Answers to your questions about credit freeze and credit monitoring

equifax-credit-hack

Our bulletin over the weekend recommending that you freeze your credit reports after the Equifax breach prompted quite a response from media and clients.

Daisy Maxey at the Wall Street Journal interviewed us about the ways in which consumers can deal with the fallout from the Equifax data hack.

We also spoke to Stan Bunger and Susan Leigh Taylor of KCBS News Radio in San Francisco on the subjects of credit monitoring, the pros and cons of a credit freeze and how to manage a fraud alert.  Audio of interview  Transcript of interview

We heard from clients frustrated and confused by the information provided by other media sources and the credit bureau websites.  Here are answers to your questions:

What's the difference between a credit freeze, credit monitoring and a fraud alert?

A credit freeze completely locks your account - current creditors can still your report, and you can still see your report, but if someone tries to open an account in your name, that attempt will be blocked.  The fee to freeze the account is small, and may be $0 in some states.  There is a fee of $3-10 to unfreeze your account (and you must be sure to have the PAPER copy of your PIN number to unlock the account.)

Credit monitoring allows banks, credit card companies, and auto-lenders to look at your credit report, but you will be alerted when such requests are made.  Costs range form $10-$30 month, with the more expensive services including scans of illicit networks where consumer data is bought and sold.

A fraud alert last only 90 days and must be renewed periodically.  Your credit report is still accessible, but any business trying to access your report must go through additional verification steps.  There is no cost to place a fraud alert.

Do I have to subscribe to credit monitoring in order to do a credit freeze?

No, though that is not obvious from the credit bureau websites.  These businesses are trying to bundle the free or cheap credit freeze with the recurring expense of credit monitoring.

These numbers are the fastest way to apply the freeze WITHOUT buying the monitoring services:

  • Equifax - 1-800-349-9960
  • Experian - 1-888-397-3742
  • TransUnion - 1-888-909-8872

We have heard from some clients that they were turned away on some occasions and redirected to websites.  We expect that occurred because the phone systems were overloaded, so try again in a week if that happens.

Why can't I find credit freeze information on the credit bureau websites?

You, the consumer, are not the ultimate customers of the credit bureaus - mortgage banks, credit card companies, auto lenders, landlords, and employer are.  If you freeze your credit, that's one less data point that can be analyzed, packaged and sold.  The credit bureaus have no incentive to help you freeze your credit report.

Should I get credit monitoring anyway?

If you decide you need to keep your reports open, you can either pay for this service or perform the monitor on your own.  We don't recommend using the credit bureaus' monitoring services - that's not their business. Instead, use IdentityGuardLifeLock or MyFico.  Each company has different options, prices points and benefits, so spend some time figuring out which options are best for you.

Alternatively, get in the habit of setting alerts in your banking and credit card websites for large (e.g. over $1000) transactions, and review your credit report periodically for accounts you didn't open.

Should I be looking at my credit report on an ongoing basis?

We suggest yes, at least once/year and more often if you're in the market for credit.  CreditKarma.com will give you Transunion and Equifax reports for free (they get paid by advertising credit cards.)  MyFico.com tracks all three bureaus, and includes alerts and traffic monitoring as well, starting at $19.99/month.  Both services offer tools for figuring out how to raise your credit score.

Could a credit freeze affect other systems I use, for example, Social Security?

Unfortunately, yes.  Systems like SocialSecurity/MyAccount  query the credit bureaus to create challenge questions (e.g. "with which of these five banks did you have a mortgage in 2009?")  If you don't create these accounts BEFORE you put on the credit freeze, you may be locked out.  For Social Security, for example, you would have to go a SS branch in person and fill out paperwork after showing proper ID.

Many e-Signature services do the same kind of verification through the credit bureas, so be prepared for frustration in other elements of your financial life.

Heron Wealth recommends that you freeze your credit reports

cyber-attack-data-breach

The Equifax Credit Bureau announced last week that cyber criminals obtained personal details (name, social security, address, birthdates and credit card information) of approximately 143 million US consumers during the period of mid May through July 2017.  This is neither the first nor last such hack we will see in our modern ultra-connected age.  

Our clients and friends should be reasonably concerned about these breaches, but not panicked.  1100 data hacks were recorded in 2016, and breaches in 2017 are running at a pace 40% higher than 2016.  Your data is already out there, but it still takes time and effort for the data to be exploited.

Cyber-criminals go after the easiest victims.  We recommend the prudent step of freezing your credit reports with Equifax, Transunion and Experian.  This process lets you restrict access to your credit report, which in turn makes it more difficult for identity thieves to open new accounts in your name. That's because most creditors need to see your credit report before they approve a new account. If they can't see your file, they may not extend the credit.

The freeze process can be done in 3 five minute phone calls to each of the nationwide credit reporting companies:

  • Equifax - 1-800-349-9960
  • Experian - 1-888-397-3742
  • TransUnion - 1-888-909-8872

You'll need to supply your name, address, date of birth, Social Security number and other personal information. 

After receiving your freeze request, each credit reporting company will send you a confirmation letter containing a unique PIN (personal identification number) or password. Keep the PIN or password in a safe place. You will need it if you choose to lift the freeze. From the Federal Trade Commission.

Does a credit freeze affect my credit score?

No. A credit freeze does not affect your credit score.

A credit freeze also does not:

  • prevent you from getting your free annual credit report
  • keep you from opening a new account, applying for a job, renting an apartment, or buying insurance. But if you're doing any of these, you'll need to lift the freeze temporarily, either for a specific time or for a specific party, say, a potential landlord or employer. The cost and lead times to lift a freeze vary, so it's best to check with the credit reporting company in advance
  • prevent a thief from making charges to your existing accounts. You still need to monitor all bank, credit card and insurance statements for fraudulent transactions.

Can anyone see my credit report if it is frozen?

Certain entities still will have access to it.

  • your report can be released to your existing creditors or to debt collectors acting on their behalf.
  • government agencies may have access in response to a court or administrative order, a subpoena, or a search warrant.

How do I lift a freeze?

A freeze remains in place until you ask the credit reporting company to temporarily lift it or remove it altogether. A credit reporting company must lift a freeze no later than three business days after getting your request. The cost to lift a freeze varies by state.

If you opt for a temporary lift because you are applying for credit or a job, and you can find out which credit reporting company the business will contact for your file, you can save some money by lifting the freeze only at that particular company.

If you have any questions, please call us at 347 580 5280.

 

Mid Year Review - Slow but Steady?

In our December 2016 year end review we wrote, "No forecast now, no forecast until April.  We can't recall another time in the last 30 years that we were so uncertain about what to expect from the US government, and how that would affect the key drivers of stock market returns - revenues, earnings and interest rates.

Other analysts put out price targets for the S&P 500 of 2300-2450, which would imply gains of 3-9.5% from the current level of the S&P 500 at 2239.  The consensus for 2017 is that:

  • Inflation will rise from the current 2% annualized
  • Interest rates will continue to rise, with the Fed raising rates perhaps 3 times this year
  • The dollar will remain strong, depressing the value of overseas earnings and promoting imports over exports
  • A combination of deficit spending and new spending on infrastructure COULD enable the US economy to grow faster than the 2% annually of the last 8 years.
  • Wages will rise as labor markets tighten
  • Earnings in general will rise, particularly if corporate taxes are lowered"

From year end through July 14th, the S&P 500 made 24 record highs and currently gains 9.85% YTD, so already above the most optimistic forecast at the start of the year.  

  • Inflation remains under 2% (helped by a 20% slide in energy prices)
  • The Fed raised rates in March and June, may well raise a third time later this year
  • The US dollar hit a 15 year high in December, sold off 7% through July, but remains in a long term uptrend.
  • US GDP growth was 3.6% in the last quarter of the Obama administration, 2.1% and 1.4% in the first two quarters of the Trump administration, with 2.6% projected for the third quarter
  • The rate of job creation is slowing, and rate of wage increases is falling
  • No chance of a corporate tax cut this year, but the S&P 500 earnings drought of 2014-15 gave way to robust growth in 2016 and the first half of 2017:

Net, the US stock market is doing well because corporate revenues and earnings are doing well, while interest rates remain low in a lower than expected inflationary environment.  Even with the unemployment rate at 4.4%, there remains considerable slack in labor markets, so strong corporate profits are NOT translating into wage gains.  Overall, good news for Americans who own stocks, not good news for Americans who have not seen real income growth since the 1990's.

In our December 2016 year end review we wrote, "No forecast now, no forecast until April.  We can't recall another time in the last 30 years that we were so uncertain about what to expect from the US government, and how that would affect the key drivers of stock market returns - revenues, earnings and interest rates.

Other analysts put out price targets for the S&P 500 of 2300-2450, which would imply gains of 3-9.5% from the current level of the S&P 500 at 2239.  The consensus for 2017 is that:

  • Inflation will rise from the current 2% annualized
  • Interest rates will continue to rise, with the Fed raising rates perhaps 3 times this year
  • The dollar will remain strong, depressing the value of overseas earnings and promoting imports over exports
  • A combination of deficit spending and new spending on infrastructure COULD enable the US economy to grow faster than the 2% annually of the last 8 years.
  • Wages will rise as labor markets tighten
  • Earnings in general will rise, particularly if corporate taxes are lowered"

From year end through July 14th, the S&P 500 made 24 record highs and currently gains 9.85% YTD, so already above the most optimistic forecast at the start of the year.  

  • Inflation remains under 2% (helped by a 20% slide in energy prices)
  • The Fed raised rates in March and June, may well raise a third time later this year
  • The US dollar hit a 15 year high in December, sold off 7% through July, but remains in a long term uptrend.
  • US GDP growth was 3.6% in the last quarter of the Obama administration, 2.1% and 1.4% in the first two quarters of the Trump administration, with 2.6% projected for the third quarter
  • The rate of job creation is slowing, and rate of wage increases is falling
  • No chance of a corporate tax cut this year, but the S&P 500 earnings drought of 2014-15 gave way to robust growth in 2016 and the first half of 2017:

Net, the US stock market is doing well because corporate revenues and earnings are doing well, while interest rates remain low in a lower than expected inflationary environment.  Even with the unemployment rate at 4.4%, there remains considerable slack in labor markets, so strong corporate profits are NOT translating into wage gains.  Overall, good news for Americans who own stocks, not good news for Americans who have not seen real income growth since the 1990's.

Healthcare and Tax Reform

On June 22nd, Majority Leader Mitch McConnell spoke from the Senate floor, "Seven years ago, Democrats imposed Obamacare on our country. By nearly any measure, it has failed and no amount of 11th hour reality-denying or buck-passing by Democrats is going to change the fact that more Americans are going to get hurt unless we do something."

The problem with this statement is that is objectively not true.  Obamacare is far from ideal, but tens of millions of Americans are dependent on the program.  Philosophically, conservatives oppose Obamacare because they don't like the government telling people they need insurance, and they despise the 3.8% net investment income tax on interest, dividend, rent, royalty and passive business income of high-income (over $250K/year) taxpayers - the 2% of richest Americans.

Many of our clients are paying this tax, and yet we oppose the Obamacare repeal.  Prior to the 2009 Affordable Care Act, the number one reason why average families ended up in bankruptcy or foreclosure was because of unplanned medical expenses.  Even young, healthy adults are just one snowboarding accident away from catastrophic medical bills.

In a recent presentation, we framed the debate as, healthcare is

  • a right
  • an entitlement
  • an investment

 Progressives see healthcare as a right (and a good thing.)  Conservatives see healthcare as an entitlement (and a bad thing.)  Pragmatists see healthcare as an investment (and a necessary thing.)  Factory owners typically spend annually 10% of the purchase price of an industrial robot on maintenance.  At Heron Wealth, health insurance expenditure equals 12% of payroll cost - money well spent to retain our excellent team.  We have the advantage of having few, highly paid employees.  We understand how healthcare spending would cripple small businesses with many, low paid employees, who resolve that problem by shifting employees to part-time schedules of less than 30 hours/week, which is not good for the business, the employees or the company's customers. 

McConnell announced last week that Congress would remain in session for an extra two weeks into the traditional August recess while the Senate attempts to corral 50 votes to repeal Obamacare - tough sledding given that 61% of polled Americans, 1/3 of Trump voters, most state governors, the AARP, the American Medical Association, and the American Hospital Association oppose the current measure. 

As of Sunday, July 16th, a vote to repeal is on hold while Senator John McCain, potentially the 50th vote, recovers from surgery to remove a blood clot.  John and Cindy McCain have a net worth of about $120 million, so no doubt McCain's medical expenses were paid through private (or self) insurance.  Staffers in his office generally would be enrolled in DC Health Link, an ObamaCare exchange where the insured pay 28% of the cost and the Federal Government pays 72% of the cost.

The most recent iteration of McConnell's bill retains the Obamacare taxes.  Removing these taxes frees up $900 billion over 10 years, which in the calculus of congressional procedures would allow for tax cuts to the wealthy including the elimination of the inheritance tax and cuts to corporate taxes as well (taxes for middle and low income tax payers would probably rise.)  It seems unlikely that tax reform will occur this year, in particular because Congress still has to approve the budget for next year and raise the debt ceiling. 

In principal, the Republicans control the House, Senate, Presidency and Supreme Court.  In practice, the government is divided between 4 minority parties - moderate Republicans, conservative "Freedom Caucus" Republicans, Democrats and Trump, whose only allegiance is to himself.  No group can command a majority without support of at least a few actors from the other groups (and such support is not forthcoming.)  As a result, the ONLY significant accomplishment of Republicans since January is the confirmation of Supreme Court Justice Neil Gorsuch, accomplished only by dismantling the super-majority rule.

And yet, stocks are doing well!  Corporations and investors dislike uncertainty.  The status quo suits investors just fine.  Investors would like tax cuts (who wouldn't) but in our last commentary we observed that tax policy and economic growth are poorly correlated.  The economy and stock market soared after President William Clinton raised taxes and balanced the budget.  Both were clobbered after President George W. Bush slashed taxes, deregulated the banking system and exploded the deficit.

The Trump Show

The most gripping reality TV show of all time (and we cannot avert our eyes!). As we know, the frustration of average Americans with economic conditions was the tipping point issue in last fall's election.  We don't feel like adding more commentary to the millions of pages already written about Trump.  We observe that a third of Americans think Trump is a hero, a third pay no attention, while the remaining third think he's a blithering idiot (and a danger to all.)

Implications of the Trump Presidency for US Stocks

trump-stock-market

After 107 days of the Trump Presidency, we believe that this administration is determined to be the wildest reality TV show of all time.  People say, "War is God's way of teaching us geography."  Perhaps Donald Trump is God's way of teaching us about the Federal Government?

The purpose of this commentary is explain the challenges of making radical decisions about the US tax code and economy without creating counter-productive secondary effects.  We will also project how these decisions affect specific sectors and industry groups.  We'll do our best to write about Trump while leaving partisan feelings to the side.

As we often tell our clients, emotions and news nuggets dominate day by day fluctuations in the US stock market.  Over longer time frames - quarters, years, decades - only revenues, earnings and interest rates matter.  Ultimately, we invest in the cash flow generated by US corporations, discounted by expectations of current and future interest rates.  Rising revenues and expanding earnings support the market; rising interest rates harm the market.  With this framework in mind, let's review everything we know about the Trump presidency so far.

Healthcare

Spending on healthcare represents 17.1% of the US economy, yet our health outcomes (obesity, child mortality, addiction rates and chronic disease) trail "socialist" countries that spend much less including Sweden (11.9%), France (11.5%), Canada, (10.4%) and Japan (10.2%).  These countries regarding health care spending as an investment in productive workers the way a manufacturer regards maintenance dollars spent on factory robots as an investment.

Americans don't regards healthcare spending as an investment, but as a cost.  Uniquely among major industrialized nations, the provision of healthcare in the US is attached to employment, which left 50 million Americans uninsured prior to the passage of the Affordable Care Act in 2010.  The ACA, with all its flaws, enabled 22 million to receive insurance, whether through purchasing policies through the exchanges, Medicaid expansion, or as young adults staying on their parents plan.  We have HNW clients who are enrolled in Obamacare because it's the most affordable option in their communities.

Conservatives hate the cost of the Affordable Care Act that is covered by a 0.9% increase in Medicare Tax for earned income in excess of $250K for a couple, $200K for an individual and a 3.8% surtax on the unearned income (interest, dividends, passive business income).  These taxes apply primarily to the top 2% of US earners and generate about $30 billion annually in tax revenues.

Given that Congress voted over 60 times to repeal the ACA between 2011-2016, observers assumed that repealing Obamacare would be the first act of the new administration.  Indeed the S&P 500 Health Care index, sold off through the summer of 2016, rallied just before the election anticipating a Clinton win, sank in the days after the election.

To the astonishment of all, the first attempt to rollback the ACA under the new administration foundered March 24th when Paul Ryan, Speaker of the House, could not corral enough Republican votes to obtain a majority (Democrats across the board refused to support the bill.)  Of the Republican dissenters, half felt that the repeal was incomplete, while the other half worried about the damage repeal would do to their own constituents.  Apparently, their constituents aren't willing to die so that the richest 2% of Americans could receive tax cuts averaging $33K/family.

Just this past week on the third attempt Congress voted 217-213 to enact the cynically named American Health Care Act, which eliminates the Obamacare taxes, cuts $900 billion from Medicaid expansion over ten years, curtails many popular healthcare initiatives including a 95% budget cut to the office that fights opiate addiction.  Congress held no committee hearings, provided no Congressional Budget office score and many congressman admitted that they had not actually read the bill.  The legislative process now shifts to the Senate, where the House bill is generally considered "dead on arrival."

For the time being, the greatest beneficiaries of the current regime are insurance providers, but medical device makers and pharmaceuticals should do well.  Actual doctors will continue to suffer the squeeze between rising costs and limited insurance reimbursements.

The Budget Process

Conservatives salivated at the idea of obtaining a $1.34 trillion reduction in spending over a decade by eliminating the ACA.  Under the 2011 Budget Control Act, Congress can't raise spending or cut taxes without demonstrating that the changes won't increase the deficit.  The Congressional Budget Office estimates the effect of changes over a ten year time frame through a process of "Dynamic Scoring."  The limitation can be relieved by a super-majority vote of 60 in the Senate, but Republicans only control 52 seats.  How are budgeting, tax breaks and tax reform all tied together?

In 2016, the US spent $3.9 trillion including 23.3% to Social Security, 15.0% to Medicare, 8.4% to Medicaid, 14.4% to unemployment benefits, federal retirement benefits and the earned income tax credit, 15.0% to Defense, and 6.2% to interest on the National Debt - 84.6% of spending is non-discretionary.  The remaining 15.4% of discretionary spending includes the Departments of Health and Human Services, Education, Veterans' Affairs, State, Homeland Security, Intelligence, Housing & Urban Development, Energy, Agriculture, Justice,  Transportation, NASA, Treasury, Labor, Social Security (administration,) Interior, Commerce, and the EPA. 

On March 16th, President Trump released a budget proposal which cut discretionary spending 9.5% by $54 billion, while increasing Defense spending by a like amount.  That proposal was largely ignored by Congress.  Turns out, millions of constituents derive considerable benefit from discretionary spending - Republican Congress members got quite an earful during the Spring recess. 

Congress avoid another government shut down on April 28th by passing a continuation resolution to fund the government through May 5th, which was then extended through September on May 5th.  President Trump still wants $20 billion for the Mexican wall and new income tax rates.  Congress is set on protecting programs that benefit their constituents.  It will be a long summer in Washington.

In general, diverting dollars from discretionary spending (government agencies that support the functioning of the economy) to Defense would lower growth rates of the economy and by extension corporate revenues (except for defense companies.)

Tax Breaks

The IRS collected $3.27 trillion in taxes in 2016.  The IRS could have collected an additional $1.5 trillion in 2016; money that is instead diverted to tax breaks such as the deductibility of employer health care expenses, lower tax rates on capital and gains and dividends, deductions for mortgage expenses, state and local taxes, charitable contributions, deductions for contributions to 401K pans and defined benefit plans.  Corporations benefit from tax deferral of foreign profits and the deductibility of interest payments. 

Specific industries benefit from a host of tax breaks, on average paying taxes at a rate of only 10.4%.  Real estate developers pay an average income tax of 2.0%.  Given Donald Trump history of real estate bankruptcies (the losses of which can be applied against income without limitation,) it's likely that he has not paid income tax in 20 years.  To be fair, his properties HAVE generated a substantial amount of real estate and payroll taxes over the last 35 years. 

Congress or the President could lower income rates in general by partially or completely removing tax breaks.  However, the pain of removing a tax break is felt acutely by a powerful constituency; the benefit to the general population is diffuse.

Tax Reform

Conventional wisdom dictates that tax cuts promote economic growth, but the evidence of the last 25 years suggests otherwise.

Under President Clinton, top rate on income was 39.6%, 21.2% on capital gains.  The budge deficit turned into a surplus, the economy grew by 56.2%, and the S&P 500 gained 264.7%.  Under President George W. Bush, the top rate on income was lowered to 35%, top capital gains rate to 15.74%, the economy grew 39.0% but the S&P 500 lost 30.0% over 8 years and the national debt increased 77%.  US wars in Iraq and Afghanistan cost $4 trillion.  No taxes were raised to pay for those adventures; the cost was "financed" by expanding the national debt.

Under President Obama, income rates rose to 39.6%, capital gains to 25%, the economy grew 29.7% and the stock market gained 221.1%.  The national debt grew 81.1% to a record $18.150 trillion from $10.024 trillion at the end of the Bush Administration.  About $5 trillion of the increase was due to deficit spending to bail out the banking industry and stimulate demand after the 2008-9 financial crisis.  Considering that Bush cratered a booming economy, while Obama rescued an economy on the verge of a second Great Depression, hard to argue that Obama was a worse steward of the economy compared to Bush.

The budget deficit soared to $1.4 trillion (9.8% of GDP) in 2009, shrank steadily down to $438 billion (2.4% of GDP) in 2015, began rising again in 2016 ($587 billion) after Congress made permanent a host of tax breaks.

At present the ratio between national debt and nation income is 106.7%.  Generally once this ratio exceed 120%, the burden of interest payments overwhelms a country's ability to pay for anything else.  Greece (158%), Italy (127.0%) and Portugal (123.0%) belong in this category.  Japan (237.9%) remains in recession since 1991.

The last time the tax code was substantially reformed was under Reagan in 1986.  Since then, many exceptions and exclusions have worked their way into the tax code. An army of lobbyists prepares to defend these exceptions.

In general, any legislation that makes the tax code simpler and more fair should benefit the economy and American businesses.  Unfortunately, the Trump administration has shown no aptitude for the painstaking process of negotiating with Congress over the details.   The "Trump Rally" faltered in March as investors realized that tax reform in 2017 was not assured.

Employment and Immigration

Though Trump lost the general election by 2.9 million votes, he won enough blue collar voters in Wisconsin, Michigan and Ohio to capture the Electoral College.  Those voters cared only about one thing - jobs!  The greatest threat they see to those jobs is competition from immigrants.  Our observation: if someone left a South America jungle with a third grade education and no English, walked across Mexico, crawled through the desert, hitchhiked the Interstate to your town and took your job, you're not very good at your job!  You need to put down your video game controller, cancel your fantasy football subscription and get yourself back to technical school.  Can you imagine Trump saying that at a rally?  No.  Much easier to blame "the illegals." 

Fun fact: a record 29.8% of players in Major League Baseball are foreign born; but no sports fan or player ever complains about unfair foreign competition in baseball.

Here's the critical issue of the next 50 years.  The world of work can be divided into intellectual (lawyer, doctor, architect) and physical (nurse, contractor, truck driver, oil rig worker.)  Within these divisions are both routine and non-routine work.  Any work that is routine can be automated.  For example, toll booth collectors were replaced by EZ-Pass and overhead cameras.  Bookkeepers were replaced by Quicken.  Retail salespeople are being replaced by direct delivery from Amazon.  Truck and taxi drivers could be replaced by driverless vehicles within ten years. 

White collar workers are not immune from this trend - law associates can be replaced by e-discovery and wealth advisors can be replaced by robo fund selection.  Every time a computer or robot replaces an employee, a business gains (robots can be depreciated, need no overtime pay, vacation or sick leave, won't unionize.)  The workers in demand will be those who can program the computers or build the robots.  The rest are left competing for minimum wage jobs ($13,926/year after deductions for Social Security and Medicare.) 

Half these workers are 16-24, just starting up the career ladder.  Half are older workers, many of whom held higher paying jobs previously that allowed them to buy a home and support a family.  Many have chosen to drop out of the workforce permanently.  The number of Americans receiving Social Security Disability benefits climbed from 5.042 million in 2000 to 8.909 million in 2015 - an increase of 65%.  Coincidently, the rate of death from opioid overdoses (legal prescriptions and illegal heroin) increased 200% from 2000-2014. 

The labor force participation rate peaked at 67.2% in 1999, currently hovers around 63%.  There are about 205 million working age Americans in 2017, so approximately 8.6 million Americans have voluntarily or involuntarily left the work force.  The non-workers don't spend much, so don't support the economy, which is currently running about 1.6% below potential.  With each passing year, their skills atrophy and the workers become ever less employable.

At present 13.3% (42.4 million) of residents in the United States are immigrants, of which about 11.1 million are considered "illegal."  In 2014 two-thirds of illegal immigrants arrived on non-work visa and simply overstayed.  The number of undocumented aliens coming over the Mexican border is down by 90% since 2005, currently about 170,000/year.  Illegal workers are represented heavily in housekeeping services, taxi driving, food processing and construction, though Americans still account for the majority of workers in these industries.  Native born Americans hold 25% of agricultural jobs, 21% are legal immigrants on H-2A agricultural visa and 53% are illegal immigrants.

Legal immigrants are generally highly skilled workers who arrive for up to six years on an H-1B visa - 85,000 are issued annually.  Melania Trump modelled "illegally" in the US under a B1/B2 tourist visa for 7 weeks in 1996, obtained an H-1B visa in October of that year.  An additional 66,000 H-2B visa are issued for "seasonal" workers - the people who staff ski and beach resorts.  There are also a limited number of visas designated E1- E5, for researchers, managers, especially skilled workers, performers, professionals such as lawyers, and finally investors and entrepreneurs.  This category of visa can put an immigrant on track for a green card.  At present, about 150,000 green cards are issued annually, with about 4.5 million applications waiting to be processed. 

Studies show that white collar workers face little competition and indeed benefit from the low cost and productivity of immigrants.  The Americans most harmed in competition with illegal workers are white males 30 or younger with no education past high school.  In 2000 66% of Americans with this profile were employed; by 2015 the employment rate dropped to 53%.  However, if all illegal immigrants disappeared tomorrow, it is unlikely that less educated American would have a much easier time.  Between 2000 and 2010, 5 million manufacturing jobs disappeared, of which 13% were exported to China, Mexico and elsewhere, while 87% were lost to automation. 

Industrial production in the United States is at an all-time record high - up 80.5% in 2000-2016.  Automobile production peaked in 1999 at 13.0 million, fell as low as 5.7 million in 2009, regained to 12.105 million by 2015.  In general, goods produced in the US today tend towards high value products like aircraft and MRI machines.  Employment in low value industries like apparel declined 68.1% between 2000-2015.

What is the takeaway? The only way to address continued under-employment among US born workers is to increase STEM spending in high schools and increase spending for technical and vocational skills post high-school.  Spending $22 billion on the Mexican border wall will not solve this problem.  Spending $22 billion on 220 technical colleges ($100 million each) would be an excellent use of funds.

Trade

During the campaign, Trump relentlessly bashed the North American Free Trade Association (NAFTA), the Trans-Pacific Partnership (TPP) and China ("currency manipulators".) 

The TPP was a free trade agreement creating multi-lateral relationships between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam, but notably excluded China.  The agreement removed trade tariffs between signatories, established minimum standards for environmental, financial and labor regulations, blocked both human and wildlife trafficking.  US exports were expected to gain $305 billion by 2025, increase the income of American workers by $77 billion.

So what's not to like?  In the US, the benefits of the TPP accrue primarily to white collar workers while the pain of increased imports of low value goods falls on blue collar workers.  By one estimate, wages for blue collar workers fell 17% between 1990-2000.  As wages fell, traditional manufacturing communities in the South and Midwest hollowed out. 

On Day 4 of the new administration, Trump signed an executive formally withdrawing from the TPP.  The remaining 11 nations may complete the TPP without the US, scaling back environmental, financial and labor protection.  China may well move into the vacuum left by the US, which is not good news for US in the long run - we lose the opportunity to shape Pacific Rim government relationships for the next 50 years.

NAFTA dates back to the 1994 and the Clinton Administration.  During the campaign, Trump labeled NAFTA "one of the worst deals ever" for American workers.  As noted above, blue collar American workers derived more harm than gain.  After 25 years, the three economies are tightly integrated.  US exports to Mexico grew 245.6% to $235 billion.  Imports grew faster - 353.8% to $295 billion for a current deficit of $60 billion.  Offsetting the goods deficit, the US runs a surplus in services of $9.2 billion.

The US also gains from increased stability south of the border.  As we noted above, illegal immigration from Mexico declined 90% because good jobs were created in Mexico.

What Trump plans to do about NAFTA is unclear, other than signing an executive order on January 23rd to renegotiate the treaty.  On April 26th, Trump announced that he would withdraw the US from NAFTA.  Withdrawal from the treaty would be a net loss for US corporations from supply chain disruption.  The economies of Texas, Arizona, California and the Northeast states of Ohio, Illinois, Indiana, New York, Pennsylvania, Tennessee are the highly dependent on exports to Mexico and Canada.  On April 27th, facing pushback from Congress and his own Cabinet, Trump announced that instead "he would renegotiate NAFTA." 

Trump's plan to apply a 45% excise tax on Chinese imports appears to be on hold - apparently he revised his opinion about China after dinner with Chinese President Xi Jinping.  Trump hopes, probably in vain, that China will apply economic pressure to North Korea to back down from their nuclear program.

Fading from the mix is discussion of Paul Ryan's "border adjustment tax."  In theory, the US could promote domestic production by changing how corporate taxable income is calculated.  Companies could no longer deduct the cost of goods sold that were sourced abroad, which increases net income and therefore net tax.  Simultaneously the tax on income from goods sold abroad would be eliminated. 

Theoretically this tax would be neutral on net corporate tax.  However the effects vary wildly by industry.  Retailers who import low value goods from overseas would be crushed - there is no manufacturing base left to produce these goods.  Energy prices could shoot up as well, causing soaring inflation for average Americans.  However major exporters like Boeing, Caterpillar, Pfizer and General Electric could benefit.  In theory the higher cost of imported goods would be offset by an increase in the value of the dollar (but then exporters lose their advantage.)

Bottom line, we believe that world wide supply chains are so finely calibrated that the disruption caused by adjusting to the new tax regime would drive the US economy into recession.

Regulation

Corporations love to complain about regulation.  Banks hate the strictures of Graham-Dodd.  Coal mines hate when the EPA requires protection of waterways.  It's reasonable to ask that regulations be simplified, perhaps even to include "sunset" clauses so that regulations have to be reauthorized every ten years.  Industries can use regulations to create artificial markets, even monopolies.  For example, for many years sofa manufacturers were required to apply flame retardant chemicals to fabric, with obvious benefit to the manufacturers of such chemicals.  Unfortunately, these chemicals can accumulate in the tissues of children and pets, causing health problems and increasing cancer rates.

For sure, we would like financial services to remain tightly regulated - we don't want to see a repeat of the 2008-9 crisis ever again.  If you think banks have reformed, just be reminded that Wells Fargo recently paid $185 million to settle allegations of creating 2 million unauthorized accounts to "harvest" $2.6 million in fees from unsuspecting customers.  CEO John Stumpf "retired" in October and forfeited $41 million in executive compensation (in other words, the worst "trade" of his career.)

The Department of Labor was scheduled to implement a "Fiduciary Rule" applicable to advise offered to Americans rolling over 401K accounts on April 10th.  The DOL had previously estimated that unscrupulous brokers "harvested" $17 billon annually from American retirement savings.  As Registered Investment Advisers required to provide fiduciary advice under the regulation provided by the 1940 Advisers Act, we whole-heartedly support this regulation.  At present, implementation is delayed until June 9th.  Consumers don't have to rely on the DOL rule however.  Simply ask any financial advisor whether he or she operates under the fiduciary standard.  If the answer is "No," move on!

Some regulations are good; others are ill conceived.  Eliminating regulations could benefit companies but harm consumers, not a win for the economy.  Building a better process for establishing the cost-benefits of regulations would be a better strategy, we think, than eliminating regulations outright.

Infrastructure spending

Though the US economy cries out for $2 trillion in infrastructure spending (highways, bridges and tunnels, water systems, electrical grids, airports) the money cannot be borrowed given the current size of he national debt. 

New construction (a new bridge, a new subway) is always more glamorous that infrastructure maintenance (typically 10% annually of the original cost of construction.)  For example a proposed high speed train between Dallas and Houston would cost $21.5 billion and run a deficit of $400 million annually to move 90,000 people a day downtown to downtown in 90 minutes, versus 3 hours 30 minutes driving.  However, there are 25 flights a day moving 10,000 people in 70 minutes.  If demand was that high for fast travel between Houston and Dallas, far less than $21 billion could be spent to add capacity at existing airports.

Even maintenance projects take time to organize.  The Obama administration passed the American Recovery and Reinvestment Act in 2009, authorizing $789 billion for "shovel ready" projects.  Even two years later much of the money had not been distributed.  At present China spends $1.4 trillion annually on infrastructure, more than Europe and the United States combined.  Some of that expense is wasted, but imagine the competitive advantage!

Until the US figures out how to pay for infrastructure spending, expect growth to remain depressed in heavy machinery and construction materials.

Climate Change

Over the last hundred years, world sea levels rose by one foot.  Hardly terrifying, yet we can already see that cities like Miami and Brooklyn are at risk from flooding. At the end of the last Ice Age 19,000 years ago, sea levels were 400 feet lower.  If polar ice melted completely, sea levels would be 230 feet higher, swamping all major US coastal cities, and submerging most of the United States from Miami, north to Charleston SC, and west to Houston. 

Global warming is apparent in our lifetimes.  What's not clear is whether the effect is caused solely by burning fossil fuels, or whether other factors are at work.  What is known is that carbon dioxide levels were stable in a range of 180-280 ppm for the last 400,000 years, but have jumped dramatically since 1950 and now exceed 400 ppm.  25-30% of air born carbon dioxide dissolves in sea water, leading to the acidification of the oceans, which subsequently harms reefs and mollusks (acidic water interferes with shell formation.)  No reefs and no shellfish mean no fish - bad news as fish account for 17% of world protein consumption for 7.5 billion humans.

In 1974 scientists first observed that chemicals (CFC's) commonly used in spray products and air conditioners caused ozone depletion in the upper atmosphere.  Life on Earth is dependent on ozone to absorb cancer causing UV-B light.  Skeptics and industry representatives pushed back against the research, but by 1987 world protocols were established to reduce use of CFC's and find replacements,  Ozone losses continued through the 1990's (CFC's don't disperse easily) but by the early 2000's, researchers could see that the hole in the Ozone Layer would disappear by 2050.  Science and government worked hand in hand to avert danger.

Trump believes that most scientific research is "fake," famously tweeting "The concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive."  Within days of taking office, reports and data on climate changed disappeared from federally administered websites.  In the short term, we don't notice global warming.  At current rates of sea rise, however, 13.1 million Americans will be displaced from coastal cities by 2100, and hundreds of trillions of dollars in real estate and business will be destroyed.  Not an issue for the stock market in the short run, but in the long run?

Credibility: Can Trump Last Four Years?

Our final comments address Trump's credibility.  We wrote our clients last fall "If Trump worked in your company, school or church, how quickly would you fire him out of self preservation?"  75% of Trump's statements are lies or falsehoods.  Politicians lie all the time (think Clinton and her email server) but Trump's lies can be refuted in real time with Google on an iPhone - this psychosis is unique in American political history.  (Definition of psychosis: a severe mental disorder in which thought and emotions are so impaired that contact is lost with external reality.)  For the time being Congressional leadership (McConnell, Ryan) are willing to cravenly ignore Trump's bizarre behavior to further their own agendas, but for how long? 

Trump wastes no time with conventional presidential ethics.  He remains tightly involved with his businesses through sons Eric and Donald, Jr.  His daughter and son-in-law occupy prominent positions in the White House.  Foreign leaders stay in a Trump hotel in Washington, violating the previously obscure Article 1 of the US constitution, the "Emoluments Clause," which prohibits the President from receiving anything of value from a foreign government.

Trump's Achilles heel may be the "Russian Connection."  By 2000, Trump was persona non-grata among American bankers.  Fortunately for Trump, Russian oligarchs were delighted to lend money to Trump in exchange for the opportunity to launder money through real estate purchases, many at Trump developments in the US.  Relationships developed through the 2000's and into 2016.  A number of Trump campaign operatives, including Paul Manafort, Corey Lewandowski, Carter Page and Michael Flynn are uncomfortably close to Kremlin officials; Flynn was forced to resign after just three weeks as National Security Advisor for "lying to Vice-President Pence about his conversations with the Russian ambassador" after the November election.

On March 4th, Trump tweeted that the Obama administration had wire-tapped Trump Tower.  As President, Trump has unlimited access to top-secret intelligence, so if the assertion was true, he could simply order the NSA or CIA to produce the evidence.  No such evidence was shown.  On March 21st, House intelligence chairman Devin Nunes suddenly rushed to the White House "to meet with a source in a secure location."  The following day he announced that FISA surveillance of Russian foreign nationals had picked up conversations with US nationals including members of the Trump transition team.  The FISA law provides that if an American falls under surveillance, their identity must be masked.  However, it seems likely that names were leaked to the White House and to Nunes.  Nunes stepped down as chairman April 6th following an ethics complaint lodged against his handling of the matter.  Though the matter has fallen from the headlines, House, Senate committees AND the FBI continue to investigate.

We don't know yet what this all means.  We do know that Russian hackers leaked details of the Democratic National Committee campaign strategy to WikiLeaks, which posted details at inopportune moments in the final days of the presidential election.  We insist that if Congress was willing to spend thousands of hours and millions of dollars investigating Benghazi, Clinton's email server and Monica Lewinsky's dress, Congress should be willing to spend millions more understanding the ties between Trump and Russia.

Of the 13 presidents for which we have data, only Trump started his administration with a lower approval rate (41.3%) than disapproval rate (52.4%), a deficit of 11.1%.  Trump says he doesn't care (or that the polls are fake.)  At a certain point, other Republicans have to wonder about the cost of remaining attached to Trump.  We doubt he would resign, but impeachment is not out of the question.  Betting at PredictIt, the political futures site gives Trump an 85% chance of remaining President through 2017 and a 70% chance through 2018.

A drawn out impeachment process is NOT good news for markets.  As the Watergate scandal unfolded between February 1973 and Nixon's resignation in 1974, the S&P 500 fell 45%.

Overall conclusions for investors

An interesting time!  For decades our research revolved around earnings reports and industry conferences.  Now we have to read Trump's Twitter feed and monitor Fox News.   At current levels, US stocks are slightly overvalued by the Morningstar Valuation Model.  The rally which started November 9th leveled out in mid-March.  Our expectation is that stocks trade sideways for the next two quarters, rally in the 4th quarter as earnings catch up to valuations.  BUT!  Uncertainty around the current administration is at unprecedented levels.  Stay tuned!

 

The 2016 Year in Review

presidential-elections

In January 2016, we projected that the S&P 500 would gain 5% for the year, but we noted we would revisit that estimate in July.  In July, noting that an earnings recession among US corporations was coming to an end, we elevated our forecast to 10%.  For the full year, the S&P 500 rose 12.0%, so close enough.  Full details of US and world Indexes are here:

Within the major categories, Energy stocks rallied 27.4%, as oil rose from a mid January low of $26/barrel to a year end high of $54.  On January 23rd, we wrote:

We would like to think that financial markets are "rational" but every once in a while, markets fixate on ONE particular indicator. In the last three weeks, price direction in stocks became entirely correlated with the price direction in oil.  Nothing else - earnings, interest rates, labor markets, industrial production, housing markets - seemed to matter.  Last August, investors fixated on the Chinese markets, which dragged down US stocks 11% in a month.  When the fixation dissipated, US stocks gained back the entire loss in 2 ½ months.  We expect the same will happen over the next few months, so starting Monday we are putting all our spare cash to work.

Indeed, we nailed the low for 2016.

Telecommunications gained 23.5% on the year, which is hard to explain for a sector that investors traditionally buy for the reliable income stream.  In a rising interest rate environment, we'd expect this sector to do poorly.  However, even the Utility sector gained 16.4% for the year.

Financial Services did third best, rallying 22.7% for the year, and 21.0% for the 4th quarter.  We're not necessarily happy about this.  Investors presume that the banks will be able to throw off the "shackles" of the Dodd-Frank regulations, resume the go-go trading activities that led to the 2008-9 financial melt-down.

Healthcare stocks were clobbered, the only losing sector on the year, with a loss of 2.7%.  Investors worry that the probable demise of Obamacare will knock 24 million Americans off the insurance rolls, massively disrupting the health care system.  According to CNBC, "More than 80 percent of those losing coverage would be in working families, and about 66 percent would have a just a high school degree or less. About half of the people who would lose coverage would be white, and 40 percent would be young adults."  As these Americans were more likely to vote Republican in the recent election, Congressional leaders now find themselves in a very uncomfortable position.

US Mid Cap and Small Cap stocks gained 21.3% in 2017, substantially outpacing the Large Caps (up 12.0%.) This divergence in return generally becomes apparent in the late stages of an economic expansion (and bull markets.)  The smaller companies can grow revenues and earnings faster than behemoths like General Electric and Microsoft, but are more vulnerable to economic contraction triggered by rising interest rates (our current scenario.)

Among international markets, the Russian stock market topped world tables, gaining 52%, benefitting from a rebound in oil prices and the expectation of a compliant relationship with President-elect Trump.

Commodity focused economies including Brazil (up 39%,) Canada (up 18%,) Norway (up 18%) did well with rising oil and commodity prices. 

The UK FSTE index gained 19.2% on the year, surprising economists who expected a recession following Britain's vote to exit the EU.  That recession may yet appear in 2017.

Chinese markets fell sharply in January, regained losses through the year, but slumped in December over fears of how Trump will handle trade.  For the year, China's Shanghai index closed down 11.3% for the year, while the Shenzhen index closed down 13.5%.

The Trump Rally?  What about the Obama Bull!

Many observers pointed to the 5.0% rally ($959 billion in market cap) in the S&P 500 since Election Day as "proof" that Trump's policies will be good for the country.  If we're going to play that game, we should also note that the bond market fell between 3.5-7.4% depending on sector over the same time frame for a loss of about $1.1 trillion.

We like to track the impact of Presidential policies from inauguration day to inauguration day, though you could argue that tracking from the April following inauguration is the best way to calculate presidential influence (the time frame that a particular President's policies are actually in effect.)

People believe reflexively that Republican presidents are better for the economy and the stock market than Democratic presidents. 

The average annual return of the S&P 500 under 28 years of Democratic presidents was 13.1%, while exactly half at 6.6% for the 36 years that a Republican occupied the White House.  William Clinton presided over total returns of 264.7%, while Kenyan born Muslim socialist Barrack Obama (gains so far of 221.1%) may yet edge Ronald Reagan (full term - 223.2%.) 

George W. Bush and Richard Nixon saw declines of 30.0%, though Nixon only served 5.5 years, so produced the worst annualized return of -6.3%.  However, Nixon took office during the turmoil of the 1960's just as the nation was losing the Vietnam war and during a period of soaring inflation with stagnant economic growth. 

For worst steward of the economy, the booby award goes to George W. Bush, who took office with unemployment at 3.5%, record levels in the stock and real estate markets, and an annual budget surplus of $124 billion.  8 years later, unemployment was at 7.8% on the way to 9.9% while the stock market and real estate markets were in free-fall, and the budget deficit was $459 billion (and $1.4 trillion in 2009.) 

The Bush tax cuts and the expense of the Afghanistan and Iraq wars grew the US national debt from $5.7 trillion to $11.1 trillion in eight years.  Additional borrowing to relieve the US economy from the Great Recession of 2009 added another $7 trillion in debt over eight years.  As a percent of the economy (104% of GDP) the only time the national debt was worse was in 1946 (126% at the conclusion of World War II.)  As much as borrowing to rebuild infrastructure is a good idea, once a country's debt exceeds its annual GDP (think Japan, Zimbabwe, Greece, Italy, Iceland), the risk of economic stagnation soars.

When we think about how Donald Trump combines the cluelessness of George W. Bush with the paranoia of Richard Nixon, we're not exactly filled with confidence about the next 4 years.

Our stock market forecast for 2017

No forecast now, no forecast until April.  We can't recall another time in the last 30 years that we were so uncertain about what to expect from the US government, and how that would affect the key drivers of stock market returns - revenues, earnings and interest rates.

Other analysts have put out price targets for the S&P 500 of 2300-2450, which would imply gains of 3-9.5% from the current level of the S&P 500 at 2239.  The consensus for 2017 is that:

  • Inflation will rise from the current 2% annualized
  • Interest rates will continue to rise, with the Fed raising rates perhaps 3 times this year
  • The dollar will remain strong, depressing the value of overseas earnings and promoting imports over exports
  • A combination of deficit spending and new spending on infrastructure COULD enable the US economy to grow faster than the 2% annually of the last 8 years.
  • Wages will rise as labor markets tighten
  • Earnings in general will rise, particularly if corporate taxes are lowered

Better earnings increase stock prices, but higher interest rates depress stock prices.  Which driver will come out on top in 2017?  We don't know yet.  However, we do know that stocks generally fare better than bonds in an inflationary environment.  The bond exposure we do have is focused on short maturities (3-5 years on average.)  As yields rise, bond prices fall, but bonds of short maturity are less sensitive.  Further as these bonds mature, the proceeds can be rolled over to new bonds with higher current coupons.  We're happy with our clients' current asset allocations, and we will continue to adjust our strategy as policies of the new administration become more apparent.

Presidential Election Recap, and What Comes Next

President-seal

In April 2014, we wrote:

With 0.0% of precincts reporting, CNN declares Hillary Clinton CNN the next president of the United States. Really? We haven't even gotten through the 2014 mid-term elections yet, yet campaigns (and the media circus that lives for campaigns) are already gearing up for 2016. For 2014, it seems likely that Republicans will retain the house and majority of state governorships. There is a 50/50 chance that Republicans take control of the Senate. Regardless of that outcome, we don't expect any significant legislation out of Washington in the next 2 ½ years.

In March 2015, we wrote:

We believe the Republican primary process will operate like a circular firing squad. The survivor will stagger into the general election July 22nd, 2016 (the convention ends July 21st) bleeding from multiple wounds, easy prey for the rested and well financed Hilary Clinton.

In September 2015, we wrote:

The Trump Insurgency: Donald Trump presently dominates polls of Republican voters, with twice the popularity of Ben Carson and three times the popularity of Jeb Bush.  In general election matchups, he's the only Republican candidate to match Hillary Clinton.   

After flirting with presidential runs in 2000 and 2012, Trump announced for 2016 on June 16th.  To the general astonishment of pundits, Republican Party officials, the other Republican candidates (16 at last count), comedians and ourselves, Trump blew away the competition.  Incredibly, the more outrageous Trump acts, disparaging Hispanics, women reporters, women in general, other politicians, veterans and POW's, the higher he scores at the polls. 

Our only reasonable explanation is that American are so unhappy with establishment politicos and are so aggrieved by their sense of economic and social malaise that they're will to take a chance on Trump.  Starting in the 1990's and accelerating since 2000, American society divided into the "have's" - credentialed, educated, urban information workers, and the "have-not's" - minimally educated suburban and rural manufacturing or service workers for whom a house, job, medical care and retirement benefits are increasingly insecure propositions.  As we said about China, "governments are commonly at greatest risk from the frustration of 'rising expectations.'" 

We've talked about the "biblical plague of Republican nominees."  Thanks to the collapse of campaign finance laws, anyone with a billionaire backer and a dream can run for president.  Trump engenders more "trust" than the other 16 candidates because, as a billionaire himself, he isn't "owned" by David & Charles Koch, Sheldon Adelson, Woody Johnson, Ken Lagone, David Geffen or any number of major donors, Republican or Democratic.  His insults are interpreted as "truth to power" by his fans.  These 30 supporters from a broad political spectrum explain "why they believe that the billionaire real-estate developer will treat them any better than the career politicians they mistrust."

Electoral College math still favors the Democratic nominee, but Trump's surge is the first time in two years we think any Republican has a chance to beat Hillary Clinton.

In March 2016, we wrote:

As of this past week, the conventional wisdom is that Trump and Clinton are the nominees.  Political analysts expect that the Republican surge in participation in the primaries will be matched by a surge in Democratic participation in the general election.  Trump scores a lower percentage of blacks, Hispanics, women and the young compared to Romney in 2012.  Electoral college math kicks in, Clinton is elected the president AND possibly the Senate flips back to Democratic.  But, as we noted above, "Since June, the conventional wisdom has been 100% wrong about Trump." 

Bottom line: Trump COULD win.

In May 2016, we wrote:

Assuming Clinton prevails and becomes the Democratic nominee, we can make projections by looking at state by state polling.  At present, Clinton outpolls Trump by 10% nationally.  According to calculations at the NY Times, that lead would deliver the electoral college to Clinton 347-191, a slight improvement over Obama's 2012 results in 2012 of 332-206.  However, a 10% lead this early in an electoral year can easily reverse, just ask Jimmy Carter in 1980, or George HW Bush in 1992.  With a lead trimmed to 5%, Clinton would still win, but just 285-253 (Trump gains Florida, Ohio and North Carolina.)  In a dead heat at the national level, Trump would also pick up Colorado, Iowa, Ohio, Pennsylvania, and New Hampshire, and would win 305-233.

On November 2nd, 2016, we wrote:

At the national level, Clinton leads by a razor thin 1.7%.  However, ONLY results in the Electoral College matter.  263 electoral votes are likely to solidly in the Democratic camp, while the Republicans have to make up quite a deficit from 148.  127 electoral votes remain in the "toss up category."  For the win, Clinton needs 270 votes.  Three states, Florida, Ohio and North Carolina, have the potential to deliver the "kill shot" to the Trump campaign.  Trump has to win ALL three of these states, plus 2 of 6 other states.  At present, Clinton is likely to win North Carolina, is on a knife edge to win Florida, and probably will lose Ohio.  No matter:  By 8 PM on Tuesday, if Clinton has won any of these three states, "game over" for Trump.

On November 9th, 2016, we wrote:

As of Monday evening, one day before the election, all 15 major political forecasters tagged Clinton for the win.  FiveThirtyEight.com was the most conservative, forecasting an electoral split of 272-268 in favor of Clinton with a 66% probability of success.  The mood among Republican operatives, even the candidate himself, was despondent.  No candidate in modern electoral history who polled so badly post Labor Day had ever won.

And yet, by 10PM last night, Trump won the three major states (Ohio, Florida and North Carolina) he had to win to stay competitive, plus enough of 6 more states to exceed 270 electoral votes by 2:30 AM.  Republicans retain control of the US Senate and House of Representatives, plus choose the next Supreme Court Justice.

What's the point of revisiting old commentaries?

Our job is to make good decisions in an environment of permanent uncertainty.  To succeed at this task, we must revisit our past research, ESPECIALLY when we are wrong.  What went wrong with our analysis of the election?

First let's consider what we got right:

  • Clinton was the ultimate Democratic nominee
  • The Republicans did indeed organize a circular firing squad, producing a nominee NO ONE expected (not even Trump.)
  • We noted that if Clinton couldn't put away Sanders, the email server or the Clinton Foundation issues she would struggle.
  • In particular, we identified the division of the country into "haves" and "have-nots."  In principal the combination of low unemployment, low inflation, low gas and fuel prices, record GDP, record number of workers employed, stock market at record highs, real-estate prices approaching record highs, should have ensured a slam dunk for the party in power.  However, the gains unevenly favored "coastal elites" over the "Rust Belt" working class.
  • These factors created an opportunity for Trump to win, even if we regarded that outcome as low probability.
  • Ultimately, electoral college math would prevail

Here's what we got wrong:

  • The final electoral college count!

In July 2015, we wrote:

How the sausage is made:

  1. About 220 million Americans are eligible to vote (the other 93 million are either too young, disqualified by a criminal record, or disenfranchised by lack of identity credentials (certain states.)
  2. The turnout rate varies between 50-60%.  We project turnout on the low side in 2016 (let's say 55% Actual 58.8%, highest since 1968. ), so 120 million voters.  Actual count was 135.5 million.
  3. 48% of voters will vote Democratic reflexively, 45% will vote Republican, so the voters that are in play only amount to 7% or 15 million.  Actual was 48.1% Democratic, 46.2%, 5.6% other.
  4. These voters are "independent" or "undecided" or simply too distracted to think about the election until the final weeks.  And also refused to answer pollster's phone calls.
  5. In many states, the opinions of the undecided voters don't matter - New York will vote Democratic; Texas will vote Republican.  Yes.
  6. These states: Colorado, Florida, Nevada, Ohio, Virginia, Iowa, New Hampshire, and to a lesser degree North Carolina and Wisconsin will be swing states in 2016.  Yes.
  7. 270 out of 538 electoral votes are required to win the presidency (a tie at 269 throws the elections to Congress, with the House voting for president and the Senate voting for vice-president.  Given current composition of Congress, a tie would ensure a Republican White House.
  8. At present, the Democrats will likely start Election Day with 247 votes already in the bag versus 206 for Republicans.  On the morning of November 8th, Clinton scored 227 firm votes versus 217 for Trump, with these states still in play - Florida, North Carolina, Pennsylvania, Michigan, Wisconsin and New Hampshire.

Through most of Election Day, Clinton polled ahead of Trump in Florida, Pennsylvania, Michigan and Wisconsin (urban precincts tabulated votes faster than rural districts.)  Yet, by 9 PM, as the tally continued, one state after the other of these four flipped from Clinton to Trump, leaving Trump in the end with 306 votes over Clinton's 232. 

Of cold comfort, Clinton exceeded Trump by 2.56 million in the popular vote. The unexpected swing states were: Michigan, voting Republican for the first time since 1988, Wisconsin, voting Republican for the first time since 1984, Pennsylvania voting Republican for the first time since 1992. A shift of 80,000 votes among these three states (0.06% of votes cast) would have changed the outcome. 

Among those three states, the swing voter was:

  • A woman
  • White
  • 40-55 years of age
  • Educated through high school
  • Economically stressed
  • Rural or small town inhabitant
  • A previous Democratic or non-voter
  • Doesn't talk to pollsters

Can we generalize about this voter's motives?  Why not!  This woman works three part time jobs at minimum wage.  Her husband is on disability, unemployed since 2009.  She has family members addicted to opiates.  Her family has not seen a real increase in income since 1990, and the future looks bleak.

Some guy flew into town on a fancy (second-hand) jet, held a monster rally and promised her husband a job (like the old times!)  This woman doesn't care about ANYTHING that's important to coastal elites (the environment, LBGT rights, opposition to misogyny, racism, keeping religion out of public life, actual preparation for public service.)  Give her husband a job, and that candidate can do whatever he wants!

So now we face an interesting two years.  In 2008, Barrack Obama beat John McCain on a platform of "Hope and Change," capturing many young and first-time voters.  That platform did not deliver for many of those voters, who stayed home in subsequent elections costing the Democrats Congress in 2010, the Senate in 2014, the presidency in 2016, 14 governorship's and control of many state legislatures over the last 8 years.

Now it's the Republicans' turn to govern.  If Trump delivers the jobs that Red State Americans crave, the Republicans will do well in 2018 and 2020.  If those voters see no gains in jobs over the next two years, but their taxes rise while their Obamacare health insurance disappears, we'll see the balance of power shift back to Democrats from Republicans starting in 2018.

Initial financial market reactions

Between 2 AM and 4 AM on the morning of November 9th, US stocks as indicated by the S&P 500 futures fell 8%.  That loss was erased by the time regular trading opened at 9:30 EST.  From Election Day through Friday, December 2nd, The S&P 500 gained 2.45%, up 1.5% on the quarter and up 9.5% on the year (our year end forecast is up 10.0%)

For every disappointed Clinton supporter, there was a jubilant Trump supporter.  Sell and buys between those investors cancelled each other out.  More importantly, US investors were net sellers of stocks August through Election Day, all that cash flooded back through November.  Whether you liked the outcome or not, at least you knew then answer.

Financial service stocks have done extremely well, up 17.4% in November.  Investors expect that Trump and Republicans will dismantle the safeguards put in place after 2009.  Good for bank profits, not so good for average American who could really use those safeguards.

Industrial stocks have done well, anticipating more spending on infrastructure.

Energy stocks have done well - less because of the election, more because OPEC acted recently to cut production.  West Texas Oil is now $51.68/barrel, well above the January low of $29.04. 

Healthcare stocks are down 5.1%, anticipating turbulence in the health insurance markets as Obamacare is wound down or replaced. 

Technology stocks are down as money rotates out of Facebook (down 13.5%)  Amazon (down 12.6%), Netflix (down 9.3%) and Google (down 8.1%)

Large cap stocks gained 3.9% in November and are up 10.0% for the year.  Small cap stocks gained 11.1% in November and are up 18.0% on the year.  Generally speaking, when small caps out perform large caps it means that the economy is overheating.  The Fed will increase rates until the economy slows.  Often a recession occurs within 1-2 years.

US stocks gained $569.3 billion in market value.  However, the US bond market is down sharply, losing over $1 trillion with the entire yield curve shifting 0.5% higher, on the expectation of higher inflation.  The ten year is now at 2.45%, up from 1.36% earlier this summer.  Bond yields were abnormally depressed this summer as uncertain stock investors parked their cash in bonds, so current yields won't depress economic activity (yet.)  It's reasonable to expect the Fed to raising rates 0.25% in December, a couple more times in 2017.

Despite all the media coverage of stock market records, stock prices are barely higher than in July, while bond prices are down.  Our investments in bonds skew to short term maturities, which are less affected by rising rates, but are still down this past month.  Clients in balanced portfolios should expect only modest gains on their November statements.

For the next 3- 6 months, we're not making substantial changes to our portfolios until we have a clear sense of spending priorities and tax policy for the new administration.  We will present a preliminary analysis in our year end commentary.

Hey "Millennial," Give Yourself a Break, You Were Dealt a Tricky Hand

millennial-financial-planning

The media does not generally portray millennials in a positive light. This holds true for perceptions of the savings habits of millennials. Millennials are still seen as the generation living in mom's basement. Whether they are doing so because they are, in fact, diligently saving, or because they are "failure to launch” kids is not usually specified. The other point that often goes unmentioned is that millennials will need to save more than previous generations, as well as work harder in order to save more. Interest rates are low and investment savings are not returning the high yields seen by previous generations. Between the major limitations of low interest rates and crippling student loan debt, most millennials are struggling to save. 

When it comes to accruing savings, millennials are swimming against the current, but they are swimming very, very hard. They are not getting into credit card debt at the rate of previous generations, which shows a wariness and sophistication with which millennials are not credited enough in mainstream media. The money they put away is not going to work as hard for them as the money put away by their parents and grandparents. As a result, millennials are being called on to put away more and more towards retirement than any previous generation. Not only are the low interest rates holding them back, but there is a very real threat that social security will run out long before full retirement age, leaving millennials to fund 100% of their own retirement.

Sadly, the main association with millennials these days is still the "participation award" generation. In truth, millennials are the generation that graduated from college in between one or two economic crises and rose to the occasion by working hard, staying out of credit card debt, and saving as much as possible for their children's education and their own retirement.

So, Millennial, next time you are feeling down on yourself for having an outrageous amount of student loan debt, and not enough savings, know that you are not alone, and the root of the problem is far from your fault.

 

Confounding All Expectations, Donald J. Trump Elected US President

financial-planning

As of Monday evening, one day before the election, all 15 major political forecasters tagged Clinton for the win.  FiveThirtyEight.com was the most conservative, forecasting an electoral split of 272-268 in favor of Clinton with a 66% probability of success.  The mood among Republican operatives, even the candidate himself, was despondent.  No candidate in modern electoral history who polled so badly post Labor Day had ever won.

And yet, by 10PM last night, Trump won the three major states (Ohio, Florida and North Carolina) he had to win to stay competitive, plus enough of 6 more states to exceed 270 electoral votes by 2:30 AM.  Clinton holds a 100K lead in the popular vote, which may flip in favor of Trump as states finalize vote tallies.  The final electoral count will be 320 Trump to 218 Clinton.  Republicans retain control of the US Senate and House of Representatives, plus choose the next Supreme Court Justice.

Clinton was the policy wonk to the end, but could not overcome three instances of bad judgement:

  1. Using a private email server for State Department business
  2. Allowing the Clinton Foundation to solicit gifts from foreign governments while Secretary of State
  3. Accepting 6 figure speaking fees from Wall Street banks

The optics were horrible, shifting 1-2% of voters in critical states and delivering Florida, Pennsylvania, Wisconsin, Michigan and New Hampshire to Trump at the buzzer.

World markets reacted poorly at first, but recovered about half of initial losses.  European markets are down 0.6-1.5%, while Asian markets are down 2.2-5.4%.  S&P 500 futures fell 5% on the initial news, but are now down 1.2% (as of 8 AM EST.)  When did we last see a similar reaction?  June 24th, 2016 - just after the UK Brexit vote.  Note that the S&P 500 made record highs one month later.

We received e-mails from distraught clients overnight, and we're calling those clients back as quickly as possible.  Our message is simple: the stock market reacts primarily to revenues, earnings and interest rates.  Corporations don't change their strategy based on one piece of bad news.  Today, Amazon will ship millions of product orders, Pfizer will research pharmaceuticals and GE will build turbines.  That was true after Brexit, after the 2008-9 financial crisis, after the 9/11 attacks.  The latest economic reports showed the US unemployment rate at the lowest level in 8 years at 4.9%, while economic growth was firm at 2.9%.  Earnings turned positive for the first time in a year and a half.  Interest rates will rise by 0.25% to 0.5%.

A brief recap of our expectations of a Trump presidency:

  • Termination of estate taxes
  • Income tax rate slashed on high earners
  • Termination of Obamacare
  • Substantial boost in deficit spending, leading to a doubling of the national debt
  • Roll back of the Department of Labor fiduciary standard of care for small investors
  • Dismemberment of the Consumer Financial Protection Bureau

The doubling of the national debt holds some risk to our clients (lower taxes feels good, but increased debt raises interest rates.)  Higher rates affect the bond portion of their investments more than the stock allocation.  Firms like ours operate under the fiduciary standard established in the 1940 Investment Advisers Act, so no change for our clients.  Americans who are less well off than our clients may suffer without the protections offered by the DOL and CFPB, and may lose their health insurance as well.  Ironically, these Americans were most likely to vote for Trump.

The unknown unknown is whether Trump bumbles us into a shooting war with, for example, China.  A low risk, but not a zero risk.

What to do about current holdings?  The knee-jerk reaction is to sell now, buy back later "when the situation looks better."  That strategy is a prescription for "selling low, buying high."  We didn't sell after 9/11 or after Brexit.  During the financial crisis, we sold mostly banks and financial institutions that we didn't think would survive.  We don't believe any of the companies in our portfolios face survival risk right now.  Our intent is to NOT sell anything today, certainly not in taxable accounts (locking in gains triggers capital gains taxes that can't be recovered when stocks move to new highs.)

One client who has worked with us since 2002 wrote, "Buy into hysteria!  Wherever possible, please take advantage of this buying opportunity."  Good perspective.

 

Trump's Victory Polarizes Investors as Financial Advisers' Clients Adjust

presidential-election

David Edwards spoke this morning with the Wall Street Journal:

If the 2016 U.S. presidential race was a tale of two countries, its aftermath has become a tale of two investors.

Financial advisers and investment houses across the country have been besieged Wednesday by investors looking for reassurance, guidance on whether to sell or stay put and advice on how to play Republican  Donald Trump's upset win over Democrat  Hillary Clinton.

Heron Financial Group received emails from distraught clients Tuesday night as the election unfolded and called them back as quickly as possible Wednesday. The New York advisory firm said it had received more calls than usual Wednesday morning-even more than after the U.K.'s June vote to exit from the European Union-from its clients, who are overwhelmingly Hillary Clinton supporters.

David Edwards, the firm's president, found himself consoling a tearful female client Wednesday morning.

"It certainly was a shock to the system," he says.

A few clients have asked Mr. Edwards to sell everything. For one client, he is raising $100,000 "just so he can sleep at night," Mr. Edwards said.

However, he has been able to discourage most others from selling. "You want to sell now and buy when things are better?" he's telling clients seeking to sell. "You want to sell low and buy high?  My job is to prevent you from doing that!"

Mr. Edwards says he gained some insight last night: "For every one of 59 million Clinton supporters who are disappointed this morning, there are 59 million Trump supporters who are happy, and might be buying stocks today," he says. "The important advice whenever something bad happens like 9/11, like Brexit, like the financial meltdown, is to not make things worse by rushing to sell."

Full WSJ article is here

At 3 PM EST, US stocks were up 1.1% on the day, up 1.9% for the month, and up 7.9% on the year.  Regardless of whether investors like or dislike the outcome of yesterday's election, the uncertainty surrounding the outcome is gone.

 

4 Trading Days Till US Presidential Election: We Are NOT Invoking Our Doomsday Plan

trump-clinton

At this point, everything that can possibly be said about this election has been said.  Whether you dislike Trump more than Clinton, or dislike Clinton more than Trump, the horrible, miserable conclusion is just days away.

Investors clearly prefer a Clinton win over Trump. A Clinton Presidency would do little to rock the status-quo, since it's unlikely that a Republican controlled House of Representatives would allow the passage of ANY substantial legislation. 

Markets have been unsettled for 7 straight trading days as Clinton's early October polling advantage shrank, particularly after FBI Director James Comey's oddly timed announcement regarding emails of Huma Abedin on the laptop of estranged husband Anthony Weiner.  After selling off 3% in the last three days, US stocks are now 4.1% below the July high, though up 5.2% on the year.  Our forecast for all of 2016 remains at 10%.

We reassured many concerned clients that if Trump appeared likely to win, four days in advance of the election we would sell all the stocks and equity mutual funds in their retirement accounts in anticipation of a 10% correction in stocks.  We wouldn't sell equity exposure in taxable accounts because the capital gains taxes would generally exceed 10% of the value of the positions.

If Clinton won, we would expect a modest relief rally of a couple of percent, gaining back the 2.5% loss of the last month, plus a little more.  Thereafter, investors would revert to studying Fed Policy and earnings expectations. 

At the national level, Clinton leads by a razor thin 1.7%.  However, ONLY results in the electoral college matter.  263 electoral votes are likely to solidly in the Democratic camp, while the Republicans have to make up quite a deficit from 148.  127 electoral votes remain in the "toss up category."  For the win, Clinton needs 270 votes.  Three states, Florida, Ohio and North Carolina, have the potential to deliver the "kill shot" to the Trump campaign.  Trump has to win ALL three of these states, plus 2 of 6 other states.  At present, Clinton is likely to win North Carolina, is on a knife edge to win Florida, and probably will lose Ohio.  No matter:  By 8PM on Tuesday, if Clinton has won any of these three states, "game over" for Trump.

Perhaps a quarter of ballots have already been cast, so before the recent bad week for Clinton.  At this point, the outcome balances on the air war (advertising, about a 5:1 advantage to Clinton) and the ground war (getting voters to the polls - Trump has no infrastructure.)  We conclude that Clinton will score better final results than current polls suggest because of superior organization.

Believe us, we are not resting easy until about 11 PM EST next Tuesday.

 

Fee-Only Wealth Advisor Doubles Managed Assets in Less Than Three Years

heron-wealth

Fee-Only Wealth Advisor Doubles Managed Assets in Less Than Three Years

NEW YORK (October 3rd, 2016) - David Edwards, founder,  Heron Financial Group | Wealth Advisors, a New York-based Registered Investment Advisor, continues to educate current clients and prospects on how to plan, grow and keep more of their financial assets.  A slate of activity at industry and business events shows the dedication that Edwards and his team demonstrate in their quest to promote the "Joyful Planning" concept.  Edwards took on leadership roles in the financial services industry, accepting advisory positions and speaking engagements with key industry associations.  Edwards brings that exposure back to the firm to provide better service for Heron clients.

"As a fiduciary to our clients, we always act in their best interests.  We remain committed to leading our profession in best practices and technology.  This combination of good advice and good service resulted in exceptional growth within our firm," said Edwards.  Heron Wealth grew from $122 million in assets as of January 2013 to $260 million through September 2016. "We plan to double assets over the next three years, double again within seven years to $1 billion.  We will continue to deliver the high touch experience our clients expect, but also derive the revenues necessary to support our continued investment in human capital, technology, cybersecurity, compliance and operations," added Edwards.

RECAP OF RECENT LEADERSHIP EVENTS

PRESENTER FOR THE FINANCIAL PLANNING ASSOCIATION (FPA) - Edwards was speaker at the FPA Webinar, "The Challenges of Investing in Election Years" June 2016.  He discussed the short- and long-term implications for the stock market and presented tools that investors could use to forecast the November outcome.  Investors gained insights into the issues they need to think about when making investments and took part in a live audience Q & A, moderated by the Financial Planning Association's Knowledge Circle host, Ray Benton.

eMONEY ADVISORY ROLE - Edwards was selected to serve on the eMoney Advisory Board, attending his first meeting at the Wayne Hotel in Radner, PA March 2016.  Serving on the Advisory Board allows Edwards to contribute to the ongoing success and development of eMoney's financial planning and digital wealth management technology, while keeping him in the loop on future developments and innovations within the financial services industry.

FIDELITY GUIDEBOOK AND INSIDE TRACK PRESENTATION -- Edwards was held up as an example to his financial planning peers in a Fidelity Guidebook on digital communications and client interaction. He presented his ideas for successful communications at the Fidelity Inside Track events held in Atlanta and Dallas in the fall of 2015.

PANELIST FOR FINANCIAL RESEARCH ASSOCIATION (FRA)  - Edwards took part in a panel discussion on "Strengthening Your Online Presence" for the Financial Research Association August 2016 in New York City. He discussed best practices for compliant internet-based, mobile-friendly marketing and advertising campaigns, marketing compliance dos and don'ts across all forums, search engine optimization, local optimization, and third party.  Edwards was part of a similar Financial Technologies Forum, entitled "Social Media and Compliance in Financial Services" at the FRA Conference in September 2015.

PANELIST FOR INVESTMENT ADVISER ASSOCIATION (IAA) - Edwards took part in a panel discussion on "How to protect your clients and firm from cybersecurity risks" for the Investment Adviser Association March 2015 in Washington DC.  Edwards took part in a similar panel discussion for the IAWatch Compliance Conference in November 2014 in Washington, DC.

LOCAL BUSINESSS AND NETWORKING GROUPS

Edwards presented the topic, " Plan | Grow | Keep!  How our wealth advice can solve your problems" to a business networking group August 2016 in New York City. The 7-minute video presentation can be viewed on YouTube here. During a Q & A session at the conclusion of the presentation, Edwards was asked how he defines and finds the "ideal client."

Several months earlier,  Edwards presented the topic, " Can Joy replace Fear in Financial Planning, Investment Management and Estate Planning?" to a business networking group in New York City.  The 9-minute video presentation can be viewed here on YouTube.  Edwards showed how Heron Wealth leveraged the eMoney Financial Planning platform to deliver good advice to clients 24/7 on their PC's and smartphones.

"Most people only want an advisor a few times in their lives: when they have a transitional life event like a promotion, job change, retirement marriage, divorce, birth of a child or grandchild," said Edwards.  "I meet a hundred contacts in a month who could become my clients, but I concentrate on the five that have that transitional life event.  I win four of those five; an 80% success rate is very satisfying."

 

US Markets Paralyzed, Await Outcome of US Presidential Election

trump-clinton

We last wrote a market commentary July 11th. Since then, we've had nothing to say as investors focus on the last stage of the US presidential election, excluding any other data points including the US employment situation, US corporate earnings, and US Fed Policy. Through September 30th, US stocks as defined by the S&P 500 are up 7.85% on the year, up 0.013% for the month of September and up 3.31% in the third quarter. 

Our forecast remains 10% gains by year end, contingent on Clinton winning the election. If Trump wins, we expect a Brexit like reaction where stocks sell off 7-10% in three days. Unlike the Brexit scenario, which primarily harmed British investors, we expect US stocks would not recover quickly. A number of our clients are so anxious about a Trump win that we have told them we will sell all the stocks in their retirement (IRA, 401K) accounts 4 days before the election IF there is a chance Trump can pull out of the death spiral of his campaign.

Plan | Grow | Keep! How our wealth advice can solve your problems

retirement-planning

Heron Wealth provides our clients with an increasingly broad range of financial advice.  To make sure that you understand everything we can do for you, watch this short video to see how our wealth advice can help solve your problems. We help clients Plan for the future, Grow their wealth and Keep more for their families. 

Plan - Financial Planning & Budgeting

Budget Creation & ManagementEducation Funding; Business Succession; Financial Planning; Cash Flow Management; Health Care Expense Management; Charitable Giving; Home Purchase; College Tuition Savings; Risk Tolerance Assessment; Disability Insurance; SOS - Second Opinion Service; Divorce Planning; Tax Optimization.

Grow - Investment Management

401K Advice for IndividualsIncome Management; 401K Advice for Businesses; Investment Performance Analysis; Annuities - Term and Variable; IRA's: Roth, Rollover & Traditional; Asset Allocation & Portfolio Mgmt; Single Stock Diversification; Bond & Fixed Income Investments; Stock & Stock Fund Investments; Hedging Strategies & Alternatives; Stock Option Planning; Education; Events & Webinars.

Keep - Estate Planning & Insurance

Eldercare; RMD Calculations for IRA's; Estate Planning; Retirement Income Needs; Life Insurance Strategies; Retirement Income Distribution; Long-term Care Analysis; Risk Management & Asset Protection; Medicare & Medicaid Planning; Social Security Benefit Options; Memorable Family Experiences.

The Challenges Millennials Face in Saving for Retirement

samantha-gorelick

Forget about everything the media is saying about Millennials. The group born between the late 1970s and 1990s is anything but lazy - yes, I am referring to the young people who in many cases are still living at home with mom and dad.

Unlike prior generations, Millennials live in a time of unprecedented student debt, and have already lived through multiple economic downturns. They are financially savvy like their depression-era grandparents, and they work hard for their money. 

Watch this quick piece from InvestmentNews where I discuss some of the challenges millennials face in saving for retirement.

Recapping the August Correction

financial-planner

Between May 21st and August 25th, US stocks as defined by the S&P 500 slid by 12.4%, leaving the index down 5.4% on the year and down 2.3% over the last year..  A correction is defined as a slide of 10% or more, while a bear market is a decline of 20% or more.  The S&P500 is currently down 10.0% from the May 21st record.   The Chinese stock market is off 38.8% from its June 12th high, down 0.9% on the year and still up 38.1% over the last year.  US stocks are on the low side of fair value.  Chinese stocks could fall another 50%, yet still be overvalued.

We were pleased that a number of our clients added cash to the accounts in the last two weeks.  We happily invested those additional funds in stocks, though it will be a few months before US stock market resumes its upward trajectory.  When the stock market has a "heart attack" as we saw in the last three weeks, it takes time before the market "gets back to the gym."  Investors remain skittish and race to sell any rally.  Earlier in the year January through June, retail investors purchased $83 billion in equity mutual funds as the S&P made multiple record highs.  In July and August, investors sold $56 billion - a classic example of buying high and selling low.  We still believe our year-end forecast of 6% gains of 2015 in the S&P 500 is reasonable, which would be 13.5% higher than Friday's close.

We addressed concerns about China in our August 22nd commentary.  The main thing we're tracking now is "how will the Chinese government switch from a 'command and control' economy to an economy flexible enough to provide for China's 1.36 billion in population?"  Governments are commonly at greatest risk from the frustration of "rising expectations."  China is the second largest economy after the US, but 89th in per capital income (out of 187 nations - US is 15th.)  We won't know the answer to that question for years.

The US Employment Situation

Of current interest to us is the latest jobs report and its significance for an increase in interest rates by the US Federal Reserve Bank in September (or more likely, we think, October or December.)  Friday's report showed an increase of 171K jobs, with an unemployment rate of 5.1%.  Generally, economists feel that a rate of 5% or less represents "full employment."  If so, why don't Americans feel "fully employed?"  The answer is that the labor participation rate (number of Americans at working divided by the adult population) at 62.6% is well down from the 66% rate that prevailed for a decade through 2008.  Wages are not growing, not even keeping up with inflation.

From peak in January 2008 through trough in February 2010, the US shed 8.7 million jobs.  A new high in total employment was set in May 2014, regaining those lost jobs - good news right?  Not so good.  Between January 2008 and present, the US added 18 million adults to the employment pool, but only gained a net of 3.9 million jobs.  142 million Americans are at work, but "full employment" should be closer to 150 million (current working population of 228 million X 66% participation rate.)  The "true" unemployment rate is closer to 9.7%.  Is it any surprise that millions of Americans, particularly blue collar Americans without college degrees, are mad as hell about our political situation.  Which leads us to:

The Trump Insurgency

Donald Trump presently dominates polls of Republican voters, with twice the popularity of Ben Carson and three times the popularity of Jeb Bush.  In general election matchups, he's the only Republican candidate to match Hillary Clinton.    

Trump was born into a well to do NY real estate real estate family of Scotch/Presbyterian heritage. Trump parlayed a University of Pennsylvania education and the recovery of the New York City economy into a real estate empire embracing apartment buildings, hotels, casinos and golf courses.  His net worth is currently valued at $3.5 billion, but it should be noted that, after bankruptcies in subsidiary companies in 1991, 1992, 2004 and 2009, Trump has very little equity in property.  He licenses the Trump name to other developers and provides management services through the Trump Organization.  Other investors (many from China and Japan) take the risks.  Most Americans and international viewers are familiar with Trump from "The Apprentice" reality show.

He was married to Ivana Trump from 1977-1992 (three children), Marla Maples from 1993-1999 (one child) and is currently married to Melania Knauss (one child.)

After flirting with presidential runs in 2000 and 2012, Trump announced for 2016 on June 16th.  To the general astonishment of pundits, Republican party officials, the other Republican candidates (16 at last count), comedians and ourselves, Trump blew away the competition (see the latest RealClearPolitics "poll of polls.")  Incredibly, the more outrageous Trump acts, disparaging Hispanics, women reporters, women in general, other politicians, veterans and POW's, the higher he scores at the polls. 

Our only reasonable explanation is that American are so unhappy with establishment politicos and are so aggrieved by their sense of economic and social malaise that they're will to take a chance on Trump.  Starting in the 1990's and accelerating since 2000, American society divided into the "have's" - credentialed, educated, urban information workers, and the "have-not's" - minimally educated suburban and rural manufacturing or service workers for whom a house, job, medical care and retirement benefits are increasingly insecure propositions.  As we said about China, "governments are commonly at greatest risk from the frustration of 'rising expectations.'" 

We've talked about the "biblical plague of Republican nominees."  Thanks to the collapse of campaign finance laws, anyone with a billionaire backer and a dream can run for president.  Trump engenders more "trust" than the other 16 candidates because, as a billionaire himself, he isn't "owned" by David & Charles Koch, Sheldon Adelson, Woody Johnson, Ken Lagone, David Geffen or any number of major donors, Republican or Democratic.  His insults are interpreted as "truth to power" by his fans.  These 30 supporters from a broad political spectrum explain "why they believe that the billionaire real-estate developer will treat them any better than the career politicians they mistrust."

Electoral college math still favors the Democratic nominee, but Trump's surge is the first time in two years we think any Republican has a chance to beat Hillary Clinton.

The Fed's Next Move

The US Federal Reserve primary function is as follows: Conduct the nation's monetary policy in pursuit of full employment AND stable prices.  Keep the unemployment rate low (under 5%) and inflation contained (around 2% annually.)  Many observers demand that the Fed raise rates now because they fear that an unemployment rate below 5% will spike inflation.  As we observed above, there is still quite a bit of slack in the employment situation.  Meanwhile, thanks to the collapse of commodity and energy prices this year, inflation in the US for 2015 is projected only at 0.1%.  Reasonably speaking the Fed could do NOTHING for the rest of the year and still satisfy the Fed mandate.  However, the Fed also cares about "market psychology" - investors who panic if they think the Fed is not vigilant about inflation.

We believe the Fed will resolve this contradiction by raising rates 0.25% ONCE between now and year end, then sit tight until inflation escalation is more apparent.

 

When to Have the 'Money Talk'

retirement-planning

There has been a lot of chatter about an article that made the rounds last week on a woman who requests to see a man’s credit score by the fourth date, and a couple who met on a dating site that matches singles based on their credit history. Most of the reactions I have heard to this article seem to be of surprise, disgust, or incredulity. I have seen a lot more criticism than acceptance of the idea that a potential romantic partner’s credit score should be of any importance, after all where is the romance in FICO?

Let’s discuss this idea. Imagine if you have worked your entire adult life to save money, build credit through responsible credit card usage and diversified manageable debt. You have always paid all of your bills on time, and you never spend more than you can afford. Then you meet someone who you hit it off with. Maybe they are as responsible with their finances as you are, maybe they have had a financial hardship, or maybe they are hundreds of thousands of dollars in debt. When do you talk about your finances with this person? On the third date? When you move in together? Three years into marriage?

Personally, I think finances are a little too personal to discuss on the third date, but you should never move in with someone before you have had this talk, let alone marry someone whose financial history you have no knowledge of. I am not saying you need to run a credit report on someone, nor am I suggesting that people need to match financially in order to have a successful, loving relationship, however you should know how much debt your partner has, how they plan to repay it, what their savings look like, and how much they earn.

I know what you’re thinking, most of us are raised not to ask questions about other peoples’ money, and it can be incredibly difficult to break the ice when it comes to a money talk. When you are in a committed relationship with someone, you need to have a plan, and having a plan means you can both afford the life you have set out on, and if only one of you can afford that life, it needs to be discussed and agreed upon that the partner who is in a position to will pick up the slack of the partner who is unable to do so.

If you are at a complete loss at how to have the money talk with your partner, there is an easy way to do it – hire a financial planner to facilitate the discussion. Financial planners are well-versed in assisting couples and families in opening up about these necessary topics. We are here to help you realize your plan without judgement.

 

Mid-year Review: Brexit, US Jobs, US election, S&P 500 Makes Record High

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January 18th we wrote:

"The US economy should grow at the middling rate of 2.5% in 2016, with unemployment hovering around 5% as more Americans rejoin the work force, and with inflation in the 0.5-1% range.  In this context, the US Federal Reserve can move slowly to raise rates, or not at all.  Corporate earnings should grow at a modest rate, reversing the negative trend of the last two years caused by declines in the energy sector.  Bottom line, our forecast of gains in US stocks for 2016 remains intact at 5%, 13% higher than Friday's close.  Stocks may sell off a little more in the next few weeks, possible testing the lows of last August, then resume the long term upward trend."

At the end of last December we wrote:

"The world economy is going through a slow patch right now, depressing revenues and earnings for US companies (60% derived from international operations.)  Economists often refer to the US as the "locomotive of global growth."  With an improving labor market, firming wage growth, low inflation and still-low interest rates, sustained consumer spending will keep the US economy growing at least 2.5%/year, and in so doing bring along the rest of the planet.  US stocks are just 4.25% off the record set in May 2015.  We have no doubt new records will be set this year."

So far, the major trends remain intact.  Jobs growth in the US was a robust 287K in June, with an unemployment rate of 4.9% and a modest year over year increase of 2.6% in wages.  Annualized, jobs growth so far this year is about a 2 million annual rate, versus 3 million last year.  Inflation in general rose only 1.0% over the last year, held down by a 10% decline in energy costs.  The Fed may raise rates once, twice, or not at all for the rest of the year.  Q2 earnings for the S&P 500 are estimated to decline 5.6%, the 5th straight quarterly, decline, but projected to gain slightly for Q3 and Q4.  With no earnings growth in over a year, it's no surprise that US stocks remain stuck in a trading range.  Yet, despite MUCH bad news this year, US stocks closed today at a record high, eclipsing the previous high set May 21, 2015, up 6.1% YTD through July 9th.  Stocks are slightly overvalued right now, but may move higher in anticipation of a return to earnings growth in 2017.  

We increase our 2016 forecast on the S&P 500 from 5% to 10%.

Brexit - the British "own goal"

Politicians LOVE making promises to their base, even at the risk of harming the larger country.  In 2013, David Cameron, prime minister of the UK, promised a referendum on Britain continued membership to placate the anti-EU wing of the Conservative Party.  Cameron didn't think he'd actually have to follow through on the promise, thinking worst case that the British would vote to "Remain."  Wrong and wrong!  In the aftermath, Boris Johnson, the Conservative MP leading the "Leave" movement demonstrated that he had no idea what to do next, and pulled out of the competition to succeed Cameron as PM.  Of 5 candidates vetted by the nomination process, the two remaining were:

  • Theresa May, MP, current Home Secretary (similar to the US Secretary of Homeland Security,) favored "remain"
  • Andrea Leadsom, MP current Minister of State for Energy, favored "leave"

The outcome would have been decided September 9th by a vote of the entire Conservative party membership, except that Leadsom pulled out of race earlier today.  As a result David Cameron will step down Wednesday, and May will become PM Wednesday evening. 

Theresa May won 199 votes versus 84 to Leadsom in the nomination process.  May stated "Brexit means Brexit.  No attempts to remain inside the EU, no attempts to rejoin it through the back door, and no second referendum."  But as we noted above, politicians LOVE making promises...  There is a chance May simply refuses to follow through in starting the process of leaving the EU by invoking article 50.

Should the British go or stay? If go, the UK would lose preferential access to export markets in the rest of Europe, but with the pound exchange rate at generational lows (and 12% lower than a month ago) exports could well expand.  Traveling abroad for the British obviously just got a lot more expensive.  London could lose its status among New York and Tokyo as centers of world finance.  That work, and the associated high paying jobs, might well migrate to Frankfurt, Amsterdam or Paris.  North Sea oil, priced in dollars, suddenly contributes 12% more value to the UK economy.  Scotland and Northern Ireland could split off from the UK, rejoin the EU on their own terms. 

It's near impossible to forecast whether the British gain or lose as a result of Brexit, but the capital markets are already voting.  The FTSE 100, clobbered 5.6% on June 24th as the referendum results were announced, is now 4.0% higher than the close on June 23rd and approaching the highest levels of the last year.

Bigger picture: will be prospect of other EU members departing FINALLY cause the European Parliament to take action to address systemic recessionary conditions existing since 2009.  Much of EU economic policy is set by Germany, which currently enjoys 4.7% unemployment rate, a substantial export economy and owns substantial debt of other EU members.  The adoption of the Euro in 1999 substantially benefited Germany, who could lend to Greece, Italy, and Spain at low rates to buy German goods. 

Alas, relying on German imports hollowed out local economies, while saddling those countries with debts that can't be repaid.  In Italy, for example, the national unemployment rate is 11.5%, the youth unemployment rate is 36.9%, the debt burden at 132.5% is the world's third highest after Japan and Greece.  It would be Italy's best interest to leave the EU, revert to the lira (which would sharply devalue just as the pound did last week, boosting exports and halting imports,) and default on half of outstanding debt.

The US Presidential Election

Average Americans are terrified by EITHER Trump or Clinton winning, by worries about Brexit, by worries about international terrorism (ISIS-Orlando, San Bernardino) and domestic terrorism (Dallas.)  We can watch YouTube videos of police officers killing unarmed civilians at average of two killings per week this year.  This era seems like the most violent period of social unrest since 1968.  Over the last 12 months, investors pulled a monthly average of $14.0 billion from US stock funds, $1.7 billion from US Bond funds, $1.2 billion from Emerging Market funds but, interesting, added $3.9 billion/month to International Developed Markets.

David Edwards recently participated in "Challenges of Investing in an Election Year," sponsored by the Financial Planning Association, addressing these topics:

  • What would a Clinton administration look like?
  • What would a Trump administration look like?
  • What are the short and long term implications for the stock market?
  • What tools can investors use to forecast the November outcome?

The replay of the webinar is available here - Edwards' remarks begin at 18:40. 

In thinking about the next presidency, we also have to think about the composition of the House, Senate and Supreme Court.  Unless the Senate allows hearings about an Obama nominee (unlikely) the next president gets to fill at least one Supreme Court seat IF the same party controls both White House and Senate.  If split, the Senate could continue to block nominees indefinitely. 

It seems unlikely, given gerrymandering after the 2010 redistricting, that Republicans lose control of the House in 2016, but the Senate could well flip from Republican to Democratic.  The present composition is 54 Republicans, 44 Democrats and 2 independents who caucus with Democrats.  After the November election, Democrats are expected to control at least 47 seats, Republicans 48, with the outcomes of Nevada, Ohio, Pennsylvania, Florida and New Hampshire currently rated as "toss up."

What would a Clinton administration look like?

We expect that if Clinton wins, the Senate would also be Democratic.  She would be able to appoint at least one Supreme Court justice.  We would expect that Ruth Bader would retire to allow her replacement with a "liberal" justice.  Anthony Kennedy, who also generally sides with liberal rulings, will shortly turn 80.  The current court is generally considered "pro-business," with the 2010 Citizen United effectively allowing unlimited spending by corporations to influence elections.  With the death of Antonin Scalia in February, the court is now divided 4-4 conservative-liberal.

With a Democratic White House and Senate, but a Republican House of Representatives, we expect that the Washington gridlock prevailing since January 2011 would continue.  For better or worse, Obamacare remains in its current incarnation.  Existing federal programs remain funded, but no opportunities for new initiatives.  We would LOVE to see billions spent on upgrading national infrastructure such as bridges, highways, airports and rails, financed by long dated industrial bonds at ridiculously low current interest rates.  No joy.

As a Senator who voted for the Iraq war and as a Secretary of State who watched Libya, Iraq and Syria fall into chaos, Clinton has been bloodied by war.  We would expect her to be cautious extending US military power overseas.

In general, we would expect Hilary Clinton's president to be an extension of Bill Clinton and Barack Obama's administrations.  Considering stocks rose 217.8% under Clinton, 189.6% under Obama, we could live with that.  By comparison, stocks rose 53.2% under George HW Bush (one term) and fell 33.4% under George W Bush (two terms.)  So much for the mythology that Republicans are good for the economy, and that Democrats, particularly socialists like Obama, are bad for the economy.

What would a Trump administration look like?

A Trump Presidency would work with a Republican Senate and House, and a conservative Supreme Court.  The Washington log-jam would break, and legislation would spew forth.  Trump would eliminate the estate tax, slash income tax rates on high income families and corporations.  Trump would erect high trade barriers, impose tariffs on imports from China, but would not touch entitlement programs such as Social Security and Medicare, nor would he slash defense spending. 

According to a well reasoned analysis from Moody's  the US economy would boom briefly with the extra cash flow, but then crash.  At present the US budget deficit is 3.5%, and national debt is $14.06 trillion versus US GDP of $16.65 trillion (84.4% debt-income ratio.)  By 2020, US GDP would grow to $17.12 trillion, but the US debt would balloon to $20.95 trillion - a ratio of 122%.  Once a country's debt exceeds its income, the cost of servicing debt crowds out all other economic activity (see Japan, Greece.)  Moody's projects that 10 year interest rates would rise from 2.4% to 7% (crushing US home values,) and unemployment would rise from 5% to 6.8%.  US corporate earnings would fall, leaving stocks flat to falling.

Presidents need to understand foreign affairs, and Trump has none (no, building golf courses in Scotland does not count as international experience.)  Trump claims to have military "experience" because he spent 5 years at the New York Military Academy in the 1960's, the place arrogant preppies attended after flunking out of New York City private schools.  (Ironically, NYMA went bankrupt in 2015 and was sold to a group of Chinese investors.)  After deferring military service to attend Fordham University and the University of Pennsylvania, Trump avoided the draft by claiming a medical injury - "bone spurs" on his feet.  Trump has expressed great admiration for those notable humanitarians Vladimir Putin, Muammar Gaddafi, Kim Jong-un and Saddam Hussein, possibly because in those countries he could never get sued for bilking Trump University students out of $40 million.

What tools can investors use to forecast the November outcome?

People often look at the national polls in forecasting presidential election.  At present, Clinton has a 4.5% lead in the RealClearPolitics average of national pools:  With four months to go, 4.5% is easily within the margin of error, so you might think the candidates are essentially even.

However, as we saw in 2000, the popular vote totals are not as important as the Electoral College count.  Here's what matters:

  • 538 electoral votes total
  • 270 votes needed to win
  • New York, California sure to go Democratic
  • Texas, Alaska sure to go Republican
  • Election decided in battleground states of: Ohio, Florida, Virginia, Michigan, Pennsylvania, New Hampshire, North Carolina

In 2012, Romney and the Republicans were highly confident of winning based on their own polling.  There was a hilarious moment during the last election when Karl Rove pounded the table denying that Romney had lost Ohio and the election, which Fox News had already called for Obama.  In fact Obama converted a modest popular vote advantage of 50.9%-47.1%to a landslide Electoral College advantage of 332-206.  Third party candidates picked up the remaining 2%.

As of July 11th, Clinton has a head start of 210 electoral votes to Trump with 164. 

12 states are still considered toss-ups, so 164 votes in play.  However, applying the latest state by state polls and eliminating toss-ups creates this electoral college map: Clinton 342-Trump 196, so a better result for Democrats than in 2012, and converging on Obama's 365-173 win over McCain in 2008.

FiveThirtyEight.com massages the poll data differently, but comes up with a similar result. We can also look at the prediction markets - how would you bet, not how you would vote?

Clinton needs 60 votes to clinch. She currently leads in most battle ground states for a gain of 99.  Trump leads only in Georgia for 16 votes.  Clinton has 700 paid staffers nationwide, even in Texas.  Trump has only 70 staffers and fired his campaign manager Corey Lewandowski last month.  Though June 20th, Clinton raised $238 million, spent $196 million (mostly on the primary) has $43 million on hand.  Trump raised $65 million, spent $63.6, and has $1.3 million on hand.  Claims he will write a personal check of $50 million to fund the campaign "when the time is right."

The Clinton campaign and related PACs are spending $500K/week on Trump attack ads in battleground states.  Aside from a small NRA spend, the Trump campaign and allies are spending no money on advertising.  Trump claims he gets so much "free" coverage from the networks (true, about $3 billion worth during the primary) that he doesn't need to buy ads.  However, most of the positive coverage he's getting now is in states he's likely to win.  Clinton's anti-Trump ads are focused in the battle ground states he can't afford to lose.

Bernie Sanders will attend a rally with Hillary Clinton July 12th in New Hampshire, is expected to endorse Clinton and direct his supporters (and their dollars) to her campaign.  Republicans can't decide whether to run from Trump or support him (at arm's length.)  Paul Ryan seems to be struggling with how to handle Trump.  We wonder at what point Ryan decides to sabotage Trump, concede 2016 to Clinton in order to set up another run of his own in 2020.

Slam dunk for the Democrats?

Not so fast!  Clinton's negatives are almost as bad as Trump's.  Many of our clients ask, "How could anyone vote for Clinton?  She's a liar!"  True!  We can be sure she lied about the e-mail server, Benghazi, her speeches to Goldman Sachs, "contributions" to the Clinton Foundation from despotic countries when she was Secretary of State. 

However Trump lies more, winning "Liar of the Year 2015" from PolitiFact.  Of 178 statements evaluated by PolitiFact, a service of Tampa Bay Times and partner news organizations, 160 are rated "Half True" to "Pants on Fire False, while only 18 are rated "True or Mostly True."  Visit the site to see how Clinton, Sanders, Gary Johnson and other leaders rate.  Most Trump supporters don't know that Trump is persona non grata in New York City after a career of defaulting on bank loans and not paying contractors.  His few projects remaining here are branded by the Trump marketing company, but the ownership remains with outside investors.  If he worked for YOUR company, you'd fire him out of self-preservation!

We are not fans of Hillary Clinton by any means, but we feel that at least she would treat the practice of governance like a grown-up.  There's no rationalization we can employ to convinces ourselves that a Trump presidency would be anything but a disaster.

Trump should have flamed out months ago.  Instead, he beat 17 more experienced politicos to become the Republican nominee.  Right now, our portfolios are configured for a Clinton win.  In the past, we've felt pretty secure about our election predictions.  On this one, we won't rest easy on until November 9th.

Why Do You Need a Financial Plan?

financial-planning

Q: Who likes talking about money?
A: <ambient noise> <crickets>

Talking about money can be uncomfortable! 

A surprising number of people do not know how much they spend every month, do not know how many years it will take them to pay down their debt, and have no idea what their credit score is or what it means. What happens if you have more than one type of debt, which are you supposed to pay down first? Do you know what year you would like to retire? Whether you know or not, how will you fund your retirement?

People who are confused about the answers to these questions might think they are alone, but in reality a surprising majority of people do in fact need help figuring out their finances – you are not alone!

If you have questions about any aspect of your financial life, financial planners and wealth advisors are here for you. We will answer your questions with compassion and without judgement.

My inbox is always open, please reach out to me anytime at SamanthaGorelick@HeronWealth.com.

 

Markets Brace for Rocky Friday After UK Votes to Exit EuroZone

heron-wealth

Defying consensus forecasts, UK citizens voted 52% to "Leave" vs 48% to "Remain" with a margin of 1.3 million out of 33.5 million votes cast.  Urban voters favored "Remain" by 60/40, but rural voters voted substantially in the other direction.   White collar "info-workers" have generally benefited from UK integration into the European Union, while blue collar, less educated and older Britons generally faired worse.  Here is the distribution of votes across Great Britain, Scotland, Wales and Northern Ireland.  Labor party voters favored "Remain," Conservative party voters favored "Leave."

World markets trended higher over the last two months on the expectation that the UK would remain in the EU.  This morning, we're seeing a sharp, unpleasant reversal in markets overseas and in US stock market futures:

  • British pound down 7.9%
  • Euro down 2.9%
  • UK FTSE down 4.0%
  • French CAC 40 down 8.5%
  • German DAX down 7.0%
  • Japan Nikkei down 7.9%
  • US S&P 500 futures down 3.9%

David Cameron, prime minister of the UK, resigned, saying, "I was absolutely clear about my belief that Britain is stronger, safer and better off inside the European Union, and I made clear the referendum was about this and this alone - not the future of any single politician, including myself.

But the British people have made a very clear decision to take a different path, and as such I think the country requires fresh leadership to take it in this direction.

I will do everything I can as prime minister to steady the ship over the coming weeks and months, but I do not think it would be right for me to try to be the captain that steers our country to its next destination."

Practically speaking, Cameron will remain prime minister through October.  Boris Johnson, former mayor of London and current member of Parliament is the odd's on favorite to succeed.  The selection of a new prime minster is not the result of a general election by British voters.  Instead, one or more candidates are nominated by current Members of Parliament to a Conservative Party selection committee.  If only one nominee passes the selection committee, he or she wins by default.  If multiple nominees, there could be a series of ballots distributed to party members only with the lowest ranked candidate of each ballot eliminated until one candidate gets a majority.

The new prime minister invokes Article 50 of the "Treaty of Lisbon."
 

  1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.
     
  2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.
     
  3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

Once Article 50 is invoked, the United Kingdom has two years to replace general EU treaties regarding, trade, taxation, defense, immigration and financial regulation with specific treaties with each of the remaining 27 EU members.  The reason why financial markets are reacting so badly to this vote is because the economic costs of going one-on-one with the rest of Europe are high.  UK GDP is expected to grow more slowly as UK exporters will have a harder time accessing European markets.

If Brexit is like poking yourself in the eye, why did British voters favor "Leave?"  The same dynamics we have seen in the US where globalization and immigration favors the educated elites at the expense of less educated industrial workers drove the decision in the UK.

What is the learning for the United States?  The Trump and Sanders campaigns attracted millions of US voters who are "mad as hell" about their economic prospects and want change - any change!  Clinton represents the status quo.  As the "establishment" candidates, she struggled to prevail over Sanders and will be challenged by Trump.  We are sending out an analysis of the US Presidential Election next week.

We are not making any immediate changes in our portfolios as a result of this vote.  The S&P 500 as of Thursday night was just 0.82% below the record high set 13 months ago.  If stocks close down 4% today (possible but more likely down 2%), stock levels will simply revert to levels seen two months ago.  Fed policy will likely remain on hold. 

The one good thing that might come out of Brexit is an incentive among remaining members to address structural barriers to growth, which keeps Europe in a state of permanent recession.  Otherwise, the EU may see a domino effect as other countries decide to exit.  Politicians in Holland, France, Italy and Denmark already called for referendums in their own countries.

You Need a Will...NOW

will-estate-planning

What are you waiting for? You need a will. Yes, you!

It is a common misconception that only older people with a lot of money require a will, but this could not be further from the truth. Whether you are old or young, have material assets or not, it is very important to leave instructions so that your loved ones know what to do in case something happens to you and you are unable to communicate your wishes.

A will is not just a way to communicate where you want your money and tangible assets to go, but it can also assign beneficiaries to your electronic assets. An electronic asset can be anything from a website or blog that is either important to you or generates revenue, or can be your email and social media accounts. In this day and age, it is important to have a beneficiary for your online passwords. It is also important to express your wishes for what will happen with these accounts once you are gone. Do you want your Facebook account taken down when you are gone, or do you want it to remain as a memorial? These questions might seem silly, but they are necessary in today’s world.