Danielle DiMartino Booth tell us what is really going on at the federal reserve board and why this might not end so well. We discuss her new book, Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America.
The Optics of a Biggest Tax Cut in History
Optics… There is no one in the history of politics that can control the optics better than President Trump. If he wants you to believe something, he will tell you over and over that it is “big league” until you eventually believe it. It is fascinating to watch. President Trump announced his tax cutting plan just before his first 100 days was complete. It is being hailed as the biggest tax cut in history. It was almost humorous to hear the Fox morning show hosts falling all over themselves about how great this is. I say, let’s not get ahead of ourselves.
The devil is in the details and there is a major lack of those details. True to form he did simplify the system by proposing to reduce tax brackets down from 7 to 3. Does that save taxes? Maybe for some but maybe not for all. It comes down to the effect of the elimination of tax deductions. He is leaving the mortgage rate deduction and the charitable deduction alone. However, it looks like the rest of the deductions might be gone. So yes, it is true that the tax brackets are reduced. However, with the potential elimination of deductions, it looks like there might be a percentage of tax payers that will actually pay more in taxes.
Although I appreciate the spirit of make America great again, cleaning up the swamp, and unlike most, I believe his heart is in the right place, I don’t think that a reduction in tax rates is the answer especially if it potentially raises taxes on any percentage of Americans. You reduce taxes and you reduce revenue to the government. I can give you 19.8 trillion reasons why that might not be a good idea especially given the fact that we are still heavily financing our government spending.
Unfortunately, we have given up on holding our politicians accountable for financial irresponsibility. As President, he has free reign to deficit spending. So, he can cut taxes, promise growth, and behind the scenes borrow more and more money to finance what doesn’t work out with the best laid plans. That will never harm his legacy because for some strange reason we expect it to happen. As a country, 19.8 trillion dollars of debt doesn’t bother Americans enough to say enough is enough. Plus, you have to blame many politicians and Presidents before President Trump in their role in the creation of trillions of dollars of debt. However, if this tax reduction passes, he will always be remembered for it.
President Trump has many a book written about his life. They are all very personal and talk about his beliefs and philosophies. Out of fascination, I have read a few. He doesn’t waiver in his approach to life and appears to have the same beliefs today as he had as a young real estate developer. The most important thing to him appears to be the optics. This is why he is cramming everything into the first 100 days. As part of his legacy, he wants the first 100 days to look unlike any other President. It has been impressive. It is good to actually see a President work. I hope he is successful and I further hope that he is right and not playing a guessing game. However, there is one question that will eventually be answered. At the end of the day, does it Make America Great Again or create the right optics? We shall see.
Warren Buffett Said What?
Unfortunately, investors look to Pop Culture Finance to increase their knowledge on investing. Pop Culture Finance or PCF makes many wrong assumptions and speaks in absolute truths. For example, one assumption they make is that everyone has the same risk level which in this day in time is so far from the truth. PCF articles write as if everyone should invest and take the full amount of risk. After investors have gone through two bear markets in the last 17 years, we have become more and more a risk averse investment community.
They also speak in absolute truths as if their beliefs that are expressed in the media is the Gospel and the only way to go. There is only one absolute truth when it comes to money that there are no absolute truths – just opinions.
A recent quote by Warren Buffett illustrates my point and absolutely makes no sense!
Now who am I to disagree with Warren Buffett? However, I will. First, a 90% investment into a S&P 500 index fund and a 10% Treasury Fund barely provides any diversification. Further, “probably good enough for most investors” remark is also off base. Once again a remark that lumps everyone into the same risk profile. On a scale from 1 to 10 with 10 being the riskiest that would probably register a risk level of 9.
If you run the numbers, you will see that this approach yields very little value from diversification. I ran a Morningstar illustration investing 90% S&P 500/10% Treasurys portfolio versus 100% S&P 50 portfolio verses a 50%/50% portfolio (equal weighting stocks and bonds). This was run during the financial crisis which I used a date of 10/31/07 to 3/31/09. I used VFINX for the S&P 500 fund and VFITX for the Treasury fund.
If an investor invested 100% into the S&P 500 fund the return for the period above would be -46.67%.
If the investor invested 90% into the S&P 500 fund the return for the period above would be -40.23%.
As you can see that approach barely yields any diversification. One might as well go 100% because both approaches showed a lost over 40%.
Now, if you went 50/50 in stocks and bonds the return would have been -14.23% which is offers up way more diversification.
Just realize that there are assumptions being made for you when you read these PCF articles most of which raises your risk level. One would think that Warren Buffett’s advice is as good as gold. Unfortunately, most of these big investors have lost touch with the common everyday investor.
NOTE: Returns in above example where created through Morningstar. Past history doesn’t guarantee the same results in the future. This was designed as an educational piece and in no way is to be taken as strategy or advice. Seek the advice from a professional before making investment decisions. In addition, there was no rebalancing during the period or any additional fees applied.
The Big Banks Have Figured a New Way to Stick It to the Consumer
A money grabbing trend has started in the financial services/banking industry and ironically it is a result of a government mandated rule.
The Department of Labor issued the new fiduciary rule to go into effect sometime in the future. The fiduciary rule was passed so that advisors put the interests of their clients first ahead of their own. This primarily points to the commission based advisor.
For example, let’s say that the advisor has product A and product B. Product A pays a higher commission. Product B is better for the client. However, the advisor recommends product A. That is a conflict of interest and the advisor putting his or her interests ahead of the client.
Most of the major brokerage houses are owned by the big banks. For example, Bank of America owns Merrill Lynch. So, what are the big brokerage houses doing? They are taking commission based accounts and converting them to fee based accounts. In fee based accounts, the notion is that there is no conflict of interest because we are dealing with fees versus commissions. The same fee gets paid regardless of the advisor’s advice.
This article points out the increase in revenue for the banks because of advisors switching from a commission model to a fee based model. The article states that Bank of America Merrill Lynch saw an increase of $29.2 billion in fee-based accounts in the first quarter. JP Morgan saw $8 billion of new deposits. These deposits will create new fees for the banks.
There is one problem with this change from commissions to fees and it is ironically enough it is a conflict of interest.
What is the advantage for someone who was in a buy and hold commission account changing to a buy and hold fee account? There is in most cases no advantage for the client. A fee based model implies that the advisor is going to actively manage the account. Are commission based advisors suddenly going to become seasoned money managers? I think not.
They solved the old conflict of interest by creating another conflict of interest. Regulators frowned on commissions so to stay in the business the big banks encouraged their advisors to switch to fees. However, they aren’t going to do anything to earn those fees. Who gets the advantage here? The advisor gets the advantage and so does the crooked banks/brokerage houses that are encouraging it. Once again, the big banks who own these brokerage firms are sticking it to the consumer.
If your advisor wants to switch you to fees, dig a little deeper to see the advantage. For a fee advisor, there should be an active management strategy in place. So, look past the glossy marketing brochures because you are probably seeing a commission account dressed in fee clothing. Most commission based advisors are going to buy and hold and maybe reallocate at the end of the year. That is not worth a big management fee. It shouldn’t take long for investors to realize that they are being taken advantage of. In fact, wait until the next big downturn.
Who gets the advantage? In most of these offers to switch to fees, there won’t be one for you. However, there will be a new revenue model for the advisor.
The Student Loan Debt Bubble is the next Debt Crisis
Consider these facts about student loan debt:
- Over the past 10 years the amount of student loan debt in the U.S. has grown by 170 percent, to a whopping $1.4 trillion
- 44 million people have student debt. Eight million of those borrowers are in default
- The average debt load individual graduates carry is up 70 percent over the past decade, to about $34,000
How exactly did we get there? Let’s just call it greed.
According to this article, a great deal of the tuition hike came as a result of hiring and increased payrolls for additional employees charged with bringing in big donors and building their school’s brand and of course building new buildings and facilities. It is about attracting students not to a school based on academics but based on the benefits that it offers. You spend money to make money. Of course, they fund all of this spending through borrowing money, dependence on donors that they can name buildings after, and increasing tuition. The math is the math and the math is based on greed. Realistically the cost of educating a student doesn’t have this high of an inflation rate.
Parents want to send their kids to college. The problem is that they are just not prepared to do so especially at these costs. As a result, they look to the government to fund the endeavor just hoping that they can figure out a way to pay the money back. Unfortunately, it is the government that is enabling this student loan bubble. According to this article, 90% of the loans made are backed by the government. Imagine that…. the government is at the heart of the problem.
The saddest part of this student loan bubble are the default victims. Unlike any other type of debt, there is no walking away from student loan debt. There is even relief for IRS debt. It is like being in a debtor’s prison. Sure, there are programs that help…when they work. Yet, they are so unknown by the masses and complicated that students are unaware of them or understand how they work.
Of course, this ends up catching up with the economy through consumer spending. There is a whole generation who is bogged down in student loan debt that is preventing them from buying houses and doing other consumer spending.
Colleges with their fancy sports programs, big buildings, and activity centers won’t always be so grand. At some point this debt binge has to come crashing down. Debt bubbles always pop. When it does, it won’t be pretty.
Cosigning a student loan provides flexible options and underwriting to account for different borrower needs. Look for Cosigner release and in-school payments
Prudent Money Reader! I wanted to introduce John Hupalo to you. He is our newest Prudent Money Contributor. John is a nationally recognized expert in the field of college admissions. He covers everything from the college admissions process to how to pay for college. His book Plan and Finance Your Family’s College Dreams should be a must read for every parent. Today, I wanted to share one of his pieces.
50/50 Chance your Car could create a Life-Threatening Problem
Hyundai and Kai announced a recall today. They are recalling 1.4 million cars to fix a serious problem. You could be driving down the road and the engine might fail. Consider these statistics:
53.2 million cars were recalled in 2016
51 million cars were recalled in 2015
63.85 million cars were recalled in 2014
323.95 million people in the US.
Assuming that the 323.95 were all driving cars, you would have a 50/50 chance that your car was recalled. We all know that number has a large population of people under the age of 16 that don’t drive. Thus, your percentage chance is much higher than 50/50. Obviously, I am playing loosely with the math. However, you get the point. The numbers are the numbers.
Why is this so serious? The majority of recalls involve automotive failure that can cause accidents which can lead to death. The automobile industry is failing to deliver safe cars without defects.
Tony Joe who is on every Friday with me on the Special Car Corner edition of Prudent Money says it is about rushing product to market and using cheap outsourced parts all to make us much money as possible. The quality isn’t what it used to be. Another reason might be that up until December 2015 there was no accountability by workers in the union based automotive field. I interviewed Stephen Kohn who is one of the top whistle blower attorneys in the US on the show last year. He said that automotive industry is one of the last industries to be protected by whistle blower laws.
The whistle blower laws allow for people to turn others in anonymously. Before those laws went into effect, it took a brave soul to blow the whistle on someone else. Reputations would be ruined, jobs would be lost, and families threatened. Thus, people knew things that should be reported but never did.
It might take a few years for those laws to affect the outcomes of recalls. Meanwhile the numbers are what the numbers are. So, do yourself a favor. Go to www.recall.gov and enter in your vehicle identification number and make sure you don’t have a recall. Your life might depend on it.