Outside Economics

Two weeks ago the world lost a very talented musician, Prince. While I must admit I have never been much of a fan of his work, or some genres of most modern musicians, he was amazingly talented. And I am sad for his family's loss. He was young - only 57 years old - young by society’s standards where we routinely expect people to live active lives into their 80's and maybe into their 90's. 

Prince is estimated to have amassed a large estate between $300 to $500 million. This was news to me as I had no idea how large his estate was. I think this is fantastic. For those who know me I thrill at learning of people's successes in life, however they define their success. That is one reason I love what I do - helping people achieve success with their financial goals, whatever they may be.

Back to Prince. I was surprised to learn that he died with no personal estate plan. He chose to use the one the State of Minnesota had planned in their estate laws instead - he died “intestate” (without a will). Now this is simply crazy! This is the example of why everyone needs at least a will, and should have a personal estate plan prepared by a real estate planning attorney.

Now it is estimated that approximately 55% (40% federal and 15% state) of his estate will go off in estate taxes. Think about this, he worked from a young age (teenager) practicing the guitar to become a world famous musician, amass a large estate because of his successful use of his talent, only to pay huge income taxes all his life and then the final rub to pay another 55% when he passes away. That works out to be $165,000,000 to $275,000,000 paid to the government (state and federal)! 

Not to mention that his estate maybe tied up in probate court for years to come. What a nightmare for his family!

Here is a person who could easily afford the best advice possible from the sharpest legal minds in our country, but chose not to do so. Clearly he had attorneys who helped review his contracts and other investment advisors who helped him manage his money. It saddens me to think not one of them sat him down and said someday you will die, you should be prepared. Perhaps they tried to do this and he ignored them, like many young people who think they will live forever.

Those of you who are young - or better yet those of you who are still breathing, young or old - need a valid estate plan. Not one referenced by the drive by financial planners, self-prepared on some internet website for $29.99. Don't create problems for those you leave behind - go see a real attorney who specializes in estate planning and get it done right.

Now you may be saying I am not wealthy like Prince; that is not the point everyone needs an estate plan if you own a home, cars, business, or any other assets, you need a plan. Besides a will or trust a proper estate plan also includes certain documents needed while you are still living, like a Medical Power of Attorney, a Living Will,  and other documents. 

If you are part of a second marriage, you need an estate plan. I have personally seen a father disinherit his children and grandchildren and everything went to the second wife, completely different from his wishes. These things happen all too often. If you don’t know of a good estate planning attorney you can I can provide you with  I know several. I wish you all the best in the proper planning for the future disposition of your hard earned assets. 

REMEMBER:

"Death is not the end. There remains the litigation over the estate" ~ Ambrose Bierce

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.

California’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

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.

The 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

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 Carinthia, 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. 

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.”

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 1^st 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

Europe & Japan

With interest rates plunging throughout the European Union and in Japan, demand for large denominated bills has risen over the past few months, as investors and individuals are finding storing wealth in stable currencies is better than paying central banks (or receiving a negative yield) to hold those same assets.

The negative yields orchestrated by the ECB in Europe and the Bank of Japan have both caused unintended consequences. Many believe that rather than seeing an increase in lending by financial institutions and spending by consumers because of lower rates, less money is actually exchanging hands resulting in less economic activity. World trade shrank 13.8% in 2015, as tracked by the Netherlands Bureau of Economic Policy Analysis World Trade Monitor.

Government bond yields in Europe and Japan dropped into negative territory in February, with the German 2-year bond at -0.53%, and the Swiss 10-year bond at 0.4%. Japan sold 10-year bonds with a negative yield for the first time ever on February 29^th. The $19.5 billion worth of bonds were priced with a yield of -0.024%.

In particular demand were U.S. 100 dollar bills, which are plentiful worldwide and easily traded. See What Raising the Fed Funds Rate Really Means for info about interest rates in the United States.  Demand for Bank of Japan notes ranging from 1,000 yen to 10,000 yen denominations each increased as rates fell below zero in Japan. Swiss 100 to 1,000 franc bills also experienced an increase in demand as yields throughout Europe fell.

At odds with the rest of Europe is Britain, whose consideration of exiting the EU has led to an increase in British government bonds.

Britain

The possibility of Britain’s exit from the European Union (EU) has sent the British pound lower, making it the worst performing currency of a developed nation versus the dollar year to date. The pound fell below 1.40 versus the dollar in February, raising fears of inflation as British consumers buy plenty of imported goods, subject to higher prices as the pound is able to buy less because its devaluation. Britain has been an integral component of the 28 nation EU for four decades.

Economists and analysts are closely watching the direction of the pound as it could possibly affect surrounding European countries and pose a risk to further fragmentation of the European Union.

Moody’s rating agency expressed concern that Britain’s exit from the EU might hinder its credit rating, thus increasing the country’s cost to borrow money.

The yield on the gilt, Britain’s 10-year government bond, rose to 1.45% in late February, as bonds were sold in anticipation of higher rates should an exit of the EU occur.

Considering that Britain has been part of the EU for so long – does anyone really think they will leave? Their fight may not necessarily be economic as it is the laws that the EU passes that have implications with their British businesses and their citizens that go against the grain in Britain. I think they are finding it hard to be a state, as we are in the U.S., and have a federal government/judiciary pass laws that don’t make sense and tell you what you have to do, chipping away at their rights!

Sources: ECB, BOJ, Fed, Netherlands Bureau of Economic Policy, EuroStat, Bloomberg, Reuters, Moody’s

REMEMBER

"Shaping your role in an organization is at the source of taking control of your career." - Make It Work, Joe Frodsham and Bill Gargiulo

The old saying, "its a small world", has become a reality in the world of economics. The economies of the the many nations around the globe have really become so intertwined, its like your kid bringing home the flu from school to share with the rest of the family. When one economy has difficulty or success the rest of the world follow right along. Here is a brief update on some of the larger players around the globe. 

Japan’s inflation rate is essentially zero as the country’s Ministry of Internal Affairs & Communications reported in late February. Over the past year, Japan has seen its prices barely move up by 0.1%, reflecting sluggish consumer demand and lack of confidence among Japanese. 

The International Monetary Fund (IMF) reported that the world economy is highly vulnerable due to a weakening global economy, depressed oil prices, and geopolitical conflicts. The IMF also released a report detailing its projections for growth, identifying India as the new growth engine of the emerging markets. China’s slowdown over the past two years has been a concern.

India’s growth has been terrific, however it poses the concern is it following in the path of China with rapid growth for several years then a long lasting slow down. Currently their GDP is up 1.7 percent and their unemployment rate is 4.9 percent with a healthy 5.18 percent inflation. 

Dropping government bond yields in Europe are being seen as deflationary as the European Central Bank (ECB) strives to stimulate economic growth, but with minimal benefits thus far. Britain’s consideration to exit the European Union (EU) has brought about uncertainty in Europe until a vote in June.

In recent days the dollar has climbed higher against other international currencies as comments have emerged from the Fed about a possible rate hike in April. Even though there is some weakness in the U.S. economy a small rate hike would certainly bring more money into the U.S. as other nations are seeing, in some cases, negative rates.

This month the U.S. Unemployment Rate dropped to 4.9 percent and the inflation rate leveled at 1.0 percent, with interest rates at 0.5 percent. The concern is how much the 1.4 percent GDP would be hurt if rates were increased.

Brazil’s economy is still struggling, the jobless rate has hit a 7-Year high at 7.9 percent, with projections for higher unemployment the rest of the year. While their inflation rate has slowed to a 10.4 percent, their GDP has continued to contract for the past four quarters. 

Each of these economies impact what happens here in the United States. It is amazing how inter-connected we have become over the past 200+ years. What we do also greatly impacts the other countries of the world. Our national debt for example is a huge concern, but that will have to wait for another article. 

Gladly Keeping you up to date,

Wendell Brock

Sources: ECB, EuroStat, Market Watch, Bank of Japan, IMF

Remember:

"Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy. Its inherent virtue is equal sharing of misery." - Winston Churchill

Each month, the Energy Information Agency (EIA) tracks the price of gasoline nationwide as well as how much households (consumers) are buying overall.

The EIA expects gasoline prices to start rising this year, while continuing to head higher into 2017 as demand picks up and supply levels drop. Gasoline prices had been falling because of lower crude oil prices, which account for about two-thirds of the price U.S. drivers pay for a gallon of gasoline.

Increases in fuel economy are also contributing to lower fuel expenditures, as cars and trucks are more efficient and travel farther on a gallon of gasoline. According to the Environmental Protection Agency, the production-weighted fuel economy of cars has increased from 23.1 miles per gallon for 2005 cars to almost 28 mpg for 2014 cars, an increase of over 20%. Similarly, the fuel economy for trucks has increased 19%, from 16.9 mpg to 20.1 mpg in the same timeframe.

The Consumer Price Index (CPI), a statistical measure of inflation, has gasoline accounting for 5.1% of consumer spending as of October 2014. Reductions in gasoline prices ultimately impact the relative weight of gasoline compared to other expenditures such as shelter, clothing, food, and entertainment in price indices compiled by the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis.

The demand for gasoline is very price inelastic over short time periods, meaning changes in price have little impact on the number of gallons used. Falling gasoline prices allow households to spend their income on other goods and services, pay down debt, and/or increase savings. However, the longer prices remain low, the more time households have to plan for driving vacations and decide on where to spend their excess money.

Sources: EIA, Commerce Dept., BLS, EPA

Remember:

"If you can't make them see the light, make them feel the heat." - Ronald Reagan

Two weeks ago I went and purchased a bunch of stamps and commented to the lady serving me at the counter, that postage prices just went up in January and I missed buying some stamps at the lower price… She explained that the price increase was just for packages, not stamps and that the price of stamps was staying the same!  Well hold on, now we have this announcement from the Post Office:

For the first time in 97 years, the U.S. Postal Service is lowering the price on first class postage. Effective April 10^th, a first class stamp will cost 47 cents, down from 49 cents. The last postal price drop was in 1919 when a first class stamp dropped from 3 cents to 2 cents. (Image at right is the World War I Victory Stamp printed in 1919.)

The price reduction is part of a prearranged agreement with Congress when the USPS was allowed to increase the price of stamps by three cents in 2014 in order to stem a dramatic loss in revenue. The price hike was set to last for only two years, allowing the USPS to raise over $4.6 billion in revenue. Stamp prices may still increase as inflation picks up, since postage is pegged to inflation.

Optimistically for the USPS, the advent of internet sales has spurred a growth in package shipments over the past few years. Standard mail, such as first class letters and postcards, represent 76% of postal revenue.

Other postage dropping in price on April 10^th includes postcards, from 35 cents to 34 cents, and international stamps from $1.20 to $1.15.

By the above numbers the average American uses nearly 350 stamps per year or a savings of only $7. For the typical consumer that uses a few stamps here and there its not a big deal, but for the small to large businesses that relies on the mail service and uses thousands of stamps a month this will add up. The savings can be quite large for these businesses.

Unfortunately for those who so far have purchased countless types of Forever stamps with an array of pricing, colors and themes, new purchases at the new “Forever” price will have to be made while putting aside all others priced above until the (not-so) Forever stamp is again at least 49 cents.

This will most likely be a temporary price reduction as the Post Office is always in need of funds, I would expect by the end of the year they are back in front of Congress looking for a price increase. (Now the Post Office won’t have the $4.6 billion they raised from the last price increase.) If you can wait to buy your next order of stamps do so, saving a little money and stock up!

Sources: USPS

Remember:

"The quality of a person's life is in direct proportion to their commitment to excellence, regardless of their chosen field of endeavor."  -- Vince Lombardi

Deciding when to start taking Social Security benefits can have a tremendous impact on the amount of lifetime benefits you may receive.  Furthermore, the Bipartisan Budget Act of 2015 recently signed into law may impact your Social Security income and increase your retirement health care expenses. 

Fortunately, the software we use has been adjusted to reflect the changes made with the law and can help you assess its impact on your projected retirement budget.

Aside from providing no 2016 Cost Of Living Adjustments (COLAs), Social Security will also significantly limit the benefits from one claiming option (File and Suspend) and eliminate another (File Restricted).   

Under the new legislation, those who file and then suspend benefits will no longer be able to allow a spouse or dependent(s) to collect a percentage of their Social Security benefits.  But, qualifying Americans can still employ this strategy until April 30, 2016.

The File Restricted option, which allows an individual to earn income based on the spouse’s record – then later file for benefits with accrued income credits, will be eliminated for anyone who has not reached 62 by the end of 2015.

There are also changes coming to Medicare, including new annual premium surcharges and a 14.4% increase to Medicare premiums for individuals who earn over $85,000 per year (and couples who earn over $170,000). 

These are complex issues.  Let me help simplify them.

As your financial professional, I am looking forward to working with you as you take control of your income, focus on managing your health care expenses, and strive to improve your financial stability in retirement.

Schedule your no cost or obligation analysis today and when we meet, you will receive a comprehensive Social Security report detailing a claiming strategy designed specifically for you.

I shared this with a client recently and she was amazed at the clarity it provided her in making the important decision on when to take her Social Security benefits and how much more she would receive - for her it was a great blessing. Your time will be well spent in learning about these changes and receiving the .

REMEMBER:

"If you have enemies? Good. That means you have stood up for something, sometime in your life."  - Winston Churchill