Tag Archives: financial planner

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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Beliefs vs Reality

My Comments: These are strange times. I’m having a hard time coming to terms with my beliefs and values as a human and the values and beliefs as expressed by others.
Mine have evolved over the past 76 years and encompass everything that defines me as a member of society. I’m comfortable in my own skin and will move on eventually to the next state of being. Meanwhile, others increasingly refute the values that I’ve considered ‘normal’ for my entire life.

So, this article has been helpful in my understanding of the disconnect that I now have with so many people who until recently I considered as being on the same planet as I am. My fervent hope is that life will soon return to at least a semblance of normality and I can live out my days without too much stress. If you too are stressed by how all this is playing out these days, I encourage you to read these words by Daniel DeNicola.

You don’t have the right to believe whatever you want to believe by Daniel DeNicola on June 6, 2018.

Do we have the right to believe whatever we want to believe? This supposed right is often claimed as the last resort of the willfully ignorant, the person who is cornered by evidence and mounting opinion: “I believe climate change is a hoax whatever anyone else says, and I have a right to believe it!”

But is there such a right?

We do recognize the right to know certain things. I have a right to know the conditions of my employment, the physician’s diagnosis of my ailments, the grades I achieved at school, the name of my accuser, and the nature of the charges, and so on. But belief is not knowledge.

Beliefs are factive: to believe is to take to be true. It would be absurd, as the analytic philosopher G E Moore observed in the 1940s, to say: “It is raining, but I don’t believe that it is raining.” Beliefs aspire to truth—but they do not entail it. Beliefs can be false, unwarranted by evidence or reasoned consideration. They can also be morally repugnant. Among likely candidates: beliefs that are sexist, racist, or homophobic; the belief that proper upbringing of a child requires “breaking the will” and severe corporal punishment; the belief that the elderly should routinely be euthanized; the belief that “ethnic cleansing” is a political solution, and so on. If we find these morally wrong, we condemn not only the potential acts that spring from such beliefs, but the content of the belief itself, the act of believing it, and thus the believer.

Such judgments can imply that believing is a voluntary act. But beliefs are often more like states of mind or attitudes than decisive actions. Some beliefs, such as personal values, are not deliberately chosen; they are “inherited” from parents and “acquired” from peers, acquired inadvertently, inculcated by institutions and authorities, or assumed from hearsay. For this reason, I think, it is not always the coming-to-hold-this-belief that is problematic: It is rather the sustaining of such beliefs, the refusal to disbelieve or discard them that can be voluntary and ethically wrong.

If the content of a belief is judged morally wrong, it is also thought to be false. The belief that one race is less than fully human is not only a morally repugnant, racist tenet; it is also thought to be a false claim—though not by the believer. The falsity of a belief is a necessary but not sufficient condition for a belief to be morally wrong; neither is the ugliness of the content sufficient for a belief to be morally wrong. Alas, there are indeed morally repugnant truths, but it is not the believing that makes them so. Their moral ugliness is embedded in the world, not in one’s belief about the world.

“Who are you to tell me what to believe?” replies the zealot. It is a misguided challenge. It implies that certifying one’s beliefs is a matter of someone’s authority. It ignores the role of reality. Believing has what philosophers call a “mind-to-world direction of fit.” Our beliefs are intended to reflect the real world—and it is on this point that beliefs can go haywire. There are irresponsible beliefs. More precisely, there are beliefs that are acquired and retained in an irresponsible way. One might disregard evidence, accept gossip, rumor, or testimony from dubious sources, ignore incoherence with one’s other beliefs, embrace wishful thinking, or display a predilection for conspiracy theories.

I do not mean to revert to the stern evidentialism of the 19th-century mathematical philosopher William K Clifford, who claimed: “It is wrong, always, everywhere, and for anyone, to believe anything upon insufficient evidence.” Clifford was trying to prevent irresponsible “overbelief,” in which wishful thinking, blind faith, or sentiment (rather than evidence) stimulate or justify belief. This is too restrictive. In any complex society, one has to rely on the testimony of reliable sources, expert judgment, and the best available evidence. Moreover, as the psychologist William James responded in 1896, some of our most important beliefs about the world and the human prospect must be formed without the possibility of sufficient evidence. In such circumstances (which are sometimes defined narrowly, sometimes more broadly in James’s writings), one’s “will to believe” entitles us to choose to believe the alternative that projects a better life.

In exploring the varieties of religious experience, James would remind us that the “right to believe” can establish a climate of religious tolerance. Those religions that define themselves by required beliefs (creeds) have engaged in repression, torture, and countless wars against non-believers that can cease only with recognition of a mutual “right to believe.” Yet, even in this context, extremely intolerant beliefs cannot be tolerated. Rights have limits and carry responsibilities.

Unfortunately, many people today seem to take great license with the right to believe, flouting their responsibility. The wilful ignorance and false knowledge that are commonly defended by the assertion “I have a right to my belief” do not meet James’s requirements. Consider those who believe that the lunar landings or the Sandy Hook school shooting were unreal, government-created dramas; that Barack Obama is Muslim; that the Earth is flat; or that climate change is a hoax. In such cases, the right to believe is proclaimed as a negative right. That is, its intent is to foreclose dialogue, to deflect all challenges, to enjoin others from interfering with one’s belief-commitment. The mind is closed, not open for learning. They might be “true believers,” but they are not believers in the truth.

Believing, like willing, seems fundamental to autonomy, the ultimate ground of one’s freedom. But, as Clifford also remarked: “No one man’s belief is in any case a private matter which concerns himself alone.” Beliefs shape attitudes and motives, guide choices and actions. Believing and knowing are formed within an epistemic community, which also bears their effects. There is an ethic of believing, of acquiring, sustaining, and relinquishing beliefs—and that ethic both generates and limits our right to believe. If some beliefs are false, or morally repugnant, or irresponsible, some beliefs are also dangerous. And to those, we have no right.

The 1 Retirement Expense We’re Still Not Preparing For

My Comments: Those of us who live long enough to enter the final stages of our lives get to confront something that rarely happens to those not retired.

I often refer to this as ‘becoming goofy’, though it’s not always a mental affliction. (My mother had Alzheimer’s and needed constant attention for over nine years.)

As you have long since discovered, being alive can expose you to a double edged sword. Yes, we’re still on this side of the grass but with that comes new challenges.

As a financial planner now focused on retirement planning, not dying quickly comes with a cost. And costs often come with price tags, many of which we’re unprepared to pay.

These words from Maurie Backman are a necessary read. It’s unrealistic to expect bad things won’t happen to us, and to the extent we can be ready if they happen, it will be good for us and our children to take some necessary steps in advance to reduce or eliminate the inevitable financial pain.

Maurie Backman | May 24, 2018

No matter what sort of lifestyle you lead, retirement is an expensive prospect. And while you can cut back on certain expenses like housing and leisure when circumstances require you to do so, there’s one expense you may not have a choice about: long-term care. And unfortunately, new data from the Society of Actuaries shows that Americans still aren’t preparing for it as they should be.

In a recent study of retirees 85 and older, most respondents who have not yet needed long-term care expect that if they do, they’ll get by with the help of paid home aides and family support. Most of those who are currently getting long-term care, however, have had no choice but to pack up and move to nursing homes or assisted living facilities, thus significantly adding to their costs.

The study also underscores the importance of having a financial backup plan for those who don’t have family to rely on to provide elder care. Currently, 32% of seniors 85 and over receive logistical support from family members with regard to physical activities such as transportation, meals, and household chores. To hire a home aide to provide those services, however, is an expense many seniors are in no position to bear.

If your goal is to maintain a level of financial security throughout retirement, then you’ll need to not only assume you’ll require long-term care at some point in time, but also save and plan for it. Otherwise, the latter end of your senior years might end up being more stressful than you ever could’ve bargained for.

There’s a good chance you’ll need long-term care…
It’s easy to think of long-term care as somebody else’s problem, but in reality, 70% of seniors 65 and over end up needing some type of long-term care in their lifetime. Among those, 69% end up requiring that care for a three-year period or longer.

And if you’re counting on Medicare to pick up the tab, you’re out of luck. The average Medicare-covered stay in a nursing home is a mere 22 days. That’s a meaningless tally in the grand scheme of a three-year period or more.

…and it’ll cost you
So how much might an extended stay at an assisted living facility or nursing home cost you? Probably more than you’d think. The average assisted living facility in the country costs $3,750 per month, or $45,000 per year, according to Genworth Financial’s 2017 Cost of Care Survey. The average nursing home, meanwhile, costs $235 per day, or $85,775 per year, for a semi-private room. Want your own room? It’ll set you back $267 per day, or $97,455 per year.

Even if you don’t require a nursing home or assisted living facility in your lifetime, there’s a good chance you’ll reach a point when you just plain need help functioning independently. And if you don’t have family around to assist, you’re going to have to pay for that help. Currently, the average cost of a non-medical home aide is $21 per hour. This means that if you wind up needing assistance for 10 hours a week, you’re looking at close to $11,000 per year.

All of this means one thing: You should be saving for these eventual costs during your working years rather than assuming you’ll cut corners to pay for them later on. And the sooner you do, the more secure you’ll be going into retirement.

The good news? If you still have a number of working years ahead of you, boosting your savings rate modestly could increase your nest egg substantially. For example, socking away an additional $250 a month on top of what you’re already saving for the next 20 years will give you an extra $123,000 in retirement, assuming your investments generate an average annual 7% return during that time. (That’s more than doable with a stock-heavy portfolio, by the way.) That’s enough to cover an assisted living facility for almost three years.

Another option? Look into long-term care insurance. The younger you are, the more likely you are to not only get approved for a policy, but also snag a health-based discount on your premiums. Having that insurance to defray the cost of long-term care could lift a major burden when you’re older and at your most vulnerable.

Finally, if you’re counting on family to provide any type of care or support when you’re older, have that conversation in advance rather than assume that help will be a given. You never know when your adult children might choose to pick up and relocate abroad or when a stay-at-home adult child of yours might opt to go back to work. Knowing what to expect assistance-wise will help you avoid a potential financial shock (not to mention an emotional one) down the line.

Guggenheim investment chief sees a recession and a 40% plunge in stocks ahead

My Comments: We can argue ‘till we’re blue in the face about when this is going to happen and none of us will be right. Just know it will happen.

There’s a reference in Scott Minerd’s comments below about the Fed raising interest rates. Here is a chart I found some time ago that shows interest rate trends since 1790. 225 years and there have been only FOUR points that define the end of a downward interest rate trend. The last one is where we are today.

The last uptrend ran from 1946 through 1981. What this tells me is that for the rest of my life, interest rates are going to trend upward, and with that trend we’ll see all kinds of consequences. Like before, some will be good and some will be bad. Good luck.

Scott Minerd, Guggenheim Partners, April 6, 2018

Guggenheim’s head of investing sees a tough road ahead for the market and economy, with a sharp recession and a 40 percent decline in stocks looming.
Scott Minerd, who warned clients in a recent note that the market is on a “collision course with disaster,” expects the worst of the damage to start in late 2019 and into 2020.

Along with the decline in equities, a rise in corporate bond defaults is likely as the Federal Reserve raises interest rates and companies struggle to pay off record debt levels.

“For the next year … equities will probably continue to go up as we have all these stock buybacks and free cash flow,” Minerd told CNBC’s Brian Sullivan in a “Worldwide Exchange” interview. “Ultimately, when the chickens come home to roost and we have a recession, we’re going to see a lot of pressure on equities especially as defaults rise, and I think once we reach a peak that we’ll probably see a 40 percent retracement in equities.”

One of the main problems is that Congress and President Donald Trump have pushed through aggressive fiscal policies at a time when the Fed is looking to control growth with higher interest rates and less accommodative monetary policy.

Corporate debt currently stands at a record $8.83 trillion, according to Securities Industry and Financial Markets Association data. Higher rates will make it harder for companies to refinance and will put pressure on them once the stimulative effects of tax cuts wear off, Minerd said.

Once short-term rates hit 3 percent, that will be enough to drive up defaults and cause a recession, he added.

“As interest rates keep ratcheting higher, with record levels of corporate debt it’s going to be harder and harder to service,” Minerd said. “At some point, as the economy starts to mature and as cash flows start to stabilize and decline, it’s going to be difficult for everybody to pay this interest.”

“Defaults are going to be concentrated in corporate America, where in the past downturn they were basically focused in areas of consumer activity,” he added.

From there, Minerd figures the Fed will get involved, going back to the quantitative easing policies that helped pull the economy out of the last recession and pushed a surge in stock market prices but also coincided with lackluster economic growth.

“All that will do is defer the problem into the future and allow excesses to continue to build and the collision course that we’re on will just come later and probably be worse,” he said.

Can the Country Survive Without a Strong Middle Class?

My Comments: Most of the recent talk about the Constitution comes in the wake of the tragedy in Parkland, Florida, for obvious reasons. The attention is well deserved but I’d have you think about more than just the 2nd Amendment.

At the national level, if not across the globe, society is re-evaluating itself. Are the values we hold dearly still valid? Are the roles played by the various participants serving our best interests? Are you willing to let the so called ‘elite’ change the economic and social landscape that most of us enjoy without allowing us to express our thoughts? Have we given them so much power that it now makes no difference?

If you’ve followed me for long, you’ve heard me talk about income inequality and the subtle effects it has on not just our society, but in virtually every society on the planet. I hope you will read this, regardless of your political leanings, as it will influence every aspect of the lives of your children and grandchildren. And the clowns in Washington, DC are not helping matters.

Rebecca J. Rosen / Mar 21, 2017

In a powerful new book, the legal scholar Ganesh Sitaraman argues that America’s government will fall apart as inequality deepens.

The U.S. Constitution, it is fair to say, is normally thought of as a political document. It lays out the American system of government and the relationships among the various institutions.

But in a powerful new book The Crisis of the Middle-Class Constitution, the Vanderbilt legal scholar Ganesh Sitaraman argues that the Constitution doesn’t merely require a particular political system but also a particular economic one, one characterized by a strong middle class and relatively mild inequality. A strong middle class, Sitaraman writes, inspires a sense of shared purpose and shared fate, without which the system of government will fall apart.

I spoke with Sitaraman about his book last week at The Atlantic’s offices in Washington, D.C. A transcript of our conversation, edited for clarity, follows.

Rebecca J. Rosen: Your new book, The Crisis of the Middle-Class Constitution, is premised on the idea that the American Constitution is what you call a middle-class constitution. What does that mean?

Ganesh Sitaraman: The idea of the middle-class constitution is that it’s a constitutional system that requires and is conditioned on the assumption that there is a large middle class, and no big differences between rich and poor in a society.

Prior to the American Constitution, most countries and most people who thought about designing governments were very concerned about the problem of inequality, and the fear was that, in a society that was deeply unequal, the rich would oppress the poor and the poor would revolt and confiscate the wealth of the rich.

The answer to this problem, the way to create stability out of what would have been revolution and strife, was to build economic class right into the structure of government. In England, you have the House of Lords for the wealthy, the House of Commons for everyone else. Our Constitution isn’t like that. We don’t have a House of Lords, we don’t have a House of Commons, we don’t have a tribune of the plebs like they had in ancient Rome.

At the time, people debated having a wealth requirement for entry into the Senate, but that didn’t happen. That would have been a common thing in the generations and centuries prior to the creation of the U.S. Constitution. So there’s actually a radical change in our Constitution that we don’t build economic class directly into these institutions. The purpose of the Senate, with its longer terms, is to allow representatives to deliberate in the longer-term interest of the republic, and that’s the goal of the Senate.

What we have is a constitutional system that doesn’t build class in at all, and the reason why is that America was shockingly equal at the time in ways that seem really surprising to us today.

Rosen: Of course, the point here isn’t only that class is ignored, or left out of the Constitution, but that the Constitution actually relies on a kind of equal society in order to function. Could you explain the premise there?

Sitaraman: That’s exactly right. The idea is that the Constitution relies on a relatively equal society for it to work. In societies that are deeply unequal, the way you prevent strife between rich and poor is you build class right into the structure of government—the House of Lords, House of Commons idea. Everyone has a share in government, but they also have a check on each other.

In a country that doesn’t have a lot of inequality by wealth, you don’t need that kind of check. There’s no extreme wealth, there’s no extreme poverty, so you don’t expect there to be strife, to be instability based on wealth. And so there’s no need to put in some sort of check like that into the Constitution.

That’s how our Constitution works. The reason why it works this way is that when the founders looked around, they thought America was uniquely equal in the history of the world. And I know that seems crazy to say, but when you think about it, it makes sense. If you imagine in the late 18th century, America is a sparsely populated area, just on the coast of the Atlantic, with some small towns and cities, and lots of agrarian lands, and it’s really at the edge of the world, because the center is western Europe. It’s London, it’s Paris, and when Americans look across the ocean at those countries, what they see is how different it is. They see that there’s a hereditary aristocracy, something that doesn’t exist in America. There’s feudalism, which doesn’t exist in America. There’s extreme wealth, there’s extreme poverty, neither of which really exists in America. As a result they don’t need to design a House of Lords and a House of Commons, they don’t need a tribune of the plebs in order to make their constitution work.

“The assumption of our original Constitution was that society would be relatively equal.”

Rosen: Of course, there was slavery at the time—and it was built directly into the Constitution.

What’s Happening This Week In The Markets?

My Comments: Somewhere in the news cycle there is always a story about what’s happening in the stock and bond market and whether or not there’s a reason to get freaked out.

Media companies these days are overwhelmed with crisis after crisis and spending much time on this issue is a waste of energy and limited resources. Only a retirement planning junkie like me is willing to pay attention. It’s a miracle you’ve read this far…

Anyway, from time to time I find in my inbox a report from J. P. Morgan, a global asset management firm with solid information. At the bottom is a link to their two page report that appeared this morning.

Here are two excerpts if a quick summary is all you have time for:

January’s inflation
report confirms that deflationary fears are
easing, and that an aggressive rise in
inflation is not materializing.

…risks stemming from rising (interest) rates and higher
wages will build as the economy moves
later into the business cycle…

What I infer from the report is that the recent volatility was healthy in the short term but that long term, all bets are off. Here’s the link to their report: https://goo.gl/By6P5E

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.