the ‘bull mania’ was completed. The ‘mania’ of crowds can last far longer than logic would dictate and especially when that mania is supported by artificial supports.

The statistical data suggests that the next economic recession will likely begin in 2016 with a negative market shock occurring late that year, or in 2017. This would also correspond with the historical precedent of when recessions tend to begin during the decennial cycle. As shown in the chart below the 3rd, 7th and 10th years of the cycle have the highest occurrence of recession starts.

With the Fed’s artificial interventions suppressing interest rates and inflation it is likely that the bullish mania will continue into 2015 as the ‘herd’ mentality is sucked into the bullish vortex. This is already underway as shown recently in ‘Charts All Market Bulls Should Consider’ which showed individuals are once again piling into stocks and depleting cash reserves in the hopes of ‘getting rich quick.

The 3 Trades You Can’t Make
As a money manager, my portfolio model remains currently fully invested. The problem is that I am grossly uncomfortable with that allocation given the risks that currently prevail. However, as I have stated many times previously, I must follow the trend of the market or I will suffer “career risk” as clients move money elsewhere to chase market returns. This is what I call the “investor duration mismatch.” While investors are supposed to be investing for long-term returns, buying low and selling high, the reality is that their emotional biases make them extremely myopic to short-term market movements. The problem with short-term market movements is that they have NOTHING to do with underlying fundamentals. (Read more on why fundamentals don’t matter.)

The problem for investors today is that the “easy money” is no longer available by betting on stocks going up. Which means there is an opportunity brewing in three areas which, unfortunately, investors cannot actually make.

• Long Volatility (NYSEARCA:VXX)
• Long Bonds (Investment Grade Corporates)
• Short Stocks

The reason I say that you can’t make these trades is that they are a bet on the eventual market reversion. When the reversion occurs volatility will significantly rise, interest rates will decline stock prices drop markedly. The problem is that most investors do not have the patience to let such a “bet” mature. The pressure of betting against a rising market will eventually lead to selling at painful losses.

The current low-volume market, combined with excessive bullish sentiment, sets up a potential for asset prices to be inflated further. As stated, the risks in the markets have clearly risen, but the next major reversion could be many months away. The problem for most, particularly those touting “investing for the long term,” is when the “dip” turns into a full-fledged “decline” the panic to exit the markets will become overwhelming.

Dr. Shiller’s final paragraph summed things up well:
“Those who warn of grave dangers if speculative price increases are allowed to continue unimpeded are right to do so, even if they cannot prove that there is any cause for concern. The warnings might help prevent the booms that we are now seeing from continuing much longer and becoming more dangerous.”

Our memories tend to be much shorter than the damage done to portfolios by failing to recognize risk and managing accordingly.

(My final note: Risk is not something to be avoided; it is something to be understood and managed. If you want to know how this is done, call me or send me an email. – TK )

The Hangover

My Comments: The blogosphere and financial press is increasingly filled with questions and presumed answers about the amount of time since the last market correction. The focus of each writers attention is to suggest doom is imminent or doom is not imminent. Personally, I have no idea when the next crash will happen, just that sooner or later it will.

That being said, here are comments from one of the bright lights at one of the best well lit family of funds available to us. Draw your own conclusions, but if you agree with me that something ominous will happen before long, then talk to me about ways to limit your losses when it does happen.

by Scott Minerd July 24, 2014

The Fed’s not taking the punch bowl from the party, but investors should be wary of the hangover.

On a fall night in 1955, Federal Reserve Chairman William McChesney Martin stood before a group of New York investment bankers at the Waldorf Astoria Hotel and delivered what is now considered his famous “punch bowl” speech. It earned this label because Martin closed his eloquent talk by paraphrasing a writer who described the role of the Fed as being “in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

Janet Yellen’s recent congressional testimony suggested that she does not subscribe to her predecessor’s temperance. While citing that valuations in certain sectors, such as high-yield or technology stocks, appeared “substantially stretched”, Yellen’s overall sentiment was clear: the Fed does not view the party as really warming up to the point that the punch bowl need be removed.

The excessive risk taking among investors lulled into complacency by an overly loose Fed is a powerful cocktail indeed; one that could produce a hangover in the form of volatility. Having said that, the Fed’s party can still go on for a long time. As I’ve said before, bull markets don’t die of old age, but because of an exogenous event or a policy mistake.

In his famous speech, Martin preceded his punchbowl comment by saying, on behalf of the Fed, “…precautionary action to prevent inflationary excesses is bound to have some onerous effects…” The flipside – a lack of precautionary action by the Fed – will have its own set of consequences in time. It is very difficult to say when exactly these will happen, but near-term indicators suggest the hangover won’t hit while you’re relaxing at the beach this summer.

Chart of the Week
Equity Markets: The Bigger they Come the Harder they Fall
The S&P500 has now gone nearly 800 days since a correction of more than 10 percent – the “meaningful” level for many analysts. The more extended the market becomes, the larger the eventual decline may be. Over the last 50 years, the longer the time between market corrections, the steeper the drop once the correction does occur.

EX-RECESSION S&P500 CORRECTIONS (>10% DECLINE) SINCE 1962

Washington’s Hawks Have Usurped the Huntsmen

My Comments: If you are unsure what is meant by the headline above, you are not alone.

However, a reading of the comments that appeared in the Financial Times tends to reinforce in my mind the discomfort all of us should feel about the US Government agency known as NSA or the National Security Agency and others whose responsibility it is to spy, as they say in the movies.

At some point someone has to take responsibility for this crap, put it in context, and then put people in charge that have a fundamental understanding that in this age of instant news and technology, ANYTHING and EVERYTHING you do might have public consequences.

Some of it is probably justified, but to simply say OK to all of it means we are already far down that ubiquitous slippery slope. Time for some new rules.

By Constanze Stelzenmüller / July 9, 2014

The unspeakable in pursuit of the uneatable.” This was Oscar Wilde on fox hunting. Spying is hunting, of sorts. But in the latest instalment of the saga of US spying on the Germans, it is beginning to look more like the irresponsible in pursuit of the incompetent.

First, the prey. A low-level registry clerk at the Bavarian headquarters of the BND, the German federal intelligence service, offers his services to the Americans by mail. He sells them more than 200 documents over several years for a five-figure sum. His handlers are especially interested in the parliamentary committee investigating the US National Security Agency’s efforts to spy on Germany; according to Der Spiegel, a news magazine, they tell him to send everything he can find on the committee.

Then our man in Pullach sends another email, this time to the Russians. Would they be interested in his wares as well? To prove that he is not bogus, he attaches a handful of secret papers.

How could this have happened in a section of the federal intelligence service that has access to information about the Bundestag’s most sensitive committee? Susceptibility to greed or treason may be difficult to test for. But surely this man was either dim, lacking a survival instinct, or both. Who vetted him? Who hired him? Who watched him? Germany can guard the space between its goalposts as though it housed a nuclear bomb. Apparently, however, it cannot guard a parliamentary committee on intelligence.

Next: the pursuers. This was a tempting offer. But did no one in the US embassy say: “Hold it one second, guys. Remember how upset Angela Merkel was when we tapped her cellphone? What if this comes out, and the ambassador has to dine alone with his family for the rest of his tenure?” They might have reflected that, in his speech in Berlin in June last year, President Barack Obama sort of said the US would not resort to such tactics again.

They might have considered that Edward Snowden’s disclosures of NSA documents have made him a folk hero for many Germans. They might have done well to weigh the benefits of espionage against the potential costs. They could even have contemplated telling the German authorities that they had a little problem, in a bid to repair trust.

But evidently they thought none of these things. John Emerson, the US ambassador, was duly summoned to the foreign ministry in Berlin. And not on just any day; he was invited to a “conversation” on July 4, when the American community throws a party for Berliners, who munch on hot dogs while their children bury their noses in ice-cream cones, and gratefully remember the “Luftbrücke”, when the US Air Force flew in food and medicine to sustain the city during the Russian blockade of 1948-49. German displeasure might have been inferred.

All that was missing was news that Germany learnt of the leak through a friendly tipoff from Russian intelligence. This news reached the chancellor during a trip to Beijing (her seventh). Standing next to Premier Li Keqiang, she acknowledged grimly that this incident was “very serious”. Her host’s response was to say that Germany and China are “both victims of hacking”.

The large business contingent in Ms Merkel’s delegation will have taken note. The head of Germany’s domestic intelligence service, Hans Georg Maassen, had despatched them with a public warning that the country’s small and medium-sized Mittelstand firms are the “easy prey” of systematic cyberespionage by Chinese intelligence, which he called an “overpowering foe”. All that was missing was news that German authorities learnt of the leak through a friendly tipoff from Russian intelligence.

Cue wild harrumphing in Berlin, from justice minister Heiko Maas mulling criminal action, via interior minister Thomas de Maizière threatening “360-degree” counter-espionage, to mutterings about expelling US diplomats. The Americans, meanwhile, are issuing limp promises to “work with” the Germans.

Both reactions are off the mark. But they ought to serve as a warning. Just a year after the first revelations about NSA spying in Germany, resentment still runs high in Berlin; a rare case in which elites are in sync with the public mood. And Washington’s feeble response is not so much a sign of guilt – though it is probably that, too – as of helplessness in the face of a secret state that appears to have outgrown political judgment or control.

Yesterday, German media were reporting that a new espionage case was being investigated – this time in the defence ministry. Mr Emerson promptly made another visit to the foreign ministry.

There is no time to lose. A nasty US-German spat on Nato’s role in the Ukraine crisis is brewing. Negotiations on a US-European free- trade agreement face bitter public resistance. Add a breakdown of trust over espionage and you could have a transatlantic trifecta of disaster by the autumn.

The writer is a senior transatlantic fellow with the German Marshall Fund

The Outlook for Yields

My Comments: Guggenheim Partners has recently been sending periodic macro insights about investments and opportunities for investors. Good stuff, so if investments interest you, I encourage you to grasp as much of it as you can.

global investingGlobal CIO Commentary by Scott Minerd of Guggenheim Partners – July 03, 2014

As U.S. economic growth gathers pace, yields on 10-year U.S. Treasuries should shift higher over the next two-three years, eventually moving as high as 3.25 – 4 percent.

While a broad-based secular increase in inflation will be a problem that comes most likely in the next decade, a number of technical and cyclical forces, such as healthcare and shelter costs, are working to push consumer prices higher over the next six months or so.

However, these forces are unlikely to spark sustained inflation in the near term, given that the U.S. unemployment rate is still quite high, the labor force participation rate has been on a downward trend for a number of years, and capacity utilization is still significantly lower than the threshold associated with a broad increase in consumer prices. In the medium-term, wage pressure will continue to rise and aggregate demand should improve. Rather than being the harbinger of an inflationary spiral many investors fear, that should be positive for economic activity.

Our research suggests that the yield on the U.S. 10-year Treasury bond should now be 3-3.25 percent, yet yields have been hovering around 2.6 percent. Keeping rates low in the near term are technical factors such as central bank accommodation flooding global markets with liquidity and some form of quantitative easing likely coming in Europe.

This week’s ADP report showing U.S. firms added 281,000 jobs in June, the most since November 2012, is the latest sign that the U.S. economic recovery is picking up steam. Over the next two to three years, given that economic growth is likely to be stronger, unemployment is likely to be lower, and inflation is likely to be higher, we will eventually start seeing fundamentals take over, resulting in higher yields on U.S. Treasuries. Assuming the U.S. Federal Reserve starts raising interest rates mid to late next year, we could see the U.S. 10-year Treasury bond reaching a cyclical high of somewhere around 3.75-4 percent.

U.S. Wage Pressure Approaching, But Not Here Yet

An improving labor market, brighter growth prospects, and higher capacity utilization are pointing to a U.S. economy approaching equilibrium. Historically, once the economy moves past equilibrium, whether defined by unemployment, output, or capacity, significant wage inflation tends to follow. Though we are drawing nearer to these levels, it is likely to take one year or longer before the gap is closed and broad-based wage inflation emerges.

Source: Haver, Guggenheim Investments. Data as of 7/2/2014. Note: We define the output gap using Congressional Budget Office (CBO) data on potential GDP, where the gap is the difference between actual and potential GDP as a percentage of potential GDP. We define the capacity utilization gap in the same way, using 82 percent as the natural rate. We define the unemployment gap using CBO data estimates of the natural rate of unemployment.

U.S. Data Points to Strong Second Quarter

• The ISM manufacturing index cooled slightly in June but remained well in expansion territory, inching down to 55.3 from 55.4.
• Personal Consumption Expenditures (PCE) rose less than expected in May, up 0.2 percent after April’s flat reading.
• The University of Michigan consumer confidence increased in June to the highest level this year, to 82.5 from 81.9.
• Pending home sales increased in May for a third consecutive month, rising by 6.1 percent from a month earlier, making it the best month in over four years.
• Construction spending rose for a second month in May but was below expectations, rising just 0.1 percent from April.
• Initial jobless claims inched down by 2,000 for the week ended June 21, to 314,000.
• Factory orders fell by 0.5 percent in May after rising during the previous three months.
• The core PCE deflator, the Fed’s preferred measure of inflation, rose in May for a third straight month, to 1.5 percent — the highest since January 2013.

China Manufacturing Positive, European Prices Muted

• Euro zone consumer prices rose 0.5 percent year over year in June, equaling May’s gain.
• Euro zone economic confidence unexpectedly declined in June to 102.0 from 102.6.
• Retail sales in Germany unexpectedly fell for a second consecutive month in May, decreasing 0.6 percent.
• Germany’s CPI accelerated to 1.0 percent year over year in June, the highest in four months.
• Spain’s manufacturing PMI rose to 54.6 in June, a seven-year high.
• The manufacturing PMI in the United Kingdom expanded to 57.5 in June, the best level this year.
• China’s official manufacturing PMI showed a faster pace of expansion for a fourth straight month in June, rising to 51.0.
• Japan’s Tankan survey of large manufacturers dropped to 12 from 17 in the second quarter. The outlook index, however, reached its highest level since 2007.
• Japan’s industrial production showed a small rebound in May, rising 0.5 percent after a 2.8 percent drop.
• Japan’s CPI climbed higher in May to 3.7 percent year over year, reflecting the recent sales tax hike. Core prices rose 3.4 percent, the highest since 1982.

Short Selling Drops to Lowest Level Since Lehman

roulette wheelMy Comments: Last Tuesday, I referenced an article with a compelling reason to think the current stock market move upward would soon go the other way. The author asserted the collapse was already under way. Here is an equally compelling article that suggests it’s not going to collapse, instead is going to continue going up.  (at least for a while!)

All this is to tell you no one has a clue. After the fact, everyone on the right side of history can claim they were right. But that’s like a broken watch which is right twice every 24 hours.

In my opinion, as a fincial advisor, the solution is to employ the skills of talented money managers, people with a laser like focus on one particular component of the overall market. Then make sure they have the ability to be in the market positively or negatively, or in cash. That way you really don’t care what happens, since your chances of increasing the size of your account are higher regardless of the history.

By Miles Johnson, Hedge Fund Correspondent / July 8, 2014
Hedge funds still unwilling to bet against the rally

Hedge funds have sharply scaled back their bearish bets that the value of stocks is about to fall, with the proportion of shares earmarked for short selling at its lowest level since before the financial crisis despite warnings of renewed market exuberance.

The percentage of stocks that have been borrowed by short sellers – who try to profit from a company’s share price falling – has dropped to the lowest level in the US, UK and the rest of Europe since the years before the collapse of Lehman Brothers, according to data compiled for the Financial Times by Markit.

The fall in short selling comes as Wall Street and markets in Europe trade at near record and multiyear highs, indicating that while some high profile hedge fund managers have warned of excessive market euphoria the industry is still unwilling to bet against the rally.

The amount of so-called short interest in the benchmark US S&P 500 index is hovering around 2 per cent of total shares in the index, close to the lowest level since Markit began collecting the data in 2006. In the European Stoxx 600 index, the level is similar at just over 2 per cent, while short interest in the UK FTSE All-Share index stands at less than 1 per cent.

This compares with sharply elevated levels in the years preceding the credit crisis, with the data showing short interest in the US in 2007 hitting a high of 5.5 per cent. The Markit data does not take into account all changes in stock indices over the period.

Buoyed in part by injections of cheap money from central banks, including the Federal Reserve’s asset-purchase programme, leading stock markets have continued to rise this year after enjoying strong gains in 2013, forcing some hedge funds to cut their short bets to avoid being squeezed.

As the FTSE All-World and S&P 500 have set records, volatility has faded away, with one measure, the Vix index or “Wall Street fear gauge” dropping to a near seven-year low.

“Historically, periods of low volatility usually lead to further periods of volatility, they are not precursors to a crisis.” – Antonin Jullier, global head of equity trading strategy, Citi

This has prompted a string of recent warnings from a number of leading hedge fund managers such as Baupost’s Seth Klarman, CQS’s Michael Hintze and David Einhorn of Greenlight Capital about the distortions being caused by ultra-low interest rates and bubbles in some asset classes.

Closely-followed short sellers such as Mr Einhorn have argued that US technology shares have reached “bubble” valuations, but have bemoaned the difficulty of making bets against them given the level of hype surrounding the sector.

“It is dangerous to short stocks that have disconnected from traditional valuation methods,” Mr Einhorn told his clients earlier this year. “After all, twice a silly price is not twice as silly; it’s still just silly”.

However, despite a jittery period for some technology stocks in the first half, investors have been undeterred by the warnings, with some analysts arguing that shares are still cheap compared with other assets.

“Historically, periods of low volatility usually lead to further periods of volatility, they are not precursors to a crisis,” said Antonin Jullier, global head of equity trading strategy at Citi.

Mr Jullier said that some hedge funds had become discouraged from short selling as a result of being repeatedly wrongfooted by rising markets.

“Hedge funds have underperformed in the first half and this means their appetite for risk has fallen over the year,” he said.

Rising stock markets have coincided with sharp price increases for other asset classes, ranging from Jeff Koons’s sculptures to junk bonds and London house prices, prompting concerns among some investors that markets have lapsed back into complacency.

A Few Other Examples of Murphy’s Law

My Comments: According to WordPress, whose templates I use for this website, this is my 900th blog post since I started this in April, 2011.

Now that the hurricane has gone off to harass someone else, please accept my wishes to you and your family for a fun July 4th.

Today is not a day to be thinking about the crisis de jour and all the crap that threatens to make our lives miserable. It’s a day to relax and reflect on good stuff. What follows is my feeble effort to add a little levity to the equation.

1. Ralph’s Observation:   It is a mistake to allow any mechanical object to realize that you are in a hurry.

2. Quantized Revision of Murphy’s Law:   Everything goes wrong all at once.

3. Zymurgy’s First Law of Evolving Systems Dynamics:   Once you open a can of worms, the only way to recan them is to use a bigger can.

4. Glatum’s Law of Materialistic Acquisitiveness:   The perceived usefulness of an article is inversely proportional to its actual usefulness once bought and paid for.

5. Etorre’s Observation:   The other line moves faster.

6. Lowery’s Law:   If it jams – force it.   If it breaks, it needed replacing anyway.

7. Knight’s Law:   Life is what happens to you while you are making other plans.