ProVise Management Group
November 17, 2010
• According to a Bank of America survey of 1,000 people with invesetable assets of $250,000 or more, 41% said that they were better off financially this year when compared to the same time last year. However, 61% said that they expect to retire later than originally planned. Significantly, about 78% of the people surveyed believed they would be even better off after 2011. It doesn’t seem that President Obama’s Health Care Bill has done much to dampen the concern of Americans about healthcare costs, as 60% of the people surveyed ranked this a major issue. (Source: Merrill Lynch Affluent Inside Quarterly)
• In the third quarter, America’s gross domestic product grew at a rate of 2%. While many so-called pundits talk about how “sluggish” the recovery has been, at least we are not listening to anyone continue to spread fear by talking about a double-dip recession. When you consider that the construction industry, which is still in a recession, is an industry which normally helps lead the way out of a recession, it is not surprising that the economy is not growing faster. But it is growing. So now, many of the pundits who foretold of a “double-dip” have shifted their thinking to “long-term deflation”, much like Japan has experienced since the late 1980s. Just as it was hard for us to visualize a double-dip recession, it is equally hard for us to visualize long-term deflation occurring in America. There are some significant differences between the United States and Japan. First, Japan has notoriously tried to export its way out of a recession, rather than consuming its way out of a recession. They tried to develop growth by sending things to other places. To a certain extent this was necessary, since the Japanese savings rate as a percent of personal income was often in the high teens. For a long time, Americans were barely saving anything, and today, the savings rate is somewhere between 5.5% and 6% - two-thirds less than what the Japanese population was doing. Yes, it is true that Japan cut its interest rates almost to zero, just as we have here (it became known as the Taylor Rule), but we have a Federal Reserve Board that has not only cut interest rates, but has taken aggressive steps (including quantitative easing) to continue to fuel the growth of money. This money will eventually find its way into the economy. Finally, and perhaps most importantly, if you go back to what we wrote during the 1990s, we kept talking about the Japanese banks being bankrupt and refusing to write off the bad loans. This stubborn behavior left the Japanese banks in a very bad financial place for many years. Traditionally, America has swallowed our bad medicine (and we certainly did this time), paid the price, and started to rebuild. The price we had to pay during the Great Recession was high, but because we paid the price, our banks are much stronger than Japanese banks. There are many other factors which make up other differences, but these three are quite significant. It may take us awhile to achieve significant growth, but there is a good chance that it will be better than many pundits are currently predicting.
• With six weeks left in 2010, the S&P 500 is up about 9.5% year-to-date. The current year’s performance is buoyed by September and October, when the S&P 500 gained 13.1%, which was the best two month’s performance for the Index, since gaining 15.7% in April and May of 2009. (Source: BTN Research)
• Things do seem to be getting a little better for corporate earnings. Currently, it is projected that the S&P 500 will produce earnings next year of about $84.30, which will get it back to where it was in 2007. Retirement accounts have now increased to $7.9 trillion against a high of $8.7 trillion three years ago. These accounts bottomed just 18 months ago at $5.9 trillion. The downturn in the markets continues to delay retirement for many who planned to stop working by now. The repercussions are significant. First, and most obviously, people are working longer because they have to. This means that they may delay starting their Social Security benefits, and that they will contribute more to Social Security as they keep working. This will help postpone the inevitable drain on Social Security, and might also postpone the inevitability of Congress doing something about it. Because people are working more years, they will need to accumulate less money for retirement because they won’t have as many years to live in retirement. Also due to the delay, younger people who were hoping to move up the corporate ladder will be frustrated as they will be stuck in their current jobs, which means that their jobs will not be freed up for someone else, and so on down the line. Hence, unemployment will remain somewhat higher than it might otherwise have been.
• The electorate has spoken and, resoundingly, they have replaced the Democratic led House of Representatives under Nancy Pelosi with a Republican House probably led by Representative John Boehner as the new Speaker. On the Senate side, we are still waiting for all of the results, but the Republicans clearly pick up at least six seats and are now in a position to exert much more power than before. Will this changeover result in continued gridlock or will the Republican led House work with the President to move forward on many important issues? Congress has just reconvened and one of the first things they will need to do is make some decisions concerning the Bush tax cuts. This should give some early hints as to how the Democrats and Republicans are going to work together (or not) and how they will vote. From the President’s perspective, during his post-election press conference he admitted defeat but clearly did not back away from his policies and gave no hint that he made a mistake in passing some of the legislation (especially having to do with healthcare) which was such a big part of the campaign. President Obama can either act like President Carter did in 1978, basically ignoring the election results, or he can emulate President Clinton’s behavior in 1994, when Newt Gingrich and the Republicans swept into power with their “Contract for America”, and move to the middle and compromise. If the President holds firm on his pledge to save the Bush tax cuts for all but just the “wealthy”, it will be the first hint that compromise will not be in the offering. In this Lame Duck session, many of those who were defeated were the so-called “Blue Dog Democrats” who were generally fiscal moderates and thus could easily side with the Republicans in extending the Bush tax cuts for everyone. The remaining Democrats in Congress are, for the most part, those who can be considered the more liberal group, which may be equally as vocal a minority as the Republicans have been for the past two years. The incoming members of Congress will not be divided by just the traditional Republican/Democratic label as the Republican party is going to be divided with the quite vocal minority of its own ranks, i.e., Tea Party members. Some of the Tea Party members will not tone down their rhetoric, but others will realize quickly that if they expect to have any influence at all, they will need to work with the leadership of the Republican party. The ineffectual Tea Party members will garner all the headlines, while the effective members will help get things done. With the 2010 elections behind us, attention will now turn towards the Presidential campaign in 2012. Once again, will the President follow President Carter’s or President Clinton’s example? Those who oppose President Obama look at his 45% Gallup approval rating and hope that this is a harbinger that he will not be re-elected. These numbers don’t really mean anything at the present time. Reagan had an approval rating of 42% in 1982 and Clinton had a 41% approval rating in 1994. Both went on to be re-elected. Conversely, the first President Bush had an approval rating of 69% at this same point, and the second President Bush had a 68% approval rating. Bush I was defeated by Clinton two years later due to a weak economy, and Bush II was re-elected, but by a very close margin in 2004. A lot can happen in two years, so hold on; it will be interesting. We will try to interpret what we think is happening, and more importantly, to cut through all of the political “jibber/jabber”. PS Won’t you miss all the TV commercials?J
• The Republicans may have had an overwhelming victory a few weeks ago, but now the real work begins. If the rhetoric continues, we are destined to two more years of nothing being accomplished in our dealings with the significant issues our country faces today. Let’s look at this from a company point of view. When a new CEO comes into a company they will often take the early time to listen to all of the people within the company talk about the things that are going right and the things that are going wrong. After that, the new CEO will set their own agenda, draw their own blueprint, and state their own vision for the company and begin to drive the company in that direction. If the Republicans lose sight of the fact that this entire election was about the economy, they are in deep trouble. Their vision must be getting the economy on the right track, creating jobs, and, borrowing from the famous Clinton campaign lines: “It’s the economy, stupid”. We should not be looking at how we divide the pie, but rather how we can make a bigger pie for all to share. Perhaps this is asking too much of our political leaders, but if we were in Washington, that’s what we would concentrate on for the next two years.
• Now that the Fed has made official what everyone expected for many weeks, the question is, what does the quantitative easing phase 2 (QE2) really hope to achieve? Bernanke and the Federal Reserve are first trying to stimulate the economy and stave off deflation. It was expected that the Treasury would buy back $500 - $700 billion worth of bonds and they actually announced $600 billion in buy backs between now and next June, and most of the buy backs are intermediate bonds, not long-term bonds. They are trying to keep mortgage interest rates low in order to continue to help the housing industry. This additional money is likely to weaken the dollar in the short run, which could lead to some inflation. We will be hearing more and more about inflation. The fact is, we need some inflation. Two to three percent is healthy. Right now, there is virtually none. In spite of the fact that the talk by the pundits will now shift to inflation, trust us when we tell you that fighting inflation is a whole lot easier than fighting deflation. The Fed’s theory is the extra cash will put more money in the hands of banks which will be incentivized to loan the money, which will stimulate growth in the economy. We are already seeing signs that small businesses are able to get loans today that they were not able to get six months ago. All of this will hopefully lead to a better economy, which will further stimulate the stock market. In our New Year’s Bullets we will provide you with some of our thoughts about 2011 and beyond.
• The net gain for the jobs numbers in October was 151,000, which is a significant improvement over what we have seen throughout the year when private sector jobs were added at about 45,000 jobs per month on average. Since May, the jobs numbers have been skewed up and down due to the number of workers hired to work the Census, and then dismissed after this temporary job was completed. Perhaps as important as the October jobs number was the fact that the numbers for both August and September improved significantly, and we won’t be too surprised if the jobs number for October is adjusted 20,000 to 30,000 higher than has been reported. While we’d like to think the new Congress could do something about the 9.6% unemployment rate, we doubt they will be able to do much, even if they do work in concert. Other than tax policy changes Congress will find it difficult to stimulate the economy, notwithstanding their desire to do so. The Federal Reserve is in a much better position to have an impact on the economy and their most recent decision of quantitative easing will not be so much of a stimulus as it will be a means for the economy to buy some time to get its legs underneath of it.
• Earlier we told you that Social Security recipients would not see a cost of living adjustment in January of 2011 for the second year in a row. Cost of living adjustments affect many other aspects of our economic lives and, as it relates to retirement plans, the limits are not changing either. For 401(k), 403(b), and 457 Plans, the limit for deductibility from one’s income remains at $16,500 and for people born in 1961 or earlier, the catch-up deferral limit also remains at $5,500. The maximum compensation limit will remain at $245,000, and for testing purposes an employee who earns more than $110,000 is considered “highly compensated”. The maximum allowable amount that can be set aside into all defined benefit contribution plans will remain at $49,000.
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon.
RAY, KIM, ERIC, BRUCE, and LOU
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