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Things That Make Me Go Hmmm

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In my humble opinion, the best-titled financial newsletter around is called “Things That Make You Go Hmmm” Lately, that catchy title has been banging around in my head. Let me just list the reasons, in no particular order of importance.

The Federal Reserve is openly talking about cutting interest rates after finally getting them up to a whopping 2% or so! Even more astonishing, like Pavlov’s dog, the mere mention of this move is causing stocks to once again reach all-time highs. Cutting rates, all-time highs? Hmmm.

We’re on the razor’s edge of taking military action in the ever-volatile Middle East, and investors are appearing to shrug their collective shoulders. Even more bizarre, our president is tweeting about his most inner thoughts on why he ordered strikes and abruptly reversed course in the span of a few minutes. The market’s reaction? Inaudible. Hmmm.

Speaking of tweets, in just the last month or so, a trade deal with China was nearly complete only to see talks suddenly fall apart. And, how did investors learn about it all? Twitter. Clearly believing this was an appropriate way to announce changes in our trade policies, we were soon greeted with deeply threatening tweets about massive tariffs with Mexico. And those threats weren’t even tied to our trade policies. Hmmm.

We’re now over 10 years into our economic expansion with our national unemployment rate near a record-low of about 3.5% and recent inflation readings are just below 2%. Yet our federal deficit is butting right up against $1 trillion. Not long ago, this type of fiscal policy would have sparked outrage, concern and political hand-wringing. Today? Nada. Hmmm.

Speaking of debt, with the recent collapse in interest rates, the global markets now offer over $13 trillion of government debt yielding negative interest. Yes, you did hear that right. Ironically, it makes our own skinny 2% bond yields the envy of the developed world. Hmmm.

As we all know too well, we’re about to embark on another presidential campaign. With now 25 Democrats vying for the presidency, the two leading candidates are soon to turn 77 and 78 years old. That fact actually makes people forget that Trump would be 75 only a few months after his re-election. With all due respect, I haven’t personally met any men well into their 70s who think they should be running a large country, let alone a small one. Hmmm.

This fall marks my 20th year in the investment business and, yes, I do still have plenty of hair on my head and chin to scratch. Let me be clear about one thing, at no time is the world totally orderly. And, rarely are financial markets free of true head scratchers. Still, these are most interesting times and, I must admit, they are making me go, hmmm, a little too often lately!

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Should Worry of a Recession Be Rising?

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People are starting to worry about a recession. Based on the Federal Reserve’s reaction, they are too. Yet, recessions don’t just happen without warning and economic expansions don’t come with set expiration dates.

Still, recessions are natural. We tend to travel between emotional peaks of euphoria to depression and back again. But, along the way, the pace of economic activity experiences fits-and-starts and the data sends mixed or false signals. This adds to a sense of futility in trying to forecast economic turning points.

When recessions do occur, however, they have a big impact. Our last two recessions produced stock market losses between 50% and 60%. In comparison, the average decline during a recession has been above 30%. Whether severe or pedestrian, it highlights the importance of being both financially and emotionally prepared heading into a recession.

On the employment front, two leading indicators look sound, regardless of the weak jobs report for May. Initial claims for unemployment benefits are still very low and aren’t really moving demonstrably higher. The same steadiness can be seen in the average weekly hours worked by employees in manufacturing. Remember, these are jobs-related data points that tend to show weakness before the onset of a recession.

Next, the latest readings of an index that tracks the mood of the manufacturing sector are down from a year ago but still don’t point to a recession either. Another leading indicator, new orders for durable goods, have also barely seen a downtick. Finally, a measure of the delivery speed of suppliers has weakened slightly but also doesn’t reach recessionary-level readings.

Turning to the housing industry, the number of building permits for new homes has basically been flat for the last couple of years and it is only down a bit from last spring. Incidentally, the current number of building permits now sits at a little more than half the level seen before the financial crisis. So, the housing industry may not have quite the economic impact as it once did. In addition, mortgage rates have recently dropped, probably providing a backstop.

Consumer confidence readings are also still quite high. After the stock market downturn late last year, confidence did fall off some. However, up until the last couple of weeks, we’ve seen a rebound in consumer confidence surveys. It should be said that the tight correlation between consumer confidence surveys and the most recent performance of the stock market tends to make this a chicken-or-the-egg type of indicator.

With the fundamental economic indicators largely in the clear, what remains are the financial market-based indicators. Since these show up on your brokerage statements, they do tend to garner attention, especially in the media.

The most worrisome is the now-inverted yield curve. This just means that longer-term interest rates are now lower than short-term interest rates for government debt. While it is not a fool-proof signal, when a yield curve inversion occurs, the odds of an oncoming recession rise.

The Fed has certainly snapped to attention. It is now strongly signaling interest rate cuts, rather than hikes. Their about-face has been very sudden and this perhaps adds to general nervousness. To quell the impression of panic, the Fed is framing their reversal as simply taking out an “insurance policy” on the economic expansion. Of course, their justification for doing so goes well beyond the shape of the yield curve in the age of Trump tweets that threaten our relationships with our major trading partners.

As I mentioned in my most recent column, the uncertainty created by the threat of trade wars does matter. It is worthy of making some proactive, risk-management portfolio adjustments. Yet, as I read the key economic data that historically behave as leading indicators of an oncoming recession, I don’t currently see obvious red flags flying. My advice is likely as bland as it is wise; keep an eye on the hard data, know your portfolio risks, develop a reaction plan and, most of all, guard against making emotional moves.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

A China Trade War is a Worthy Concern

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Things are becoming clearer, even as they remain muddy. Our trade dispute with China could spin out of control into a full-blown trade war. In hopeful anticipation of a pending deal with the Chinese late last year, up until a few weeks ago, we’ve been amply rewarded with a big stock market rebound after last fall’s sudden decline. However, negotiations appear to have broken down and the aggressive rhetoric has ramped up.

To some, this last-minute gamesmanship is just a predictable stage in the art-of-the-deal. Let’s hope. To me, however, it smacks as a sad display of amateur economic diplomacy. Rather than taking a wait-and-see approach, especially after such a strong start to 2019, I chose to make some portfolio risk management adjustments in the spirit of prudence.

A trade war is inherently an unhealthy development. The uncertainty impacts future hiring and business investment decisions. And, in turn, it sends the signal to consumers to hold back. In my view, the Trump administration is banking too much on the relative strength of the US economy compared to the rest of the developed world in its tough-talk negotiating stance. It is also a mistake for Trump to say that “we’re just playing with the bank’s money” given the rise in the stock market since his election. To most normal people, not living inside Washington’s political bubble, their brokerage statements are titled in their names, not the bank’s!

Most sensible economists, both right-leaning and left-leaning, would argue the world economy is better off with mutually-beneficial trade pacts rather than economic isolationism. However, we are quickly approaching another heated election cycle and the demonizing of China plays very well politically.

In all fairness, China is not an innocent party when it comes to trade and cybersecurity violations. China’s policies have led to many incidences of outright intellectual property theft against U.S. companies and there have been verifiable Chinese-originated breaches of both our private and public computer networks. These are worthy issues to resolve.

Of course, it should also be said that U.S. corporations have knowingly transferred their proprietary know-how to the Chinese for many decades in order to gain access to that growing market. It’s been pragmatically viewed as the price of admission. While probably too late now, some corporate leaders are re-evaluating the trade-offs that have been made through their distorted lens of short-term profit.

In light of recent developments, the possibility of escalating, tit-for-tat actions and reactions are rising. This is especially the case as a sense of national pride on both sides is at stake. Given this, it is most certainly not helpful to be tweeting about how we are “winning” while our important trading partner is “losing.” But, sadly, these ill-chosen words have been used recently. As markets enter the proverbial dog days of summer, let’s hope the Chinese leaders, too, have learned to ignore the tweets!

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Making a Lag Putt for Your Retirement

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I’m not much of a golfer. Perhaps that’s explained by the fact that I get out on the links maybe two or three times a year! They say practice makes perfect, but for some reason, I don’t think that applies to me and the game of golf.

Last weekend’s exciting Masters victory by Tiger Woods triggered, for me, the similarity between retirement planning and the idea of the lag putt. For readers who don’t know golf’s lingo, a lag putt is one that isn’t really meant to go in the hole. Instead, it is a putt that’s supposed to just make the next one a “gimme.”

Getting to a financially secure retirement is similar. It feels like one lag putt after another until the ball finds the bottom of the cup. It’s a gamble to base your retirement on a lucky stroke.

After analyzing and creating retirement plans for many years and many clients, I’ve found there are really only three variables to consider. It’s not rocket science. It’s more like a little math.

The first thing to consider is time. Creating a retirement plan projection for a 35-year old is vastly different than one designed for a 60-year old. In my financial planning work, I often imagine a person’s remaining “economic value” while they are still working. When you’ve only got about 5 years of active work left out of what’s likely to be a 50-year work history, about 90% of your economic story has already been told. Your ability to build up financial resources through additional savings is limited by time.

The next input is your accumulated financial resources that will provide the cash flow needed to sustain your retired lifestyle. These include your various investment accounts, that small business you hope to sell, your rental properties or the real estate equity you’ll free up when you decide to downsize. This also includes any pension benefits you’ll get and, of course, your projected Social Security benefit. It’s really just a comprehensive tally of what’s been built to date.

The final variable – the most important of all – rests on the cost of your desired retirement lifestyle. And, outside of your mortgage or other debts you plan to pay down before retiring, your core retirement lifestyle will probably mimic your current one. Any sound retirement plan requires you to reasonably define your life’s costs. While most financial planners work to avoid the dreaded word, a comprehensive retirement plan does require you to have a handle on your household budget.

Just like any round of golf, the course of a lifetime of retirement preparation is littered with hazards and obstacles. The occasional sand trap or tree limb or awkward swing closely mirrors that untimely lost job, unfortunate divorce, or unexpected repair, not to mention recessions and bear markets. It’s all par for the course.

Eventually, through sound planning, deferred pleasure, and emotional flexibility, the final stage of your own retirement journey can look like Tiger’s masterful round where all that remained was his boring, lag putt followed by a short gimme!

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Social Security’s Shocking Statistics

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Some statistics are meant to shock. Others do it without even trying. According to a recent population survey, half of all retirees rely on Social Security for more than 50% of their income. And, more shocking still, one in four retirees depend on Social Security for over 90% of their income. These stats are truly mind-blowing!

To see how this can be, let’s begin by imagining Lily, a typical 17-year old just starting her first job. Her early years of work won’t likely be her most lucrative. But, by the time she reaches her full retirement age of 67, she’ll have successfully recorded five decades of work. (Psst, don’t ever frame the future like this to an actual teenager; realizing that a half-century of work is still ahead of you isn’t a great motivator!)

Social Security won’t care about each and every one of Lily’s 50 years of work. They will kindly give her a free pass for some of them. In fact, she’ll get to throw out 15 of her lowest earning years. Social Security will officially only care about her best 35 years.

Once her highest earning years are logged, Social Security will then adjust each one for inflation. It’s only right. After all, even a modest 2% inflation rate will silently eat away about half of the purchasing power of one dollar after 35 years!

Of course, it’s important to note that Social Security will completely ignore any of Lily’s earnings that exceed a set annual maximum income of $132,900. This income level is also where Social Security will stop requiring Lily to contribute into the system. Think of this threshold as the start of the “no contributions/no benefits” zone. This threshold is adjusted for inflation. For example, it was only about $38,000 in 1984.

Let’s now fast forward to Lily as a 67-year old. With her 35 years of work adjusted for inflation, Social Security’s formula figures out her average monthly earnings. This monthly average is the basis for Lily’s Social Security benefit.

To show just how easily explainable those shocking statistics are, let’s say Lily’s lifetime average earnings turned out to be $4,000 per month. What portion of her earnings will Social Security replace?

Using some rounded figures, Lily will get 90% replacement of the first $1,000 per month of her historical work record. On her next $3,000 per month of earnings history, she’ll get 32% replaced. Taken together, Lily’s Social Security benefit will be about $1,800 per month; successfully replacing a bit less than half of her average monthly earnings.

From the looks of it, Lily’s reliance on Social Security is typical and the program’s importance is beyond obvious.

To learn more about Social Security, attend our next Money Series presentation on Wednesday, April 10 at 6:30pm in the McGuire Room of the Traverse Area District Library. To register, please visit MoneySeries.org or simply call (231) 668-6894. Front Street Foundation, through its commercial-free Money Series, is a non-profit committed to providing open-access to financial education, for all.