Outside Economics

With 2014 wrapped up a new year started many people are inclined to ask questions – it sort of reminds me of the old game “20 Questions”. All sorts of questions get asked at this time of year – often I wish I had all the answers; but when looking forward I soon realize that no matter how much experience anyone has in the market or investing professions no one has the answers to how a particular investment portfolio or market will behave – we just don’t know the future!

Sometimes people may think they have right answers, only to realize that they answered the wrong question. I remember once in college, sitting in the testing center, taking a timed exam getting to the bottom of the Scantron answer sheet (where you fill in the bubbles with pencil and the machine grades the test in seconds) and realizing I had miss placed one answer, thus making all the subsequent answers wrong. That would have been an epic failure!

Fast forward thirty years and I still am amazed at the answers people give to questions asked. Maybe we really need to look at the questions better. I have learned that asking questions helps to crystallize your thinking or another person’s thinking.

“The art and science of asking questions is the source of all knowledge” Thomas Berger

“A focus on questions recognized the ambiguity associated with economics, markets and investing – there are rarely “specifically” right answers, but more commonly, there are “generally” right answers. Investment answers may materialize abruptly, but often answers occur on a timeframe independent of consensus. Thoughtful questions point us generally in the right investment direction. In our view, “generally right” is a worthy, sustainable, long-term objective. On the other hand, “specifically right” investing is rarely repeatable and too often leads an investor onto unrealistic and unattainable market paths. We also recognize that sometimes we don’t know what we don’t know, so the “right” questions may not even be on our radar.”[1]

Recently we have seen Germany’s central bank lower rates on its 10 year bonds to 50 basis points and Japan has lowered their rates to 25 basis points, while the US is around 2.0 percent. This begs the question how long can these governments keep rates so low? At some point won’t Germany and Japan have to raise rates somewhat closer to the US? Or will we have to lower our rates? After all, we could theoretically, borrow money from Japan and loan it out in the US and make 1.75 percent.

In the past six months oil prices have been cut in half. I was in a meeting listening to an oil analyst during the summer where he expected oil to hit $140+ per barrel before the end of the year. Perhaps he was not asking the right questions? Are the geopolitical assumptions we have been using the past five to ten years going to hold out for the next five years? What could cause a shift in the geopolitical environment that would cause a drop in the price of oil? Will the current oil prices remain low? What impact does a stronger dollar have on current commodity prices? Are derivatives going to be impacted by the low oil prices? Will the U.S. be able to continue producing oil from shale as prices continue to fall?

With all that is going on in the world the United States looks pretty good, but how long will that last? China is boasting that their economy is now larger than that of the U.S. Is the U.S. economy really picking up steam or are we still sputtering along? While our political leaders battle things out in Washington, leaving us in a solid gridlock (thank goodness), is the market advancing because of real value or because of central bank manipulation? The gridlock in many ways has kept lots of laws from being passed, thus creating new regulations, which have given us a bit of a break from the constant barrage of endless new regulations we must follow. I believe this has been a blessing to the economy and businesses in general.

Human nature can always make the markets rise and fall by how we react to news and information and mostly by our own emotions. We are susceptible to irrational behavior and emotional responses to “what just happened.”

All of these things can impact investments, markets and returns. However successful investing requires that we not only question what is going on in the markets, but also ask ourselves in an effort to seek greater understanding. Have we selected an investment approach that makes sense, is disciplined, and sustainable? Next – am I willing to follow this approach over the long term? Giving up is a challenge we all struggle with in the face of up or down markets or account values. Up, because we should have more of the return, we think “the strategy just isn’t working right”; down, “because the account should never go down, where is the downside protection!”

This is why long term investing is so difficult, sometimes it is better to just forget about it and let someone else worry about it. “Investment success is most likely to be achieved when finding the appropriate combination of diversified market risk and tactical strategy risk.”[2]

As an advisory firm, we worry plenty about our clients’ investment portfolio; we appreciate working with you and remain devoted to your overall long-term success. We are happy to answer questions about what is important to you. We wish y’all the greatest success in 2015.

If you want some basic questions to ask yourself about how you invest, check out our short investor profile - click the button below to get a copy.

 

 

 

[1] John Lunt, Lunt Capital Management, Inc.

[2] John Lunt, Lunt Capital Management, Inc.

In an effort to make life insurance policies more appealing and fit more of a family’s financial needs, measuring the risk, insurance companies have included insurance riders that cover terminal illness, critical illness, and chronic illness. The idea being, that the insured may develop an illness that causes great financial stress on a family, which could be covered by their life insurance. Should the person eventually pass away, why not accelerate the benefit a few years and pay something now? The policy rider may or may not be a great benefit.

These accelerated benefits, also known as “living benefits” are defined as follows:

— Chronic Illness: an insured is unable to perform two out of six activities of daily living, such as bathing or toileting, walking or transferring to or from a bed or chair.

— Critical Illness: an insured is diagnosed with a major illness such as cancer, heart attack or stroke.

— Terminal Illness: meaning a life expectancy of less than 12-24 months, depending on state limitations.

Acceleration of Benefits and Policy Maximums

These riders give you the option to access your policy benefits prior to death in the event of terminal or other life changing illnesses, when the need for additional funds may be crucial. This can be done either as a partial acceleration, meaning a part of your death benefit may remain in force, or a full acceleration. If you elect full acceleration, your policy will be terminated.

Generally there are limits on these policies, the maximum death benefit available for someone under age 65 is $2,000,000 and the maximum death benefit for those over age 66 is $1,000,000. The living benefit is based on the insurance amount; should you use the living benefit, you will not be paid the total amount of the death benefit.

How it works

If a 45 year old insured male becomes ill, for example with prostate cancer (common cancer for men), this person is insured with a ten year term policy for $1,000,000. The insurance company will look at how long the policy has been in force, age of the insured, type of illness, chance of recovery, policy death benefit, etc., they will look at everything related to this person and their current situation, then the actuaries will perform an analysis and make the insured an offer. This offer may be only a fraction of the total death benefit – maybe only $100,000 or less; or it could be more. Each person and their illness, stage in life, and how long the policy has been on the books are all considered when making the offer to the insured. In the end, it may or may not be worth it to give up the insurance policy for a living benefit.

Some policies state that they will pay up to 60% of the death benefit, some more, but the bottom line is that it all comes down to what the insurance company will offer considering all factors.

Typically, in the case of a terminal illness, the insured will get a higher pay out because it may be a matter of months until the insurance company will have to pay the full death benefit. The great advantage to this type of rider is for someone in business they can use the living benefit to help settle their affairs with their business partner(s) before death, leaving their heir(s) free of such complicated burdens. They may also choose to use some of the funds to travel or engage in other activities before they become too incapacitated by their illness.

While these benefits may be valuable for many people, they do not solve all the problems, nor replace the need for good medical insurance, long-term care insurance, life insurance or disability insurance. If the rider is used, the policy may be terminated and may end the possibility for a person to obtain additional life insurance in the future. The rider is an important extra benefit hopefully not in a position of last resort.

There are "stand alone" critical illness policies, which may be better for you for more information on the limits of thes policies, click below.

A small business owner typically has a relationship with a banker, a lawyer, insurance agents, and an accountant or tax adviser. But what about a wealth manager or what I call a Personal CFO? Further, what is a wealth manager and why would a small business owner want to have one working on his behalf?

In a business a CFO manages the finance side of the business; he will pull the banker, lawyer, accountant, insurance agents, and investment advisor, together on behalf of the business owners and make sure they are all working toward the same goals. A good wealth manager will save the business owner time as well as help him address issues that will create the most value. This is different than a typical investment manager who manages assets such as stocks, bonds, cash and mutual funds towards a specific future goal such as retirement or college funding.

Some areas of focus a wealth manager would address would be a privately-held business, personal residence, vacation property, insurance, loans, taxes, employee benefits, estate planning, investment advisory, cash flow, debt elimination, the needs of beneficiaries and so on; basically anything that impacts an individual's net worth.

A good wealth manager will pay attention to the estate planning, a critical part of a business owner’s conservation strategy; because he knows that the owner’s family is a part of the overall picture and they need to be provided for. If these crucial elements are avoided or ignored, the end results can be devastating to the business as well as the family members.

A case in point that hits home for me, happened with my oldest brother who was an architect. He along with his two business partners owned an architecture firm for over thirty years. When the business was initially set up they put a stipulation in place that would be activated upon the death of any of the partners. It was modified and updated about 35 years into it, however, the modifications were short-sighted and not set up well. Two years ago my brother passed away suddenly, activating the stipulations. Unfortunately, what they had thought was a wise plan ended up not providing for the business or the two remaining partners in a way that would enable the doors to remain open.

A personal CFO could have foreseen the fall-out of the short-sighted stipulations and made the proper provisions. He would have factored in the legal considerations, taxes, accounting and insurance considerations, and any other assets or special conditions that would be impacted with the death of a partner and ensured that the family heirs, business, and remaining partners would be provided for when faced with such a loss.

There are many details that come into play when one considers net worth and the best way to manage it. Business owners often do not have the time nor the expertise to handle all the details well. If a business owner is working 80-hour weeks, how much time can they really spend considering how assets are titled, or whether there are methods of shifting tax burdens to family members in lower tax brackets, or whether there's too much risk in an investment portfolio?

The needs of a business will vary significantly from one business to another. For example, a family farm can utilize a family limited partnership, where a publicly traded tech firm cannot. On the other hand, the shareholder of a publicly traded firm can sometimes gift stock options to an irrevocable trust. There are hundreds of income and estate tax strategies. The job of a wealth manager is to assist in the decision making process so the right approach may be selected for each individual situation.

Besides the varying needs of a business, business owners each have very different wants. Wants, such as what does the owner want to do with his business? What is important to them? Do they want it handed down within the family or do they want the business to go public? How do they create lasting value in the business, so it can be sold in the future? These answers are more about the individuals owning/running the business rather than the economics of the business.

A wealth management strategy cannot be implemented all at once. There are a number of gradual steps that must take place because it is a process, not an event. It takes years for a business owner to build a company, as the company gains wealth, strategies are implemented. By the same token, it may take years to properly enhance and protect that wealth. A good wealth manager will take the time to evaluate all the issues, then he will start with those things that are easy for the client to do. At the same time, a wealth manager should emphasize the strategies that are most critical for the client whether they are easy to accomplish or not.

A Personal CFO needs high levels of expertise and an ability to work alongside other professionals who are currently serving business owner's legal and financial needs. He needs to understand the cash flow of the business, their tax bracket, cash-flow projections, and the risk involved in the business as well as other assets. Business owners will come to value a Personal CFO's advice as they see details of the business resolved and the wealth and sustainability of the business protected.

During the final days of 2014, the government issued a report stating that the GDP had grown by 5% in the third quarter of the year. Many are cheering the news, but there are also many who are calling slight of hand! I have three articles that I will reference to dissect this report, one supports the government's claim, and two oppose.

The first article is called “Why Aren't We Thanking 'Gridlock' For Saving The Economy?” written by David Harsanyi. His reasoning for the 5% jump is that for the first time in the Obama administration, no one was 'tinkering' with the economy. To be fair, he doesn't give credit to Obama for turning it around, nor does he give congress the credit. Rather he says that because of gridlock in D.C., no one was able to accomplish anything, and just the mere fact of letting the economy maneuver for itself, allowed it to begin to pull out of this long recession.

By John Hendrix

From Harsyani, ““People often don’t realize that a political system is sometimes effective when it does not do certain things.” Pietro Nivola, a senior fellow in governance studies at the Brookings Institution, argued in 2013. “You can’t just measure the things it does, the actions it takes; you also have to measure the actions it does not take.” Nivola’s study was impressed by how gridlock has the ability to stop the Republican House from cutting spending too abruptly for the economy.

“And perhaps he’s right. Gridlock has caused an odd, but pervasive, stability in Washington. Spending has been static. No jarring reforms have passed — no cap-and-trade, which would have artificially spiked energy prices and undercut the growth we’re now experiencing. The inadvertent, but reigning, policy over the past four years has been, do no harm.”

I have always thought that if congress could only pass one new tax law, (one that raised revenue to the Federal Government in any way), every seven years, the economy would be much better off. This would give the public time to absorb the law before a whole new set of rules and regulations come out to hit us again.

Harsanyi also mentions that the congress has issued fewer laws during the last few years. While there may have been fewer laws passed, he overlooks the fact that the ones that have passed have been so large that the congressmen don't have time to read them before they come up for a vote. To quote Senetor Pelosi, “We won't know what is in the law until after it has passed.” A foolish way to govern and far from the do no harm policy Harsanyi claims.

Further, while the number of laws issued may be less than in other years, the amount of regulations pouring out of D.C. have been more than most people can keep track of. There were over 3,000 that were ready for take-off the week of Thanksgiving alone! There were just as many issued back in the spring. While congress can't take credit or blame for these, they certainly do impact the economy in big ways.

For example, the energy sector is being regulated out of their current system into a coal-free one. We can debate all day what is the most earth-friendly method of creating a stable energy network that will serve our population needs in the most cost effective and efficient manner. However, in the past, the free-market and innovation led us to new advances, not regulations and red tape.

As a matter of course, it used to be that laws were presented by congress, to be enforced by the executive branch and appealed to through the judicial branch. Regulations by-pass our entire system of checks and balances, leaving us with a penal system that is deaf to any appeals. I submit that regulations are more damaging to a free economy than a president's policies or legally enacted law.

The next article, “Q3 GDP Jumps 5%; Ha! The Crap Behind the Numbers” written by Tony Sagami of Mauldin Economics. In this article he doesn't necessarily cry foul, but he raises some doubts about the integrity of the 5% claim because of other numbers in the economy that don't add up to a jump. He outlines four points:

“Fun with Numbers #1: The biggest improvement was in the Net Exports category, which increased by 112 basis points. How did they manage that? There was a downturn in Imports.

“Fun with Numbers #2: Of the 5% GDP growth, 0.80% was from government spending, most of which was on national defense. I’m a big believer in a strong national defense, but building bombs, tanks, and jet fighters is not as productive to our economy as bridges, roads, and schools.

“Fun with Numbers #3: Almost half of the gain came from Personal Consumption Expenditures (PCE) and deserves extra scrutiny. Of that 221 bps of PCE spending:

Services spending accounts for 115 bps. Of that 115, 15 bps was from nonprofits such as religious groups and charities. The other 100 bps was for household spending on “services.”
Of that 100 bps, the two largest categories were Healthcare spending (52 bps) and Financial Services/Insurance (35 bps).

“The end result is that 85% of the contribution to GDP from Household Spending on Services came from healthcare and insurance! In short… those are code words for Obamacare!

“While the experts on Pennsylvania Avenue and Wall Street were overjoyed, I see just another pile of white-collar manure and nothing to shout about.

“Fun with Numbers #4: Lastly, the spending on Goods—the backbone of a health, growing economy—declined by 27 bps.”

With this in mind, let's move on to the third article posted on December 26, 2014 by John Hinderaker in Economy, Obamacare, & PowerLine called, “About that 5% GDP Growth Rate…”. Citing another economist, Tyler Durden at Zero Hedge, Hinderaker helps uncover the sleight of hand being played out and points the finger assuredly on Obamacare spending as the main reason for the jump in the economy.

“Back in June, when we were looking at the final Q1 GDP print, we discovered something very surprising: after the BEA had first reported that absent for Obamacare, Q1 GDP would have been negative in its first Q1 GDP report, subsequent GDP prints imploded as a result of what is now believed to be the polar vortex. But the real surprise was that the Obamacare boost was, in the final print, revised massively lower to actually reduce GDP!

Of course, even back then we knew what this means: payback is coming, and all the BEA is looking for is the right quarter in which to insert the “GDP boost”.

Don’t worry though: this is actually great news! Because the brilliant propaganda minds at the Department of Commerce figured out something banks also realized with the sub “kitchen sink” quarter in November 2008. Namely, since Q1 is a total loss in GDP terms, let’s just remove Obamacare spending as a contributor to Q1 GDP and just shove it in Q2.

Stated otherwise, some $40 billion in PCE that was supposed to boost Q1 GDP will now be added to Q2-Q4.

And now, we all await as the US department of truth says, with a straight face, that in Q2 the US GDP “grew” by over 5% (no really: you’ll see).”

While the exact quarter predicted was incorrect, the overall scheme was called out back in June with 'Obamacare' spending accounting for two-thirds of consumer spending. We can only hope that increasing Obamacare costs don’t drive “personal consumption” any higher in future quarters, and also that integrity can somehow return to our public servants.

So we come to the final question: what really happened to the numbers? Anyone want to guess – let me know what you think?

As this year is opens, now is a good time to reflect on some of the things that worked and didn't work in your financial life. What may be holding you back from living on a budget? What would it take to finally be serious about getting out of debt (renting money is very expensive)? Or when will you finally get around to setting up an estate plan that will ensure your family will be provided for if something happens to you? And remember procrastination is a very bad and expensive habit.

Here are the Top 10 – Out With the Old Excuses, to kick for 2015:

Don't have time

This is the big one! While many Americans are stretched to the limit when it comes to their time, making sure your financial life is in order is more about priorities than it is about time. We make time for things that are important to us, like watching TV or our favorite game. Getting your financial house in order means that with all your efforts to provide for your families, we are also ensuring that long-term their needs will be met.

Here is one I like:

We are all busy people and perhaps busy is the number one reason people don’t take the time. This is typically how it goes: “Its tax season and once I can get past April 15^th then I will have more time!”

What’s next after tax season: “It’s the end of the school year and my kids are in all the different activities and between that and sports, we are just too busy, maybe during summer?”

Summer yes the kids will be out of school and we will have more time…how does this go: “We are so busy getting ready for summer vacation with the family, we just need to get past the vacation then we will work on our finances!”

After summer then what? “We are getting ready to get the kids back in school – after the kids are in school things will settle down and we will have time.”

The kids are settled in school and doing well, but then: “It’s the holidays and we are swamped with family coming and going and work end of year things to finish, I am sure we will be able to have the time after the holidays!” Right!!

And after the holidays: “Its tax season again and life is just too crazy right now!”

Don't have money

It is far cheaper to live on less now, and ensure that our financial life is sound, than it is to continue on a frivolous path and reap the consequences later. The old adage of “living on less than you earn” really is the wisest path. Either way there will be a day of reckoning. Consider ways that you can do more with less, and cut back in wasteful spending in order to make room for a sounder future. It is amazing what people do with a just a little money.

My spouse isn't on board

There are many reasons spouses may not be united in a family budget. It is your job to initiate the conversations that are required to become one in this area of your marriage. It will take patience, time, and probably a change of behavior from both spouses as well as some negotiations in order for both spouses to be united on the budget. While it might seem like an uphill battle now, many couples have accomplished the trek and have found greater peace in their marriage and power in their financial life. It is well worth the effort! This is a place where spouses need to be unified.

I don't know how, I was never taught

This may be true, but it is never too late to learn! Start now, make the commitment to learn how to manage your finances. Find a good financial advisor whom you trust and ask them to mentor you. Don’t let your ego get in the way – there is no shame in getting help! Everyone needs help now and then.

That is for other people, not me

This is a true case of denial. It doesn't matter how rich or how poor you are, your financial life affects you. Consider the truth in the statement that your choices will determine your destiny.

I don't care

Unless you are a welfare recipient, than perhaps you do care, but don't want to admit it. If you care enough to get up and go to work each day, then you ought to care enough to see that your hard work is not squandered.

I'm too lazy

This is probably at the heart of most of our excuses as to why we don't do the things we ought to do- whether in finances, diet & exercise, or any other should or ought to's in our life. It is probably the most honest excuse as well. People rarely change until they get sick and tired of being sick and tired. Short of that, it often takes some type of severe wake-up call before meaningful change ever happens.

I have more than I need so I don't worry about it

If this is you then congratulations on being financially comfortable! While this is a nice place to be, it is a short-sighted response in a world that is ever changing. Beware of being too comfortable for your own good!

The Bible says money is at the root of all evil, so I ignore anything that has to do with money

Yes, I have actually heard this excuse in others before! It is folly and a sheer refusal toward any type of financial maturity. If this is you or your spouse, some therapy might be in order to help you through your issues. We also have a responsibility to use our talents wisely.

Money, what's that?! I use the barter system for all my needs

While the barter system may be useful to you in some regards, it can only go so far. While the current world we live in may allow for some bartering, it also requires money. Both skills are likely necessary in order to get along in it. Consider enhancing your financial skills this year- perhaps you can barter for a good financial mentor!

They say that “insanity is doing the same thing over and over and expecting a different result!” If you want to really make some changes then you have to reprioritize your time and make the time to get it done. You may also have to reprioritize your spending too as well as other things you like in life, but it all starts with “time!

J. Pierpont Morgan said, “A man generally has two reasons for doing a thing; one that sounds good, and the real one.” What other reasons regarding your financial life keep you from success? I'd like to hear about them! Leave a comment and let's discuss it! In the meantime, Happy New Year and best wishes for 2015!