Outside Economics

Here Goes California - More Government Control

Posted by Wendell Brock, MBA, ChFC on Fri, Apr 29, 2016

With a population of 38 million people, California maintains the single largest cluster of hourly workers of all 50 states at over 9.1 million workers, per U.S. Labor Department data released in 2015 . According to Kevin De Leon, president pro tempore of the California state senate, about 5.6 million Californians, representing roughly 32% of the state’s workforce, currently live on the minimum wage.

CA_Flag.pngCalifornia’s current statewide minimum wage of $10 per hour is already among the highest in the country. The state of New York is also considering raising its minimum wage to $15 per hour, where fast food restaurants are already subject to a $15 per hour minimum.

Both houses of California’s state legislature passed a measure to raise the wage on March 31st. California’s current minimum wage is set at $10 an hour. Under the measures, increases would start in 2017 with a $0.50 hike to $10.50 an hour. This would be followed by another $0.50 raise in 2018, and then annual $1.00 increases through 2022.

Individual cities and counties may also impose their own minimum rates, such as Los Angeles which will be increasing its minimum to $15 per hour by 2020.

Nationally, the federal minimum wage has not increased since 2009 and is currently set at $7.25 an hour, yet 29 states and D.C. have higher minimums.

For over 74 years, workers in the United States have been granted a minimum wage level for their benefit. An initial attempt to establish a minimum level for wages occurred in 1933, when a depression era mandate set a wage minimum at 25 cents per hour ($4.10 in 2012 dollars). The National Industrial Recovery Act, which was the act that the initial wage evolved from, was declared unconstitutional by the Supreme Court in 1935.

In 1938, the minimum wage was re-established successfully under the Fair Labor Standards Act. The act held ground because the Supreme Court noted that Congress had the power under the Commerce Clause to regulate employment conditions. Since then, a minimum wage has always been in place and enforced nationally.

The Fair Labor Standards Act sets federal minimum wage standards, while state governments set state minimum wages. While some states have higher minimum wage standards than federal law, others have the same rate or none at all. Where federal and state laws have different minimum wage rates, the higher standard (wage) applies.

Some states don’t impose a minimum wage and just let employers abide by the federal standards. Alabama, Louisiana, Mississippi, South Carolina, and Tennessee currently have no minimum wage.

Sources: U.S. Bureau of Labor Statistics: Characteristics Minimum Wage Workers 2014 Table 3, Released 2015; www.senate.ca.gov

 
REMEMBER:
 
 

“Try not to become a man of success but rather try to become a man of value.”

~Albert Einstein
 
 
 

Topics: Economy, Minimum Wage

Stop Keeping Old Income Tax Info

Posted by Wendell Brock, MBA, ChFC on Fri, Apr 22, 2016

Things can get a bit crazy at tax time, there is so much information to keep track of and provide to the preparer (CPA or Enrolled Agent - EA) or IRS. As we make our way through the piles and files of receipts and statements left over from tax time, disposing of some of these obstacles is a thought. It is always suggested to carefully shred documents containing any critically sensitive information.

paperwork.jpgThe idea is to toss out what you don’t need anymore, yet keep what you might need for income taxes and accounting purposes. Here are some items that accumulate the most with a note as to how long to keep them:

Monthly Utility Statements - can be disposed of after three months unless the expenses are being written off for tax purposes, then you may want to maintain those until after tax time.

Pay Stubs – having the most recent pay stub handy is suggested, with no need to keep older stubs since the most recent stub should contain all YTD details. Should you be applying for a loan or mortgage, then having as much as one year’s stubs available is helpful.

Credit Card Receipts & Statements – can be tossed when the credit card statement is received and reviewed. If using a credit card for business purposes, then keeping receipts for seven years is the recommended time period. Statements on the other hand should be kept for three months should there be a dispute or chargeback of an expense.

Canceled Checks – can be shredded once the bank statement arrives. Credit card receipts and business related expenses should be kept for seven years. Most people don’t get their canceled checks back any more, but if a photo copy comes with the bank statement treat these the same as a canceled check.

Bank Statements – are possibly the most important items to keep for an extended period. Like pay stubs, if a loan or mortgage application is in process, six to twelve months of statements is what most lenders are asking for nowadays.

Insurance – always replace outdated policies and coverage verifications with the most recent and keep in an accessible place should a claim need to be filed.

Medical Statements, Bills & Insurance Notices – should be kept for at least five years especially if these items are used as tax deductions and even lingering insurance payment claims. With the onslaught of recent health care initiatives, it is wise to track and file all medical related items as detailed as possible.

Tax Returns & Supporting Items - should be kept at least seven years. Supporting documents include receipts, mileage logs, spreadsheets, paid invoices and canceled checks.

For business owners, this is a good time to “clean house” and get rid of  old information (back eight years) get rid of that box or file of receipts and tax returns. That would be seven years for the tax return filed (2015 - 7 years = 2008) So throwing away stuff from 2007 should be safe.

After selecting all the stuff to get rid of, I think it is just easier to shred it all. Here is why: 1) you may have inadvertently left an important document in the stack to throw out, this way you know everything is destroyed properly. 2) the shredded paper is easier to recycle. 3) it also makes a good fire starter for your next camping trip! Having burned up a couple shredders in the past its worth the money to get a good one.

It is also a good time to check tax planning for the year, don't wait until year end to plan - are you on track? Learn some new tax rule changes, and a couple big income tax problems for this year. Good luck cleaning House!

 

REMEMBER:

The income tax has made liars out of more Americans than golf. - Will Rogers

Must Read for People Who Have Bank Accounts

Posted by Wendell Brock, MBA, ChFC on Fri, Apr 15, 2016

The great recession has left its mark on many of us in so many ways it is hard to understand them all - perhaps similar for generations before with the Great Depression. One major mark is in banking. The Great Depression produced the FDIC which insured customer deposits and help provide a level of financial security to the banking system. Now Europe and the E.U. has lead the way with a “bail-in” concept where depositor bank accounts are used to shore up the troubled bank, thus taking the tax payers off the hook for failed banks. 

This week Austria put this to the test. Hypo Alpe Adria (HETA) collapsed under the weight of bad loans. The bank is located in the Province of Cimages.jpgarinthia, which has mostly controlled the bank for the past year, when it first started having problems. In taking on the obligation of this bank Carinthia is worried that it may cause the Province to file for bankruptcy as well.

The Austrian Financial Market Authority (FMA) in its role as the resolution authority for failed banks has issued the key features for the steps to resolution. The Bank Recovery and Resolution Act (BaSAG) outlines how the issues surrounding failed banks are to be resolved. The most significant are:

  • A 100% bail-in for all subordinated liabilities,
  • A 53.98% bail-in, resulting in a 46.02% quota for all eligible preferential liabilities,
  • The cancellation of all interest payments from 1 March 2015, when HETA was placed into resolution pursuant to BaSAG
  • As well as a harmonization of the maturities of all eligible liabilities to 31 December 2023.

Subordinated liabilities is simply another term for depositor’s money in the bank. In the typical banking arrangement the bank’s assets are the loans on the books, while their creditors are all the depositors. The exact opposite of personal or business finance, where loans are liabilities and cash deposits are part of their assets. 

This sort of “bail-in” can cause a lot of panic in finance world, simply because people losing their deposits can demonstrate some serious concerns about how well a bank is operated. Clearly an uncharted path. Some concerns exist over the legal as well as the practical aspects of the “bail-in” concept. This makes the creditors of the bank more responsible for how the bank is run. If there appears to be any problems creditors simply will not lend money to a bank or if they do they will demand a much higher risk premium. This will of course raise interest rates for everyone.

Corinthia attempted to remove the guarantees by purchasing the bonds at a discount from the bond holders, primarily Commerzbank, AG and Pacific Investment Management Co., (PIMCO), who rejected this offer last month. The creditors are demanding that Austria pay up if Carinthia cannot pay. In either case the depositor’s monies are gone.

This rule was put into place after the Great Recession to help relieve the burden on the tax payers for bailing out banks. The results are yet to be determined, but like every regulation there are unintended consequences. Some of those consequences maybe, higher interest rates, depositors being extra cautious where they deposit their paychecks, fewer loans made to small or medium size businesses, bankers will be unwilling to take risks with business owners on such loans. 

 

In The United States

You maybe asking yourself why does this bank in Austria matter to me? Here is the short answer; the United States banking regulators have adopted a similar rule. When a bank fails the regulators can force a bail-in of depositors monies to right the ship. Many people do not realize or understand that this can and most likely will wash up on the shores of America as soon as we have another major financial melt-down. Watching how this precedent action plays out may be an example of how it will work here in the States. 

I am clearly not suggesting that you take your money out of the banking system and hide it under your mattress, that would be foolish. Also I think that U.S. banks operate with safety and soundness regulations that help protect depositors money. This maybe one reason why gold and silver has shot up in price this past week. People still perceive precious metals as a safe haven for currency problems. 

Sources: Bloomberg, Financial Times, Superstation95
 
Remember:
People should be more concerned with the return of their principal than the return on their principal.
-- Will Rogers
 

Topics: Precious Metals, banks, failed banks, Currency, Gold and Silver

What's Up - Quarterly Economic Update

Posted by Wendell Brock, MBA, ChFC on Fri, Apr 08, 2016

Equity markets rebounded in March as rate hike fears eased and healthy domestic economic data revealed consistent conditions, resulting in a resounding turnaround from the market lows experienced in February. Market volatility appears to be mellowing compared to a year ago (except for oil). “With Volatility trending lower assets further out on the risk spectrum, such as Emerging Markets, Small Caps, and High Yield rallied.”SSGA-SPDR-ETFs--April-2016.jpg

This first quarter has seen a healthy run up in the prices of gold and silver, however the returns are fading as profit takers sell off. Some of the reason for the price moves, poor stock market return, fears about interest rate hikes, on going inflation worries and currency weakness. Some analysts believe that gold will drop back to support level of about $1,150 per ounce by third quarter; while Credit Suisse has increased its forecast for first quarter 2017 to $1,313 per ounce and Silver to $16.50 per ounce. Whom ever you believe it appears that at current prices gold and silly er are still pretty good buys. 

The concern of a rapid rate increase by the Federal Reserve subsided towards the end of the 1st quarter, as Fed Chairperson Janet Yellen helped tame prior remarks made by fellow Federal Reserve members. Subdued inflation and economic growth expectations led the Fed to curtail its stance on predetermined rate hikes. The Fed identified “global economic and financial developments continue to pose risks”.

Labor Department data released for the first week in March showed that merely 253,000 Americans filed for unemployment, the fewest number since 1973. Economists view the lessening amount of unemployment applicants as a validation that the labor market continues to steadily strengthen.

Additionally, the Labor Department’s monthly employment report for March showed a 215,000 increase in jobs, with an increase in the unemployment rate to 5% from 4.9%, signaling that more people have entered the labor force.

Some analysts believe that oil may have found a bottom around $26 per barrel in the first quarter, alleviating fears of a further oil price drop. Oil prices recovered in March from persistent lows earlier in the year. This recovery will help strengthen the economy - a fair balance in oil prices will only help keep things moving.

Easing rate hike concerns led to the dollar’s derailment from its uptrend during the quarter, creating opportunities for additional exports, as American made products become less expensive for international buyers.

A new acronym arose from international central banks lowering rates to negative territories, NIPR (Negative Interest Rate Policy). The Bank of Japan adopted negative interest rates in January and lowered key lending rates to below 0%, nearly a year and a half after the European Central Bank became the first major institution of its kind to venture below zero. Other countries meandering into the negative arena include Switzerland, Denmark and Sweden.

The ECB ramped up its economic stimulus efforts in Europe by increasing its bond purchases from 60 billion euros to 80 billion euros per month. In addition, the central bank will be buying both government bonds and investment grade corporate bonds. Markets welcomed the strategy of venturing into the corporate realm, sending bond prices higher due to a limited supply of the debt.

The economy continues to worry many people, I see many people who have just been laid off from their job, which is a very big concern. This gives rise to worries about a future recession - some analysts talk that we are long over due, others say that we have not fully recovered from the last "Great Recession". Personally, I think while the technical definition of a recession ended in 2009, we have not fully recovered. For many people it certainly does not feel like it has ended, as they are not any better off. They feel like they are still treading water. However I don't see the U.S. slipping into a recession until after the presidential election this fall, so maybe in the first half of 2017.

Sources: Fed, Dept. of Labor, Eurostat, ECB, Dept. of Energy, State Street Global Advisors

 
REMEMBER:
 
"The three "R's" of choice: the Right of choice; the Responsibility of choice; and the Results of choice." - Thomas S. Monson

Topics: Economy, Oil, Gold and Silver, Equity Markets

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Wendell W. Brock, MBA, ChFC

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