Higher Rates: The Tempest in the Teapot

By Bob Veres

Anybody who was surprised that the Federal Reserve Board decided to raise its benchmark interest rate this week probably wasn’t paying attention.  The U.S. economy is humming along, the stock market is booming and the unemployment rate has fallen faster than anybody expected.  The incoming administration has promised lower taxes and a stimulative $550 billion infrastructure investment.  The question on the minds of most observers is: what were they waiting for?

The rate rise is extremely conservative: up 0.25%, to a range from 0.50% to 0.75%—which, as you can see from the accompanying chart, is just a blip compared to where the Fed had its rates ten years ago.

The bigger news is the announced intention to raise rates three times next year, and move rates to a “normal” 3% by the end of 2019—which is faster than some anticipated, although still somewhat conservative.  Whether any of that will happen is unknown; after all, in December 2015, the Fed was telegraphing two and possibly three rate adjustments in 2016, before backing off until now.

The rise in rates is good news for those who believe that the Fed has intruded on normal market forces, suppressed interest rates much longer than could be considered prudent, and even better news for people who are bullish about the U.S. economy.  The Fed may have been the last remaining skeptic that the U.S. was out of the danger zone of falling back into recession; indeed, its announcement acknowledged the sustainable growth in economic activity and low unemployment as positive signs for the future.  However, bond investors might be less pleased, as higher bond rates mean that existing bonds lose value.  The recent rise in bond rates at least hints that the long bull market in fixed-rate securities—that is, declining yields on bonds—may finally be over.

For stocks, the impact is more nuanced.  Bonds and other interest-bearing securities compete with stocks in the sense that they offer stable—if historically lower—returns on your investment.  As interest rates rise, the see-saw between whether you prefer stability or future growth tips a bit, and some stock investors move some of their investments into bonds, reducing demand for stocks and potentially lowering future returns.  None of that, alas, can be predicted in advance, and the fact that the Fed has finally admitted that the economy is capable of surviving higher rates should be good news for people who are investing in the companies that make up the economy.

The bottom line here is that, for all the headlines you might read, there is no reason to change your investment plan as a result of a 0.25% change in a rate that the Fed charges banks when they borrow funds overnight.  There is always too much uncertainty about the future to make accurate predictions, and today, with the incoming administration, the tax proposals, the fiscal stimulation, and the real and proposed shifts in interest rates, the uncertainty level may be higher than usual.


A Market High—But Is It a Market Top?

by Bob Veres

In case you hadn’t noticed, the S&P 500 index reached record territory yesterday, and the Nasdaq briefly crossed over the 5,000 level before settling back with a more modest gain.  At 2,137.6, the S&P 500 finished above the previous high of 2,130.82, set on May 21, 2015.

We’ve waited more than a year for the market to get back to where they were before the downturn this January, before Brexit, before a lot of uncertainties in the last 12 months.  The market top itself is an uncertainty; after all, many investors regard market tops warily.  When stocks are more expensive than they have ever been (so goes the thinking) it may be time to sell and take your profits.  However, if you followed this logic and sold every time the market hit a new high, you’d probably have been sitting on the sidelines during most of the long ride from the S&P at 13.55 in June 1949, which was the bull market high after the index started at 10.  New highs are a normal part of the market, and it is just as likely that tomorrow will set a new one as not.  In fact, overall, the market spends roughly 12% of its life at all-time highs.

We all know that the next bear market will start with an all-time high, but we can never know which one in advance.  Market highs do not necessarily become market tops.  Let’s see if we can all celebrate this milestone without the usual dose of fear that often comes with new records.

New guidelines, better advice?

By Bob Veres

Most people think that the Securities and Exchange Commission (SEC) regulates the investment markets and providers of investment advice, and that the Financial Industry Regulatory Authority (FINRA) regulates the Wall Street sales agents.

But in fact, when it comes to your retirement plan, like a 401(k) account, the chief regulator is actually the United States Department of Labor.  Anybody who provides advice to these plans has to meet standards generally defined in the 1975 law known as ERISA (Employee Retirement Income Security Act), which is administered by the Department of Labor.

The list of retirement plan advisors is a long one.  There are independent financial advisors who receive fees directly for their work, and act in the best interests of the plan participants.  But many plans have been sold by insurance agents and brokers, who creatively introduce a growing array of hidden charges and fees and high-cost investments which, according to analysis by the White House Council of Economic Advisors, together have been quietly shifting roughly $17 billion a year out of the pockets of American workers into Wall Street bonus pools and insurance company coffers.

This month, the Department of Labor issued rules designed to stop these brokers and agents from working in their own interests rather than the interests of American workers.  The rule imposes iron-clad fiduciary requirements on anyone who provides investment advice to these plans or plan participants.  “Fiduciary” is a legal term that is grounded in case law, but essentially it means that the customer’s interests must be the priority when any investment recommendation is made.

In addition, the Department of Labor extended these new, stronger protective rules to anyone who recommends that consumers roll their money out of a retirement plan into an IRA.  Those investment recommendations, too, must also be made in the best interests of the customer.  This was intended to prevent insurance agents and brokers from recommending that their customers move money out of the newly-cleaned-up plan into the same high-commission products (like variable annuities and non-traded real estate investment trusts) that they had been recommending in the plan.

How well will this new set of rules protect consumers?  At this point, there is reason to be optimistic.  The larger sales organizations on Wall Street and in the insurance industry could be sued under this strict fiduciary standard if their brokers and agents continue their current practices, and they would be unlikely to prevail in court.  The safest course would be for these organizations to set up divisions made up of people who would be trained to recommend only lower-cost or high-performing investment options, meanwhile giving up the sly hidden fees that they have been collecting for decades.

Alas, the rule specifically states that existing arrangements will be grandfathered, which means that if you’re a participant in a plan at your workplace, you may not immediately feel the impact of new fiduciary obligations.  But over time, most companies are expected to take a closer look at their fee structure, and as they amend their plans, the money leaks will gradually be repaired.

Eventually, if the analysis is right and workers suddenly find themselves with, collectively, $17 billion a year more in their retirement accounts than they were getting before, we could see a difference in the number of people who can afford retirement.  The only losers would be Wall Street bonus pools, which, for most observers, actually makes this a win-win.

Cheaters, Thieves and Tax Havens

By: Bob Veres

Leaked information tells the story of prominent world leaders who avoided taxes or looted their country’s treasuries in order to squirrel away not only money, but expensive yachts, luxury homes, ownership of a candy company and investments in construction companies.  The Prime Minister of Iceland has already resigned as a result of the leaked client files of a Panamanian-based law firm that specializes in creating secret tax havens.

What, exactly, are we to make of the Panama Papers leak?

The sometimes shocking revelations that are making their way into news outlets is the result of a hack into the files of a giant Panamanian law firm known as Mossack Fonseca, which had apparently become the world’s go-to resource for kleptocrats and tax avoiders who wanted to hide assets away in shadowy offshore shell corporations.

The hackers ultimately sent 11.5 million records to the German newspaper Suddeusche Zeitung, which promptly shared the massive data trove with the various news organizations that are members of the International Consortium of Investigative Journalists.  Their analysis is far from complete, but what we know so far is what you probably already suspected: the leaders of certain countries like the Ukraine, Syria, Saudi Arabia and Russia have been squirreling away state resources into their own secret personal accounts, while prominent leaders in less corrupt nations have been quietly funneling money into offshore havens to avoid having to pay their fair share of taxes.  And this activity has apparently been going on for decades.

Nobody should be terribly surprised that close associates of Russian president Vladimir Putin—including cellist Sergei Roldugin, along with brothers Arkady and Boris Rotenberg—are connected to more than $2 billion in shadowy assets, some of which found their way back into Russia’s TV advertising business.   The Rotenbergs are also proud owners of seven British Virgin Islands-based companies that, in turn, control investment assets around the world.

Nor was the world astonished to learn that two cousins of embattled Syrian President Bashar Assad have been filtering tens of millions of dollars worth of the country’s oil revenues through numerous offshore accounts.  Former Iraqi interim prime minister Ayad Allawi managed, in his brief kleptocratic term in office, to secret away assets in a Panama-registered company called I.M.F. Holdings and a British Virgin Islands company called Moonlight Estates Ltd.

The embattled people of Ukraine are doubtless outraged to discover that Ukranian President Petro Poroshenko is sole owner of a British Virgin Islands firm that secretly controls a European candy factory, auto plants, a TV channel, a chocolate business and a shipyard.  And one wonders why Saudi Arabian king Salman Bin Abdulaziz Bin Abdulrahman Al Saud would want to hide assets offshore in several British Virgin Islands companies that hold $34 million in mortgages for luxury homes in London, and a fancy yacht that he uses for pleasure cruises.

The most immediate fallout from the released files is the resignation of the Prime Minister of Iceland, Sugmundur Gunnlaughsson, after it was revealed that the Panamanian law firm had secreted $4 million of bonds in his name through a British Virgin Islands shell company—assets he had never gotten around to revealing to the nation’s tax collector.

The list of offshore cheats also includes the former Prime Minister of the nation of Georgia, Argentine President Mauricio Macri, former Jordanian Prime Minister Ali Abu Al-Ragheb, former Qatari Prime Minister Hamad Bin Jassim Bin Jaber Al Thani, and some people whose names you might recognize: soccer player Lionel Messi and the late father of UK Prime Minister David Cameron, who apparently avoided British taxes for 30 years on his investment fund by employing accounts based in the Bahamas but incorporated in Panama.

High-ranking Chinese and Spanish officials, and six members of the British House of Lords also made the list.

As the hacked files are sifted through for more revelations, it reminds us that, while data security issues are a huge nuisance for all of us, they not an unalloyed evil.  Hacked files can sometimes lead to greater social transparency, and help us spot the people who cheat or steal, some of whom, by strange coincidence, happen also to be among the world’s wealthiest individuals.  But, if these assets are frozen by international monetary authorities, perhaps not for long.

Many Guns, Many Deaths

by Bob Veres

The recent news of three gunman shooting innocent civilians in San Bernardino, CA has prompted a number of news outlets to point out that this is nothing new.  Mass shootings—defined at shootings at a public place in which the shooter murdered four or more people, excluding domestic, gang and drug violence—are happening more than once a day in 2015.  Indeed, an interactive map that identifies each location since the December 2012 Sandy Hook shooting gives an alarmingly dense coverage of the U.S.  The map included in this article only shows the locations (deep red circles indicate places where more than one shooting took place), but the actual map (located here: http://www.vox.com/a/mass-shootings-sandy-hook) tells the actual date and location of each incident.

The total: 1,042 mass shootings, 1,312 people killed, 3,764 wounded.  These numbers are compiled by Mass Shooting Tracker, which, the website notes, is crowdsourced and requires that all circles on the map be verified with news reports.  It may be missing some incidents.

Despite these alarming numbers, mass shootings still make up a small minority of all firearm deaths in America—which total more than 32,000 each year.  However, contrary to what you may hear, two-thirds of those deaths are suicides, not homicides.  Nevertheless, when you add in all the statistics, in 2012, the most recent year that we have accurate numbers, there were 29.7 firearm related deaths per 1 million Americans.  The comparable statistic in Canada: 5.1.  In Germany, the rate is even lower: 1.9 per 1 million citizens.  One possible explanation for a violent death rate that is orders of magnitude higher than other countries: more guns.  The U.S. makes up about 4.4% of the total global population, but owns 42% of the world’s civilian-owned guns.

Major Changes Ahead

by Bob Veres

When you look at recent history, the changes in our daily lives have been breathtaking.  Nine years ago, the iPhone hadn’t been invented yet and so there were no mobile devices to keep people staring at their screens as they walk around in public.  Facebook was a college phenomenon, there was no Twitter, and the cloud was that fluffy white thing passing by overhead.  No apps, nobody was talking about self-driving cars, solar panels were rare, and light bulbs were incandescent rather than LED.  America was heavily dependent on foreign oil, and you had to ride a cab rather than in the passenger seat of a stranger’s car if you wanted to get home from the airport.

What will be the next breakthrough technologies that will rock our world?  An article in SingularityHUB, published by Singularity University, offers a handful of predictions that are already in the early stages of changing our world today.

The first is clean energy, whose widespread adoption would dramatically disrupt the traditional oil and gas and coal industries, and make electricity dramatically cheaper for all of us.  The article says that every two years, solar installation rates have been doubling, and the cost of photovoltaic modules are falling by about 20%.  These panels are expected to halve in price by 2022, and they will be far more efficient in the amount of energy they capture.  By 2030, the article estimates that solar power will be able to provide 100% of today’s energy needs, and by 2035 energy will be almost free—kind of like cell phone calls are today.

The second big change is the fall of China as the world’s manufacturer, led by a return to locally-sourced manufacturing.  This will be driven by advances in robotics that are already finding their way to the factory floor.  The Chinese government is aware of the trend, and currently has an experimental facility that is being labeled as the world’s first “zero-labor factor” factory, where robots replace humans doing the hard rote work of assembling cars and appliances.

Unfortunately for China, the robots in Guangdong Province are no more productive than the robots here in the U.S. or anywhere else in the world.  They work 24 hours a day, and are unlikely to join labor unions.  Their cost is going down yearly.  So why would a company in the U.S. outsource manufacturing to China and incur the long shipping times and high transportation costs when they can assemble the finished goods right next to the customer base?  Manufacturing will once again become a local activity.

A third change will be what the industry is calling digital manufacturing—which you know as 3D printers.  The parts that the robots will be assembling have traditionally been made with lathes, saws, milling machines and drill presses, which physically remove material to obtain the desired shape.  Digital manufacturing produces those same components using the opposite approach, with powdered metal, droplets of plastic and other materials brought in to add materials to a frame.

The article says that in the early 2020s—less than a decade from now—households will buy low-priced 3D printers, and order things online.  The online services will send instructions to the 3D printers to manufacture the item right there in the spare bedroom.  Eventually, these printers may take jobs from the robots, who by then might be intelligent enough to organize their own protest rallies.

Why You May be 15 Years Younger Than You Think You Are

by Bob Veres

How long are you and I going to live?  None of us knows, of course, but this number is important for a variety of planning issues—including, of course, how long your money will have to last in retirement.  Actuarial tables tell us how long people will live on average, but that isn’t much help for planning a specific person’s life, and the averages conceal a lot of variation.

Living today is a huge advantage over living in the past, and living in a developed nation is a benefit as well.  As you can see from the chart, most children born in the late 1700s had a life expectancy below age 35; today, the global average is 70, and people who make it to age 65 have a good chance of living to 85 or longer.

If you’re above the national average in wealth and income, and especially if you have certain lifestyle characteristics like regular exercise and no tobacco usage, then there’s a good chance you’ll live longer than these averages.

There’s a website that can help you get a better feel for your expected lifespan; it’s called Living to 100 (www.livingto100.com).  The site asks you a series of questions including your birthday, gender and marital status, and some interesting questions related to the number of new relationships you’ve developed over the last 12 months, the way you cope with stress and some of the sources of stress you’re currently experiencing, your normal sleep habits and your education level.

There are questions on nutrition, your height and weight, how often you eat red meat and sweets, and at the end, you are told how well your answers match up with the tendency to live a long life.  At the end of a tutorial on your answers and suggestions for improvement, you get a calculated life expectancy, and a list of things that could add as many as ten years to that life expectancy.

Chances are, you’ll be surprised at how long you’re expected to live, and astonished at the possibilities suggested in the list of potential changes to your lifestyle.  That means that you’ve managed your life and your health intelligently, and the extra years could be an unexpected bonus.  Of course, it also means that you should take a second look at how much you’ve saved and the possibilities of using your skills and experience to earn income during retirement.

Bottom line: you may discover that you have 15 more years to live than you expected based on your experience with your parents, which means you can start thinking of yourself as 15 years younger when you look at your options and personal timeline.