Tag Archives: financial advice

The Danger From Low-Skilled Immigrants: Not Having Them

My Comments: To Make America Great Again, the presumably well intentioned mantra for those leading the GOP these days, someone has to overcome ignorance of economics and start paying attention to reality.

A positive corporate bottom line is the driving force for a healthy US economy. To reach that goal, we need people willing to spend time in the trenches doing whatever grunt work is necessary. Despite machines that increasingly automate the grunt work, a supply of young people has to match the demand created until artificial intelligence takes over.

The supply of labor is not going to miraculously appear. A greater number of us are old and fragile, and fertility rates among young men are declining. Exactly who is going to look after all us old folks because we refuse to hurry up and die?

We should be encouraging immigration and refugees. Yes, there is a potential security threat, which implies applying resources to screen and maintain a reasonable level of security. And yes, someone is probably going to get killed or maimed or whatever when someone nefarious sneaks through.

The laws of supply and demand are well known. Right now we have an increasing demand for labor, which can only stabilize with either more people being allowed into the country, or a large increase in the cost of labor to force more of into the trenches. Either that or starve, in which case you die. Some would have that happen since dead people are less likely to vote against those wanting to restrict immigration.

Eduardo Porter \ August 8, 2017

Let’s just say it plainly: The United States needs more low-skilled immigrants.

You might consider, for starters, the enormous demand for low-skilled workers, which could well go unmet as the baby boom generation ages out of the labor force, eroding the labor supply. Eight of the 15 occupations expected to experience the fastest growth between 2014 and 2024 — personal care and home health aides, food preparation workers, janitors and the like — require no schooling at all.

“Ten years from now, there are going to be lots of older people with relatively few low-skilled workers to change their bedpans,” said David Card, a professor of economics at the University of California, Berkeley. “That is going to be a huge problem.”

But the argument for low-skilled immigration is not just about filling an employment hole. The millions of immigrants of little skill who swept into the work force in the 25 years up to the onset of the Great Recession — the men washing dishes in the back of the restaurant, the women emptying the trash bins in office buildings — have largely improved the lives of Americans.

The politics of immigration are driven, to this day, by the proposition that immigrant laborers take the jobs and depress the wages of Americans competing with them in the work force. It is a mechanical statement of the law of supply and demand: More workers spilling in over the border will inevitably reduce the price of work.

This proposition underpins President Trump’s threat to get rid of the 11 million unauthorized immigrants living in the country. It is used to justify his plan to cut legal immigration into the country by half and create a point system to ensure that only immigrants with high skills are allowed entrance in the future.

But it is largely wrong. It misses many things: that less-skilled immigrants are also consumers of American-made goods and services; that their cheap labor raises economic output and also reduces prices. It misses the fact that their children tend to have substantially more skills. In fact, the children of immigrants contribute more to state fiscal coffers than do other native-born Americans, according to a report by the National Academies.

When Should You Apply for Social Security

My Comments: Brian Stoffel has identified 3 critical elements for everyone not yet retired and receiving Social Security benefits. And they are not just about money and the role it plays in people’s lives. I could point out some flaws in his arguments, but the message is real.

Brian Stoffel | Apr 17, 2017

You can choose to take Social Security as early as age 62, and as late as age 70. When to claim your benefits is a question many retirees take a long time to consider. To make the best decision, it’s important to look at how your monthly benefits change based on when you begin receiving them.

Currently, the average retirement benefit check from the program is $1,360, and the average retirement age is the earliest option, 62. But if recipients waited, these checks could get much bigger. Here’s what it would look like for those born in 1954 and earlier:

As you can see, those aren’t small differences. On the one hand, if you wait until age 70, your monthly benefit will be a whopping 76% higher than if you claim right away. On the other hand, if you do decide to delay your benefits that long, you’ll go almost a decade with no Social Security income coming in even though it was an option.

While there are tons of different variables that affect when you should apply for Social Security benefits, the following three questions often play an outsize role.

1. How do you feel when you get up and go to work in the morning?
This may seem like an odd place to start, but hear me out. Most people worry about having enough money to retire — that is an important concern, and we’ll get to it in a bit. But there’s one big blind spot to tackle first: hedonic adaptation.

You’ve likely heard hedonic adaptation being used in the context of getting used to lifestyle improvements, as in, “Even after buying the new car to keep up with the Joneses, Mark was still miserable — that’s hedonic adaptation for you.”

But in truth, it works both ways: We can have much less materially, and not be nearly as depressed about it as we’d expect.

If you want proof, I point you toward a Merrill Lynch/Age Wave survey that came out in 2015. When respondents of different ages were asked how often they felt happy, content, relaxed, and/or anxious, here’s how they responded:

And lest you think that this was just a survey of wealthy respondents, it was “nationally representative of age, gender, ethnicity, income, and geography.”

The bottom line is that if you hate your work and you can make ends meet on Social Security plus other sources of income, you shouldn’t wait to apply for benefits.

2. Can you make ends meet?
Of course, we can’t forget entirely about money. In the survey mentioned above, 7% of retirees said retirement was less fun and more stressful than pre-retirement years. The main culprit: financial concerns.

Almost all retirees report spending less in retirement than while they were working, and these expenses continue to fall as people age. Of course, everyone has heard about rising healthcare costs — and it’s true that healthcare expenses do jump. But there’s a host of other realities that keep costs down: less money spent on transportation costs commuting to and from work, a drop in food costs as you can make your own food more often, and a house finally being paid off in full, to name a few.

In general, you’ll need to calculate how much income you’ll get from three streams:
• Social Security and/or pensions
• Withdrawals from your own retirement accounts, using the 4% rule
• Other forms of income

The “other” forms of income could come from rental properties you own or even part-time work.

The bottom line is that you should try living for six months on this income to ensure that it’s suitable.

3. Have you coordinated with your spouse?
Finally, we have to deal with the sobering reality that one partner often lives longer than another. In that situation, Social Security has a simple rule: The surviving spouse gets to either keep his or her current benefit, or assume the benefit of the deceased — whichever is larger.

It’s important to remember that, statistically speaking, wives will live longer than their husbands. And if husbands were the higher earners, they may want to consider waiting as long as possible to claim their benefit, as it maximizes what their wives will receive after they pass away.

In this respect, there are a dizzying number of variables to consider, and I suggest doing further reading to figure out which will be best for you and your partner.

In the end, if you can answer these three questions accurately, you’ve got a good grasp on the factors affecting when to claim Social Security benefits.

I Inherited a Roth IRA. Now what?

My Comments: More and more people have Roth IRA accounts. A common question about retirement is whether to draw money from their Roth IRA first or take money from their non-Roth retirement accounts first.

It depends. Any money not yet taxed is going to get taxed. Period. The Roth IRA money comes out tax free; the taxes have already been paid. If your non-spouse beneficiary is in a high tax bracket, it may be better for them to get it in the form of Roth money.

Most beneficiaries are simply happy to get unexpected money. If they have to pay tax, it’s not an issue. You can run a million scenarios and when all is said and done, it makes little difference in the grand scheme of things.

June 28, 2013 by Dan Moisand at MarketWatch.com

When you inherit retirement plans, the rules for how those funds are taxed and the options available to the beneficiary vary based on the type of account and whether the beneficiary is a spouse or not.

Today I explain to a non-spouse beneficiary some of the rules that apply to inheriting a Roth IRA. I also answer a reader question about one way to increase her Social Security payments even though she started taking benefits early at a reduced rate.

Q. My Dad is 74, and he has a ROTH IRA as well as a 401(k). When he passes away, my mom will inherit the retirement accounts, and then we his sons will. My question is can I, as a non spouse beneficiary, rollover the ROTH IRA into my personal ROTH IRA? — C.B.

A. No you cannot roll the Roth IRA money into your personal Roth IRA. Only spouses may do that. If your mother rolls the Roth IRA into her own Roth IRA, it is treated as though she had always been the owner of those funds, so those funds will continue to be exempt from Required Minimum Distributions (RMD), an attractive feature of Roth IRA’s. Also, she would name the beneficiaries. It is important to check that the beneficiary designations on all accounts match the wishes of the current account owners.

The beneficiary designation trumps anything written in one’s will or trust agreements. I saw a case in which the wife had a small IRA that named her church as primary beneficiary. When her husband died, she rolled his account into her IRA but did not change her beneficiary designation. When she passed away, the church was entitled to all of the funds. This was an unpleasant surprise to the beneficiaries.

You have two basic options as a non-spouse inheritor; take a lump sum or, transfer the funds into an account titled as an “inherited Roth IRA.” Taking the lump sum is pretty simple. The lump sum you receive is not subject to tax. Once you get your check, if you wish to invest any part of it, it will be taxed just like funds in any other non-retirement account.

Most inheritors with an eye on the long term prefer to rollover the money to an inherited Roth IRA. The assets continue to grow untaxed, you can choose your own beneficiaries and withdrawals are tax free.

You cannot, however, let all the account just sit in the inherited Roth IRA. By Dec. 31 of the year after the year in which the owner died, you must have begun taking required minimum distributions (RMD) annually. If you don’t make the RMD by that deadline, you will need to have withdrawn all the assets by the end of the fifth year after the year of death.

The RMD you will be subject to is based upon the IRS’s single life expectancy table. The value of the account on Dec. 31 of the year death is divided by the beneficiary’s life expectancy listed on that table to obtain the first RMD amount. For example, if you are 55 at the time, the table says your life expectancy is 29.6, you would divide the Dec. 31 value by 29.6. In the following year, you use the following Dec. 31 value and divide by one less year (28.6). The next year, use the value as of the next Dec. 31 and 27.6.

You mentioned you had brothers. There is one more step to consider. If your mom lists more than one person as beneficiary, you should have the shares of the account separated into individual inherited Roth IRAs by Dec. 31 of the year following the year of death. This enables each beneficiary to use their own life expectancy. Otherwise, distributions are calculated based upon the oldest beneficiary’s age causing distributions to occur faster than necessary.

This can be particularly important with non-Roth retirement money like a 401(k) in which distributions are taxable. Generally, beneficiaries wish to have the smallest RMD’s possible in order to control taxation better. A beneficiary can always take more than the RMD but the lower the minimum, the more flexibility in tax planning.

Again, make sure all the beneficiary designations on all accounts reflect the owner’s wishes. It should be noted that the rules are different if any of the beneficiaries are beneficiaries through a trust that is named as beneficiary of a retirement account. Naming a trust can be helpful but if not done correctly, can result in an acceleration of taxation.

Also, to accommodate an account holder’s specific wishes, many attorneys prepare customized beneficiary designations. Not all 401(k) plans will accept customized beneficiary designations so many will roll those funds into a traditional IRA.

Rates Won’t Skyrocket, So Ignore the Cassandra Chorus

My Comments: The last time interest rates started moving upward in a long term up trend was 1946. This lasted until 1981. Then they started moving down again.

Now, 36 years later, they have once again started upward. The central bank, known as the FED, started moving them back up about a year ago. Granted, the increases are tiny, but I believe it’s the start of an long, upward trend.

If you expect to live another 20 – 30 years, the financial landscape you’re used to is going to be very different. Rising interest rates are going to influence the value of your retirement accounts and other funds, the money you will use to sustain your standard of living going forward.

Just thinking about it could give you a headache…

By Scott Minerd, Chairman of Investments and Global CIO, Guggenheim Partners – July 17, 2017

When markets suddenly change short-term trends or direction, prognostication abounds to explain the most recent gyrations. Often, those who missed the move leading up to the sudden change by sticking to an earlier erroneous call will suddenly issue statements to vindicate the veracity of their earlier predictions. Others, looking to justify the conventional wisdom, will seize an opportunity as proof that the masses were right and the conventional wisdom, whether empirically true or not, still holds.

Such has been the events of recent days.

With the sudden rise of rates around the world, the pundits present the recent selloff as proof that long rates are bound to skyrocket as a result of any number of factors including reduction of the Federal Reserve’s (Fed) balance sheet, tapering of quantitative easing by foreign central banks, lurking inflation and growth, fiscal stimulus from Washington, D.C., and so on.

In moments like these, I think it is wise to step back and grasp the big picture. The Fed is on course to continue raising rates. If it does not, it is only due to weakening growth or inflation. Either way, case history tells us that the yield curve will continue to flatten.

As for ‎skyrocketing long rates, that seems unlikely during the current economic cycle. Virtually every business cycle ends with an inverted yield curve. If the yield on the 10-year Treasury note were to ‎rise to 3 percent, that would imply an overnight rate at 3 percent or higher. Using a number of metrics, an overnight rate of 3 percent would be so restrictive as to induce a recession.

Even the Fed, which has notoriously forecast rates higher than the market delivers, sees the longer term “terminal” rate (the apex of the policy interest rate during the business cycle) at 3 percent. Given the structural debt load on corporate balance sheets, a 3 percent short-term rate would ultimately prove unsustainable. With a cap on short-term rates around 3 percent, the likelihood that long-term rates could be sustained above 3 percent for any period of time is low.

Then again, there is a fairly good argument that the terminal short-term rate may be lower than 3 percent. Deflationary headwinds continue to restrain price increases. With declining energy and commodity prices, supply gluts in automobiles, competitive restraints on retail merchandise such as groceries and apparel, and a growing inventory of new apartments weighing on owner-equivalent rents, these headwinds are unlikely to dissipate anytime soon. Since inflation is tamed when real rates rise enough to choke off economic expansion, the lower the level of inflation, the lower is the nominal rate necessary to restrain it.

If that is the case, then the terminal rate is likely to be closer to 2 percent.

Only time will tell but that scenario argues for less policy tightening by the Fed as further rate increases are likely to slow the economy and inflation more than expected.

There is also the issue of valuation. Many routinely argue that bonds and stocks are overvalued yet the empirical evidence is sketchy.

As for interest rates, the last era of financial repression between the 1930s and 1950s resulted in long-term rates remaining below 3 percent for more than 20 years. The argument that 10-year yields need to be close to nominal gross domestic product (GDP) growth rates is equally unsound as, aside from the era of opportunistic disinflation from 1980 into early in the new millennium, 10-year yields on balance were below nominal growth rates for most of the past century.

Finally, the downtrend in long-term rates that began in the early 1980s is firmly intact. ‎To break that 35-year trend, the 10-year note would need to yield more than 3 percent for some period of time. Even if we did break that downtrend, history shows that rates will tend to move in a sideways consolidation for a number of years, often retesting the lows more than once.

The simple truth is that, while rates may trend higher in the near term, the risk is that we have not reached the point where the macro economy can sustain persistently higher rates. If anything, political, military, and market uncertainties would more likely lead to another sudden decline in rates rather than a massive spike upward.

Investors would be wise to ignore the growing chorus of Cassandra cries and look through the noise to the fundamentals. There are many things to be concerned about in the world but skyrocketing rates is not likely among them.

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.

Investing Defensively

My Comments: I posted recently that we had better revise our investment expectations downward if we are planning to use our retirement savings to sustain our standard of living for the next twenty years or so.

I attributed the likelihood of lower growth and investment return numbers on demographics and a rising interest rate environment. http://wp.me/p1wMgt-1Qz

The article below by James Hickman is long, full of charts, and technically ripe. You may easily get lost. But he echoes the same message as mine but mostly for those of you who are OK with playing the markets by yourself. If that’s not you, there are other ways to be defensive.

Below is his introduction to Part I of II. If you click on his name, you’ll also find Part II.

May 31, 2017 \ James Hickman

Retired Or Retiring In Next 15 Years? Better Get Defensive (Part I Of II)

Summary

  • Market timing is sensible in certain circumstances – like reducing US equities exposure now.
  • Always passively invest in public equities and fixed income – not alternatives – but asset allocation still requires active approach.
  • Financial healing power of “the long-term” is no remedy for max drawdowns in the retirement plan homestretch.
  • Portfolio implications of 3% ROI for another decade, 2% US GDP forever.

“Market timing is a loser’s game” is a misleading marketing slogan peddled by the long-only mutual fund machine. The mass cash movements in and out of public equity markets that cause market timing failure are rarely driven by disciplined, value-based decisions about asset allocation but rather by emotional investor capitulation to protracted trends at precisely the wrong times. The trite phrase is invariably trotted out when markets are most over-valued and risky – when investors should be selling but rarely are. Now is one of those times.

Recognizing that you should always use low-cost, passive vehicles in certain asset classes and pay for skill in others is not news. But the more important question is: How much should be allocated to each asset class? Asset class and investment strategy exposures, beyond just equities and fixed income, is critical to portfolio diversification and return variation (Brinson, Hood and Beebower – 1986; and Xiong, Ibbotson, Idzorek and Chen – 2010). But can asset classes be timed? The answer is yes.

The professional investment industry has always been animated by failed attempts to systematize alpha generation – to create a better mousetrap for delivering repeatable outperformance of the market and justify higher active management fees. Active managers continued their interminable streak of underperforming the broader markets in 2016. According to S&P Dow Jones Indices’ SPIVA US Scorecard for 2016, “Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks.”

This Is Not How A Bear Market Starts

My Comments: Today is Memorial Day, and the markets are closed in this country. It’s a day for us to instead remember those of us who gave their lives that we might continue with ours. Pray that fewer lives will be given in the years to come.

The following comes from someone whose name I do not know. But if you can wade through the math and graphics, you may find that the world is not about to end. At least financially.

Here’s how the author describes himself: “I have a degree in Math and Science from the University of Toronto, as well as a degree in education, also from U of T. I have traded private equity for 38 years and have developed a proprietary Price Modelling System which has provided me with consistent profitable trading success. In partnership with my computer scientist son, Aidan Gomez, we have automated this model using neural networks, and offer a Trade Alert service that lets subscribers replicate the trades we are involved in.”.

To see the charts, you’ll want to visit the source article HERE.

May 22, 2017 | ANG Traders

Summary
There has been much digital ink spilled trying to convince us that the bull market is on its last legs.

We present fundamental and technical reasons to support the idea of an ongoing bull market.

Black swans aside, this is not how bear markets start.

There has been, and continues to be, an inordinate amount of digital ink spilled promulgating the imminent demise of the bull market. Most of the arguments for this, center around the near-historic levels of certain metrics, such as PE ratios and S&P averages, but they ignore the factors that truly coincide with the launch of bear markets. In this piece, we will attempt to elucidate several of the metrics that we have correlated with bear or bull markets, and hopefully, show that the bull market is alive and well.

Rate Differential
When the 10-y minus the 2-y Treasury rate inverts, it has a way of marking the end of bull markets. When this differential turns negative, in conjunction with low unemployment, investors should look for an exit. Today, the unemployment rate is low, but not as low as in 2000 or 2007, and the 10-y minus 2-y rate is still a healthy +1%. It will take several sizable Fed rate hikes before the rate differential inverts (chart below). This does not look like the start of a bear market.

Fed Funds Rate

It is obvious that when the Fed raises rates, the bull market dies, but often when it comes to the market, what is obvious, is obviously wrong. In fact, three of the last four bull markets occurred while the Fed raised rates – the latest bull market being the exception (chart below). The Fed has lots of room to raise into a growing business cycle. Bear markets do not start when low rates are being raised.

Industrial Production
Except for a five-month period in 2002, a rising industrial production has coincided with a rising SPX. The chart below demonstrates this strong positive correlation. Bear markets do not start with rising industrial production.

GAAP Earnings

The Generally Accepted Accounting Principles (GAAP) earnings enjoy a positive correlation with the S&P 500. The GAAP earnings started rising two quarters ago, and the current quarter is shaping up to be positive also. Bear markets do not start with rising GAAP earnings.

Technical Indicators
The 8-month moving average remains above the 12-month moving average, the MACD is rising, the ADX is displaying a bullish pattern, and the RSI and stochastic are elevated, but they can remain elevated for long periods of time (chart below). This is not how bear markets start.

Investor Sentiment
Bull markets climb the proverbial “wall of worry.” There is a lot of geopolitical and intramural politics to worry about, and which are feeding the bull market. Bear markets do not start when there is fear around. They start when investors are confident and throw caution to the wind. The AAII investor sentiment indicator stands at a fearful 24% bullish sentiment, and 34% bearish sentiment (red and blue arrows respectively on the chart below). Bear markets start when bullish sentiment is over 50%, and bearish sentiment is under 30% (red and blue oval on the chart below). This is not how bear markets start.

In conclusion, the evidence presented paints a picture of a bull market that is still fearful and healthy. That is not to say that a black-swan won’t fall out of the sky and ruin the picnic, but judging from what we can and do know, a bear market is not imminent.