LOWER DEFICITS AND BAD DATA

America's budget deficit is ballooning out of control, right?

As it happens, while Congress and certain pundits scream that we need to cut government spending to the point where we can drown the executive branch in a bathtub, analysts are discovering something surprising: the U.S. government budget deficit this year and next appears to be shrinking.The Wall Street firm Goldman Sachs has issued a report which lowered fiscal 2013's estimated red ink from $900 billion to $775 billion, or about 4.8% of total U.S. economic output.

How did this happen? Spending is down as a result of the sequestration ($85 billion this year) and prior spending cuts, plus tax revenues are up 12% over last year, the report tells us. It says that the deficit may come in even smaller than currently anticipated, due to the higher payroll taxes that are only now starting to be counted on the government's balance sheet. If the economy grows faster than expected, that, too, could bring in higher-than-anticipated revenues. Goldman now projects the budget deficit to fall to just 2.7% of economic output by the 2015 fiscal year, which many economists believe is a sustainable level.

Interestingly, some global economists are not happy about this optimistic budget news. Senior members of the International Monetary Fund are criticizing Washington policymakers for imposing too much budget austerity, too soon, arguing that it is preventing the unemployment rate from coming down more quickly.

Meanwhile, one of the most influential arguments for bringing the overall deficit down before it reaches 90% of American GDP has taken a serious hit to its credibility. In an astonishing development, three professors from the University of Massachusetts have looked over spreadsheet data behind a highly influential book published by professors Carmen Reinhart and Ken Rogoff, which purports to show that throughout history, nations have typically foundered when their debt level reached certain thresholds. The UMass professors found that in their calculations, Reinhart and Rogoff inadvertently omitted data for three countries: Australia (1946-1950), New Zealand (1946-1949) and Canada (1946-1950). An embarrassing coding error in the spreadsheet also excluded other data from five countries: Australia, Austria, Belgium, Canada and Denmark.

When the missing information was correctly included, it painted a very different picture of the dangers of high government debt levels. In the original report, whenever countries reached overall government levels of 90%, they experienced negative GDP growth--essentially, a recession--in aggregate over the countries studied. With the new data, countries crossing that threshold, in aggregate, actually experienced 2.2% positive growth levels.

This revisionist view is actually being confirmed in the real world. Japan has the highest debt-to-GDP ratio in the world, well beyond the supposed collapse threshold, and its interest rates have remained stubbornly low (as, to be fair, has its economic growth). Southern European countries that have embraced austerity--like Greece, Spain and Portugal--have endured multiple recessions, the opposite of what the original (flawed) Reinhart/Rogoff data suggested. The United States, which opted for a stimulus approach to the 2008 meltdown, is recovering faster than any developed country in the world.

Getting the economy healthy accomplishes two things: it lowers the budget deficits by bringing in more tax revenues, and it further lowers the debt-to-GDP ratio by expanding the GDP number in the equation. Nobody argues that America can keep piling up debt forever. But it seems clear, from the data on the ground and from the corrected data in the influential report, that the stimulus efforts after the Great Recession weren't quite the terrible decision that they are sometimes made out to be.

Sources:
http://economix.blogs.nytimes.com/2013/04/22/the-incredible-shrinking-budget-deficit/?partner=yahoofinance
http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf
http://www.businessinsider.com/paul-krugman-is-right-2013-4

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

GOLD'S BIG PLUNGE

Why did its price drop more than 13% in two days?

Suddenly, a bear market in gold. On April 12, the precious metal settled at $1,501.40 on the COMEX - diving 4.1% in a single trading day and 20.5% under its all-time closing high of $1,888.70 on August 22, 2011. Statistically, that was the end of a lengthy bull market - one marked by 12 years of annual gains.1,2

As gold bulls discovered, the selloff was just getting started. April 15 was the worst day for gold in 30 years - prices slid 9.4% lower on the COMEX to a close of $1,360.60.3

Buyers crept back into the gold market April 16, and the yellow metal staged something of a rebound - but why did prices plummet so quickly? While the tragedy at the Boston Marathon stunned Wall Street and the nation, the key factors behind gold's two-day retreat came from overseas.

One influence: a sell signal from Cyprus. Late last week, reports emerged that the central bank of Cyprus was going to sell its excess gold reserves. Those reserves are scant by global standards - around 40 metric tons - but investors worried that other distressed eurozone nations might follow suit.1,3

Another influence: China's Q1 GDP. On April 15, its National Bureau of Statistics estimated first quarter growth at 7.7%, down from 7.9% in the fourth quarter. Economists polled by Reuters had projected China's Q1 GDP at 8.0%. This riled Wall Street, and it was certainly unwelcome news for gold bugs as China's appetite for gold seems to generally be quite strong. Stock and commodity investors were counting on the PRC's growth to pick up, and instead they got one more signal of economic slowing adding to a perception of weaker global growth, implying less inflation and less demand to send gold prices higher.3,4

Another lesson in diversification. Historically, many investors have hedged with gold - holding a little in their portfolios, but not too much. During the 2008-09 bear market in stocks, the flight to quality was strong and gold played the role of the "safe haven". Now, stocks are strong and gold prices have suddenly sunk. Both of these downturns illustrate why many investors feel it is wise to allocate portfolio assets across different investment classes.

Citations.
1 - www.marketwatch.com/story/gold-prices-slip-with-weekly-declines-in-sight-2013-04-12 [4/12/13]
2 - www.cnbc.com/id/100644021 [4/16/13]
3 - www.usatoday.com/story/money/personalfinance/2013/04/15/gold-plunges-in-panic-selling/2085867/ [4/15/13]
4 - www.cnbc.com/id/100640654 [4/14/13]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

MISTAKES FAMILIES MAKE WITH 529 PLANS

5 common errors to avoid + 2 big factors to consider

Most families that start 529 college savings plans have done their "homework" about these programs. Missteps are made, though, often with the distribution of 529 plan assets. Here are some of the major gaffes, and the major factors anyone should think about before enrolling.

Assuming a university will withdraw 529 plan assets for you. When the time comes, you have to tell the 529 plan that you need the money and specify the payee. Typically, a 529 program offers you either a check written out to you, to your student, or a payment made directly from the 529 plan to the university. There are two big reasons why a check made payable to the student may be the best option.

*A 529 plan distribution triggers a Form 1099-Q. You most likely want your student's name and Social Security number on that form, not yours. If your student's name is on the 1099-Q and your student has qualifying higher education expenses (QHEE) equaling or exceeding the gross distribution figure for that tax year listed on the form, that whole 529 plan withdrawal becomes tax-free and the distribution from the 529 doesn't show up on the student's Form 1040. If your name is on the 1099-Q, the distribution doesn't show up on your 1040. Even if your student's QHEE equals or exceeds the magic number on the 1099-Q for the tax year, an omission may trigger an IRS notice to you, and you will have to defend the exclusion.1

*Let's say you accidentally overestimate your student's qualified education expenses, or maybe parents and grandparents make withdrawals without each other's knowledge. In this event, the earnings portion of the distribution is partly or fully taxable. If the distribution is paid out to you, then the earnings are taxed at your federal tax rate. If it is made payable to your student, then the earnings are taxed at his or her federal tax rate, which barring the "kiddie tax" is presumably just 10-15%.1

Having a payment made directly to the school can lead to a second common mistake.

Inadvertently reducing a student's financial aid potential. When a university takes a direct payment from a 529 plan, its financial aid office may make a dollar-for-dollar adjustment to the need-based aid a student receives. Often, it is viewed the same as scholarship money.1

Since the IRS bars you from using multiple education tax benefits to pay for the same education expenses, using tax-deferred 529 plan earnings to pay for the first semester of college may disqualify your student for an American Opportunity Credit. You should read up on the IRS income restrictions on education credits or consult a tax professional. Paying the first few thousand dollars in freshman year expenses with funds outside the plan may allow your student to retain eligibility.2

Mistiming the distributions. It can take up to two weeks to arrange and carry out a 529 plan distribution; telling a financial aid office that you are using 529 funds to pay tuition just a few days before a tuition deadline is cutting it close.3

Some families withdraw 529 monies during freshman year, which can conflict with federal tax returns. If a tuition payment is due in January, withdrawing it in December will create an incongruity between total withdrawals and expenses. The same will apply if a withdrawal is made in January, but tuition was due in December.3

Botching the tax break offered to you on the distribution. To get a tax-free qualified withdrawal from a 529 plan, the withdrawn funds have to be used for qualified, college-related expenses. If the distribution isn't qualified, it will be considered fully taxable, and you may be hit with a 10% federal penalty plus state and local income taxes. If you withdraw more plan assets than necessary, any excess distribution is also nonqualified. Calculating and withdrawing the "net" qualifying expenses of your student's college education could help you avoid this last problem, or alternately, you could report the excess 529 funds on the student's 1040.3,4,5

Ceasing 529 contributions once a student enters college. You can keep putting money into a 529 plan throughout your student's college years, with the opportunity for additional tax-deferred growth of those savings.2

Finally, two other factors are worth noting. These would be a 529 plan's expenses and deductions.

Tax deductions represent a key reason why families choose in-state 529 plans. Most states that levy income tax offer 529 programs with deductions or credits for taxpayers. It varies per state. In Michigan, a married couple can deduct the first $10,000 of 529 contributions annually, which leads to a state tax savings of up to $425. Some other states offer no deductions.6

Some 529 plans have different advantages. If your home state's 529 plan expense ratio exceeds 1%, consider another state's plan. (You can find objective rankings of 529 plan expenses online.)

Lastly, compare the expenses and fund choices offered by a 529 plan to those of other funds or investment vehicles found outside the 529 wrapper.

Make no mistake, 529 plans offer great potential advantages for households striving to meet future college costs. Just remember to read the fine print, especially as your student's freshman year draws closer.

Citations.
1 - www.bankrate.com/finance/college-finance/3-ways-to-take-a-529-plan-distribution.aspx [10/5/09]
2 - www.usnews.com/education/best-colleges/paying-for-college/articles/2012/08/01/4-costly-mistakes-parents-make-when-saving-for-college [8/1/12]
3 - www.savingforcollege.com/articles/20101001-5-blunders-by-first-time-529-plan-spenders [10/01/10]
4 - www.foxbusiness.com/personal-finance/2011/11/14/dont-make-your-52-plan-distribution-taxing/ [11/14/11]
5 - www.529.com/content/benefits.html [3/28/13]
6 - www.forbes.com/sites/baldwin/2013/03/27/the-two-step-guide-to-529s/ [3/27/13]

Sincerely,
Willliam T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

DOOMSDAY PROPHECY

When a former White House Budget director who famously never balanced the federal budget suddenly claims to have special powers to forecast a major economic crisis, it's hard to understand why anybody pays attention. But recently David Stockman, who served as Ronald Reagan's budget chief back in the 1980s, has gotten a lot of publicity for his fiery Easter Sunday article in the New York Times, telling us that America's future is bleak and everybody should get out of the investment markets as quickly as possible. His advice (the first paragraph contains the words "we should be very afraid") is getting a lot of attention among triumphant doomsayers who have been predicting America's downfall for decades, and from economists, who wonder where Mr. Stockman learned how to add and subtract.


The article was written to support Stockman's newly-released book, called The Great Deformation, and it shows that the author knows how to generate a lot of attention. It calls the Federal Reserve Board "a rogue central bank," and declares that the U.S. is fiscally, morally and intellectually broke. It predicts a global currency war that America is destined to lose. Stockton's advice: "hide out in cash."

Is this good advice? Interestingly, the article says that the problems began in 1933, when the American dollar went off the gold standard, and have simply accelerated ever since. But anybody who avoided the U.S. stock market since 1933, and hid out in cash, would have missed the greatest period of stock market returns in world history--not to mention the enormous strides in standards of living and, most notably, no more economic catastrophes like the Great Depression. Even the Great Recession meltdown in 2008 has been followed by a long, steady recovery that has produced new market highs. And despite 80 years of disconnect from the gold standard, the dollar remains the strongest currency in the world, the reserve currency against which all others are measured.

Predicting doom is a great business to be in, because our minds are wired to spook at the first sign of danger, and our eyes are instantly attracted to warning signs. People buy because they're afraid not to. The only problem with the doomsayers who have made these predictions is that they have never actually been right. Betting on the end of the world, or the end of the U.S. economy, or the death of the stock market, has never been a winning choice.

In addition, you have to wonder how credible Stockman is to be telling us our economic future. Never balancing the federal budget puts him in pretty good company, but Stockton has had an undistinguished Wall Street career at Salomon Brothers and the Blackstone Group, and his job as CEO at auto supplies manufacturer Collins & Aikman Corp. led, less than two years later, to the company filing for Chapter 11 Bankruptcy protection.

If Warren Buffett tells us to get out of stocks, we're going to listen carefully to his arguments. When David Stockman peddles gloom to an ever-ready market, because he seems to be the only Wall Street executive who has to supplement his income by book revenues, we simply put our hands over our ears and continue with our investment policies. If his fiery case for gloom and doom make you nervous, our best advice is to consider what would have happened if you had retreated to cash in 1933 when the S&P 500 was trading at 6.25 and stayed out while it rose to (recently) over 1,550. Missing out on 24,700% overall growth (and all the associated dividends) might be too scary even for David Stockman to contemplate.

Sources:
http://www.businessinsider.com/david-stockman-america-is-doomed-2013-3
http://www.csmonitor.com/USA/USA-Update/2013/0401/David-Stockman-warns-of-economic-collapse-critics-cry-cranky-old-man
http://blogs.wsj.com/marketbeat/2013/04/01/skeptics-scoff-at-david-stockmans-doomsday-scenario/

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

THE POPE AS CEO

The Roman Catholic cardinals selected a new pope: Cardinal Jorge Mario Bergoglio, now more popularly known as Pope Francis I. With his ascension to the Papacy, the Argentinian-born Jesuit became the second-largest employer in the American economy, behind only Wal Mart. The Economist magazine estimates that American-based Catholic institutions (including churches, health care networks, primary and secondary schools plus 244 Catholic colleges and universities) employ more than a million people. Its annual budget comes to some $170 billion, higher than General Electric's annual revenue of $150 billion. Catholic Charities USA and its subsidiaries employ over 65,000 paid staff members and distributed $4.7 billion to the poor in 2010, the last year for which data is available. The Archbishop of New York is believed to be Manhattan's largest landowner.


Less well-publicized is the fact that the church is now an active issuer of bonds. The Municipal Securities Rulemaking Board reports that at least 736 American state bond issues--with interest exempt from federal government taxation--are currently outstanding to pay for expansion and renovation of hospitals, schools and other church facilities in 30 states.

In all, 74 million Americans identify themselves as Catholic; only three countries in the world--Brazil, Mexico and the Philippines--have larger Catholic populations. The sheer size of the church's operations in America--an estimated 60% of its global wealth--makes us think about the new pope in a new way: as a CEO who takes over a troubled franchise, and an important player in the U.S. economy.

Sources:
http://www.economist.com/node/21560536
http://www.economist.com/blogs/newsbook/2012/08/catholic-church-america

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.