Category Archives: Financial Advice

The market will crash this year — and there’s a good reason why

My Comments: Frankly, I have no idea if it will or not, but I tend to pay attention when people smarter than I start talking about stuff that is clearly an existential threat to my financial well being and that of my clients, family and friends.

If the money you have saved is critical in terms of being able to pay your bills in the future, there are ways to protect yourself against downside risk and still participate in the upside promise of the markets.

Thomas H. Kee Jr. / President and CEO of Stock Traders Daily / April 25, 2018

The market is going to crash this year, and there is a very good reason why. The amount of money chasing stocks is drying up considerably, natural conditions are prevailing, and it is happening on the heels of the most expensive bull market in history.

The stimulus efforts of global central banks created a fabricated demand for stocks, bonds, and real estate, ever since the credit crisis, but as of April 2018 those combined efforts are now a drain on liquidity. As recently as last September the combined effort of the ECB and the FOMC was infusing $60 billion per month into these asset classes, like they had almost every month since the credit crisis — but now they are effectively selling $30 billion of assets per month. That is a $90 billion decline in the monthly demand for assets in seven short months.

Central banks are now a drain on liquidity, and it is happening when natural demand levels are significantly lower than where current demand for stocks, bonds, and real estate appears to be.

According to The Investment Rate — an indicator that measures lifetime investment cycles based on ingrained societal norms to identify longer term stock market and economic cycles in advance — we are currently in the third major down period in US history. The rate of change in the amount of new money available to be invested into the U.S. economy declines every year throughout this down cycle, just like it did during the Great Depression and stagflation. This down cycle also started in December of 2007.

Although the market began to decline directly in line with The Investment Rate’s leading indicator, the declines did not last very long. The Investment Rate tells us that the down period lasts much longer than just the credit crisis, and the declines The Investment Rate suggests are rooted in material changes to natural demand levels based on how we as people invest our money, so it identifies natural demand. The natural demand levels identified by The Investment Rate are much lower, and they decline consistently from 2007.

As much as The Investment Rate serves to identify natural demand levels, when stimulus was introduced by Ben Bernanke a second source of new money was born. The stimulus efforts by the FOMC and the ECB added new money to the demand side of stocks, bonds, and real estate, with the intention of spurring prices higher to induce the wealth affect. The policies were successful, asset prices have increased aggressively, but there are repercussions.

Asset prices increased so much that the valuation of the S&P 500, Dow Jones industrial average, Russell 2000, and NASDAQ 100 at the end of last year made them more expensive than in any other bull market in history. In other words, we just experienced the most expensive bull market in history, and the PE multiple of 25 times earnings on the S&P 500 was driven by the constant capital infusions coming from central bank stimulus programs.

Not only were these programs unprecedented given their size, but they also told us what they were going to buy, when they were going to buy it, and how much they were going to buy, every month, in advance, every year since the credit crisis. At no time in history has Wall Street been able to identify when buyers were going to come in like they have during this stimulus phase.

However, now the stimulus phase is over and not only are these central banks no longer a positive influence on liquidity, but they are now removing liquidity from the financial system as well.

This is happening at a time when natural demand levels as those are defined by The Investment Rate are also significantly lower than where demand currently seems to be, and that creates a double whammy on liquidity. The demand for equities this year is far less than it was last year as a result of these two demand side factors. Because price is based on supply and demand, and because demand is cratering, prices are likely to fall. This applies to stocks, bonds, and real estate.

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What’s Next For Investments???

My Comments: You have not heard much from me lately. That’s because I’ve been spending hours and hours building an internet course on retirement planning. I’m not there yet but soon will be. Keep following this blog and you’ll get an announcement when it’s ready.

In the meantime, we’re at the end of Quarter 1 of 2018 and it was an interesting quarter for a lot of reasons. For those of you with time on your hands and sufficient interest to explore the details, the following article from The Heisenberg Report is revealing. Whether it helps you make money or helps you not lose money remains to be seen.

Go HERE if you are ready to wade through 8 pages of commentary and graphs. The conclusion you will discern is that market complacency is diminishing rapidly and that something uncomfortable is likely to happen soon.

A Time for Courage

My Comments: In past blog posts I’ve shared the words, and wisdom, of Scott Minerd. He’s one of the principal brains at Guggenheim Partners, a major player on the world stage when it comes to investing money. (BTW, this pic of Scott is from 12/21/2015)

Right now many of you are rightly worried by the fall in equity prices on Wall Street, if not across the planet. Don’t equate a crash on Wall Street with the American economy. What it means is there are strong feelings about the high valuations that we see in the DOW and the S&P500.

Is it time to bail out and wait for the bottom to appear? Probably not. But don’t take my word for it. Read below what Scott is saying and then sit back. From a strategic perspective, you need to decide how much of your overall portfolio is exposed to the markets and how much of it should be protected against severe downside movements. There are insurance policies available that make this possible and the price is reasonable.

By Scott Minerd, Chairman of Investments and Global CIO – 02/06/2018

In what otherwise might have been another quiet Monday with investors lulled to sleep by the low volatility world of the past year, I was surprised to be suddenly overwhelmed with a deluge of calls late in the day from clients and the media asking for an explanation of the collapse in equity prices. My answer in a word was simply “rates.”

The backup in bond yields has been significant, with the 10-year Treasury rising 23 basis points in the last month, and hitting a recent peak of 2.88 percent. The tax cut euphoria drove stocks up at an unsustainable pace, but concerns have been building about bond market supply congestion following the Treasury Department’s refunding announcement, and Friday’s employment report has increased speculation that the Fed may need to become more aggressive to head off potential inflationary concerns.

Contributing to inflation worries is impressive wage growth. Hourly earnings were up 0.3 percent in January and upwardly revised for December to 0.4 percent, supporting the concept of wage growth of 4 percent or more for 2018. These data are trending up even before we fully digest changes to the minimum wage and the effect of wage increases and bonuses related to the new tax plan. These are likely to give a lift to consumption, which will reinforce more labor demand, and thus drive unemployment lower.

Dare I say that some in the market are becoming concerned that the Federal Reserve may be falling behind the curve, especially as evidenced by the recent steepening in bond yields? This is also a possibility. The consensus for future rate hikes, was moving to four rate increases in 2018, and possibly more.

I think that the setback (the largest one-day point decline in history) is not over but we are approaching a bottom. This correction is a healthy development for the markets in the long run, and the equity bull market, while bloodied, is not broken. The lower bond yields will help but the curve steepening speaks more of flight to safety in times of market turmoil than concerns over the economy.

Ultimately, my previously held market views are intact. I still hold the opinion that the favorable economic fundamentals that are in place, where we are in the business cycle, the breadth of the market, and levels of current valuations are supportive of equities. Buying here will probably make investors happy campers later in the year, but the tug of war between stocks and bonds is just getting under way. This may be the big investment story for 2018.

The Perfect Storm (Of The Coming Market Crisis)

My Comments: We do not live in a perfect world. Flaws are all around us. As responsible adults, we always try to make good decisions, and mostly we succeed. Until we don’t.

If you expect to live another 20 or 30 years, the money you’ll need to pay your bills has to come from somewhere. If you’ve already turned off the ‘work for money’ switch and retired, you’re dependent on work credits and saved resources. Maybe you have a pension that sends you money every month. Good for you.

If you are still working, you’re probably setting aside some of what you earn so you can someday retire and get on with the rest of your life without financial stress. At least that should be your plan.

This article from Lance Roberts, a professional money manager, needs to be read and understood. I’m not going to copy everything he says, but I do encourage you to follow the link I’ve put below. Make an effort to understand what he’s telling us. Your financial life may depend on it.

Know also there are ways to shift the risk of loss to a third party. For a fee, you get to enjoy the upside and avoid the downside. If you do live for another 20 – 30 years, where is your money going to come from?

Lance Roberts published this today, November 28th, and it can be found HERE.

FIA: Dream Investment or Potential Nightmare?

My Comments: The article below by Jane Bryant Quinn in the AARP Bulletin are fine, as far as they go.

My initial reaction was to reject her comments out of hand as they reflect a bias that to my mind is not accurate. But then I decided to expand on her thoughts. I apologize if I made this too technical for some of you.

Most of the Fixed Index Annuities (FIA) sold are probably very close to having the features and limitations she describes. If there is indeed $60B flowing into FIAs each year, then they are being sold by every run of the mill agent across the planet. And most of those are probably selling whatever their company is telling them to sell. A strong reason for them to sell FIAs is that they make good money for the company. If the client benefits, it’s an incidental benefit for most of them.

I decided to add my two cents worth, below in red, based on what I know after 40 plus years as an entrepreneur in financial services, and the qualities and features of the FIAs I’ve chosen to present to potential clients. You should draw your own conclusions about the merits of FIAs, or the lack thereof.

by Jane Bryant Quinn, AARP Bulletin, October 2017

I’m getting mail about an apparent dream investment. It promises gains if stocks go up, zero loss if they fall and guaranteed lifetime income, too. What’s not to like? Plenty, as it turns out.

The investment is called a fixed-index annuity, or FIA, and it’s issued by an insurance company. Sales are booming — $60.9 billion in 2016. FIA contracts vary, but this is how they work. (Sales are booming, not so much because of the financial benefits, but because they offer emotional benefits as well. ie “I get to stay invested in the markets and I won’t lose any money…”)

You buy the annuity with a lump sum, which goes into the insurer’s general fund. You are credited with a tax-deferred return that’s linked to the market — for example, to Standard & Poor’s index of 500 stocks. If the S&P rises over 12 months, you receive some of the gain. For example, your credits might be capped at an increase of 5 percent, even if the market soars. If stocks go down, you take no loss — instead, your FIA receives zero credit for the year. ( Many FIAs do have caps limiting the upside potential. The one’s I offer clients have NO caps. If the index goes up 50%, you get 50%. If it goes down 50%, you get nothing credited. You have shifted the downside risk to an insurance company. It also means that when the market goes back up again, you are starting from zero and not from somewhere lower. That in turn means at the end of the next crediting period, you are higher than if you were starting in a hole somewhere.)

Each year’s gains or zeros yield your total investment return. . (Your money is NOT invested in an index, whether it’s an S&P500 index or any of dozens of other indices. The yield on bonds inside the insurer’s general fund is used to buy option contracts and the return given the client is a function of the performance resulting from those options.) But I see problems:

Low returns. Salespeople might claim that FIAs could earn 6 or 7 percent a year. But with fees, they’ll struggle to match the low returns from bonds, says Michael Kitces of the wealth management firm Pinnacle Advisory Group in Columbia, Md.(The product I prefer buys 2 year option contracts with the bond yield. Over a ten year period, any ten year period since 2000, a 2 year option result exceeds two consecutive one year options 87% of the time. Some of this is due to the fact that 2 year options are cheaper than 1 year options. In this scenario, a 6% geometric mean return is not unreasonable.)

High fees. You can’t find out what you’re paying for investment management. Costs are buried in the black-box system used to adjust the credits to your account. Sales commissions run 5 to 7 percent and may be hidden, too. Under the new fiduciary rule, which requires advisers to put your interests ahead of theirs, commissions have to be disclosed if you’re buying the annuity for a retirement account, but not for other accounts.

Salespeople sometimes claim, falsely, that their services are free. (Numbers shown in hypothetical illustrations provide by sales agents are always net of fees. At least the ones I show prospective clients. Yes there are obviously costs inside FIAs. I’m sorry but no one works for free. What is critical, however, is the net return to you the buyer.)

Profit limits. Every year, the insurer can raise or lower the amount of future gain credited to your account. You face high risk that returns will be adjusted down. (Yes, this happens. It’s a function of market cycles, of interest rates in general, and the performance of the index chosen. The FIAs I offer have NO CAPS and will credit whatever the option used calls for.)

Poor liquidity. You can usually withdraw 10 percent in cash, each year, without breaking your guarantee. But you’ll owe surrender charges if you need your money back before five or 10 years are up. You might also forfeit some gains. ( This lack of liquidity is the price you pay for shifting the risk of loss to an insurance company. It’s the same thing you do with your car, your house, your life when you buy life insurance, etc. The benefit to you from this ‘cost” is the avoidance of downside risk associated with market corrections. Without the ability to offset this risk to an insurance company, many people opt instead for ‘guaranteed’ returns which actually means you are guaranteed to go broke if you get less than the increase in the cost of living. The cost of a guaranteed returns might mean you run out of money sooner.)

Lifetime benefits. For about 1.5 percent a year, you can add a “guaranteed lifetime withdrawal benefit” to your FIA. Promised yearly payments run about 5 percent. But, Kitces asks, why do it? Your basic FIA already provides a lifetime income. What’s more, 5 percent is not a return on your investment. The insurer is merely paying you your own money back, in 5 percent increments — and charging you 1.5 percent for the “service.” If you live long enough, you’ll exhaust your money and the insurer will pay, but that doesn’t happen often. ( I choose not to offer these anciliary benefits to clients. They serve to make more money for the company by playing to your fears.)

For a guaranteed income, try a plain-vanilla immediate or deferred annuity. It’s cheaper, and you’re not apt to be led astray. (It’s possible you will be led astray. The rules today do not support a fiduciary standard. They should, but our current administration is working hard to avoid that outcome. It’s back to buyer beware despite the best efforts of some who think all financial advisors should be legally required to work in a clients best interest.)

On balance, Jane Bryant Quinn’s comments are essentially correct. But only if you are talking about the arguably poor contracts that so many companies and their agents are interested in selling. If you find someone who is happy and willing to act in your best interest, you are much more likely to find FIAs that resemble the contracts I prefer for my clients. They are a way for you to stay invested in the markets and at the same time, remove the risk of market losses within a crediting cycle.

Protect Yourself Against Cognitive Decline

My Comments: Readers of my posts know I usually talk about money or some aspect of it. My challenge over the years has been to assess the financial literacy of whomever I’m talking with. And that challenge increases with age; both mine and that of my friends and clients.

This article might start a useful conversation between you and your children and/or other family members. I’ve had clients reach the end of their lives leaving loved ones totally ignorant about their financial lives. It can dramatically increase the pain and frustration of those they leave behind.

by Danielle Howard \ Aug 12, 2017

You could lose the ability to manage your finances and not know it

Many people work hard to make sure there are ample assets to provide for the go-go, slow-go and no-go season of life. Have you ever considered how the mental capacity to manage those resources will change as you age?

A study done in January of 2017 by the Center for Retirement Research at Boston College delves into how cognitive aging could affect financial capacity.

Your financial capacity is the ability to manage your financial affairs in your own best interest. It scopes a broad range of activities ranging from rudimentary money skills (understanding the value of bills and coins) to complex activities such as identifying assets and income, exercising judgment around risk and return of investments or comprehending tax implications of purchases or sales.

Many activities in our financial lives are based on “crystallized” intelligence. This is the knowledge and skills we have gained over time, also known as financial literacy. These are the practical, day to day financial applications or procedures in our lives. It is heightened with the level of involvement in family monetary matters. With normal cognitive aging, knowledge remains largely intact throughout our 70s or 80s.

Our “fluid” intelligence incorporates memory, attention and information processing. As our wealth grows, so does the need to track where it is, and how to best use it for what is important to us. This “fluid” aspect of our intellect can start to decline as early as age 30.

The research found that individuals who age normally are more likely to develop deficits in the area of judgment over their ability to carry out the basic tasks. However, there are cautions in both areas of capacity.

Many people in their fall season are competent of managing the “crystallized” aspects of their financial lives. If a person has not taken an active role in the family finances, they are vulnerable to losing capacity in this area. A “financial novice” may be a person that has had to take over the responsibilities of managing the family finances in the event of a death or incapacitation of another family member. Women who lose a spouse and have not been involved in the family finances are highly vulnerable to losing capacity in this area.

Cognitive impairment, ranging from mild (CMI), to dementia primarily affects financial judgment — the “fluid” intelligence”. This can pose challenges in that a person can feel confident and remain “knowledgeable” about day to day activities, but their impaired judgment makes them more likely to become victims of fraud. As people loose both the “crystallized” and “fluid” elements of their intellect, they are additionally exposed to financial abuse by caregivers.

Since a critical characteristic of cognitive decline or impairment is the unawareness of the deteriorating state, how can we protect ourselves and our loved ones?

1. Become financially literate. I have heard too many stories that started with “my spouse is the money person, I just let them take care of it”. Educate and empower yourself around everything financial. Start somewhere and keep learning.

2. Educate yourself on the aging process. Talk to your elder family members as to what they are experiencing. Embrace and make the most out of it. Do the best you can with your choices to maximize your health in all areas of your life during this season.

3. Build trusted relationships. That includes your relationships with friends, family and advisers (health, spiritual, financial). Make sure everyone has your best interest in mind and communicate with each other. Transparency, integrity and honesty will serve you well.

Danielle Howard is a Certified Financial Planner practitioner. She’s the author of “Your Financial Revolution: Time to Recognize, Revitalize, and Release Your Financial Power.”

When Will the Bull Market End?

My Comments: Be assured, I have no idea. But then, I don’t know what I’m going to have for lunch either. All I know is that I will have lunch and one of these days, this bull market will end.

The trick is to understand that it will end, and if you’re not ready to watch a ton of your money disappear, then you have to be ready. Some of you may have enough money that you really don’t give a damn. Good for you.

But if you worry about this, even a little bit, then you should talk with someone who has some answers. Someone you can relate to. I promise it won’t hurt much.

By Anne Kates Smith, Senior Editor @ Kiplinger, June 26, 2017

As the second-longest bull market in history makes its way into its ninth year, many investors are understandably asking: When will it end? We’d all be rich if there was a foolproof way to figure that out. But we can make some educated guesses.

One thing to remember is that bull markets don’t die of old age alone. Something’s got to kill them. And the surest weapon is a recession. That’s not always the case. There have been bear markets without a recession, as the crash of 1987 shows. But many of the worst downturns have been accompanied by a recession – or, more accurately, followed by one. The Great Recession that began in December 2007 was preceded by the start of a bear market in October of that year that went on to lop 57% off stock prices. The recession that began in March 2001 followed a March 2000 market peak that initiated a 49% stock decline.

False alarms are frequent, says economist and market strategist Ed Yardeni, of Yardeni Research. “The next bear market will start when the market anticipates the next recession – and turns out to be correct. The market has anticipated lots of recessions since 2008 that have turned out to be buying opportunities,” says Yardeni.

When recessions do pair with stock market peaks, they can do so immediately, as with the concurrent start of the recession and bear market of July 1990, or they can lollygag more than a year behind. On average, recessions begin 7.7 months following a stock market peak, according to market research firm InvesTech Research.

If we only knew when the next recession would begin. Well, Yardeni has a date in mind: March 2019. He bases his determination on the average number of months the economy has continued to expand after it has reached its previous peak, going back to the early 1970s. Counting from November 2013, which is when the economy finally surpassed its 2007, prerecession peak, Yardeni arrives at March 2019.

The date is not an official forecast, says Yardeni, who adds that it comes with no guarantees and plenty of questions. “What do we know today that suggests that March 2019 is a realistic date, or that a recession will come sooner or later? Right now, March ’19 looks realistic,” says Yardeni. “But if pressed,” he adds, “I’d say it might be later.” If the economic cycle sticks to the averages and if the stock market does, too – both big “ifs” – then investors should look for a market top around August of next year.

4 signs of recession

Sam Stovall, chief investment strategist at investment research firm CFRA, looks at four indicators when he’s searching for a recession on the horizon. Every recession since 1960 has been preceded by a year-over-year decline in housing starts, says Stovall. The dips have ranged from a 10% decline to a drop of 37%, and they have averaged 25%. The most recent report on housing starts showed a decline of less than 3%. “So we’re on yellow alert, not red,” says Stovall.

Consumer sentiment is another signpost. Before a recession kicks in, you’ll typically see an average decline of 9% in the University of Michigan’s monthly sentiment index compared with the previous year, says Stovall. Current reading: up 2.4%.

A drop over a six-month period in the Conference Board’s Index of Leading Economic Indicators means trouble, too, with declines of 3%, on average, registering ahead of an economic downturn. Latest six-month change: up 3%.

Finally, when yields on 10-year bonds dip below the yields on one-year notes – known as an inverted yield curve – look out, says Stovall. Ominously, long-term rates recently have been under pressure while the Federal Reserve pushes short-term rates higher. “We’re getting a flatter yield curve, but nowhere near an inversion,” says Stovall. His conclusion: No recession is in sight.

Before you fixate on the twin risks of recession and a bear market, ponder a third risk – exiting a bull market too early. The payoff in the final year of a bull market is historically generous, with returns, including dividends, averaging 25% in the final 12 months and 16% in the final six months.

Nonetheless, investors have every right to ratchet up the caution level at this stage of the game. Now is a good time to make sure your portfolio reflects your stage in life and your risk tolerance. Stick to a regular rebalancing schedule to lock in gains and maintain the appropriate balance between stocks, bonds and other assets, domestic and foreign. And whatever you do, make sure your portfolio is where you want it to be before you go on summer vacation next year.