By Mitch Zides Uncategorized 0 Comments

Is the American dream dead?

I’m taking a break from writing about tariffs and trade wars. There is not much more to say other than trade wars are not easy to win, which is why the S&P 500 wiped out $4 Trillion in it’s second-worst May since the ’60s.  I’d estimate that half of my clients somewhat agree in principle of why we are fighting these trade wars, and half are counting the days until the next election day.  What we all have in common though, is the hope that the president forgets his password to his twitter account for the next few weeks. The negative news cycle has been unrelenting, but there are some very good things still happening.

One of these remarkable stories comes from one of my clients that recently left his job. He was tired of his long commute, working long hours, and he wanted to spend more time with his newborn baby and wife. He moved halfway across the country and settled in a small town in MA to plan his next move. He spent the next few months researching different businesses so that he could figure out a way to restart his career. He settled on a franchise opportunity. This franchise is not a name that you would recognize. He hit the ground running and in the last few months his revenue is now supporting his family.

The strong U.S. economy is opening up many success stories just like this. Technology has changed the economy and transformed society. Peter Lynch who achieved annualized returns of 29.2% over a 13-year period from 1977 through 1990 as the portfolio manager of the Fidelity Magellan Fund, was able to spot trends well before those on Wall Street.

I always watch to see how my children are spending their time. There are some unbelievable individual success stories from people leveraging the YouTube platform. The top 10 YouTube stars make over $14 million a year. The number one earner is on Ryan ToysReview. He’s a 7-year-old boy named Ryan who reviews toys for other kids. Forbes had him earning $22 million last year. My son follows someone called Pewdipie and he has 95 million followers. Pewdiepie lost in a race to 100 million followers verse someone called T-Series, but they are both winners. Pewdiepie makes foolish videos and pulls in $1 million dollars per month.

In my opinion, America is great when a 7 year old boy can make $22mm shooting videos of toys. It’s even better when one of my clients can go from earning $0 to replenishing his cash flow in just a few short months. I hope that this 7 year old boy can break $30mm next year and Pewdiepie can hit $20mm. The American dream is alive and well. I just hope that it doesn’t get destroyed by any Democrat or Republican sitting in the White House. If it does, you might find me one night selling gold on an infomercial at 2:00am. 🙂

Please read our disclosure statement regarding the contents of this post and our website as a whole.

By Mitch Zides Investments 0 Comments

Warren Buffett said What?

I recently spoke with someone that had attended a free lunch offered by a financial advisor. This lunch was touted as an “educational” retirement seminar. I don’t want to knock all financial advisors who offer these free lunch seminars because not all of them are high pressure sales presentations that push unsuitable financial products. But I got a good laugh out of this one. This financial advisor was pushing annuities as a way to generate retirement income. He used Warren Buffett as an example of someone that would buy an annuity. The advisor said that Buffett has been selling stocks because he is holding $110 billion in cash. Buffett supposedly believes that markets are overvalued because the yield curve is inverted. When the short-end of the yield curve is higher than the long-end, it’s time to get defensive. Moreover, the stock market is at an all-time high and if Buffett is selling stocks you should buy an annuity to protect your capital.

Here is a consumer alert on annuity sales presentations – Annuity salespeople are trained to exploit your fears. To quote an instructor at an annuity training conference, “They thrive on fear, anger and greed … Show them their finances are all screwed up so that they think, ‘Oh no, I have done it all wrong.’ This will make you money.”

I learned something new reading through this consumer alert on annuities. The sales representatives will station spotters in the parking lot to take note of who arrives at the lunch driving expensive cars. Those people are marked as potential “clients” and frequently the sales representative will show up uninvited at their homes for a follow up consultation.

The person that I was speaking with had done a great job saving for retirement and was not fooled by this annuity salesperson. But they did believe what the financial advisor had said about Warren Buffett. It took me a few minutes to explain that Warren Buffett is holding $110 billion in cash because he is waiting for the right time to buy what he terms an elephant size takeover. He has come close a few times, but nobody wants to sell to him anymore because the terms of the deal will not be in their favor. He thrives more in times of illiquidity and panic when companies are desperate for a bailout. Buffett has been a buyer of equities recently and is on the record as saying markets are undervalued relative to low interest rates. This is the exact opposite of what was said at the free lunch seminar.

It’s always best to get a second opinion before purchasing an annuity.  Do not make a significant financial investment without talking to different financial advisors and consulting with friends and family members you trust. The Massachusetts Securities Division shared a very good warning on the dangers of annuities that you can read here.

The funniest part of the annuity sales pitch was Buffett buying an annuity for himself or Berkshire Hathaway. I’m happy that I wasn’t in attendance, because I would have lost my lunch. 🙂

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By Mitch Zides Financial Planning 0 Comments

A HELOC for all the wrong reasons

I recently heard a radio advertisement for a Home Equity Line of Credit (HELOC). The bank that paid for the radio spot was one of the largest financial service companies in New England.  I’m sure this bank does many things well to help their customers, but in this case, they are not doing what is in their best interests.

There are many justifiable reasons to tap into the equity of your house. Families have used the equity in their homes to pay for home improvement, education, a health emergency, or to even help pay for the costs associated with a transition into a new career. This bank was advertising a HELOC for all the wrong reasons. They were trying to sway the audience to use a HELOC to buy a new car, take a dream vacation, or to consolidate all their debt.

Someone paying for a vacation with a home equity line will unlikely need any retirement planning. The dream vacation will last a week, but the HELOC loan will last a decade.  This advertisement actually endorsed skipping out of work to take that dream vacation.

If a vacation wasn’t your fantasy then this advertisement wanted you to buy that vehicle of your dreams. There is a reason why most auto loans are only for 5 years and not 10-15 years like a HELOC.  The car will eventually be worthless, while the interest on the HELOC will likely rise.  I could almost guarantee that the person who had a weak moment and used the HELOC to go on a vacation or purchase a car will have a bad case of buyers remorse when that first HELOC statement is delivered in the mail.

Amy Hoak wrote a post on MarketWatch and she said that financial planners caution homeowners against using home-equity loans to fund short-term expenses, including vacations. According to results of a recent Discover Home Equity Loans survey, the most popular use of money for a HELOC was taking a vacation for more than half of U.S. homeowners (ages 30 and 34 who have owned a home for three years or more).

These advertisements are very effective or they wouldn’t be running.  The likely target market and demographic for this advertisement, which aired on a sports radio show, are the millennials that never lived through the credit crisis. They must not realize that their home equity can disappear overnight.

A HELOC should never be used for any short-term splurges. A good case can be made to take out a HELOC for an emergency or to cover medical expenses. I realize that all of my readers are already financially savvy enough and know much better than to take a HELOC to take a vacation or buy a car. I wrote this post because it’s always good to know what other people are doing with their money. As we all learned in the technology bubble and credit crisis, it’s other peoples follies that can indirectly impact your employment, savings, and home value. Let’s hope that nobody acted on this advertisement because living through one credit crisis was enough for one lifetime.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

By Mitch Zides Financial Planning 0 Comments

Student loan debt crisis

Reshma Kapadia wrote a solid article in Barron’s last week titled, How Your Kids Can Ruin Your Retirement — and How to Make Sure They Don’t. This story resonated with me because I work with a number of clients that have set goals to delay retirement into their late 60’s so that they can help pay down their children’s college debt.  There are now more than 44 million parents and students who owe collectively over $1.5 trillion in education debt. This is about $521 billion more than the total U.S. credit card debt and $400 billion in U.S. auto loan debt. This election season, I expect that the debate over student loans is going to heat up.

Senator Bernie Sanders is championing the cause with this plan called College for All Act to Eliminate Undergraduate Tuition at 4-year Public Colleges and Universities. This legislation would provide $47 billion per year to states to eliminate undergraduate tuition and fees at public colleges and universities. I may not agree with much of Senator Sanders socialist agenda, but I do agree with helping students to re-finance their loans into more reasonable rates. I have reviewed many student loan statements and have seen students with frightful interest rates as high as 10%. The average student loan has interest rates between 6-7%. It’s no wonder why 70% of parents surveyed by T. Rowe Price said they would be willing to delay retirement to pay for college. Many of their children can’t even pay off the interest alone never mind the principal. I have one client with a child that graduated with $180,000 in debt and the interest in the last few years has increased the outstanding balance to $210,000.

Two stats in Reshma’s Barron’s article did not surprise me at all. The first was that nearly 80% of parents give some financial support to their adult children—to the tune of $500 billion a year, according to estimates by consulting firm Age Wave. That’s twice what parents put into retirement accounts, according to a 2018 survey from Bank of America Merrill Lynch and Age Wave. The second was that about 15% of 25- to 35-year-olds were living at home in 2016, based on a Pew Research report. That’s five percentage points higher than the share of Generation Xers living at home when they were the same age, and almost double the share of today’s older retirees who were in the same situation years ago. (source: Barron’s, Reshma Kapadia)

This article was written from the parent’s perspective. If it was written from the child’s perspective, Reshma would have likely highlighted how more young adults do not have enough money to afford a mortgage or how they are delaying marriage or putting off having babies.

U.S. Department of Education Secretary Betsy Devos says that student loan debt is now a crisis. The average student in the Class of 2017 has almost $40,000 in student loan debt. DeVos raised a “red warning flag” that student loan debt is crippling students, federal taxpayers and stealing from future generations. I’d take it one step further and predict that if student debt triples again, massive amounts of student debt could possibly trigger an economic slowdown.

I’m sure this topic touched many of you reading who have adult children.  I recognize that most of my retired clients greatest accomplishment was helping to put their children through college and how they sacrificed a large part of their own retirement savings to achieve this meaningful goal.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

By Mitch Zides Financial Planning 0 Comments

Why would you buy an annuity?

Ken Fisher hates annuities. You can find him on what seems like every other CNBC commercial screaming how much he despises annuities.  He calls variable annuities obtuse, confusing, and hence rarely read. The sales reps that are paid obscenely large commissions don’t even know what they are selling most of the time.

People buy variable annuities because they want stock exposure but don’t want to lose money in the stock market. They soon realize that there is no free lunch. The Financial Industry Regulatory Authority once sent out an investor alert that, the marketing efforts used by some variable annuity sellers deserve scrutiny—especially when seniors are the targeted investors. Sales pitches for these products might attempt to scare or confuse investors. One scare tactic used with seniors is to claim that a variable annuity will protect them from lawsuits or seizures of their assets. Many such claims are not based on facts, but nevertheless help land a sale.

An annuity is not an investment.  It is a product designed so that someone will not outlive their savings. They give up most of the upside of the S&P 500, but gain the certainty that a check will be in their mailbox each month. The guaranteed income in a very strong selling point.  When the stock market sells off and investor fear is high, annuity sales will always increase. In the midst of the 20% downturn back in November 2018, variable annuity sales went up 25% over a one year time period.

I believe that if I gave a 20 question exam on the bells and whistles of a variable annuity to a potential owner, they would fail. Most variable annuity buyers don’t understand the products. Here are a few reasons why  variable annuities are not a good product solution:

  • There is no step-up in basis – A nonqualified annuity does not provide a step-up in cost basis at death. All of the deferred earnings (gains) will be taxable as ordinary income to a non-spousal beneficiary.
  • Beware of the penalties – The surrender schedule of 8%, 7%, 6%, 5%, 4%, 3%, 2% indicates a 7-year surrender period. These schedules are long because they lock in buyers after they realize that they made a bad decision.
  • High Expenses – The mortality expense, administrative fees, fund fees, special fees, will eat away investment returns at a clip of over 2% a year.
  • No tax advantage for IRA’s – Investing in a variable annuity within a tax-deferred account, such as an individual retirement account (IRA) is a bad idea. Since IRAs are already tax-advantaged, a variable annuity will provide no additional tax savings. It will, however, increase the expense of the IRA, while generating fees and commissions for the broker or salesperson (Source: FINRA Investor Alert).
  • No inflation hedge – During the annuitization phase the payout is a fixed payment that will not hedge against rising inflation.
  • Limited investments – The investments inside many variable annuities have layered fees and many of the insurance companies will limit investment options to lower risk funds.
  • Horrible death benefits – Your beneficiaries could potentially lose a substantial part of your annuity if they take the full cash value (immediate payout option) upon your death. They might be forced to take your annuity over 5 years to get the full death benefit.

Even though I’m not a fan of variable annuities, there are a few types of annuities that I would recommend to clients. An immediate fixed annuity is an appropriate product to provide a paycheck for life with a guaranteed income. This annuity could be a great way to manage risk and limit exposure to market volatility. It would also improve diversification and transfer all the risk to the insurance company.

If you want to learn more about annuities, I can provide you with a second opinion to find out if it’s the right fit for your retirement plan. Like all financial decisions, every choice is unique to your own personal situation and risk tolerance.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

By Mitch Zides Financial Planning 0 Comments

When do people claim Social Security?

One of most important decisions that you will make near retirement is when to take Social Security benefits. The internet is full of websites, recommendations, and articles on the best claiming strategies. It’s a complicated system and since the Social Security administrators don’t understand your unique personal situation, they can neither provide advice nor make recommendations.

The federal deficit clock recently surpassed $22 trillion and isn’t slowing down anytime soon. If anything, it’s been speeding up. The language that the Social Security Administration (SSA) added to every benefit statement this year is a follows: “By 2034, the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.” This system is eventually going to run out of money (I added that last sentence). 🙂

The government will likely change the rules.  They always do. The last major change to Social Security was in 2016 when they ended the popular strategy known as “file and suspend”.  I expect that some benefits will be cut in the near future.  President Trump’s fiscal 2020 budget proposed spending $26 billion less on Social Security programs, including a $10 billion cut to the Social Security Disability Insurance program. I’m sure by 2034 the rules will have changed drastically.

It’s impossible to know when the government will change the rules and it is only a guess at this stage. It’s best to assume that the program will continue and that the decision on when to take Social Security should only be made after reviewing a full retirement financial plan. There are just too many considerations to factor in on when to take the benefits.  They include tax consequences, saving rates, investments, cash flows, budgets, insurance coverage, spousal benefits, and work history.

Most people claim benefits as soon as they qualify at age 62. Approximately 34% of people start collecting at their earliest retirement age or age 62. Social Security reduces your benefit by 5/9 of 1% for every month you claim before full retirement age, up to 36 months. Over 36 months, then your benefit is further reduced by 5/12 of 1% per month. Taking benefits early at 62, amounts to 25% to 30% less than what you would get by waiting until your full retirement age (66 or 67, depending on the year you were born).

Only 3.7% of people delay their retirement benefits to age 70. From your full retirement age (66 or 67) up until age 70, you can receive delayed retirement credits of an 8% increase for every year that you delay.  Since Social Security payments are indexed to inflation, it is the best annuity that you can own. Delaying your benefits puts you in the best position to get the most out of the system.  The table below provides a good visual breakout of when people claim Social Security.

My recommendation for most people is to claim Social Security at their full retirement age. The chart above is exactly what I would have predicted. The majority of people claimed early and the next largest group waited until their full retirement age. With rising health care costs and life expectancy rates rising for retirees, the people that delayed their benefits will be able to keep better pace with inflation.

I plan to take my social security when I turn 70 but that’s not because I want to make the extra 8% per year from 67 to 70. I believe that my full retirement age will be increased to 70 at some point in the next few decades. I’d be shocked if my full retirement age was still 67 in 20 years.  If you have any questions on this topic, I can prepare a personalized analysis on when it is the best time for you to take Social Security.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

By Mitch Zides Financial Planning 0 Comments

Best States to Retire

I’m often asked by clients, what are the best states to retire. There are 10,000 people turning 65 a day and many are likely asking themselves this very question. There has been a migration of retirees moving from the coasts to the middle and southern states. This shift is likely to continue for the foreseeable future.

With the change in tax laws, this topic has become one of the more popular searches on the internet. There is no shortage of opinions and there are entire books written on this subject. To answer this question, you need to learn how much money has been saved, retirement ages, if there are any health issues, the type of retirement benefits, and the quality of life that the retiree wants to have in retirement.

We live in an area of the country that is one of the highest in terms of affordability, but it offers the best health care services. The table below created by WalletHub.com ranks affordability, health care, and quality of life.  I sorted the table on affordability from least affordable to most affordable.  The table includes a quality of life ranking, but I believe it’s subjective because this is more of a personal preference. For instance, some people like the change in seasons and others prefer a warmer climate. For the full description of the methodology, please click here.

 Best & Worst States to Retire –
Overall Rank
(1=Best)		StateTotal Score‘Affordability’ Rank‘Quality of Life’ Rank‘Health Care’ Rank
47Vermont47.7650623
40Hawaii50.6649342
38Connecticut51.0948207
36New York51.36471113
49Rhode Island45.94464318
46New Jersey47.85453329
21Massachusetts56.604423
10Minnesota59.884311
41Maryland50.55423019
26Nebraska55.2641178
35Oregon52.21402430
23Maine55.94391014
28Illinois54.87382511
32Alaska53.16373225
31Washington53.42361832
19North Dakota56.8935216
25California55.40341515
45New Mexico47.92334739
50Kentucky43.85324847
29Montana54.39312333
12Wisconsin59.3230420
16Michigan57.50291621
14Arizona57.60282912
7Iowa60.4127810
3Colorado62.192694
4New Hampshire61.802539
24Kansas55.73242635
9Pennsylvania59.9423522
48West Virginia47.26224149
34Indiana52.94213740
17Ohio57.43202728
22North Carolina56.42193134
13Idaho58.37181931
15Missouri57.60173626
6Utah60.73161416
11Delaware59.67152817
5Virginia60.82141324
30Georgia53.48134042
27Nevada54.96123541
44Arkansas48.53114946
42Louisiana50.06104545
2South Dakota63.729225
8Wyoming60.1381236
37Tennessee51.2274444
33Oklahoma53.0764243
20Texas56.8553838
18South Carolina57.1543937
43Mississippi48.8735050
39Alabama50.8824648
1Florida65.601727

Source: https://wallethub.com/edu/best-and-worst-states-to-retire

Major considerations on where to retire include property tax rates, state income taxes, inheritance taxes, sales taxes, and taxes on Social Security.  I don’t think the decision on where to live should be made solely on taxes alone.  In my opinion, healthcare is also an important consideration. Massachusetts might be one of the least affordable states, but if you need urgent care, it has one of the best network of hospitals. Below is a table of the most tax friendly states.

Most tax-friendly states

RankStateState sales taxState tax on Social Security benefitsProperty taxIncome tax
1Alaska1.76%None0.97%0.00%
2Wyoming5.41%None0.52%0.00%
3Delaware0.00%None0.57%5.55%
4New Hampshire0.00%None1.94%0.00%
5Washington6.29%None0.89%0.00%
6Nevada7.98%None0.65%0.00%
7Florida6.80%None0.90%0.00%
8South Dakota6.39%None1.19%0.00%
9Tennessee9.46%None0.71%0.00%
10Hawaii4.35%None0.29%7.20%

Source: GOBankingRates

In my post last week, I wrote how tax reform has punished states with high state and local taxes (SALT). The Tax Cuts and Jobs Act capped the SALT deduction to $10,000.  Property taxes at the local level have hit New Jersey and California the hardest. If you are wealthy, it is more likely that state income taxes and inheritance taxes will come into play.

The table above can be misleading because Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire and Tennessee only tax interest and dividend income, it is earned income that is tax-free. Also, states with no income taxes often make up a loss of tax receipts with higher sales taxes, exorbitant fuel taxes, and other taxes.

Social Security benefits can also be taxable. At the federal level, Social Security is taxed up to 85% of your benefits, depending on your income. Some states tax Social Security benefits and others do not. It varies from state to state and rates are constantly changing.  The same goes for inheritance taxes that differ from state to state. I expect that tax laws will continue to change drastically in coming years. The high tax states will likely need to change their tax codes to remain competitive.  For instance, New Hampshire’s Legacy & Succession Tax was repealed in 2002. Other states followed and lowered their inheritance rates.

Asset protection should also be a consideration of where you should live, especially as you age if there are not enough assets to afford long-term care. State, federal and territorial homestead exemption statutes vary.  Some states, such as Florida, Iowa, Kansas, Oklahoma, South Dakota and Texas have provisions, if followed properly, allowing 100% of the equity to be protected. Other states, such as New Jersey and Pennsylvania do not offer any homestead protection.

The state that you live in will ultimately be a major factor in how long your money will last in retirement. My focus is on managing your investments so that you can enjoy your retirement no matter where you decide to live. If you have any questions on this topic, please feel free to give me a call or send me an email.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

 
By Mitch Zides Taxes 0 Comments

2018 Taxes – Are you going to pay more or less in taxes?

There has been plenty of negative news coverage around fewer refunds being issued this year, compared to last year. The IRS reports that the average refund is down 27%. The likely reason is that the IRS published updated tables when tax reform was passed which resulted in workers receiving an immediate increase in take home pay as employers withheld less in taxes. Other families will pay more in taxes but it will all depend on your age, income, size of family, real estate assets, the trade you work in, and type of business structure – LLC, partnership, or corporation.

The big winners for this tax cut are those retirees that have no mortgage debt, pay low state taxes, and have limited income. The reason is many retirees don’t carry a mortgage and don’t itemize their deductions.  They will be helped by the doubling in their standard deduction. Below is a table of the changes to the standard deduction for all taxpayers.

Changes to the Standard Deduction
Filing Status2017 Standard Deduction2018 Standard Deduction
Single$6,350$12,000
Married Filing Jointly$12,700$24,000
Married Filing Separately$6,350$12,000
Head of Household$9,350$18,000

Also, there is an additional standard deduction if you are over 65 – $1,600 per individual and $2,600 per couple. Social Security benefit taxes will likely be lower given adjusted gross income falling.

All taxpayers will benefit from the change in lower tax brackets. If you are in the higher marginal tax bracket, you will likely benefit from these lower rates.  The graph below created by Fidelity Investments does a great job of illustrating the change in marginal tax rates. Notice the widening of the tax bracket, which will lower the taxes for the upper to middle class.

However, those that make the most income might not fully benefit from the lower marginal tax rates. They will pay more because they can no longer deduct state and local taxes (SALT), which was capped at $10,000. This property tax cap hit homeowners who live on the coasts in higher tax states such as New York, New Jersey, and California. These taxpayers are now more likely to take the higher standard deduction and the mortgage interest deduction will no longer matter. So even though they are benefiting from lower marginal tax rates, they are most likely still paying more in taxes. High earnings will also pay more because the Social Security income tax cap increased from $128,400 to $132,900.

The new tax rules will not be as beneficial for larger families.  Personal exemptions of $4,050 per family member were eliminated. However, the child credit was increased from $1,000 to $2,000 per qualified child under the age of 17. Most families were much better off with the higher personal exemptions.

I’ve spoken to a number of clients that will be paying more in taxes this year.  Most of these clients in the past itemized their taxes because of large mortgages and higher real estate taxes. I expect that many families will be surprised by a lower refund this year. If they want a larger refund, they might adjust their tax withholding so that more taxes are withheld next year.

It will be interesting to see how lower refunds will impact the economy in the next few months. In the past, many families used their large refund checks to go on vacations, save for college, or go car shopping.  With these checks being lower, it will be interesting to see if there is any drop in consumer spending in the coming months.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

By Mitch Zides Investments 0 Comments

How worried should we be about debt?

All of the long-term bleak market forecasts have something to do with the debt piling up on government balance sheets. Seth Klarman, who is the founder and portfolio manager of the Baupost Group, a hedge fund with over $25 billion in assets, and who is compared to Warren Buffett, and is nicknamed the Oracle of Boston released a letter this week that gave a bleak warning on global division and debt.  The full story of the letter can be found here.

Klarman’s warning is very similar to that of Jeffrey Gundlach, CEO of Doubleline Capital. Gundlach said in a recent Barron’s interview, “One of the reasons the economy picked up was the tax package and increase in government spending. Those are one-off things—unless if you keep doing it. If you keep having a delta of incremental spending and deficit, you’re going to end up with trillions and trillions and trillions of dollars of debt—precisely when the Fed has raised interest rates. I’ve been calling it a suicide mission: You’re issuing increasingly more debt and the cost of that debt is being voluntarily raised.”

The investment implication is likely to be diminishing growth expectations. This is the message coming out of the World Economic Forum that was held in Davos this week. This is not a short-term dire warning, but one that will take time to play out. Seth Klarman also wrote that since the worst does not frequently happen, you cannot let the fear of a monster storm completely paralyze you. I expect that governments around the world can just keep printing new money as long as interest rates remain low.

The biggest risk to most financial plans is above average inflation. A CD or short-term bond that pays 2% is not much of a return if inflation jumps to 3%. The real rate of return, which is inflation adjusted, is the true goal of all investors. Over the long-term, the best hedge against inflation is a diversified stock and bond portfolio. Fixed annuities and low rate CD’s will reduce market risk but do increase inflation risk.

Political risk and inflation risk will become more intertwined in the coming years. We are seeing signs of politicians trying to address higher deficits with unrealistic solutions.  This week Alexandria Ocasio-Cortez proposed a 70% tax rate. Elizabeth Warren proposed a new “wealth tax” on very rich Americans with $50 million in assets. As I’ve written before, I’m less worried about a China trade deal or government shutdowns. If these new tax proposals were to gain in popularity, the stock market would fall even faster than December’s “correction” and there would be no “V” recovery this time.  Liquidity would just disappear and it would not reappear until market levels were much lower. Investors will eventually turn their attention to government deficits but the timing is unknown. This is a long-term concern but it does shape how I’m constructing portfolio allocations to hedge against some of this potential risk.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

By Mitch Zides Investments 0 Comments

My Biggest Risk in 2019 – Dysfunctional U.S. Government

Markets around the world have rebounded and recovered about half of the loss from the prior few months. The technical picture looks like a “V” type of recovery which started with a 20% correction, followed by a sharp 10% bounce. Liquidity also returned to bond markets which recovered with the lowest quality High Yield bonds and Bank Loans leading the way.  The market crash in December was no surprise to investors after the onslaught of selling in October and November. It was the extent of the sell-off, which was stunning. It was the worst quarter of returns since the Great Depression!

Most of the 2019 market outlooks warned about the ongoing trade war with China, aggressive Fed tightening, and a material global growth slowdown. I’m less concerned about these risks and more concerned about the dysfunctional U.S. Government.

President Trump will likely reach some form of a trade agreement with China. The Federal Reserve is not going to raise rates this year. And the risks of a material global slowdown in China and Europe are already well known. The biggest portfolio risk going forward might be the U.S. Government. This risk has been building over the years and seems about to erupt.

This week Federal Reserve Chairman Jerome Powell said that he is very worried about the deficit, but it’s a long-term issue that we definitely need  to face, and ultimately, will have no choice but to face it. This risk was echoed by DoubleLine Capital CEO’s Jeffrey Gundlach, but not on the long-term time horizon. In his 2019 outlook, he believes that this year might mark the time when investors wake up to this risk and the bond markets will reckon with the rising federal deficit. He said the exploding national debt and liabilities involving pension funds, state and local government governments and Social Security have reached a stage that is “totally unthinkable.”

As we approach the longest government shutdown in history, I believe we are at a stalemate. It’s horrible that 800,000 federal unpaid workers find themselves in the middle of this fight.  I wrote a few weeks ago that the stock market would not be focused on the shut-down and it has been up 8% during this time.  We are now in uncharted territory and if this government shutdown continues much longer, volatility could return and markets might force a compromise if this impasse continues.

Investors have become more frustrated with politicians inability to compromise or come up with any solutions.  Even though the market is more focused on the news about the upcoming trade deal or changes in interest rates, it might end up being the dysfunction of the U.S. Government that will be to blame if the U.S. economy begins to slow.

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