Outside Economics

The Argues of the Super Macro Economic View

Posted by Wendell Brock, MBA, ChFC on Fri, Aug 05, 2016

In the United States we have enjoyed the largest economy in the world for so long that we often don't think of how events around the globe affect us. Maybe we just don't want to admit that we are suceptable to the economic occurances that take place twelve thousand miles away in some small country! But those things do affect us now that we really operate in a global economy and the macro view is not just a look at the United States any more - it is a look at the world. Maybe we will have to reference Macro as the Super Macro View for the world economy, vs. the Macro View for the U.S. Economy. Luckly we have not sneezed this year so the rest of the world has not caught a cold, but there are events that have occured that are affecting us. Maybe what we have is a case of "the argues" as old Festus from Gunsmoke use to describe his aches or pains in his body - it was when one part of the body was arguing with the other! (Wow that really dates me!)festus.jpg

Macro Overview

Macro risks are still prevalent throughout the world as the effects of Brexit and terrorism continue to be ongoing concerns. U.S. markets have been resilient to the uncertainties, as major U.S. stock indices reached new highs in July.

Some believe that the outcome of the EU vote, as well as the sentiment in Britain shortly before the vote to leave the EU, has many similarities to the U.S. presidential race. Key election issues and how they may affect the economy include: NAFTA, immigration, terrorism, and banking regulations such as Glass-Steagall and Dodd-Frank.

The presidential campaign has brought about the suggestion of reforming existing regulations, which are adversely affecting the banking and financial services industry. Some candidates argue for the repeal of Dodd-Frank, regulations put in place during the current administration to regulate banking activity.

The problem has been that the costs of the new regulations have inhibited smaller banks and credit unions. Some candidates lobbied to bring back legislation known as Glass-Steagall, put in place during the depression in order to prevent banks from combining financial services and lending simultaneously with the more risky business of investment banking.

In the last eight years since the “Great Recession” there have only been four community banks started in all 50 states, down from about 160 in 2007. Community banks are often a major economic engine for the local economies.

Economic growth, measured as GDP, was reported by the U.S. Department of Commerce to have increased at an annual rate of 1.2 % in the second quarter of 2016, below analyst’s expectations of 2.5%. The dismal GDP report was accompanied by a drop in oil prices of over 15% in July and a record low for the 10-year Treasury yield hitting 1.37%.

Upcoming economic data for the U.S. may influence the Federal Reserve to act on raising rates rather than waiting any longer. Analysts believe that a rate increase by the Fed before the end of 2016 based on U.S. economic data may be a mistake. Rates in Europe and Japan remain in negative territory due to the uncertainty of growth within the EU and the expected derogatory effects of Brexit on global business transactions. Fed members decided to leave interest rates unchanged during their July meeting, stating that it was prudent to wait for more data following the consequences of Britain leaving the EU.

Banks in Italy have become the latest of concerns in Europe as souring loans are being recognized throughout the Italian banking sector. As the third largest economy in the EU, Italy’s banking sector is prone to a crisis that could have dire consequences for the country and neighboring trading partners.


Stagflation On The Horizon – Monetary Policy

Former Fed Chairman Alan Greenspan said that the U.S. may be heading toward stagflation, a slow-growth economy coupled with rising inflationary pressures. Greenspan also said that there seems to be pockets of inflation even though low productivity is prevalent in the economy.

Stagflation is an economic phenomenon when there is slow or stagnant economic growth at the same time as rising inflationary pressures. The 70’s were a period when rapidly rising fuel prices coupled with dismal economic growth, led to stagflation. This same scenario occurred in the first two years of the 80’s, until both monetary and fiscal policies were enacted that halted destructive inflationary pressures and curtailed taxes to boost economic activity.

Inflation is measured by the CPI (Consumer Price Index) and economic growth is gauged by GDP (Gross Domestic Product), which are both released by the Department of Commerce each month. As a barometer of general prices throughout the country as well as current economic activity, both indices help identify any possible stagflation scenarios.

Managing your way through this current economic time can be challenging. It would seem that rates will remain low for the near future, certainly into 2017. The Fed may make minor adjustments, but I don’t think we will see any drastic increases. Wall Street needs better earnings to keep it going, I think they have had their fill of low rates. It’s a good time to review where you are at, and how your plans are shaping up for the year. Additionally, now is the time to start the final work for income tax reduction strategies, as we finish the third quarter. It much better to do this now rather than starting in December!

The current low rate environment, is no longer an effort to keep fueling Wall Street, but in an effort to keep the Federal Government afloat (they are the largest borrower in the world). If rates increase for the government, then ALL TAXES must go up to pay for the increases in interest payments. Don’t get me wrong, lower rates do help the Market, but the Market has adpted to lower rates for some time.  Now the Federal Government needs to get its borrowing under control for the rest of the economy to move forward. (See Feed the Pig Article)

Sources: EuroStat, Dept. of Commerce, BEA, Federal Reserve, ECB


"So that the record of history is absolutely crystal clear. That there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system."  Milton Friedman

Topics: Economy, Interest Rates, Great Recession, Brexit, Stagflation

Lasting Effects of the Great Recession

Posted by Wendell Brock, MBA, ChFC on Wed, Nov 05, 2014

It is an interesting time that we live in. Consider some of the current economic themes in households, businesses and markets throughout America:

In October 2007, U.S. stocks were hitting an all-time high, jobs were plentiful and homes were expensive. Two months later, the Great Recession began to eviscerate the economy, ultimately sucking $10 trillion out of U.S. stocks, collapsing a housing bubble and pushing the unemployment rate over 10 percent.

Seven years later, most Americans have tried to put their finances in order, many are reducing their debt and working to save more. But Americans are making a lot less money and own fewer assets, even as stocks reach new highs, according to the Federal Reserve Bank.

Great_RecessionHousing prices are still 13 percent below 2007 levels. Fewer Americans own houses - sending rents up 16 percent, to an average of $1,100 per apartment in metro areas.

Educational loans are up, by $2,500 for the median family paying off student loans. That is prompted by tuition increases and a surge of people going back to school. Post-secondary enrollment jumped 15 percent, or 2.8 million, from 2007 to 2010, according to the U.S. Department of Education.

Jobs may be coming back, but good jobs are still scarce. More than 7 million people are working part-time jobs when they'd prefer a full-time position, 57 percent more than in 2007. And more than 3 percent of adults have left the workforce entirely since 2007, according to the U.S. labor force participation rate.

Increased government regulations have made it increasingly difficult for small businesses to grow, let alone stay in business. The uncertainty of new regulations and the differing political winds have all but removed the stability of our Republic. It was with this political stability that ideas and businesses thrived over the past 238 years. Instability causes uncertainty, hence in October we saw huge swings on Wall Street.

The Financial Select Sector SPDR (XLF), an exchange-traded fund targeting banks and investment firms, had the biggest withdrawal last week since 2009 amid concern that low interest rates and market swings will hurt profits.

Investors pulled $913.4 million from the $17.5 billion ETF, whose top holdings include Berkshire Hathaway Inc., Wells Fargo & Co. and JP Morgan Chase, a shift that turned its flow of funds negative for the year. The SPDR fund tracking financials is the largest and most-traded among the 40 U.S. listed ETFs focusing on that industry. Its shares outstanding decreased 5 percent, the biggest weekly decline in more than year.

Commercial Banks have waited for years for higher rates and more robust trading to b


oost revenue from lending and market-making. “Weaker-than-expected global growth could prompt the U.S. central bank to slow the pace of eventual interest-rate increases,” Federal Reserve Vice Chairman Stanley Fischer said. The severity of market swings last month also boosts the risk that some investment banks will incur losses while facilitating client bets, and it may slow mergers and acquisitions.

All this combined makes me wonder if we are indeed out of The Great Recession, as some say we are. Are the strategies proposed by the central banks as well as politicians designed to keep our economy down or to help it grow as they insist?

The outcomes of the elections this week will be very telling as to how Americans are feeling about the realities of what they are experiencing, day in and day out.

Topics: Great Recession

401(K) Borrowing – Not a Good Idea

Posted by Wendell Brock, MBA, ChFC on Fri, Jul 12, 2013

For years as a financial adviser I have recommended to people not to borrow from their 401(K)’s and other retirement plans. However, as this Great Recession lumbers on, which I know has passed, but many people are still suffering from its effects, the number of people who are borrowing from their 401K is growing. The effects of which will not be felt by the borrowers for years to come. Here are t
Egg Buildinghe problems.

When borrowing from one’s 401K many people don’t consider it a “real loan”. After all, they are borrowing from themselves, right? Yes you may be borrowing from yourself, but it’s the wrong attitude. It is a real loan and must be paid back or penalties will be incurred.  Those penalties are very costly.

The penalties on the unpaid loan balance are income taxes and a 10 percent penalty tax (if you are under 59 ½ ). If you are in the 28% tax bracket, and your unpaid loan is $20,000 that means the cost of not paying back the loan will be approximately $7,600 or 38 percent – this does not include any state income taxes that may be due. If you are in California the amount could easily reach 50 percent or more in combined taxes and penalties.
You may say, "I am one of the 96 percent of borrowers as reported by Fidelity who pay the loan back faithfully, so what is the problem then"? Those who borrow typically reduce their 401K contributions during the years that the loan is being repaid – so they are saving less. If the loan is paid back over 
the typical three years this lower savings rate has an impact on long term retirement savings. If the savings reduction is only two percent for three years for a 40 year old person that can be a cumulative loss of thousands of dollars at age 65.

Another problem is when repaying the loan it is with after tax dollars. So repaying the loan with after tax dollars means that those dollars will be taxed twice. For example: a $20,000 loan paid back with after tax dollars means that you will have to pay taxes on that $20,000 again when it is withdrawn for living expenses during retirement. So you paid taxes to earn the 20,000 to repay the loan and then again when it is withdrawn from the account at some point in the future.

Job cuts can cause you to either pay the loan back within 60 days or it becomes a distribution, subject to the taxes and penalties. This is especially hard when people have lost their jobs and are required to pay extra taxes on what is now income they were not expecting (Distributions are considered income). Or they are required to pay back a loan of any size in 60 days, chances are if they could do that they would not have borrowed the money in the first place.

Some employers, to discourage borrowing, charge loan fees, thus increasing the cost of the loan. Or employers are only allowing one loan at a time and after the loan is paid back they have a six month waiting period to borrow again. Employers are getting wise to the problems of borrowing, so they are limiting loan amounts to only employee contributions – thus keeping their contributions off the table.
There is also a trend that Fidelity has noticed, serial borrowing. Constantly going back to the 401K to borrow money is much a kin to keeping balances on your credit cards. This can be especially bad when trying to develop retirement security. This is what the government does, borrows against future tax revenue; we all know what a mess the government finances are. The idea should be to build a retirement nest egg, and get out of debt and stay out of debt.

A loan of any kind can be trouble, the best thing to do is build the emergency fund and stay out of debt. Remember we create our own emergencies – we are the ones who determine what an emergency is. A broken arm of a child is part of life, the emergency is getting them safely where they can receive proper care. The financial expense is just a part of life we need to plan for, that is why we save money. I have found that when we save for emergencies, we tend to have fewer of them.

Bottom line – be very careful about borrowing from a 401K. Do your best to do without borrowing for any reason and you will have a more prosperous life. I know there are times and circumstances where we as people feel stuck, but really what are they? Can’t the problem be solved some other way?

Topics: 401K, 401K Borrowing, 401K Loans, Great Recession

The HARP Program for Homeowners

Posted by Wendell Brock, MBA, ChFC on Fri, Jun 28, 2013

The HARP Program was designed to help homeowners refinance their mortgages who may have been damaged during the financial crisis or the Great Recession. The Program helps people get a lower interest rate on their mortgage, thus making the home more affordable. In many cases it helps families keep their homes. Below are the basic requirements and our experience of going through the process. 
HARP Program - Home Savings
The requirements are simple: 

1.       The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.

2.       The mortgage must have been sold to Fannie Mae or Freddie Mac before May 31, 2009.

3.       The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May 2009.

4.       The current loan-to-value (LTV) ratio must be greater than 80%.

5.       The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months. [i]

Additionally your mortgage company has to participate in the program. I think it is harder to find a mortgage company that does not participate than one that does. 

Thinking that our mortgage company would be the best place to start with refinancing our mortgage I called them and started the process for the home loan modification, not knowing that I was ineligible because we were always on time with our mortgage. Six months later, we found out that we were declined because we always paid our mortgage and were not in threat of foreclosure. I was pretty angry to say the least, that it took them six months and mounds of paper work, to tell me this. 

A couple months went by and someone from our mortgage company called me to talk about the HARP program and that I should consider applying, I was thinking you have a lot of nerve calling me asking me to reapply after what you had put me through a few months ago. The lady assured me that this program was different and the only paperwork I would be required to deliver were my tax returns. She let me know the requirements and that I clearly qualified and that the rate would be less than 4.0 percent. After an hour of talking, she finally convinced me to give it a try. 

Within two weeks I was approved and it took me longer to get my tax returns from my accountant than to get the loan finalized.  This was really a smooth deal and a no hassle opportunity to lower my rate! They did pull my credit, but mainly to verify my address. A good credit score is not a requirement as she explained to me (not that mine was bad). Saving money is a great blessing!

This was bar none the easiest loan I think I have ever applied for. Perhaps it was my lender, but not sure, as CitiMortgage – a subsidiary of CitiBank – is not always known for being the most efficient or best company to work with. So the bottom line – go get HARPed!! Have you already been through the process if so what was your experience?

[i] Making Home Affordable -http://www.makinghomeaffordable.gov/programs/lower-rates/Pages/harp.aspx

Topics: Great Recession, Homeowners, HARP Program, mortgages


Wendell W. Brock, MBA, ChFC

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