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Maybe we just elect the D students???? April 3, 2015

Posted by forwardfinancialplanning1 in Economic Conditions, Financial Planning.
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Read a recent study by WalletHub which caused me to chuckle at some of its implications. WalletHub claims to have a methodology that ranks each of the fifty states in terms of financial literacy. Lo and behold, the fiscal train wreck known as Illinois came in seventh in the ranking. Here are the measures (and Illinois’ score) that WalletHub used to arrive at its conclusions. “Knowledge and Education Rank”-14th; “Planning and Daily habits Rank”–8th; “Percentage of people who spend more than they make”–18%; “Percentage of people with a rainy day fund”–45% “Percentage of unbanked households”-7.4%; “Champlain University High School financial literacy grade”–B; “High School drop-out rate”-2.4%

Now my purpose here is not to throw stones at WalletHub’s intent. However, one could reasonably surmise that a state with such outstanding financial literacy skills should be a model for fiscally responsible government. After all, the government of the state is populated by these same, seemingly qualified residents. Well, then how do you explain Illinois being dead last in credit rating and degree of public sector pension funding? Likewise, would a financially literate government have a $6 billion backlog of unpaid bills?
Either WalletHub’s methodology is flawed, or perhaps we only elect the financially illiterate among us.


Does this seem stupid to everyone else too???? February 25, 2015

Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Economic Conditions, Intermediate Term Bond Funds, Long Term Bond Funds, Short Term Bond Funds.
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Read where Germany has just sold 5 year government debt securities at a yield of -.08%. In January, they sold the same securities at -.05%. Also saw where Finland recently issued some government debt at a negative yield. My question for all readers is, “How can this make sense??”

A negative yield on a newly issued bond essentially means that the German/Finnish governments actually GOT PAID to borrow money!!! Some of the explanations for this perverse behavior cite the requirement for commercial banks to hold these high quality debt securities to meet regulatory capital requirements. That is, the banks in a fractional reserve system have to hold something of value to protect their depositors. This makes sense, but wouldn’t the banks accomplish the same thing (and avoid an expense) by simply holding on to their cash? Purchasing an investment that’s guaranteed to lose money is totally illogical. Just the same, I wish I could get paid to borrow money………..

Occasionally, they do something right in D.C. February 14, 2015

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Economic Conditions, Intermediate Term Bond Funds, Long Term Bond Funds, Short Term Bond Funds.
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It’s usually pretty easy to find something to complain about when one considers what’s going on in Washington DC. If not, many in the media would be out of work. However, some recent reading led me to conclude that occasionally, they do something in Washington that could actually be described as “smart”.

It’s no secret that interest rates around the world are at rock bottom levels. U.S. banks and credit unions are paying depositors virtually pennies in interest on substantial balances. The interest yields in Europe and Japan are even lower, which makes US Treasury debt look very favorable to foreigners. Due to this substantial worldwide demand, the US government is able to finance its borrowings at very favorable rates.

How favorable? A year ago, 30 year US Treasury securities yielded about 4%. As of January 30, 2015, this figure was 2.2%. And, the term structure of the US government’s borrowings has lengthened. Treasuries maturing in three years or less comprise only 48% of US government debt compared to 58% six years ago. The portion of debt coming due within the next year is approaching levels last seen in the 1950’s. The government now pays less interest than it did in 2008, despite the fact that the amount of outstanding US debt has more than doubled to $12.5 trillion during this time period.

These circumstances might be akin to an astute household which refinances its mortgage debt when 30 year fixed rates have fallen greatly. Perhaps they lock in a home equity loan to pay off some higher cost debt while interest rates are way down (For the sake of argument, we’ll ignore the fact that they may be collateralizing a previously unsecured debt). And while it must be conceded that excessive debt is never a good thing, it’s highly unlikely that the US government is going to run a budget surplus any time soon. Similarly, it’s a rare household that can buy a house without a mortgage. So, if we accept the notion that the US government is going to borrow (and that the household will borrow for a home purchase) locking in historically low rates for longer periods of time is actually pretty smart behavior.

Is it lack of spending restraint or lack of income?? October 28, 2014

Posted by forwardfinancialplanning1 in Credit Cards, Economic Conditions.
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Came across some statistics recently that made me wonder, “What is the real cause of this negative development in US consumer finances?”
Money Zine evaluated debt growth and income growth over the past few decades and found: Back in 1980, the consumer credit amount per person was $1,540, which represented 7.3% of the average household income of $21,200. In 2013, consumer debt averaged $9,800 per person, which was 13.4% of the average household income of $72,600. In other words, consumer debt increased 70% faster than income from 1980 through 2013.

Clearly, credit is more widely available today than it was in 1980. So are we getting more than enough rope to hang ourselves? Credit card issuers demonstrate a willingness to readily extend credit as it is highly profitable for them. But, why can’t the average American “just say ‘no””?? Some in Washington would like us to believe that problems such as these are created by lack of income growth. While perhaps there is some truth to this supposition, I would suggest that a more likely factor is our collective lack of spending discipline. And, the federal government is in no position to criticize, as their spending record is many times worse. The big question is, “how long can this debt binge continue, before it threatens our civilization?”

Progress on credit-worthiness October 13, 2014

Posted by forwardfinancialplanning1 in Credit Cards, Economic Conditions.
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A recent report by the American Bankers Association offers hope to the beleaguered US consumer. The ABA says installment loan delinquencies are at secular lows and all home related delinquencies have fallen. Total debt delinquencies are at a 40 year low.

We have heard much about the struggles of the middle class and the lack of wage growth in our economy. But, perhaps the lessons of fiscal conservatism from the Great Recession have taken hold. Let’s hope that the lessons are permanent………….

We knew somebody was picking up the tab……… April 4, 2014

Posted by forwardfinancialplanning1 in Annuities, Economic Conditions, Fixed Annuities, Investing-General, Retirement Spending.
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I’ve had numerous conversations over the past few years with clients who are puzzled by US Federal Reserve policy. Several have commented that the Fed seems to be “creating money” out of thin air. They recognize that there are no “free lunches” in the real world and many wonder, “Will there be repercussions somewhere in the system?”

As is always the case, there are repercussions, and National Bureau of Economic Research President, James Poterba “nailed it” with a recent research release. Poterba estimated that a 65 year old who wanted to pay for retirement with annuities tied to bonds needed 24% more wealth in 2013 than he would have needed in 2005. Academics can argue all they want about central bank policy. but this observation definitely “hits home” for retirees.

Where will see the fallout? February 11, 2014

Posted by forwardfinancialplanning1 in Economic Conditions, Federal Income Taxes, Income Taxes.
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Read a very interesting article in the Winter edition of The T Rowe Price Report entitled, “Is the Financial System Healed”? The material discusses our collective national experience since the September 12, 2008 Lehman Brothers meltdown through year-end 2013. A reader certainly has to conclude that by many measures, the US has weathered the storm since peering over the edge of a financial abyss in late 2008.

But at what price? Clearly we have an economic system that’s struggling to digest Dodd-Frank, the Affordable Care Act among other governmental efforts to “save us from ourselves.” And of course, to the long term unemployed and under-employed, it feels like the recovery never came. But a table of comparative data included in the article may foreshadow some additional long term issues to be reconciled.

On September 12, 2008, Total Public Debt (federal) was $9,620 billion while at year-end 2013, the comparable figure was $17,179 billion. The US Federal Reserve’s balance sheet has ballooned from $1,007 billion to $4,033 billion. If excessive private sector debt (both corporate and individual) can be blamed for the financial crisis, what will be the future impact of such huge increases in public debt and the money supply? Savers have been victimized by the Fed’s Zero Interest Rate Policy for several years, now. but it has definitely helped improve the solvency of our financial system. But, at some point, some new victims will come forth. Who will they be?

If the outcome is a burst of inflation, the same savers who have watched their interest yields vanish will be asked to “fall on a sword” a second time. Somehow, that just doesn’t seem fair.

The tide has turned on mutual fund cash flows December 9, 2013

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Economic Conditions, Equity Mutual Funds, Investing-General.
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Regular readers probably got tired of postings in 2011 and 2012 which at the time, noted the inordinately large cash outflows from stock mutual funds and the enormous inflows into bond mutual funds. (One can check the archive for postings on 12/12/2011, 01/02/2012, 01/10/2012, 8/13/2012 et. al. for details). The main theme of these postings was to point out a possible application of the famed Warren Buffet quote, “Be fearful when others are greedy and greedy when others are fearful.” While not recommending that investors abandon bonds, the main message suggested that stocks might be poised to do well, due to the apprehension of mutual fund investors to commit money to equities. The strong returns experienced in 2013 seem to have validated Buffet’s axiom.

However, the tide appears to have reversed. The attached link from Vanguard notes that for the first time in years, equity funds are attracting strong cash inflows while bond funds are experiencing negative cash flows. The link is:

The article makes for good reading as it suggests that these inflows be noted as a good reason to rebalance one’s portfolio. Vanguard wisely suggests that one should always adhere to one’s long term plan and that maintaining the appropriate asset allocation is an important part of implementing that plan. For most long term investors, this would presently suggest that one’s equity exposure should be trimmed back to its target percentage with a corresponding increase in bond exposure. Of course, this means reducing one’s holdings of a “hot” asset class only to be replaced by the asset class that others are selling.

Easy to follow? No.
Contrarian? Yes
Solid long term financial strategy? Yes

The “good old days” probably were………… October 29, 2013

Posted by forwardfinancialplanning1 in Credit Cards, Economic Conditions, Personal Budgets.
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One often hears the adage that “things were better in the good old days”. This cliché fails, of course to recognize our mind’s propensity to block out unpleasant memories while maintaining our more favorable impressions of the past. However, it’s hard to argue with facts and here are some very sobering ones.

The Economic Policy Institute maintains an enormous data base of statistics and publishes an on-going report entitled “The State of Working America.” This report found that for the US population as a whole, household debt as a share of disposable income rose from 22% in 1956 to 118.7% in 2011.

If this is progress, we really don’t need any more.

Worst estimate ever October 11, 2013

Posted by forwardfinancialplanning1 in Economic Conditions, Financial Planning, Retirement Savings.
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Recently read an article in US News and World Report which discussed the anticipated inheritances that most baby boomers can expect to receive. A decade-old estimate was cited (with no attribution, however) that it was once expected that baby boomers would collectively receive about $40 trillion from previous generations. At the time, it was believed that these substantial sums might “save” the baby boomers from their own collective failure to adequately save for their retirements.

What has come to pass? The same article now asserts that the collective baby boomer inheritance will be about $6 trillion and that this will be heavily concentrated in the “1%ers”. An AARP study found that 80% of boomers will receive nothing and that only 1 in 15 expect to receive sums in excess of $100,000.

Where did the $34 trillion go?