Tag Archives: financial advisor

How Jobs Are Created in Our Economy

pieter-bruegel-the-younger-proverbs-2My Comments: The actual title that caused me to read this article follows my comments. Since man began gathering in tribes, society was to some extent defined by the jobs it’s members performed and how that justified their existence in their tribe. It’s just a lot more sophisticated these days.

Jobs change over time; no one graduates from high school today expecting to find work as a haberdasher or a milkman. Factory jobs have disappeared since we don’t have factories like we used to. So how do new jobs get created in modern society? Henry Blodget has some good thoughts about this.

Sorry, Donald, rich people like you and me actually don’t create the jobs

Henry Blodget | Oct. 12, 2016

One of the seemingly less-controversial things that Republican presidential nominee Donald Trump says on the campaign trail is that, as a successful businessman, he has “created thousands of jobs.”

That is a common refrain among entrepreneurs, investors, and executives like Trump: “Rich people create the jobs.”

It sounds persuasive. It just doesn’t happen to be true.

The story that “rich people create the jobs” goes like this: By starting and directing America’s growth companies — and hiring the people who staff them — entrepreneurs and investors create the jobs that sustain everyone else.

When my partners and I started Business Insider nine years ago, for example, there were no jobs. Now Business Insider employs about 400 people. So, voila, we created 400 jobs!

But entrepreneurs and investors like Trump and me actually don’t create these jobs — not sustainably, anyway.

Yes, we can create jobs temporarily, by starting companies and funding losses for a while. And, yes, we are a necessary part of the economy’s job-creation engine. But to suggest that we alone are responsible for “creating” the jobs that sustain ~150 million working Americans is the height of self-importance and delusion.

So, if rich entrepreneurs and investors like Trump and me don’t create the jobs in our economy, what does?

A healthy economic ecosystem — one in which most participants (especially the middle class) have plenty of money to spend. This ecosystem starts with a company’s customers.

A company’s customers buy the company’s products. This provides cash that allows the company to hire people to produce, sell, and service those products. If the company’s customers and potential customers go broke, the demand for the company’s products will collapse. And the company’s jobs will disappear, regardless of how brilliant or well-intentioned the entrepreneurs or investors are.

Yes, entrepreneurs are an important part of the company-creation process. And, yes, so are investors, who risk capital in the hope of earning returns. But, ultimately, whether a company continues growing and creates self-sustaining jobs is a function of people’s desire and ability to pay for the company’s products, not the entrepreneur’s vision or risk-tolerance or the investor’s capital.

At Business Insider, for example, the money to pay the paychecks of the 400 of us who work here (including me) does not come from me. It also does not come from our owners. It comes from our readers, who buy our subscriptions, event tickets, and other products, and from our clients, who buy advertising.

Yes, to maintain our jobs (and help create new ones), my colleagues and I have to continue to create and distribute a service compelling enough that people want to use it.

But we can’t do it alone.

Saying “rich people create the jobs,” in other words, is like saying that “seeds create trees.” Seeds do not create trees. Seeds start trees and direct their growth. But what actually grows and sustains trees is the combination of the DNA in the seed with the soil, sunshine, water, atmosphere, nutrients, and other factors in the environment that nurture life.

If you think seeds create trees, try planting them in an inhospitable environment. Plant a seed in a desert or on Mars, and the seed won’t create anything. It will die.

So, next time you hear Mr. Trump say he has “created thousands of jobs,” wag your finger at him. Say: “Now, Donald, that’s not really true. You helped create thousands of jobs. But your investors, employees, and customers and America’s robust economy, infrastructure, and legal system played a far bigger role.”

Rich people don’t create the jobs in America.

Our economy creates jobs.

We’re all in this together.

Calculating Required Minimum Distributions From a Tax-Qualified Retirement Account

income taxMy Comments: OK, I’m not a CPA and I’m talking about a tax matter. Please don’t call the FBI on me. If you have money in an account and it it got there before income taxes were applied to the money you earned, it’s known as a “qualified account”. Simply put, it “qualified” for special treatment by the IRS.

The offset to this is that in exchange for you NOT treating that money as taxable when you earned it, the IRA has imposed rules saying WHEN you must pay income taxes on that money. The incentive for all this is to encourage people to set aside money while they are working so they will have more when they are NOT working, ie retirement.

The Required Minimum Distribution (RMD) rules come into play when you reach age 70½. The requirement is you must start taking money out of those accounts or there is a disincentive that will cause you financial pain.

By Sean Williams | October 15, 2016

The United States may have the highest GDP of any country on the planet, and Americans may enjoy an above-average standard of living, but that doesn’t mean we have the best financial habits.

According to St. Louis Federal Reserve, the U.S. personal household savings rate in August was just 5.7%. This is well below most developed countries, about half the rate of what Americans were saving 50 years ago, and markedly lower than the 10% to 15% figure that financial advisors recommend consumers save. Per GoBankingRates’ latest survey, 62% of Americans have less than $1,000 in savings.

Yet here’s the irony of these figures: Americans have a bounty of tax-advantaged retirement options at their fingertips practically begging to be used. Three of the most common of these tools are the Traditional IRA, Roth IRA, and employer-sponsored 401(k).

Americans have an abundance of tax-advantaged retirement options

Of the three, the Roth IRA has probably witnessed the strongest growth this decade. Beginning in 2010, lawmakers altered the Roth IRA conversion rules. This allowed people who had previously been unable to contribute to a Roth because they earned too much to make the switch. Though a Roth IRA doesn’t provide an upfront tax benefit, it does allow a persons’ money to grow completely tax-free for life, so long as no unqualified withdrawals are made prior to age 59 1/2. It’s this potential for tax-free income during retirement, as well as the financial flexibility afforded by the Roth IRA — contributions (not to be confused with investment gains) can be withdrawn at any time, and for any reason, without tax or penalty — that’s made it such a popular retirement option.

But, no retirement plan has more active accounts than a 401(k), and the number of Traditional IRA accounts still outnumbers Roth IRAs. Both the Traditional IRA, which allows for a maximum contribution of $5,500 annual for people aged 49 and under and $6,500 for seniors aged 50 and up, and 401(k), which allows for contributions of up to $18,000 and $24,000, respectively, among those same age ranges as the Traditional IRA, are tax-deferred investment tools. This means that they can help reduce your taxable income in the current tax year, and that your investments can grow on a tax-deferred basis. However, once you retire, you’ll be required to pay ordinary income tax on the money you withdraw from a Traditional IRA and/or 401(k).

How to calculate your required minimum distribution

There’s another factor retirees should probably acquaint themselves with if they plan on utilizing a 401(k) plan or Traditional IRA during retirement: both plans have required minimum distributions, or RMDs. In plain terms, there’s a formula that determines how much money you’ll be required to withdraw from these retirement plans every year. Failing to do so could result in hefty tax penalties of up to 50% on the amount you should have withdrawn.

How do you calculate your RMD? Let’s take a closer look.

In order to calculate your RMD, you’ll need to know three figures:
• The age you’ll turn in 2016.
• The applicable divisor associated with that age (which we’ll get to in a moment).
• The monetary value of your 401(k) or Traditional IRA. ( as of 12/31/XX of the year immediately preceding the year for which you are making the RMD calculation)

In order to locate your applicable age-dependent divisor, use the following table:

As you can see, the applicable divisor decreases over time, requiring you to make larger distributions as you age.

As an example, a Government Accountability Office study in 2015 found that persons aged 65 to 74 had an average of $148,000 in retirement savings. Assuming you’ll turn age 70 in 2016, the divisor you’d use is 27.4 based on the table above. In order to determine your RMD in a given year you’ll divide your current account balance into the divisor (i.e., $148,000/27.4). In this instance your RMD in 2016 would be $5,401. Failing to withdraw this amount from your 401(k) or Traditional IRA could lead to a 50% penalty.

Investing shouldn’t stop when you retire

However, there’s an oft-overlooked point about RMDs: continued investment in a 401(k) or Traditional IRA could still lead to portfolio growth and/or RMD replacement well after your 70th birthday. Below is a table detailing the required rate of return you’d need in your 401(k) or Traditional IRA to maintain your account balance following your withdrawal. These calculations are provided by the Financial Industry Regulation Authority, and they assume beginning-of-the-year distributions. (Note: I’ve not included this table here. If you need to see it, go HERE )

What you’ll note is that in the 14 years between ages 70 and 84 the required rate of return to maintain your account balance from one year to the next is lower than 7%. The reason this figure is of such importance is that historically the stock market has returned 7% per year, inclusive of dividend reinvestment.

It’s impossible to predict what the stock market will do in the short-term, but over the long run the stock market tends to head higher, as the data clearly shows. What this implies is that if retirees continue to invest for their future, they may be able to hold off on seeing any real depletion in their retirement accounts until their mid-80s. Again, this makes some very broad assumptions that the stock market continues to perform as it has in the past; but the data is suggesting that continuing to invest could be of great benefit to seniors and their tax-advantaged retirement accounts.

(Note: there is an effective RMD calculator to be found HERE: )

Would The Donald Be Good For Business?

US economyMy Comments: Clients ask me what is likely to happen to their investments if Donald achieves the White House. Frankly, I have no idea. You might as well ask me what I’m having for lunch next Monday; I have no idea.

But his candidacy and his expressed values will influence how he might think and act on economic issues over the next four years. It is already having an effect across the world. And it’s not good.

This article came from a news feed I follow and was originally published by the Foundation for Economic Education. (https://fee.org/ )

By Jeffrey A. Tucker | 10/15/16

The public-relations disaster that Trump has caused the GOP won’t soon be repaired.

But I’m worried about another, and ultimately more serious problem: the damage that Trump has inflicted on the reputation of capitalism, business and commerce – the very basis of our standard of living that is forever under attack. Trump has given no one a reason to support capitalism and every reason to regard it as dangerous, hateful and aggressive.

Think of it. At long last, a successful businessman with no prior political experience received the nomination of a major political party. For those of us who celebrate markets and entrepreneurship, you might think this would be something to celebrate.

Except that it’s not. The whole Trump phenomenon has created a terrible mess for the reputation and cause of economic liberty. It’s a correctable setback in the PR war, to be sure, but active explanation is necessary.

The Cartoon Capitalist
The point was underscored by the first presidential debate. Clinton cited the many instances, now heavily documented, in which Trump had stiffed workers.

Clinton: I have met a lot of the people who were stiffed by you and your businesses, Donald. I’ve met dishwashers, painters, architects, glass installers, marble installers, drapery installers, like my dad was, who you refused to pay when they finished the work that you asked them to do.

We have an architect in the audience who designed one of your clubhouses at one of your golf courses. It’s a beautiful facility. It immediately was put to use. And you wouldn’t pay what the man needed to be paid, what he was charging you to do.…

Trump immediately shot back without thought: “Maybe he didn’t do a good job, and I was unsatisfied with his work.”

The response seemed to concede the truth of what she said. The message here is that capitalists have all power and pay when they want, as if contracts have nothing to do with it. The rich have all the power to decide whether to pay, he implies.

We’ve all known people, rich and poor, who fail to live up to their commitments. This is not something markets reward; indeed the opposite is true. Markets reward promise keeping, even mandate it.

The truth is that in the world of business, Trump has a very bad reputation. Many institutions and people will not deal with him. In retrospect, it makes sense why he would choose politics, a terrain where you can fool more people for longer than you can in the business world.

Next during the debate Clinton accused him of not giving to charity (he didn’t dispute it, and there’s been no documented record of his charitable giving) and claimed he paid no taxes. Trump’s instant response: “That makes me smart.”

For those who claim that the rich are getting a free ride at the expense of everyone else, this response was the vindication of their most paranoid fantasies.

Finally, Clinton accused Trump of profiting from the housing collapse. Trump shot back: “That’s called good business,” seeming to show zero sympathy for the millions who lost their savings during that disaster.

The real story of that crash is that Wall Street paid a heavy price and got bailed out by the political system just as the markets were working to punish bad judgment.

Looking at Trump’s behavior that night, you have the leftist caricature of a rapacious looter who cares about no one, wins as everyone else loses and pays nothing back to the society he loots. It’s straight out of Marxian central casting.

Not True
For decades, advocates of market freedom have worked to change this impression of capitalists and capitalism. Milton Friedman rightly pointed out that the main beneficiaries of capitalism are the poor and the workers. The natural state of humanity is desperate poverty; creating wealth to lift everyone out of the muck requires enterprise and private property.

Ludwig von Mises worked mightily to demonstrate that if anyone has power within the capitalist economy, it is consumers, not producers. It is their decision to buy or not to buy that determines how resources are used and who profits.

The real story of markets is that profits are extremely hard to maintain in a highly competitive environment; the innovation and service to society must never stop.

And countless activists in our own time are working to free the lives of small entrepreneurs who have their innovations blocked by regulations, taxes, zoning controls and trade restrictions.

Now Trump comes along and seems to undermine the whole message in one fell swoop. We should not underestimate the potential damage a person like this does to a wonderful cause.

He Is No Capitalist
It’s not just Trump’s policies, but those matter. He jumped into the campaign advocating (as a first principle) not market competition but the opposite: protectionism. His tariff proposals are about taxing American consumers in order to block competitive goods and services from outside the country—the classic mercantilist policy that real capitalists have battled for centuries. His immigration ideas apply that same policy to people.

Beyond that, his infrastructure and military ideas are all about huge government spending. Even the Wall is little more than a public-sector boondoggle (the building of which will result in mass theft of private property). It’s a major opportunity for countless sweetheart deals that give well-connected contractors a free ride.

In terms of the digital economy today, he has no sympathy. He has advocated busting up Amazon with antitrust laws and imposing speech restrictions on The Washington Post.

His knowledge of the greatest innovation in the history of technology is near zero. The entire debate, he kept referring to the entire digital realm as “the cyber.” Incredible.

Not the Capitalist Way
None of this is the capitalist way. To be very clear, what market liberals favor is full freedom for everyone in the commercial sphere of life, and privileges for none: no bailouts, no subsidies, no favors, no special access to power. No matter how rich or powerful or connected you are, a society of commercial freedom gives no one a legally enforced advantage over anyone else.

This, not monopolistic protection for cronies, is the way the free market operates.

If this weren’t enough, in his business dealings, which are now under heavy scrutiny, Trump has become the caricature of the connection fat cat that the Marxists have dreamed of, and always claimed to be the norm under capitalism. He is their ideal, not ours, of what it means to be successful and rich.

Think of the capitalist that the fevered Marxist imagination has conjured up since the 19th century. He sells illusion to unwitting buyers and then the dream fails to materialize in any substantial way. He doesn’t pay his workers. The dream dies but the initial promoter makes off with millions. And with that the community suffers.

He Plays One on TV
The more we learn about Trump’s business successes, the more we see not the market at work but the kind of tainted success generated by state intervention in the market.

He uses eminent domain, litigious methods of contract enforcement, zoning regulations, subsidies of all sorts, to drive his business. He has learned to work a state-dominated, politically manipulated system. This is not the same as market success.

What’s more, deeper research into his history of enterprises reveal the surprising truth that Trump is not a winning builder and investor so much as a brand name that he sells to stamp on other people’s projects.

The most successful thing he has ever done is a television show. There’s nothing wrong with being an entertainer but he is not the successful real estate investor he claims to be.

It’s also true that bad businesspeople exist even within a market setting. No system of economics can change human nature. A wonderful feature of the market (and not government), however, is that it adapts to punish such people over time and deny them a free ride. Trump’s now-famous $1 billion loss is a better indication of what the market is capable of imposing on such people.

Truly, even though the Trump case might indicate otherwise, the justly rich are worth defending. A free society needs them. Capital accumulation is meritorious, an essential feature of a prosperous society.

But let’s never forget that capitalism is also about the Etsy seller, the Uber driver, the hair braider, the small contractor and the tens of millions of small-scale entrepreneurs who find personal joy and fulfillment in the service of others through the opportunities capitalism provides.

Real capitalism is not about ripping people off and bragging about it. It’s about freedom, serving others, realizing dreams, spreading opportunity, better lives, and a beautiful world that is prosperous and free.

If you see something or someone who looks like a different animal, it probably is.

Prepare yourself, market apologists: We are going to be digging out from under the Trump rubble for years to come.

Jeffrey A. Tucker is director of digital development at the Foundation for Economic Education and chief liberty officer of Liberty.me.

About Your Money Market Fund

My Comments: We take them for granted. A place to park money that earns a little bit and can be used to buy stuff or used to invest somewhere else. If you’re bored by finance and economics, this post is not for you, even though it may affect your wallet along the way.

by Bob Bryan | October 15, 2016

On Friday, money market funds underwent a huge shift in how they will be regulated, resulting in a sea change for the $2.65 trillion money market fund industry.

Let’s recap quickly. Money market funds are mutual funds that invest mostly in short-term assets such as US Treasurys and short-dated corporate bonds with maturities under one year. These funds are generally thought of as safe, but yield low returns.

The net asset value [(market value of all of its shares – fund’s liabilities) / number of issued shares] of money market funds is designed to remain around $1, but should not go below. Only three money market funds have fallen below $1 in NAV, or “broken the buck,” the most recent in 2008. This caused a run on money market funds and contributed to the financial instability of the time.

To try to prevent this from happening again, the federal government passed regulations in 2014 that mandated changes to make these funds safer. Now all money market funds are required to maintain an average maturity for their assets of just 60 days, and the ratings criteria for the types of assets the funds can hold have increased as well.

The new regulations have made investors shift large amounts of money out of prime market funds, which invested in all types of short-dated assets, and into government funds which only invest in government debt. In fact, prime market funds have seen massive outflows.

“More than half a trillion dollars have fled the prime money market fund complex since this summer,” said Dominic Konstam, an analyst at Deutsche Bank. “In recent weeks, the pace of outflows has also picked up considerably – prime funds lost on average $60 billion of assets per week in September and an eye-popping $110 billion last week, with their total assets now below $500 billion for the first time.”

In total, more than $700 billion has flowed out of prime market funds, according to Barclays, since the reforms were announced, with much of it heading to government funds.

With fewer funds holding non-government short-dates assets, the liquidity in trading for things such as commercial paper and certificates of deposit have increased. With less liquidity, interest rates for near-term lending products such as the London Interbank Offering Rate, or Libor, have increased to their highest levels since the financial crisis.

This increase in Libor, however, may have run its course according to Konstam. The gap between the Federal Reserve’s fed funds rate and the Libor rate, which is used as a proxy of stability for the banking system and the benchmark for how expensive short-term leaning is, has tightened in recent weeks after exploding over the summer.

“Despite this, 3-month Libor and the Libor bases have been relatively well behaved during this stretch, and FRA/OIS spreads are actually now ~5 bps tighter from three weeks ago,” said Konstam.

“We are inclined to think that the midsummer Libor pain has fully run its course, and 3-month Libor could begin to set tighter against Fed expectations (OIS) after next week’s SEC money market reform deadline.

All in all, these changes aren’t going to impact retail investors very much and the long lead time has allowed many fund managers to make the shift in portfolios ahead of time.

Jim O’Connor, senior portfolio manager for money market funds at BNY Mellon’s subsidiary The Dreyfus Corporation, told Business Insider that most of his clients’ portfolios had been shifted away from prime funds well before the date of the regulation implementation and the only changes made in the run-up were to back-end maintenance.

The jump in rates such as the Libor, however, may impact some borrowers. Floating rate mortgages and other types of floating rate loans can be pegged to the Libor, thus as it increases the interest costs for those borrowers will increase.

The move has been a massive multi-year shift of billions of dollars, but for many investors it will likely not even move the needle.

Stocks Heading Toward A Healthy Cleanse

money mazeMy Comments: My thinking about a market crash is evolving. I think it’s much closer than it was six months ago. I think it will be relatively short lived. I don’t expect it to be as deep as the one that happened in 2008-2009. But it will happen, and for some of us, it will be painful.

by Eric Parnell, CFA | October 14, 2016

The stock market needs a good cleanse. A solid correction is just what the doctor ordered in working the market back toward some semblance of true fundamental health.

Many signs suggest that such a cleanse could begin to take place at any time now.

Any potential cleanse should be view with opportunity through the start of next year.

The stock market needs a good cleanse. Having become chock full of all sorts of toxins since the calming of the financial crisis so many years ago, a solid correction is just what the doctor ordered in working the market back toward some semblance of true fundamental health. Many signs suggest that such a cleanse could begin to take place at any time now.

In fact, one is long overdue. And for investors focusing on the short-term time horizon, any such stock market cleanse that begins to unfold in the coming week should be viewed as a potentially attractive buying opportunity for holding periods through the start of next year.

Feeling Sluggish
The U.S. stock market has been stuck in a sluggish trading range for far too long now. Despite all of the talk of new all-time highs, the S&P 500 Index (NYSEARCA:SPY) has effectively gone nowhere for the last two years since the end of QE3 in late 2014.

Along the way, it has endured a few corrections that have been unsettling for investors already fidgety about the fact that U.S. stocks are trading at historically high valuations and steadily declining earnings at a time when stock markets around the rest of the world have given way to the downside a long time ago now. In short, it has been a long and sleepless road over the past two years in generating flat-to-low single-digit returns at best on the headline benchmark U.S. stock index.

Nevertheless, the S&P 500 Index remains the leading major stock market on the planet given that supposedly there is no alternative (TINA) to owning U.S. large cap stocks. Thus, it is worthwhile to consider where we stand today and where we are likely to go next.

Put simply, the setup is hardly bullish for the S&P 500 Index as we progress through the final quarter of 2016.

First, the corporate earnings situation remains deeply challenged. The earnings outlook is critically important to the stock market, for it is the “E” in the all-important “P/E ratio.” Thus, if the “E” is shrinking, the stocks that investors own become increasingly more expensive even if the price is grinding nowhere. And such has been the case over the past two years since corporate earnings peaked in 2014 Q3, which is not coincidentally at the start of this sideways grinding period.

Indeed, while corporate earnings are expected to deteriorate even further for Q3 on an annual basis once the final numbers from the quarterly earnings season have been tallied, they are expected to gradually improve in the coming quarters thanks in large part to the gaping profit holes caused by the massive drop in oil prices back in 2014 and 2015 begin to roll off. But with stocks trading at historically high valuations at present, even an unlikely robust corporate earnings recovery will do little in bringing current valuations down from nosebleed levels.

Also, the technical outlook for the S&P 500 Index is looking increasingly like a market that is breaking down. At the moment, the S&P 500 is continuing to hold support at its previous all-time highs of 2134.72, but it has been increasingly testing this support level over the past month as well as the level below it at 2116.48 on the S&P 500 Index.

Given such a soft breakout induced almost purely by the post ‘Brexit’ euphoria in early July (huh? Sounds like something only liquidity-spraying central bankers could cook up), the fact that stocks are already repeatedly testing these previous resistance, now support levels is a bad sign for the ability of stocks to continue holding their ground.

Focusing in on the red box in the chart above, we see that a number of key technical readings are presenting a market that is increasingly wearing down. The S&P 500 Index has been steadily setting a sequence of lower highs since mid-August. And on Thursday, it managed to touch a lower low on an intraday basis for the first time since early September.

Over this same time period, the relative strength of the S&P 500 Index has been on the wane. Over the past month plus since early September, relative strength also switched over from consistently bullish readings steadily over 50 to bearish readings below 50.

Adding to the concern is the fact that momentum has been on a steady ski slope downward from strongly positive readings on the MACD in the immediate aftermath of ‘Brexit’ in early July to consistently in negative territory over the past month.

At the same time, money flow has been consistently fading from strongly positive readings in late July to marginally negative and trending lower today.

Time For A Detoxifying Cleanse

So the market appears to be heading toward a correction. But the first point to mention is the following. Just because it looks like the S&P 500 Index is headed toward correcting does not mean that it actually will. A characteristic that has repeatedly defined the post crisis U.S. stock market is that just as it looks like the bottom is about to go out from under the S&P 500, it somehow manages to find its footing time and time again to rally its way back higher.

As a result, we should not be surprised if we suddenly see the stock market regain its vigor once again and push its way back to the upside. After all, U.S. stocks had many of the makings of a market that was ready to fall into correction in August and September, yet here we are today still grinding along.

But suppose we do fall into cleansing period sometime over the next few weeks. What, if anything, should investors do about it? What magnitude of a correction should we expect? And how long is it likely to last before we see some relief?

In order to answer this question, it is worthwhile to reflect back on the stock market dating back over the past decade, nearly all of which includes the financial crisis period and its aftermath. In each of the past nine years, through both good years and bad, we have seen at least one correction of -5% or more take place during the period from August to December with the magnitude of the average correction coming in at around -10% excluding the fall of 2008.

Thus, a correction in the -5% to -12% range should not be ruled out in the next few weeks. It should be noted that at present, the S&P 500 Index is currently -2.5% below its recent highs, so today’s market would already have at least some of any potential near-term correction already baked in.

What is the most likely correction magnitude in the short term? Something in the -6% to -7% range overall should be considered likely. For a correction of this magnitude would bring the S&P 500 Index back to both its 200-day and 400-day moving averages, which is likely to provide support on any initial corrective move lower. Moreover, a correction in the range of -7% has historically been the pain threshold at which the U.S. Federal Reserve typically begins to relent with soothing words about backing off on any monetary tightening in the near term.

And given that the Fed has conditioned the markets to think that it will be raising interest rates in December, it is already armed and ready with the policy concession of backing off on this rate hike to get the U.S. stock market back into good cheer again.

And if such a correction were to unfold, exactly how long should we expect it to last? August to December corrections in recent history have tended to be sharper and shorter. And given that we are already late in the year in mid-October, it is likely that any correction that were to unfold over the next few weeks would likely be swift, which could end up being unsettling to investors, many of which may already be braced for the “big one” where the stock market finally falls and does not come back.

But for as prone as the market is to corrections during this time of year, so too is it inclined toward bouncing strongly following these sharp corrections. For example, the average rebound following these corrections over the past decade has been +12.6%. And the sharper the market corrects, the more meaningful the subsequent bounce higher. This even includes the period in 2008, as stocks rallied by +27% from mid-November through early January following the dramatic declines that came before in October and early November.

Seek To Benefit From Any Purifying Stock Market Experience

Thus, investors may be well served to actively seek to capitalize on any short-term correction in stocks in the coming weeks. If the correction is shallow – say we only see another -2.5% of downside from here in the next few weeks – expect the subsequent bounce to be shallow. And if the correction is more pronounced – suppose the market pulls back by -6% to -7%, or perhaps even -10% or more – expect the subsequent rally to be more profound.

For while the market may have serious challenges going forward from a long-term fundamental perspective, enough liquidity and policy firepower still exist in the system to restore its verve for a respectable bounce in the short term.

Anticipate that any such post correction bounce could last at least through late December and early January. This may be true even if the Fed does end up raising interest rates by 25 basis points in December. But once we begin to move solidly into the New Year, all subsequent bets about market direction are off, particularly if corporate earnings disappoint expectations between now and then, which is very much a possibility. Put more simply, the potential still looms large over the intermediate term to long term for the onset of a new sustained bear market at some point in time going forward.

America’s Economic Mess

retirementMy Comments: Like a pig going through a python, baby boomers represent a demographic with staggering economic implications. I’m on the front end of that demographic, and those of you behind me are coming to terms with the concepts of retirement and getting older.

It’s the primary reason we perceive there’s a change happening in our lives over which we have little or no control. And make no mistake, there is very little we can do about it. But it does help to have a better understanding of the dynamics involved.

By Ana Swanson | October 7, 2016

Ever since the financial crisis, the U.S. economy has grown at a stubbornly slow rate, far less than the 3 percent that was widely considered a sign of good health. This disappointing outcome — the Federal Reserve expects the economy to grow only about 1.8 percent this year — has been blamed by economists on many factors: the financial crisis in 2008, fiscal fights in Washington, Europe’s repeated debt crises, China’s slowdown and more.

But according to provocative new research from Fed economists, there might be a simple explanation for the slow growth — and there might not have been much policymakers could have done about it. If the new explanation is true, it might also explain why efforts to boost economic growth — including trillions of dollars in monetary stimulus and near-zero interest rates — haven’t worked that well.

In a new paper, the Fed economists argue that America’s slow economic growth and low interest rates might have been largely inevitable — and they might not have much to do with the 2008 financial crisis at all. Their main culprit: demographics.

The researchers — Etienne Gagnon, Benjamin Johannsen and David Lopez-Salido — created a model of the economy that shows how changes in births, deaths, aging, migration, labor markets and other trends have affected the U.S. economy since 1900. Using that model, they find that most of the decline in economic growth and interest rates since 1980 has been due intractable factors like the aging and retirement of baby boomers, lower fertility rates and longer life expectancy for Americans.

They find that these demographic changes account for a 1.25 percentage point decline in annualized economic growth since 1980, which is essentially all of the decline we’ve seen in that metric, according to some estimates.

What’s really remarkable is that we might have seen this coming. The macroeconomics effects of this kind of demographic transition “have been largely predictable,” the economists write in their paper. In fact, most of the relevant changes that have weighed on growth and interest rates took place before the 1980s.

The biggest drag on the economy has been the aging and retirement of America’s baby boomers, the researchers say. The boomers are by far the largest American generation on record, with 76 million people born between 1946 and 1964. They are substantially more numerous than the 47 million members of the Silent generation that preceded them, as well as the 55 million Gen Xers, the 66 million millennials and the 69 million post-millennials, according to Pew Research Center.

Their generation is so large that it’s easy to see their impact as they move through the American age distribution, as the chart below from the U.S. Census Bureau shows:

As the boomers reached working age in the 1960s and 1970s, they greatly drove up the supply of labor in the United States, and that in turn boosted economic growth and interest rates. The effect was especially strong because boomer women went to work in much larger numbers than their mothers did, due in part to the women’s rights movement and more readily available birth control.

The U.S. economy enjoyed the benefit of a demographic dividend, as the number of workers relative to the total population reached a historic high.

But the boomer generation also ended up having fewer children than their parents did. And as they aged and retired, they left fewer people in the American workforce, and that reduced the country’s economic output.

The aging and retirement of the boomers also put downward pressure on America’s interest rates, the economists say. Interest rates that stay low for a long time are a problem in that they indicate an economy in which growth is slow and there is little willingness to invest. Low interest rates also leave central bankers with little capacity to stimulate growth in the future by cutting interest rates.

The retirement of the baby boomers has meant that what economists call capital — machines, factories, roads and buildings — has become relatively abundant compared to labor. That has depressed the return investors receive for investing in capital, and led to our era of lower investment. And that in turn led to a fall in the interest rate. In line with their model, the real interest rate in the United States rose through the 1960s and 1970s, peaked around 1980s, and has gradually declined since then, the economists say.

In the last decade, the effect of these trends has become even more pronounced, they say, as more boomers have retired and effects of the IT boom have faded. And their model suggests that low interest rates, low economic growth and low investment are here to stay, since America’s working population is not set to grow much in coming decades. Other countries in Europe and East Asia, are undergoing similar transitions, with rapidly aging populations, too.

Because of the timing of this trend, the economists say, many have confused it with the lingering effects of the financial crisis. The financial crisis undoubtedly had a powerful effect on the economy. Actions like the massive bond-buying programs undertaken by central banks around the world to lift their economies are powerful, too. But both may pale in comparison to the economic power of demography.

Source article: https://www.washingtonpost.com/news/wonk/wp/2016/10/07/theres-a-devastatingly-simple-explanation-for-americas-economic-mess

How To Explore The World On Social Security Income Alone

My Comments: Let me know how this works for you…

Suzan Haskins and Dan Prescher – 09/06/2016

Sometimes it just pays to retire overseas … not only can you live much more affordably overall, but you can treat yourself to experiences you might not have access to or be able to afford at home …

One of the biggest advantages we’ve discovered in our 15 years of living overseas is the constant availability of travel and adventure … and a big benefit is how remarkably little it costs.

We’ve written before about the low cost of bus travel in Ecuador, where we live. For about $2.50 we can travel by bus from our home in Cotacachi in northern Ecuador to the capital city of Quito, two hours to the south. If we want to hire a private driver, we’ll typically pay $50 to $60 for that. Domestic airfares are low, too. You’ll rarely spend more than $50 to $70 to fly anywhere in the country.

So if, on a whim, we want to take a weekend junket to the city…or to the Amazon basin and one of Ecuador’s many rainforest lodges, or to a Pacific coast beach town … we can do that both easily and affordably.

Case in point … a few weekends ago, we took a Sunday trip — from 7 a.m. to 6 p.m. — to visit a national park in Ecuador’s Carchi province that’s home to one of the most unique ecosystems on the planet.

This tour cost just $25 apiece. (The U.S. dollar is Ecuador’s official currency, in case you’re wondering.) This included our transportation and driver/guide. We spent another $10 for our park entry and our eco-guide.

Along the way, we stopped for a breakfast of grilled cheese toast, eggs, fruit, yogurt and granola, coffee, and fresh-squeezed juice — just $4. Lunch was a choice of fresh-fried trout or grilled chicken with salad, rice and potatoes, more delicious juice, coffee, and homemade ice cream for dessert. The grand total for that feast was just $6 apiece.

Of course, just living outside the U.S. can be a daily adventure for a couple of U.S. Midwesterners like us, and we suspect the same is true for most North Americans we know who have moved abroad. But the opportunity to spend the day or weekend visiting someplace amazingly exotic and seeing something that you’ve never seen before … often right on your doorstep and often for less than the price of a fancy dinner back home … sets the adventure bar pretty high for us.

This most recent adventure took us up into the high-elevation Andes Mountains to explore an ecosystem that only exists between 11°N and 8°S latitudes, mostly in the northwest corner of South America. It’s called the páramo, and it’s a kind of alpine tundra that exists between 9,000 to 15,000 feet above sea level … from down where the trees start to get weird and stunted up to where the permanent snow line starts and almost nothing grows.

In Ecuador’s El Angel Ecological Reserve, the local páramo is an amazing wetland thanks to a convergence of air currents that brings fog and rain almost daily. A two-hour walk through the park takes you through two of the three main zones of a páramo ecosystem—first a walk through a stunted, twisted, shaggy barked forest of polylepis trees, some of the slowest-growing trees in the world—trees that only grow at high elevations. Climbing up, the forest soon gives way to a zone of grasses and stunted frailejones, a plant that looks like a cross between a dwarf palm tree and a cactus.

We thankfully didn’t walk up into the third zone of the paramo up near the snow line…but we could see it high above us.

Aside from the fact that the páramo only exists in very few places on the planet, it is even more special because, here in Ecuador, it forms a kind of huge geological sponge. The plants and soils trap the constant upper-altitude rain and fog and release it slowly into streams and rivers that flow down into Ecuador’s Andean valleys, supplying much of the fresh water for entire regions of the country.

In fact, there are places in the El Angel Ecological Reserve that look like broad, grassy avenues—a kind of Alpine mirage. Beneath the pathways, underground waterways flow through fine sandy mud…you can jump on the ground and feel it quiver and shake as though you’re walking on a sponge.

The opportunities to visit places like this in Ecuador are legion thanks to the little country’s geography and latitude. The Andes Mountains run right down Ecuador’s spine, from north to south. From the beaches at sea level on the Pacific coast, the country rises eastward to some of the highest mountain peaks on the planet before descending again into jungles from which spring major headwaters of the Amazon River basin.

The diversity is incredible, which makes for some really diverse and amazing opportunities to visit places unique on the globe. And luckily for us, it’s more than affordable to explore Ecuador. It’s easy enough to find comfortable hostels — yes, with private bathrooms — for anywhere from $20 to $40 a night, breakfast included. And you can spend more for more luxurious digs with all meals and tours included.

This isn’t just true of Ecuador, of course. Expats living overseas all have a world of such adventures to choose from. In eastern Mexico, the ruins of the entire northern Maya empire are day trips apart…and they sit atop an amazing geographical region of underground rivers and cenotes to explore. In Belize, the second-largest reef system on the planet lies just a few hundred yards offshore. In Costa Rica, a significant portion of the entire country is national parkland with some of the most bio-diverse flora and fauna anywhere.

The list of amazing places that expats have access to is as vast and diverse as the places they settle. It’s part of what makes retiring overseas such a worthwhile experience … it can be easy and affordable to indulge your inner explorer.