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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.

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7 Social Security “did you know” moments to consider

My Comments: For millions of us, Social Security is a critical component and source of income as we attempt to flourish and enjoy our retirement. For those of you who decry the idea of ‘socialism’, I encourage you to attempt to finish your life without every cashing one of your monthly checks.

Yes, you might prefer to have never paid into the system, but pay in your must. Years ago, people we elected to serve in public office at the national level determined that it was in society’s best interest that the elderly not be reduced to living in the streets or under bridges.

Over time, it’s appropriate for us to re-evaluate those decisions. That’s what we’re doing now. I have confidence the aforementioned choices made by our elected leaders will be confirmed and re-affirmed. Democratic Socialism is a viable economic model for us to follow.

Sean Williams, The Motley Fool Published 7:00 a.m. ET May 5, 2018

Social Security arguably is the most important social program in this country, but you wouldn’t know that by quizzing the American public on their knowledge of the program.

Back in 2015, MassMutual Financial Group did just this and found that only 28% of the more than 1,500 respondents could pass its straightforward, 10-question, online true-false quiz with at least seven correct answers. Such poor results suggest that most seniors are likely to leave money on the table or make a non-optimal claiming decision during their golden years.

The fact of the matter is that the American public doesn’t know much about Social Security. And while there’s a laundry list of things they don’t know, the following seven facts stand out most of all.

1. Did you know that Social Security is only designed to replace 40% of your working wages?

To begin with, you may or may not be aware that Social Security is not meant to be a primary source of income for retired workers. When it was signed into law in 1935, its purpose was to provide a financial foundation for lower-income workers during retirement.

Today, the Social Security Administration (SSA) suggests that benefits be relied on to replace about 40% of working wages, with this percentage perhaps a bit higher for low-income workers and lower for well-to-do workers. By comparison, 62% of current retirees lean on Social Security to account for half of their monthly income. That’s a bit worrisome, as the average check for retired workers is only $1,410 per month.

2. Did you know that the Social Security Administration can withhold some or all of your benefits, depending on when you claim?

Claiming benefits before your full retirement age — the age where you become eligible to receive 100% of your monthly benefit, as determined by your birth year — may entitle the SSA to withhold some or all of your benefits. If you won’t reach your full retirement age in 2018, the SSA is allowed to withhold $1 in benefits for every $2 in earned income above $17,040. Meanwhile, if you’ll reach your full retirement age in 2018 but have yet to do so, the SSA can withhold $1 in benefits for every $3 in earned income above $45,360.

The good news is you’ll get every cent withheld back in the form of a higher monthly payment once you hit your full retirement age — likely between 66 and 67 years old. The bad news is it’ll prevent most folks from double dipping with working wages and Social Security income prior to hitting their full retirement age — i.e., between the ages of 62 and 66 to 67.

3. Did you know that Social Security benefits may be taxable?

Believe it or not, your Social Security benefits may be taxable at the federal and/or state level. If your adjusted gross income plus half of your Social Security income totals more than $25,000 as a single filer, half of your Social Security benefits are taxable at federal ordinary income tax rates. For couples filing jointly, this figure is $32,000. A second tier allows 85% of Social Security benefits to be taxed above $34,000 for single filers and north of $44,000 for couples filing jointly.

What’s more, 13 states tax Social Security benefits to some extent. A few, like Missouri and Rhode Island, have exceptionally high income exemptions, allowing most retired workers to escape state-level taxation. Others, like Vermont and West Virginia, mirror the federal tax schedule and can act as a double whammy for seniors.

4. Did you know that Social Security offers a mulligan?

You probably aren’t aware that there’s a do-over clause built into Social Security if you regret claiming benefits early. Beneficiaries are allowed to undo their claim within 12 months of receiving benefits if they file Form SSA-521 or a “Request for Withdrawal of Application.” The catch? First, you only have 12 months to make this choice, and second, you’ll have to repay every cent you’ve received from Social Security in order to undo your original filing.

The benefit of this mulligan is that it’ll allow your benefits to grow once again at 8% per year, until age 70. It’s as if your claim was never made. Seniors who wind up going back into the workforce shortly after they start receiving Social Security income usually benefit the most from SSA-521.

5. Did you know that your claiming decision may be about more than just you?

Deciding when to take benefits might be one of the most important decisions a senior citizen will make. However, it may be an equally important decision for their spouse.

In addition to providing retired worker benefits, Social Security provides benefits to the disabled and the survivors of deceased workers. If a high-earning spouse passes away, a lower-earning spouse may be able to claim survivor benefits based on their deceased spouse’s earnings history, assuming the survivor benefit pays more per month that the low-income worker’s own retirement benefit. If a high-earning spouse enrolls for benefits early — i.e., before his or her full retirement age — it can adversely impact the survivor benefit that the lower-income spouse receives.

6. Did you know Social Security isn’t going bankrupt?

Surprise! Despite a pervasive myth that Social Security is spiraling into bankruptcy, I can assure you that it’s not.

Social Security is funded three ways:

  • A 12.4% payroll tax on earned income up to $128,400, as of 2018.
  • The taxation of Social Security benefits.
  • Interest earned on almost $2.9 trillion in asset reserves.

The secret sauce here is the 12.4% payroll tax, which accounted for 87.3% of the $957.5 billion collected by the program in 2016. As long as Americans keep working and Congress leaves the funding mechanism for the program as is, there will always be money collected that can be disbursed to eligible beneficiaries.

Mind you, this doesn’t mean the current payout schedule is sustainable. Social Security’s Board of Trustees projected last year that sweeping benefit cuts of up to 23% may be needed by 2034 to sustain payouts through 2091.

7. Did you know it’s been 35 years since the program’s last overhaul?

Finally, were you aware that it’s been 35 years since Congress last enacted a sweeping overhaul to the Social Security program? Sure, it’s tweaked a few things over the years, but it hasn’t made any major adjustments in over three decades.

That’s disturbing for one big reason: Social Security is facing a $12.5 trillion cash shortfall between 2034 and 2091, and lawmakers are simply kicking the problem under the rug. Make no mistake about it, Democrats and Republicans each have a core fix for Social Security that works. Unfortunately, with politics in Washington highly partisan, no middle-ground solution has been reached.

While there’s much more to learn about Social Security, these seven facts offer a solid foundation on which to build your wealth of knowledge.

 

Filing for Social Security Benefits

My Comments: For millions of us, a predictable monthly income from Social Security has become critical for sustaining our standard of living. For many reasons, we should be increasingly worried about it. But that story is for another day.

Right now, I’m sharing with you what I hope is a simple overview if you have not yet applied for benefits. You can choose from any one of 97 months. The first one is when you turn 62 and the last one is when you turn 70. (you can wait beyond that but it’s pointless…)

Know this too: regardless of when you sign up, we’re talking about essentially the same amount of money spread over your lifetime. Starting early means you’re getting a smaller check for a longer period of time. Starting late means you’re getting a larger check for a shorter period of time.

The optimal month for most of us, is, in my opinion, the month when you reach what is known in Social Security jargon as your FULL RETIREMENT AGE or FRA. Unless you plan or expect to die before your full life expectancy, that date is your first target for signing up.

There are dozens of good reasons to sign up early. And there are dozens of good reasons to wait until your FRA. There are far fewer good reasons to extend your wait beyond your FRA. Here’s a summary of what you can expect.

by Maurie Backman / Apr 10, 2018

Age 62
Age 62 is the earliest point at which you can file for Social Security, and it’s also the most popular age for seniors to claim benefits. The advantage of filing at 62 is that you get your money sooner. The downside, however, is that you’ll face the greatest reduction in benefits by going this route.
If you’re entitled to a full monthly benefit of $1,500 at age 67, for example, then filing at 62 will knock each payment you collect down to $1,050. That said, if you’re unemployed come 62 or need the money for another reason, you’re better off taking benefits than resorting to credit card debt.

Age 63
Filing for Social Security at 63 still means taking benefits early and having them significantly reduced. Still, if you’re desperate for cash, it often pays to take that hit, which won’t be quite as bad as it would if you were to file at 62. Using our example above, a $1,500 benefit at age 67 would be whittled down to $1,125 at 63 — not ideal, but better than collecting just $1,050.

Age 64
Claiming Social Security at age 64 will also result in a sizable reduction in your full monthly benefit. But it won’t be as drastic as filing at an earlier age. In the case of a $1,500 benefit at 67, you’d only lose about 20% by filing at 64, thereby resulting in a $1,200 monthly payment.

Age 65
Once you turn 65, you’re eligible for coverage under Medicare. As such, some people get confused and assume that 65 is the age at which they’re able to collect their Social Security benefits in full. Not so. Still, if you retire at 65 once Medicare kicks in and decide to file for benefits simultaneously, you won’t face such an extreme reduction. Following the above example, a $1,500 monthly benefit at 67 would only be reduced to $1,300 at 65.

Age 66
Age 66 is a significant one from a Social Security standpoint because it’s when workers born between 1943 and 1954 reach full retirement age and are thereby eligible to collect their monthly benefits without a reduction. Your full retirement age is a function of your year of birth, as follows:

Year of Birth       Full Retirement Age
1943-1954                  66
1955                            66 and 2 months
1956                            66 and 4 months
1957                            66 and 6 months
1958                            66 and 8 months
1959                            66 and 10 months
1960                            67
Data source: Social Security Administration.

Therefore, if you were born after 1954 but before 1960, your full retirement age is 66 and a certain number of months. If you were born in 1960 or later and have a full retirement age of 67, filing for Social Security at 66 will reduce your benefits by about 6.67%. That means a full monthly benefit of $1,500 would go down to just $1,400 if you were to take them a year earlier.

Age 67
If you were born in 1960 or later, this is perhaps the age you’ve been waiting for, since it’s when you get to take your monthly benefits in full. In our example, age 67 is when you’d get that $1,500 we keep talking about. That said, you don’t have to file for Social Security at full retirement age. You can hold off and grow your benefits for a higher monthly payout.

Age 68
Though 68 is hardly a common age for taking Social Security, it’s a strategic one nonetheless. That’s because for each year you delay your benefits past full retirement age up until age 70, you get an 8% boost in payments, which, in our ongoing example, would take a full monthly benefit of $1,500 at 67 up to $1,620 at 68. That increase then remains in effect for the rest of your life. Of course, not everyone wants or can afford to hold off on benefits all the way until 70, but waiting until 68 is a decent compromise — you get a modest boost without having to wait too long.

Age 69
Age 69 is a good time to take your benefits if you don’t need them sooner. Doing so will boost our aforementioned $1,500 benefit to $1,740, thus guaranteeing a higher payout for as long as you collect Social Security.

Age 70
The credits you accrue for delaying benefits past full retirement age stop accumulating once you reach 70. Therefore, it’s considered the latest age to file for Social Security. Granted, you don’t have to sign up for benefits at that time, but there’s really no financial incentive not to. If you’re dealing with a full retirement age of 67, filing at 70 means boosting your benefits by 24%, which would turn a $1,500 monthly payment into $1,860 — for life.
Which of the above ages is the right one for you to take benefits? It depends on a host of circumstances, from your savings level to your employment status to the state of your health. The key is to understand the pros and cons of filing at various ages so you land on the one that works best for you.

What’s Next For Investments???

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

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

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

Vanguard’s Chairman Sees Muted Decade for Stocks After Long Rally

My Comments: Little is said these days about those who are investing for the future and are still working vs those investing for the future who are no longer working. Think of it as being defined as the accumulation phase of your life vs the distribution phase of your life.

Different rules apply. Vanguard Funds founder John Bogle famously suggested that the bond part of your portfolio, presumably the ‘safe’ part, should be equal in percentage terms to your age. If you were 70, for example, 70% of your portfolio should be in bonds.

Demographics, interest rates, and the profusion of new financial products has largely put Bogle’s dictum to bed. But it does illustrate the continued confusion caused by those who fail to recognize the difference between someone in their 50’s working hard to accumulate a sufficient pile of money for retirement from someone in their 70’s trying to make sure they don’t run out of money before they run out of life.

We are currently conditioned to positive returns from the markets, except for 2015, that started as we emerged from the Great Recession of 2008-2009. Those of you in the distribution phase of your life need to heed the warning expressed here.

By Nico Grant | January 17, 2018

F. William McNabb, Vanguard Group’s chairman, cautioned investors to consider reducing their stock exposure before the nearly 9-year-old rally ends.

“We would expect the next decade to actually be very modest on the equities side in the U.S., a little less so in Europe and a little less so in Asia,” McNabb said in a Bloomberg Television interview that aired Thursday. “But it’s still overall lower than long-term historical averages.”

Stock markets reached a fever pitch in 2017 as the S&P 500 Index hit record highs and the rally has continued this year. The advance, buoyed by low interest rates around the world, economic growth and the U.S. tax overhaul, has sparked concerns that valuations have gotten stretched, spurring some investors to brace for a decline.

McNabb, whose firm oversees about $5 trillion, said long-term investors may benefit by holding balanced portfolios with bonds as well as stocks.

“No one can predict what’s going to happen in the next 12 months,” he said. “Having just said that, I’m sure the equity market will continue to skyrocket for the next few months.”

McNabb, who ceded the role of chief executive officer of the Valley Forge, Pennsylvania-based firm to Tim Buckley this month, spoke to Bloomberg in Beijing, where Vanguard is eager to take advantage of China’s opening to foreign financial-services companies. The country’s government said it plans to remove ownership limits on banks and allow overseas firms to take majority stakes in local ventures.

“With some of the changes, it looks like there may be a path to doing retail mutual funds, depending on how things get interpreted,” McNabb said.

How your 401(k) can survive and thrive in the next bear market

My Comments: Some of you reading this have money in 401(k)s and 403(b)s and cannot simply remove it and place it somewhere safer. Which means you’re completely exposed to the vagaries of the markets and you can only hope for the best.

I learned long ago that HOPE is not an effective investment strategy. So these words from Adam Shell may make your life a little easier. If you want more information, you know how to reach me.

Adam Shell, March 9, 2018

The nine-year stretch of rising stock prices won’t last forever. So now’s a good time for investors to bear-proof their 401(k)s before the next financial storm.

The current bull market, now the second-longest ever and celebrating its 9th birthday on Friday, is most likely in its final stages, Wall Street pros say. That means a bear market will occur at some point, and the stock market will tumble at least 20% from its peak.

What could cause it and when? No one can know for sure. A recession perhaps, or a surge in interest rates and inflation? An unexpected event or investors getting too giddy about stocks and driving prices up to unsustainable levels? All could be the triggers of a big drop in stocks.

Remember, if you have any money invested in stocks, you won’t be able to avoid all the pain that a bear inflicts on your 401(k). While a drop of 20% from a prior peak is the classic definition of a bear market, most drops are more sizable. The average decline for the Standard & Poor’s 500 stock index in the 13 bears since 1929 is 39.9%, S&P Dow Jones Indices says. A swoon of that size would shrink a $100,000 investment in an index tracking the broad market to roughly $60,000.

Prepare ahead of time

“The best way to survive a bear market is to be financially prepared before one happens,” says Jamie Cox, managing partner for Harris Financial Group.

That means not having 100% of your money invested in stocks near a market top. It also means maintaining low levels of debt and having some emergency savings to avoid having to sell stocks in a down market to raise cash, he says.

From a portfolio standpoint, make sure your investment mix isn’t too risky. Are you loaded up on high-fliers that have greater odds of suffering steep drops if the market tanks? Make sure you own some “defensive” stocks, such as utilities, consumer companies that sell everyday staples like soap and cereal, or health care names, which tend to hold up better when markets fall overall.

“Investors should take the time to control the parts of their portfolios they can control,” Cox advises.

If, for example, your portfolio was designed to have 60% in stocks, and that percentage has ballooned to 80% due to the long period of rising stock prices, consider “rebalancing” your portfolio now. Sell some stock to get back to your initial 60% target.

Play defense

The time to be aggressive in the market is when stocks are up, and you can make tactical moves likes cashing out stocks, says Woody Dorsey, a behavioral finance expert and president of Market Semiotics, a Castleton, Vt.-based investment research firm. It makes more sense, he adds, to be defensive when the market is entering or in a period of falling prices.

“Does a bear market mean an investor needs to freak out? No. But it does mean you should be more careful,” Dorsey says. “If the market is going to be difficult for one or two years, just get more defensive. Keep in simple.”

One simple strategy to employ is to get “less exposed to the market and raise cash,” Dorsey says. “Most people are not used to that message, but it’s a good message.” While a normal portfolio might consist of 60% stocks and 40% bonds, a bear market portfolio, he says, might be 30% cash, 30% U.S. stocks and the rest in foreign investments and bonds.

Main Street investors could also consider defensive strategies employed by professional money managers, he says. They can buy things that hold up better in tough times, such as gold. Or add to “alternative” investments that rise when stocks fall, such as exchange-traded funds that profit when market volatility is on the rise or funds that can short the market, or profit from falling prices.

Identify severity of bear

The next bear isn’t likely to be as severe as the epic one following the Great Recession or the dive in early 2000 after the dot-com bubble burst, says Liz Ann Sonders, chief investment strategist at Charles Schwab. Both of those bears saw market drops of about 50% or more.

“The next bear will be a more traditional one that likely comes from the market sniffing out a coming recession,” she explains. “We don’t think it will be caused by a global financial crisis or bubble bursting.”

That means fear levels likely won’t spike quite as high. Investors will also have a better idea of when the bear market might hit, as it will be foreshadowed by signs of a slowing economy.

It also suggests the market will likely rebound more quickly than the average bear of 21 months. As a result, employing basic investment principles, such as portfolio rebalancing, diversification and buying shares on a regular basis, which forces folks to snap up shares when prices are cheaper, can help investors emerge from the next bear market in decent shape.

“Diversification and rebalancing are boring to talk about,” says Sonders. “But they are more useful strategies than all the hyperbole on when to get in or get out of the market, which is not an investment strategy.”

Buy the ‘big’ dips

There are big market swings even in bear markets. A way investors can play it is to buy shares on the days or periods when stocks are under intense selling pressure. “There will be lots of wild swings,” says Mike Wilson, U.S. equity strategist at Morgan Stanley.

Investors have to take advantage of stock prices when they are depressed and present good value, he says, even if it seems like a scary thing to do at the time.

“You have to be willing to step in” when market valuations fall a lot, no matter what’s going on in the world, Wilson advises.

Your Retirement Money

My Comments: If you’ve read my blog posts these past few months and years, you know that I have no idea what is coming next.

What I do know, however, is that anyone who says “it’s different this time” is full of s**t. It’s the nature of the beast for there to be corrections, and it’s just a matter of time for one to appear. On the other hand, telling everyone ‘the sky is falling’ soon gets old, and essentially useless.

My entire focus these days is helping people retire with more money, the opposite of which is to retire with less money. Personally, I’d rather have more money.

If you have any money fully exposed to what I call downside risk, and are uncomfortable with simply ‘staying the course’, here are three articles that appeared in my inbox in the past few days.

You should be interested in preserving your nest egg from a potential downturn, one that will make it harder to pay your bills in the future.

Making informed decisions about your money starts with paying attention and being able to tuck in your tail before the door slams shut.

I make no apologies for any political implications associated with the three articles.

Economics are never 100% divorced from politics. It doesn’t matter who is pulling the strings.

What matters is that the strings are being pulled, and how that pulling will affect you and your bank accounts. These three articles are worth reading if you have any doubts about having enough money when you retire…

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