Here’s a good paper that studies returns going back to 19
Basically it’s saying there’s validity to Warren Buffet’s phrase “be greedy when others are fearful and fearful when others are greedy.”
Of course, there were notable exceptions to the rule, but an interesting article and study nonetheless.
The first quarter was a strong quarter, particularly for the unmanaged US stock market indexes.
But what is going on in Europe? What might the unintended consequences be of the Cypriot banking issues?
I talk about all of this in my video, so I highly encourage you to take a few minutes and listen to my thoughts.
Graphs referenced in the video: Full Graphs
Transcript:
Good morning. Mike Brady with Generosity Wealth Management, a comprehensive full service wealth management firm here in Boulder, Colorado, and I am so pleased to talk with you this morning because we’re going to talk a little bit about the first quarter of 2013. We’re going to talk about the rest of the year. We’re also going to talk about unintended consequences, and I’ll talk about what I mean by unintended consequences in just a little bit.
First quarter of 2013, very good quarter, particularly if you’re 100% invested in the S&P 500 (which you probably shouldn’t be), and very disappointing for you if you’re 100% invested in wheat futures (which you probably shouldn’t be). Realistically you hopefully have a well diversified portfolio of stocks and bonds and cash in US and international, something that fits well with you with your risk tolerance level. If you’re my client, of course I’ve talked with you about that. If you’re not my client, well gosh darnit, you should call me so I can work with you on that.
I’m going to put up on the chart there something that might be a little difficult so I’m going to put a link to it so you can grab the high definition JPEG of it, but you’re going to see across the gamut there, from on the left you’re going to see the S&P 500 all the way to the wheat futures there on the right, all kinds of ranges from – from very good double digits in the positive to for the unmanaged stock impact indexes to double digit negatives for those – those evil wheat futures.
I’m always reminded that like predicting the weather, predicting the economy and predicting the markets, et cetera, is a very complicated proposal. No one is absolutely right, and there’s many different variables that go into it. The older I get, the more humble I become, and at the beginning of the year I said that I thought that this was going to be an up and down couple of years, that it’s going to be a trading range, and I was asked by a client last week if I was surprised by the first quarter strength and the answer is I was surprised but one quarter does not a year make. One quarter does not a two-year time frame make, and I hold to that.
I think that going forward there are so many pieces of data that are negative, there are so many pieces of data that are positive, and that’s normal. When someone says to you, if you see some kind of a TV pundit or an analyst that, well, all these, we have conflicting data. Well, there’s always conflicting data. There’s never 100% way or the other. We have to become comfortable with that type of chaos, and we I think have to take all the data in and say, okay, what does it really mean? And for me it means that it’s going to continue to be that muddle through.
One thing that does concern me from an economy point of view is it feels like a very sluggish economy. The participation rate from an employee point of view, I’m going to throw a chart up there, continues to discourage employees. That being said, I don’t take the complete pessimist view, because we knew this going back that there’s going to be so many baby boomers exiting the work force, so we knew this. Remember that book back in the early 2000s, The Roaring 2000s by Harry Dent, he talked about how around this time frame there are going to be a lot of people exiting the work force and starting to withdraw money from the market. That being said, I think that if you talk with some of your friends and family members, you probably know people who have tried to get a full time job that have decided to go back to school or decided to take something that is less than full employment or what they’re looking for, so it’s a combination of those two, and at various points in time we have a major shift change, and I think that we’re going through that right now and have been for the last two, three, four years, of what does it really mean to be fully employed? What skill levels are we as a society needing in some of those high tech and creative positions? And so that’s what we’re seeing right now. It’s always painful when we go through it, but I’m ultimately an optimist on the US and how we solve things and our ability to weather many things.
Now, I want to talk about unintended consequences. The unintended consequence from August of 2011, remember what we were talking at that point about the down grade of the US from triple A down to double A, and everyone said oh, my gosh, no one’s going to want our treasuries. Well, the exact opposite happened and people basically looked at, investors looked at all of their options and said, you know, this can have a huge impact on some of these other asset classes. I actually want the treasuries which look the best horse in the glue factory, and so that’s exactly what happened. There was a huge rally in the treasuries. I think about, and this is a slight tangent, but I think about Kenya about four or five years ago. I think many of you know that I go to East Africa for two to three weeks a year and do some charity work there, and in Kenya they had a riot after one of the elections and it cut off the whole, you know, Rwanda and Uganda from the ability to get fuel and to get other goods and services because they were coming through Kenya. Well, what was the unintended consequence of that? Now there’s a huge pipeline and rail that’s going through Tanzania that completely bypassed – they’re going to completely bypass and have as a secondary something that’s not Kenyan. That’s really going to long term hurt Kenya, who had a monopoly on getting goods and services in there.
The reason why I bring that up is let’s look at what happened with Cyprus and the European monetary union. Essentially the Cyprus banks decided to treat their depositors as investors in the bank, saying, well we’ve lost all this other money, we can’t – we’re having real difficulty, and the European monetary – European Union is basically saying well, you got us tickets to those uninsured depositors. Now, if you were a depositor of a large amount, you think that’s not going to cause some concern down the road? I mean, I think this is probably the end of the Cyprus banks there, and it also had an unintended consequence of everyone else who is looking at the investing, not investing but depositing banks and European banks is that the European Union said, you know what? This country, the next time Italy comes around, the next time Portugal or Spain comes around, or Ireland, you know, you’re on your own. It’s up to the country. We’re not unified as a European monetary union, unlike what we have here in the United States.
So I think that the unintended consequence of that is a further segregation of the banking system and financial system in Europe that’s just going to speed along what we’ve been talking about for two to three years. Whether all that money that was part there now comes towards the US banks is still to be seen. That being said, I actually think the US financial system is still sick, I mean there seemed to be no consequences for bad action and bad investments even here in the United States, and this is something that we’re going to have to pay at some point as a society and as tax payers, and I don’t know when that’s going to be, whether it’s one quarter, two quarters, two years, or within ten years, but that is something that is going to have to be addressed at some point.
What does this mean for 2013/2014? I continue to believe in the trading range and that we need to be prepared for some up and down movement in the next year and a half, year to year and a half to two years. If you’re my client, of course I’ve talked with you about it. I met with pretty much all the clients in the first quarter and I tried to recommend managers and third party managers that I believe do well in that type of market.
I’m going to put up there on the chart a long term 110-year, 113-year view of the market, and the longer the time horizon that you have as an investor, the happier you’re going to be. If you’re a minute by minute, if you’re an hour, a day, a week, a month, those are hugely short times frames, and what we want to do is have investments that do well on the yearly, the two, the five, and the ten-year time horizon, and if we can have decade time horizon, you’re going to be a very happy, happy camper.
Before I end here, I’m going to throw a couple more charts up to show you what Europe looked like in the first quarter. You’re going to see that Europe was definitely trailing the S&P 500. You’re going to see that the financials trailed all the European stock market indexes, the unmanaged stock market indexes even more, and going forward I think that we need to be prepared for some volatility. We have to remain diversified, and we have to remain consistent with the risk level that we need for the plan that you hopefully have in place. The reason why I say the plan that you hopefully have in place is you’ve got to know where you’re going, you’ve got to have that nice retirement analysis and plan, and what risk level do you need? Because if you only need 2 to 3% a year and you’re taking risks that can get you 10 or 12% in a good year but also lose it in another, why are you taking all of that risk? And so I think that that’s something that you need to keep in mind.
I’m going to wrap up now, because it feels like I’ve been talking for awhile. I’m going to be a little bit more consistent with my videos going forward because gosh darnit, this first quarter was so busy for me as I was meeting with my existing clients and meeting with new people, that I didn’t have – I felt like I was communicating one on one all the time but I wasn’t doing as good of a job with my newsletters and my videos, and I’m going to get back to that, so you’ll see an awful lot going forward.
I am taking new clients. I would love for you to give my name out to your friends and colleagues and family members, et cetera, have them give me a call. We’ll have a conversation whether or not it makes sense for us to sit down and whether I’m the right guy to help them out. What people want, I can’t help everyone, so what they might need might not be what I do, and I’ll be very blunt about that and then very timely of course, but I’ll try to point them in the right direction.
Mike Brady, Generosity Wealth Management, 303-747-6455. You have a wonderful week, wonderful quarter. Thanks, good-bye.
You’re probably hearing a lot about the Fiscal Cliff, and may be wondering
• What does it really mean?
• What are the implications?
• What can, or should, I do?
In order to answer these questions, I have a slightly longer than usual video this week (about 10 minutes), but one of the best ones I’ve done in a while (if I do say so myself).
This is a very timely subect, and you’ll be hearing about the Fiscal Cliff in all the media for the next month or so. Now is your chance to be as informed as possible, and take action if necessary.
Click on the video
TRANSCRIPT:
Good Morning! Mike Brady with Generosity Wealth Management speaking to you from Boulder Colorado. Hopefully you had a very nice Thanksgiving weekend.
Today, I want to talk about the fiscal cliff. Perhaps you have read or heard about the fiscal cliff and have wondered, “what the heck is it?” I mean they seem to talk about it like it is so obvious what the implications are and I thought I would take a step back with you and talk about the origin, kind of what the fiscal cliff is, but also what are some things that we can do between now and the end of the year and also what the implications may be for the stock market.
Let’s start off with the beginning. Back in 2001, there was a pretty much across the board reduction in income taxes from the lower rates to the higher rates about 3% give or take. At that time there were also child credit increases, which was a good thing. This was all renewed in 2010. It was supposed to expire in 2010. At that time the Obama administration with the Democrat Senate and House of Representatives extended it for another two years and that two years is coming up. So when it is described as the Bush era tax cuts, at this point really I would say it is the Bush and the Obama because really both sides of the isle have either started it or extended it. And so, at this point now, both sides of the isle want it extended as well, but they are disagreeing about how to extend it and to whom it is extended and which parts of it.
What does this really mean? Well, from an income tax point of view, pretty much across the board from the lower income tax rate all the way up to the higher ones; it is going to go up about 3%. I am going to throw up a graph there on the video and you’re going to kind of see how before and after it can go up. In addition capital gains are going to go from, at the very lowest it is going to go from 0 – 15 or from 15 – 20% on capital gains. Dividends are going to go from 15% all the way up to whatever your marginal tax bracket is, which could be 39.6 if you are in the very highest. Your payroll tax, two years ago, in addition to extending the tax cut, they lowered the FICA tax that is charged to the employees. It went from 6.2% down to 4.2%. Well that would be reversed. So 4.2%, so basically an extra 2% tax for those that are W-2 employees, well all people who pay FICA tax, so whether you are self-employed or a W-2. Also from an estate tax point of view, right now estate taxes are 35% to the amount in excess of 5.12 million, the amount that is excluded from estate taxes. If this isn’t resolved, in January it will be the amount over 1 million dollars per person, will be at 55%. It will go from 5.12 at 35 to 1 million dollars at 55%. A million sounds like an awful lot of money but once you start adding up life insurance and your house and your retirement account, it is very easy and quick to get over a million dollars. So this is a huge impact for a significant number of people.
You might ask yourself, who cares about all taxes, whether or not they are higher or lower, etc. And the argument, the reason why this is such a big deal is when taxes are raised, that is usually a decrease in production of some amount and so the question is although, for each dollar there is more of a tax in my example, right now we are talking about 3%, there might be less productivity in order to charge it on, so that your net after-tax is actually less to the federal reserve, to the federal treasury than you had before. Both sides of the isle ultimately want the tax rates to be lower because they believe that it will hinder the growth that has been happening most recently and harm the recovery that we’re seeing some legs under right now. So both sides want it. The question is to whom is the extension really going to be applied to. Is it going to be applied since the reduction was across the board, is the reduction across the board going to stay or are some at the very highest going to allow to be lapsed and so their rates go up when everybody else gets to stay the same?
That right there is where a lot of the compromise is going to happen in the next month or so. Now let’s talk about what could happen. I mean, essentially, number one, they could let it lapse. I don’t think that’s very likely. Both sides want something to happen. Congress has a tendency to work well when the pressure is on, when the public and when the media is putting so much of a spotlight on it. They could extend some but not others. That is absolutely possible. As a matter of fact, I would even argue that that is more likely, either some to all is going to be extended. Of a lack of the overhaul, the whole tax mode and that’s great, wonderful thinking, but that’s not going to happen.
What does this mean for the markets? Remember about a year and a half ago, the AAA rating of the US government was downgraded. At that time there was a huge decline in August and September and a little bit into October of 2011. There was a huge deal by S&P, or was it Moody’s? I can’t remember. One of the two, basically saying that they felt that the deficit was getting out of control and that we didn’t have the political will in order to solve it. This would be another further confirmation that that assessment a year and a half ago was actually true. I think that that would be a very bad thing if we are not able to get this resolved.
I still believe and you’ve heard me the last nine, 10 months or so, feeling strong about the underlying fundamentals of the private sector of the corporations, etc. Although we have a kind of a jobless recovery, the efficiency and the profitability of some of the corporations are great and I am feeling very optimistic and positive about that. This is a huge drain on the full economy of the United States and, of course, on the world because we are the world’s largest economy. I do believe that the market would go down and there is going to be a reaction to it. The question is how long that would be, whether that would be temporary or whether that would be permanent. If it does go down, I believe that it would be a temporary thing because the underlying fundamentals I still feel strong about.
A year and a half ago, let’s not forget, that the markets went down in August in September and they actually had a very nice rally after that. We got rid of some of the people who got scared. Those of us that were still invested in October, in general, in an unmanaged stock market index, did very well in the six months following. I think that this would be potentially a temporary downturn as well. We still have a whole month before now and then and it’s been hard to try to guess what the federal government is going to do and our particular politicians.
What can you do between now and then if you believe that tax rates are going to go up and it is not going to get resolved, basically you try to do more taxation in this year. You can sell those assets that have capital gains. You could reposition your assets, like for dividend paying stock, they can go over to maybe reposition in IRAs and some things of that nature. Or you are looking at bond issues, maybe it would make sense to go into municipals or tax-frees or something that is not fully taxable. There are a number of different things that you can do. If this does occur and what can we do in 2013? Absolutely we should consider the estate tax. At that point I will be talking with many of year to ensure that you have your estate planning and your estate planning attorney have really reviewed your particular situation as it relates to estate tax with various types of trusts and other things that you can do to try to minimize the very high estate tax that you might suddenly find yourself.
Anyway, that is the fiscal cliff in a few minutes. A few minutes, I think, probably turned into an even longer time, maybe ten minutes, which is a longer video than normal, but this is your summary.
Mike Brady
Generosity Wealth Management
303-747-6455
Hopefully I can help you out. If you are one of my clients, of course, I have an ongoing conversation with you. If you are not one of my clients and want to give me a call, go ahead and do so at 303-747-6455. My pleasure talking to you. You have a great day. Thanks, bye bye.
One month left in 2012.
Now is the time to ensure you’ve done your last minute tax planning for 2012, and looking towards 2013.
I reference the important Tax Policies above that need to be addressed by the end of the year.
With the election over, will the Congress finally address it?
Click here for a full discussion of this. You’ll be hearing a lot about it in the next 2 months.