If you want to see a very funny video on how Economics works under a variety of conditions, click this link: Economic Conditions
There's another, less amusing video making the rounds these days which warns of all kinds of terrible economic catastrophes in a very reasonable-sounding voice, offered as a "public service" by an investment research firm that you had previously never heard of. The video narrator predicts that the very foundation of America will shake, bringing our way of life to a grinding halt. This tour of the future includes riots in the streets, arrests on an unprecedented scale, martial law, soaring prices of basic commodities, banks closing, credit cards not working, a collapse of our monetary system. The author purports to be the only analyst in the world who is paying close attention to the national debt, and uses the most basic scare tactics to induce people to... purchase his newsletter service.
What makes this particular video interesting is that its narrator, Porter Stansberry, has been in trouble with the U.S. Securities and Exchange Commission as far back as 1993 (Porter Stansberry), and he has been labeled a "stock hypester" in discussion forums among investors (Discussion Forum).
But this is only the most obvious example of a scam that is perpetrated by countless tips and toutsters--and even some of the economists that you see on reputable financial channels. It's a variation on an old game played by tipsters at the race track. They would scurry around to different prosperous-looking individuals in the stands, and whisper in their ears a hot tip that a certain horse would win, say, the third race. If that horse lost, that was the last these people would see of the tipster. But if it did happen to win, the tipster would be back, now with a "track record" (this is the origin of the term), to ask for money in exchange for more "sure winners."
In the economic world, this game is played by people who make a living out of predicting bear markets and economic disasters. In the financial services world, we refer to them as "permabears;" that is, people who are always bearish, always warning about a market collapse, no matter how bright the economic sun might be shining. Perhaps the most famous of these is Howard Ruff, whose "Ruff Times" newsletter advised its subscribers during the 1980s and early 1990s to avoid stocks, buy Swiss francs and Kruegerrands, guns, ammunition, dried food, bottled water and a place in the woods where all of this could be defended from the starving millions who, unprepared, would be fleeing the immanent economic collapse. Ruff's followers missed perhaps the best decade of stock returns that the world will ever see again.
How, exactly, does this game work? It's best described by a saying that goes around the investment community: "A stopped clock is always right twice a day." The tipster or economist makes dire predictions all the time, year-in, year-out, and, of course, most of the time the predictions turn out to have been way off-base. The key is to be persistent in your gloom, until you finally arrive at something like the 2008 market meltdown, when the permabears all hit the jackpot. Almost anything they said that sounded remotely dire came true, and suddenly they were geniuses, although no more than you would have been if, every morning, you yawned, stretched, looked at the sun rising in the sky and muttered dire public prophecies of catastrophe.
Now that these permabears have a "track record" of predicting the 2008 meltdown, you can expect to hear a lot more from more of them, telling you that since they predicted that the markets would go haywire and banks would collapse, you should buy their exclusive advice and avoid the next series of terrible events that they see right around the corner. Of course, every meltdown in history has been followed by an even-more-robust recovery, so the "services" of these permabears will likely cost you not only the price of their newsletter subscription, but also the missed years of positive return and economic recovery.
But never fear; you can count on their consistency, and eventually, at some unpredictable time after the markets have passed by their hapless subscribers, they'll be right again, and soon thereafter be sending out more viral videos in hopes of luring in new business and, for their next round of subscribers, destroying all faith in the system's ability to heal itself.
What a wonderful way to make a living.
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.
Thursday, January 27, 2011
Monday, January 24, 2011
IRA Changes for 2011
Little details you need to know about.
What’s new? Every year brings changes in tax law, and some of these revisions always seem to affect IRAs. Here is a look at some of the new wrinkles for 2011.
You can’t defer income resulting from a Roth IRA conversion in 2011. If you converted a traditional IRA to a Roth IRA in 2010, you could opt to divide the income resulting from the conversion between your 2011 and 2012 federal tax returns. (If you did go Roth in 2010, you have until October 17, 2011 to choose this income deferral option.) You don’t have this choice in 2011 - the income can’t be deferred to a future tax year. 1
The IRA charitable rollover is back. In 2011, IRA owners aged 70½ or older can again donate IRA proceeds to charity tax-free. The Tax Relief Act of 2010 brought back the opportunity, at least for this year. 2
A charitable IRA rollover lets an IRA owner gift up to a total of $100,000 in IRA assets to one or more qualified charities or non-profit organizations. The distribution has to go directly from the IRA custodian to the charity. You don’t get a tax deduction for the move, but you could use this qualified charitable distribution to fulfill some or all of your 2010 RMD. 2
The Tax Relief Act also gives IRA owners until January 31, 2011 to make 2010 charitable IRA donations. So you could transfer up to $100,000 from your IRA to a charity in January and have it retroactively count as a 2010 distribution, then transfer another donation of up to $100,000 to the charity later this year. 3
Here’s the irritating asterisk on all this: if you took your 2010 RMD assuming that you couldn’t make a charitable IRA donation in 2010, there is no do-over available. You can’t put back your 2010 RMD into your IRA and redirect those assets toward charity. The IRS issued a statement on January 5 citing existing language in IRS Publication 590, explaining that “required minimum distributions (RMD) from an IRA received by a taxpayer cannot be rolled over to an IRA.” 4
You have three extra days to make your 2010 IRA contribution. The District of Columbia observes Emancipation Day on April 15, so the deadline for your 2010 IRA contribution is April 18, 2011.5,6 (Remember to tell your IRA custodian that you are making a contribution for the 2010 tax year.)
You may have a chance to go Roth with your 401(k) or 403(b) in 2011. As a result of the Small Business Jobs Act of 2010, some employer-sponsored retirement plans are now allowing in-plan Roth conversions, i.e., the chance to “convert” a percentage of the pre-tax dollars you have saved to after-tax dollars without the necessity of a rollover to a Roth IRA. However, there are criteria to meet.
• Your employer’s retirement plan document has to permit after-tax Roth contributions.
• You must be older than 59½, or you have to have assets in a 401(k) or 403(b) account at a past employer that could potentially be rolled over to your current employer’s plan. 7,8
Roth IRA phase-outs have been set higher for 2011. While anyone can convert a traditional IRA to a Roth IRA, not everyone can contribute to a Roth IRA because of MAGI limits. For 2011, those phase-out limits have increased by $2,000 for joint and single filers. The phase-out range for joint filers and qualifying widows this year is $169,000-179,000. For single filers, it is $107,000-122,000. 6
Traditional IRA deduction phase-outs are also higher for 2011. If you own an IRA and participate in an employer-sponsored retirement plan, your IRA contributions may or may not be deductible, depending on your MAGI. In 2011, the MAGI phase-out ranges are bumped up slightly to $90,000-110,000 for joint filers and qualifying widows and $56,000-66,000 for single filers and heads of households. 6
One thing that hasn’t changed… With minimal inflation for 2010, there was no COLA to send the annual IRA contribution limit higher. You may contribute up to $5,000 to your IRA in 2011, $6,000 if you are 50 or older. If you have more than one IRA, your total 2011 IRA contributions to your IRAs cannot exceed the above limits. 9
This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.
Citations
1 – online.wsj.com/article/SB10001424052748703675904576063903166546250.html [1/8/11]
2 – online.wsj.com/article/SB10001424052748703395904576025610771041244.html [12/18/10]
3 - blogs.forbes.com/ashleaebeling/2011/01/06/taxwise-giving-from-your-ira-the-january-do-over/ [1/6/11]
4 – online.wsj.com/article/SB10001424052748703730704576065931348238132.html [1/7/11]
5 – irs.gov/newsroom/article/0,,id=233910,00.html [1/14/11]
6 – irs.gov/publications/p17/ch17.html#en_US_2010_publink1000252730 [1/14/11]
7 - bankrate.com/financing/retirement/converting-to-a-roth-401k/ [11/4/10]
8 - sibson.com/publications-and-resources/compliance-alert/archives/?id=1534 [10/27/10]
9 - irs.gov/retirement/article/0,,id=202510,00.html [11/1/10]
10 - montoyaregistry.com/Financial-Market.aspx?financial-market=required-ira-distributions&category=1 [1/16/11]
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.
What’s new? Every year brings changes in tax law, and some of these revisions always seem to affect IRAs. Here is a look at some of the new wrinkles for 2011.
You can’t defer income resulting from a Roth IRA conversion in 2011. If you converted a traditional IRA to a Roth IRA in 2010, you could opt to divide the income resulting from the conversion between your 2011 and 2012 federal tax returns. (If you did go Roth in 2010, you have until October 17, 2011 to choose this income deferral option.) You don’t have this choice in 2011 - the income can’t be deferred to a future tax year. 1
The IRA charitable rollover is back. In 2011, IRA owners aged 70½ or older can again donate IRA proceeds to charity tax-free. The Tax Relief Act of 2010 brought back the opportunity, at least for this year. 2
A charitable IRA rollover lets an IRA owner gift up to a total of $100,000 in IRA assets to one or more qualified charities or non-profit organizations. The distribution has to go directly from the IRA custodian to the charity. You don’t get a tax deduction for the move, but you could use this qualified charitable distribution to fulfill some or all of your 2010 RMD. 2
The Tax Relief Act also gives IRA owners until January 31, 2011 to make 2010 charitable IRA donations. So you could transfer up to $100,000 from your IRA to a charity in January and have it retroactively count as a 2010 distribution, then transfer another donation of up to $100,000 to the charity later this year. 3
Here’s the irritating asterisk on all this: if you took your 2010 RMD assuming that you couldn’t make a charitable IRA donation in 2010, there is no do-over available. You can’t put back your 2010 RMD into your IRA and redirect those assets toward charity. The IRS issued a statement on January 5 citing existing language in IRS Publication 590, explaining that “required minimum distributions (RMD) from an IRA received by a taxpayer cannot be rolled over to an IRA.” 4
You have three extra days to make your 2010 IRA contribution. The District of Columbia observes Emancipation Day on April 15, so the deadline for your 2010 IRA contribution is April 18, 2011.5,6 (Remember to tell your IRA custodian that you are making a contribution for the 2010 tax year.)
You may have a chance to go Roth with your 401(k) or 403(b) in 2011. As a result of the Small Business Jobs Act of 2010, some employer-sponsored retirement plans are now allowing in-plan Roth conversions, i.e., the chance to “convert” a percentage of the pre-tax dollars you have saved to after-tax dollars without the necessity of a rollover to a Roth IRA. However, there are criteria to meet.
• Your employer’s retirement plan document has to permit after-tax Roth contributions.
• You must be older than 59½, or you have to have assets in a 401(k) or 403(b) account at a past employer that could potentially be rolled over to your current employer’s plan. 7,8
Roth IRA phase-outs have been set higher for 2011. While anyone can convert a traditional IRA to a Roth IRA, not everyone can contribute to a Roth IRA because of MAGI limits. For 2011, those phase-out limits have increased by $2,000 for joint and single filers. The phase-out range for joint filers and qualifying widows this year is $169,000-179,000. For single filers, it is $107,000-122,000. 6
Traditional IRA deduction phase-outs are also higher for 2011. If you own an IRA and participate in an employer-sponsored retirement plan, your IRA contributions may or may not be deductible, depending on your MAGI. In 2011, the MAGI phase-out ranges are bumped up slightly to $90,000-110,000 for joint filers and qualifying widows and $56,000-66,000 for single filers and heads of households. 6
One thing that hasn’t changed… With minimal inflation for 2010, there was no COLA to send the annual IRA contribution limit higher. You may contribute up to $5,000 to your IRA in 2011, $6,000 if you are 50 or older. If you have more than one IRA, your total 2011 IRA contributions to your IRAs cannot exceed the above limits. 9
This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.
Citations
1 – online.wsj.com/article/SB10001424052748703675904576063903166546250.html [1/8/11]
2 – online.wsj.com/article/SB10001424052748703395904576025610771041244.html [12/18/10]
3 - blogs.forbes.com/ashleaebeling/2011/01/06/taxwise-giving-from-your-ira-the-january-do-over/ [1/6/11]
4 – online.wsj.com/article/SB10001424052748703730704576065931348238132.html [1/7/11]
5 – irs.gov/newsroom/article/0,,id=233910,00.html [1/14/11]
6 – irs.gov/publications/p17/ch17.html#en_US_2010_publink1000252730 [1/14/11]
7 - bankrate.com/financing/retirement/converting-to-a-roth-401k/ [11/4/10]
8 - sibson.com/publications-and-resources/compliance-alert/archives/?id=1534 [10/27/10]
9 - irs.gov/retirement/article/0,,id=202510,00.html [11/1/10]
10 - montoyaregistry.com/Financial-Market.aspx?financial-market=required-ira-distributions&category=1 [1/16/11]
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.
Wednesday, January 19, 2011
WHEN WILL JOBS AND HOUSING IMPROVE?
What factors need to be in place for this to happen?
What will it take for the housing market and employment to really improve? It really boils down to the two greatest economic factors of all: supply and demand.
What needs to happen in the labor market? Ideally, a swift rise in consumer demand for goods and services in 2011 spurs businesses to hire, with no need for another costly federal stimulus. About 125,000 people enter the U.S. labor force every month, so job creation needs to hit that level just to tread water in terms of employment–to-population ratio. Data from the Brookings Institution shows that 280,000 new positions emerged monthly at the peak of job creation in the 2000s. Back in 1994, the economy was creating an average of 321,000 new jobs a month.1
As 2010 drew to a close, our economy wasn’t anywhere near that. According to the Labor Department, 71,000 new non-farm jobs were created in November and 103,000 new non-farm jobs in December. Last month, the government said that private payrolls grew by 113,000 (297,000 according to payroll services provider ADP). Yet the December report also indicated a 1.3 million month-over-month rise in the population of discouraged workers who had simply stopped seeking jobs.2
On December 7, Federal Reserve chairman Ben Bernanke told the Senate Budget Committee that while we were seeing a “self-sustaining” economic recovery, the jobless rate would likely remain elevated through 2015 or 2016.3
Perhaps 2011 could be better than we expect. A Manpower Inc. survey of employers in December found that 73% foresaw no change in the pace of hiring at their firms for the first quarter of 2011. However, the survey did find that seasonally adjusted (read: net) hiring was projected to rise from 5% in the past quarter to 9% in 1Q 2011.4 That represents a significant jump in net hiring and suggests either the perception or reality of rising demand in some industries.
The Bureau of Economic Analysis recently reported a 3.4% year-over-year rise in disposable personal incomes for 3Q 2010, which would seem to promote a consumer spending increase. Federal Reserve data showed consumer credit card debt ticking back up by 0.6% in September and 1.7% in October after months of decreases; this is another potential sign of a rebound in consumer spending and consumer confidence.5
What needs to happen in real estate? Well, two key factors do seem to be in place to encourage a rebound. Interest rates on 30-year conventional home loans are still below 5%; compare that with 9.4% as recently as the early part of 1989. The Standard & Poor’s/Case-Shiller Home Price Index tells us that existing home prices dropped 29.6% between July 2006 and October 2010, and some analysts see them falling further.6,7 But two cold, hard facts remain in the way of a recovery.
• You can’t buy a home if you don’t have a job. Unemployment and its cousin underemployment represent the biggest drag on the real estate market - thwarting purchases, reducing demand, and hastening delinquencies and foreclosures.
• You can’t readily sell your home if it is “underwater”. The latest CoreLogic Inc. data shows that 22.5% of U.S. homeowners owe more than their residences are worth.7
During 2009-2010, any sense of momentum or recovery seemed a product of government intervention. The homebuyer tax credit led to a spike in sales, then a reversal. Turning from the month-to-month “weather” of the real estate market to year-over-year numbers, you would think things couldn’t get any worse: according to the latest figures (November), existing home sales were down 27.9% year-over-year and new home sales down 21.2% from 12 months before.8
However, some of the “weather” bears studying; things did get sunnier during 2010 in some respects. Mortgage rates didn’t rocket north when the Fed ended its campaign to buy mortgage-backed securities last March. (The European debt crisis had an effect.) Existing home sales rose by 5.6% in November, and the rate of new home purchases also improved by 5.5%. Pending home sales, as tracked by the National Association of Realtors, were up a record 10.4% in October and up another 3.5% for November.8,9
Ideally, 2011 brings some kind of sweet spot for the residential real estate sector where job creation ramps up while mortgage rates remain historically low for a few months. That could contribute nicely toward a recovery in the sector in 2012.
This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.
Citations.
1 brookings.edu/opinions/2010/0806_employment_looney_greenstone.aspx [8/6/10]
2 money.usnews.com/money/careers/articles/2011/01/07/jobless-rate-falls-but-american-employment-remains-bleak.html [1/7/11]
3 cnbc.com/id/40962516 [1/7/11]
4 theatlantic.com/business/archive/2010/12/hiring-will-rise-in-2011-but-will-it-be-enough/67617/ [12/7/10]
5 csmonitor.com/USA/Society/2010/1220/Consumer-spending-is-up-Are-Americans-enjoying-a-post-recession-holiday [12/20/10]
6 latimes.com/business/realestate/la-fi-housing-recovery5c.eps-20110102,0,1869511.graphic [1/2/11]
7 online.wsj.com/article/SB10001424052970203731004576045811887540604.html [1/3/11]
8 usatoday.com/money/economy/housing/2010-12-23-housing23_ST_N.htm [12/23/10]
9 thestreet.com/story/10957404/pending-home-sales-rebound-35-in-november.html [12/30/10]
10 montoyaregistry.com/Financial-Market.aspx?financial-market=who-needs-wealth-management-services&category=4 [1/9/11]
What will it take for the housing market and employment to really improve? It really boils down to the two greatest economic factors of all: supply and demand.
What needs to happen in the labor market? Ideally, a swift rise in consumer demand for goods and services in 2011 spurs businesses to hire, with no need for another costly federal stimulus. About 125,000 people enter the U.S. labor force every month, so job creation needs to hit that level just to tread water in terms of employment–to-population ratio. Data from the Brookings Institution shows that 280,000 new positions emerged monthly at the peak of job creation in the 2000s. Back in 1994, the economy was creating an average of 321,000 new jobs a month.1
As 2010 drew to a close, our economy wasn’t anywhere near that. According to the Labor Department, 71,000 new non-farm jobs were created in November and 103,000 new non-farm jobs in December. Last month, the government said that private payrolls grew by 113,000 (297,000 according to payroll services provider ADP). Yet the December report also indicated a 1.3 million month-over-month rise in the population of discouraged workers who had simply stopped seeking jobs.2
On December 7, Federal Reserve chairman Ben Bernanke told the Senate Budget Committee that while we were seeing a “self-sustaining” economic recovery, the jobless rate would likely remain elevated through 2015 or 2016.3
Perhaps 2011 could be better than we expect. A Manpower Inc. survey of employers in December found that 73% foresaw no change in the pace of hiring at their firms for the first quarter of 2011. However, the survey did find that seasonally adjusted (read: net) hiring was projected to rise from 5% in the past quarter to 9% in 1Q 2011.4 That represents a significant jump in net hiring and suggests either the perception or reality of rising demand in some industries.
The Bureau of Economic Analysis recently reported a 3.4% year-over-year rise in disposable personal incomes for 3Q 2010, which would seem to promote a consumer spending increase. Federal Reserve data showed consumer credit card debt ticking back up by 0.6% in September and 1.7% in October after months of decreases; this is another potential sign of a rebound in consumer spending and consumer confidence.5
What needs to happen in real estate? Well, two key factors do seem to be in place to encourage a rebound. Interest rates on 30-year conventional home loans are still below 5%; compare that with 9.4% as recently as the early part of 1989. The Standard & Poor’s/Case-Shiller Home Price Index tells us that existing home prices dropped 29.6% between July 2006 and October 2010, and some analysts see them falling further.6,7 But two cold, hard facts remain in the way of a recovery.
• You can’t buy a home if you don’t have a job. Unemployment and its cousin underemployment represent the biggest drag on the real estate market - thwarting purchases, reducing demand, and hastening delinquencies and foreclosures.
• You can’t readily sell your home if it is “underwater”. The latest CoreLogic Inc. data shows that 22.5% of U.S. homeowners owe more than their residences are worth.7
During 2009-2010, any sense of momentum or recovery seemed a product of government intervention. The homebuyer tax credit led to a spike in sales, then a reversal. Turning from the month-to-month “weather” of the real estate market to year-over-year numbers, you would think things couldn’t get any worse: according to the latest figures (November), existing home sales were down 27.9% year-over-year and new home sales down 21.2% from 12 months before.8
However, some of the “weather” bears studying; things did get sunnier during 2010 in some respects. Mortgage rates didn’t rocket north when the Fed ended its campaign to buy mortgage-backed securities last March. (The European debt crisis had an effect.) Existing home sales rose by 5.6% in November, and the rate of new home purchases also improved by 5.5%. Pending home sales, as tracked by the National Association of Realtors, were up a record 10.4% in October and up another 3.5% for November.8,9
Ideally, 2011 brings some kind of sweet spot for the residential real estate sector where job creation ramps up while mortgage rates remain historically low for a few months. That could contribute nicely toward a recovery in the sector in 2012.
This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.
Citations.
1 brookings.edu/opinions/2010/0806_employment_looney_greenstone.aspx [8/6/10]
2 money.usnews.com/money/careers/articles/2011/01/07/jobless-rate-falls-but-american-employment-remains-bleak.html [1/7/11]
3 cnbc.com/id/40962516 [1/7/11]
4 theatlantic.com/business/archive/2010/12/hiring-will-rise-in-2011-but-will-it-be-enough/67617/ [12/7/10]
5 csmonitor.com/USA/Society/2010/1220/Consumer-spending-is-up-Are-Americans-enjoying-a-post-recession-holiday [12/20/10]
6 latimes.com/business/realestate/la-fi-housing-recovery5c.eps-20110102,0,1869511.graphic [1/2/11]
7 online.wsj.com/article/SB10001424052970203731004576045811887540604.html [1/3/11]
8 usatoday.com/money/economy/housing/2010-12-23-housing23_ST_N.htm [12/23/10]
9 thestreet.com/story/10957404/pending-home-sales-rebound-35-in-november.html [12/30/10]
10 montoyaregistry.com/Financial-Market.aspx?financial-market=who-needs-wealth-management-services&category=4 [1/9/11]
2010: THE FINANCIAL YEAR IN REVIEW
QUOTE OF THE YEAR
“To climb steep hills requires slow pace at first.”
– William Shakespeare
THE YEAR IN BRIEF
2010 was a very nice year on Wall Street. At the closing bell on December 31, the Dow Jones Industrial Average was sitting just eight points beneath a two-year high recorded two days earlier. The S&P 500 finished up 12.78% for the year and the Dow, NASDAQ and S&P all posted double-digit yearly gains. The Dow finished 2010 at 11,577.51, the NASDAQ at 2652.87 and the S&P at 1257.64.1
The economy grew, but instead of a V-shaped recovery we saw a shallow U-shaped one. The Fed didn’t touch the benchmark interest rate all year; it did embark on another round of monetary easing. The unemployment rate stayed consistently above 9%. On Capitol Hill, you had the passage of health care reforms and the Dodd-Frank Act, the surprisingly easy extension of the Bush-era tax cuts, and a resolution to the estate tax question. The real estate sector stumbled along; mortgage rates fell remarkably before rising a bit at the end of the year. Consumer spending increased, though not impressively; inflation was barely on the radar. The bull market in commodities continued. Foreign economies struggled with problems much greater than ours.
DOMESTIC ECONOMIC HEALTH
The American economy comes down to the consumer, and the good news is that consumer spending increased in nine out of the 11 months on record for 2010 (it was flat in April and June). As for inflation, it was almost nil: the Consumer Price Index gained just 1.1% from November 2009 to November 2010, and core CPI rose but 0.8% in that span.2,3,4,5
The Conference Board’s consumer confidence survey moved from 50.6 (December 2009) to 54.1 (December 2010). The Reuters/University of Michigan survey moved from 72.5 to 74.5 across that span, with a 9.4% improvement in consumer expectations. America’s jobless rate did show some improvement: it was 10.0% in December 2009 and still at 9.8% in November, but down to 9.4% for December.6,7,8
Let’s look at the growth in the service and manufacturing sectors through the lens of the Institute for Supply Management. Its November manufacturing report indicated the 16th straight month of growth in the sector, with employment trending positive for 12 months and production expanding for the past 18 months. The November service sector report indicated the 11th straight month of expansion and the 15th straight month of growth when it came to new orders. Census Bureau data showed durable goods orders up 14.3% from year-ago levels in October (and without seasonal adjustment, the year-over-year rise was 10.4% from November 2009 to November 2010.)9,10,11
In the nation’s capital, the Republicans gained control of the House in the mid-term elections and President Obama seemed eminently agreeable to their demands by year’s end. In March, landmark health care reforms were passed to fulfill the President’s mandate of bringing health insurance coverage to (virtually) every American, though the public option that would have made the federal government a competitor in the health insurance industry was defeated. In July, the Dodd-Frank Act was passed bringing new regulations to the financial industry. Besides trying to prevent a repeat of TARP, it green-lighted the creation of a new watchdog agency to help protect and educate consumers, opened up derivatives trading to the public eye, and set the FDIC insurance limit permanently at $250,000.12,13
The fall brought a new round of bond-buying from the Federal Reserve - QE2, as it came to be called in the media. The Fed committed to buying $600 billion worth of Treasuries through June 2011 and announced plans to buy up to $900 billion in debt by the end of next September. In December, the President struck an accord with Republicans resulting in swift passage of new tax laws: the EGTRRA and JGTRRA cuts were preserved for another two years, employee payroll taxes were cut by 2% for 2011, and the estate tax resumed for 2011 at 35% with a $5 million exemption.14,15
GLOBAL ECONOMIC HEALTH
It was a harsh year for the euro and for the European Union. Central banks and governments faced payback for years of loose lending and nonchalant spending. Greece was the first EU member to crack, getting a €110 billion bailout from the EU and the International Monetary Fund in May. In November, Ireland got a ₤72 billion EU/IMF bailout, and Portugal and Spain remain on the EU watch list. (At one point last year, the bank bailout guarantees amounted to about 25% of the EU’s GDP.) In May, French prime minister Nicolas Sarkozy warned that his country would ditch the euro if Germany’s chancellor, Angela Merkel, didn’t agree to create an EU bailout fund. She did, and a €440 billion fund is now in place for any future rescues.16
In the third quarter of 2010, China became the #2 economy in the world, right behind the United States; Japan fell into third place. China’s manufacturers saw their collective profits rise 49.5% across the first 11 months of 2010. The nation’s central bank twice raised interest rates during the year. Japan couldn’t shake its deflation – in November, its core consumer price index went negative for an astonishing 21st consecutive month – but its industrial output rose in November for the first time in six months. India’s remarkable economic engine showed little if any sign of slowing down – the IMF projected India would end 2010 with a +9.7% GDP and forecast 8.4% growth in 2011.17,18,19,20
WORLD MARKETS
Looking at the consequential stock markets around the world, we see some great 2010 performances. At the top we find Argentina’s MERVAL, +51.8% for the year. Finishing second, we have Indonesia’s Jakarta Composite, +46.2% for the year. Rounding out the top five, we have Thailand’s SET (+40.6%), the PSE Composite in the Philippines (+37.6%) and Chile’s IPSA (also +37.6%). Several other benchmarks outpaced the S&P 500 last year: Pakistan’s KSE 100 (+28.1%), South Korea’s KOSPI (+21.9%), Mexico’s IPC (+20.0%), India’s Sensex (+17.4%), Germany’s DAX (+16.1%) and Canada’s TSX Composite (+14.4%). Other gains: Singapore’s Straits Times Index, +10.1%; Taiwan’s TAIEX, +9.6%; Great Britain’s FTSE 100, +9.0%; Hong Kong’s Hang Seng, +5.3%; Brazil’s Bovespa, just 1.0%.21
Some benchmarks went negative: Australia’s All Ordinaries index (-2.6%), Japan’s Nikkei 225 (-3.0%), Ireland’s ISEQ (-3.0%), France’s CAC-40 (-3.3%), China’s Shanghai Composite (-14.4%), and finally two indices you would expect to finish at or near the bottom for 2010: Spain’s IBEX (-17.4%) and Greece’s ASE (-35.6%). How did the MSCI World Index and Emerging Markets Index fare in 2010? In U.S. dollar terms, the World Index gained 9.55% and the Emerging Markets Index posted a 16.36% return.21,22
COMMODITIES MARKETS
The bull market continued. Palladium was the best-performing marquee commodity of 2010, gaining an astonishing 97.3%. Other metals also posted great yearly gains: gold rose 29.8% to close 2010 at $1421.10 per ounce, silver gained 83.8% to $30.91 a troy ounce, and copper prices rose 33.4% to $4.4395 a pound for December. Platinum futures advanced 21.5% last year.23
How did energy and crop futures do? Well, oil climbed 15.2% for the year, with prices cresting at $91.51 on December 6 and finishing the year at $91.38. Natural gas was the “blown tire” of the commodities sector, with futures dropping 20.9% for 2010. Corn gained 51.8%, wheat 46.7% and soybeans gained 34.1%, spurred by a drought affecting Russia. Coffee futures were up 76.9% for the year, and sugar futures gained 19.2 across 2010. The Dow Jones-UBS Commodity Index followed its 19.0% 2009 gain with a 16.8% advance for 2010.23
The U.S. Dollar Index gained 1.41% for 2010 and the real yield of the 10-year note went from 1.48% on December 31, 2009 to 1.00% a year later (a 32.4% decline).24,25
REAL ESTATE
This is an annual review, so let’s talk about the numbers that really matter when it comes to the housing market: the year-over-year change in home sales and home sale prices. The latest available data we have, of course, comes from November 2010 – so let’s reference those figures. In November, existing home sales were down 27.9% from a year ago, though the median sale price improved by 0.4% in that time. New home sales were down 21.2% from 12 months ago, with a median sale price of $213,000 – a year-to-year retreat of 2.0% from $217,400 in November 2009.26,27,28
Has the housing market hit bottom? Will we have to wait until sometime in 2011 … or 2012 … to see a bona fide recovery? As the biggest drag on the real estate market is actually unemployment, and as unemployment will continue at high levels for the foreseeable future, the near future of the sector does not look too bright.
Mortgage rates moved downward for most of 2010; new record lows seemed to be set every week during the summer and fall. Rates were on the upswing in December, at least in the short term. When Freddie Mac assessed matters on December 30, they noted the following year-to-year movement: average rates on conventional 30-year FRMs had moved down to 4.86% from 5.14%; rates on 15-year FRMs were averaging 4.20%, down from 4.54%; average rates on the 5-year ARM were at 3.77%, down from 4.44% a year prior; average rates on the 1-year ARM had descended to 3.26% from 4.33%.29
LOOKING BACK … LOOKING FORWARD
It is hard to forecast the future; just ask the experts. At the start of 2010, some analysts were predicting growth of more than 3% for the U.S. economy (didn’t quite happen), an unnerving double dip in housing prices after the end of the homebuyer tax credit (this only happened to a minor degree), and a jobless rate well over 10% (it stayed below 10% from January-November). Some voices worried about deflation; that hasn’t happened either. And Harry Dent – the author of The Roaring 2000s who famously predicted the Dow would hit 40,000 during the last decade – forecast a severe bear market beginning in 2010 (as you can see below, that hasn’t happened at all).8,30
% CHANGE 2010 2009 5-YR AVG 10-YR AVG
DJIA +11.02 +18.82 +1.60 +0.73
NASDAQ +16.91 +43.89 +4.06 +0.74
S&P 500 +12.78 +23.45 -0.15 -0.47
REAL YIELD 12/31 RATE 1 YR AGO 5 YRS AGO 10 YRS AGO
10 YR TIPS 1.00% 1.48% 2.06% 4.03%
Source: cnbc.com, bigcharts.com, ustreas.gov, bls.gov - 12/31/101,35,31,32
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.
The fact is, we don’t know what 2011 will bring. There seems to be less talk of a double-dip recession in the air; the tax deal forged in Washington certainly eased the minds of the affluent (lenient estate tax, Bush-era cuts preserved) and the middle class (2% payroll tax reduction). Are we going to see a greatly improved real estate market in 2011? How about a big reduction in the jobless rate or a big jump in GDP? It doesn’t seem likely. The economy and the stock market have some momentum going; if the geopolitical climate remains relatively placid and indicators continue to pleasantly surprise, 2011 could be a better year for Wall Street and Main Street than 2010.
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.
“To climb steep hills requires slow pace at first.”
– William Shakespeare
THE YEAR IN BRIEF
2010 was a very nice year on Wall Street. At the closing bell on December 31, the Dow Jones Industrial Average was sitting just eight points beneath a two-year high recorded two days earlier. The S&P 500 finished up 12.78% for the year and the Dow, NASDAQ and S&P all posted double-digit yearly gains. The Dow finished 2010 at 11,577.51, the NASDAQ at 2652.87 and the S&P at 1257.64.1
The economy grew, but instead of a V-shaped recovery we saw a shallow U-shaped one. The Fed didn’t touch the benchmark interest rate all year; it did embark on another round of monetary easing. The unemployment rate stayed consistently above 9%. On Capitol Hill, you had the passage of health care reforms and the Dodd-Frank Act, the surprisingly easy extension of the Bush-era tax cuts, and a resolution to the estate tax question. The real estate sector stumbled along; mortgage rates fell remarkably before rising a bit at the end of the year. Consumer spending increased, though not impressively; inflation was barely on the radar. The bull market in commodities continued. Foreign economies struggled with problems much greater than ours.
DOMESTIC ECONOMIC HEALTH
The American economy comes down to the consumer, and the good news is that consumer spending increased in nine out of the 11 months on record for 2010 (it was flat in April and June). As for inflation, it was almost nil: the Consumer Price Index gained just 1.1% from November 2009 to November 2010, and core CPI rose but 0.8% in that span.2,3,4,5
The Conference Board’s consumer confidence survey moved from 50.6 (December 2009) to 54.1 (December 2010). The Reuters/University of Michigan survey moved from 72.5 to 74.5 across that span, with a 9.4% improvement in consumer expectations. America’s jobless rate did show some improvement: it was 10.0% in December 2009 and still at 9.8% in November, but down to 9.4% for December.6,7,8
Let’s look at the growth in the service and manufacturing sectors through the lens of the Institute for Supply Management. Its November manufacturing report indicated the 16th straight month of growth in the sector, with employment trending positive for 12 months and production expanding for the past 18 months. The November service sector report indicated the 11th straight month of expansion and the 15th straight month of growth when it came to new orders. Census Bureau data showed durable goods orders up 14.3% from year-ago levels in October (and without seasonal adjustment, the year-over-year rise was 10.4% from November 2009 to November 2010.)9,10,11
In the nation’s capital, the Republicans gained control of the House in the mid-term elections and President Obama seemed eminently agreeable to their demands by year’s end. In March, landmark health care reforms were passed to fulfill the President’s mandate of bringing health insurance coverage to (virtually) every American, though the public option that would have made the federal government a competitor in the health insurance industry was defeated. In July, the Dodd-Frank Act was passed bringing new regulations to the financial industry. Besides trying to prevent a repeat of TARP, it green-lighted the creation of a new watchdog agency to help protect and educate consumers, opened up derivatives trading to the public eye, and set the FDIC insurance limit permanently at $250,000.12,13
The fall brought a new round of bond-buying from the Federal Reserve - QE2, as it came to be called in the media. The Fed committed to buying $600 billion worth of Treasuries through June 2011 and announced plans to buy up to $900 billion in debt by the end of next September. In December, the President struck an accord with Republicans resulting in swift passage of new tax laws: the EGTRRA and JGTRRA cuts were preserved for another two years, employee payroll taxes were cut by 2% for 2011, and the estate tax resumed for 2011 at 35% with a $5 million exemption.14,15
GLOBAL ECONOMIC HEALTH
It was a harsh year for the euro and for the European Union. Central banks and governments faced payback for years of loose lending and nonchalant spending. Greece was the first EU member to crack, getting a €110 billion bailout from the EU and the International Monetary Fund in May. In November, Ireland got a ₤72 billion EU/IMF bailout, and Portugal and Spain remain on the EU watch list. (At one point last year, the bank bailout guarantees amounted to about 25% of the EU’s GDP.) In May, French prime minister Nicolas Sarkozy warned that his country would ditch the euro if Germany’s chancellor, Angela Merkel, didn’t agree to create an EU bailout fund. She did, and a €440 billion fund is now in place for any future rescues.16
In the third quarter of 2010, China became the #2 economy in the world, right behind the United States; Japan fell into third place. China’s manufacturers saw their collective profits rise 49.5% across the first 11 months of 2010. The nation’s central bank twice raised interest rates during the year. Japan couldn’t shake its deflation – in November, its core consumer price index went negative for an astonishing 21st consecutive month – but its industrial output rose in November for the first time in six months. India’s remarkable economic engine showed little if any sign of slowing down – the IMF projected India would end 2010 with a +9.7% GDP and forecast 8.4% growth in 2011.17,18,19,20
WORLD MARKETS
Looking at the consequential stock markets around the world, we see some great 2010 performances. At the top we find Argentina’s MERVAL, +51.8% for the year. Finishing second, we have Indonesia’s Jakarta Composite, +46.2% for the year. Rounding out the top five, we have Thailand’s SET (+40.6%), the PSE Composite in the Philippines (+37.6%) and Chile’s IPSA (also +37.6%). Several other benchmarks outpaced the S&P 500 last year: Pakistan’s KSE 100 (+28.1%), South Korea’s KOSPI (+21.9%), Mexico’s IPC (+20.0%), India’s Sensex (+17.4%), Germany’s DAX (+16.1%) and Canada’s TSX Composite (+14.4%). Other gains: Singapore’s Straits Times Index, +10.1%; Taiwan’s TAIEX, +9.6%; Great Britain’s FTSE 100, +9.0%; Hong Kong’s Hang Seng, +5.3%; Brazil’s Bovespa, just 1.0%.21
Some benchmarks went negative: Australia’s All Ordinaries index (-2.6%), Japan’s Nikkei 225 (-3.0%), Ireland’s ISEQ (-3.0%), France’s CAC-40 (-3.3%), China’s Shanghai Composite (-14.4%), and finally two indices you would expect to finish at or near the bottom for 2010: Spain’s IBEX (-17.4%) and Greece’s ASE (-35.6%). How did the MSCI World Index and Emerging Markets Index fare in 2010? In U.S. dollar terms, the World Index gained 9.55% and the Emerging Markets Index posted a 16.36% return.21,22
COMMODITIES MARKETS
The bull market continued. Palladium was the best-performing marquee commodity of 2010, gaining an astonishing 97.3%. Other metals also posted great yearly gains: gold rose 29.8% to close 2010 at $1421.10 per ounce, silver gained 83.8% to $30.91 a troy ounce, and copper prices rose 33.4% to $4.4395 a pound for December. Platinum futures advanced 21.5% last year.23
How did energy and crop futures do? Well, oil climbed 15.2% for the year, with prices cresting at $91.51 on December 6 and finishing the year at $91.38. Natural gas was the “blown tire” of the commodities sector, with futures dropping 20.9% for 2010. Corn gained 51.8%, wheat 46.7% and soybeans gained 34.1%, spurred by a drought affecting Russia. Coffee futures were up 76.9% for the year, and sugar futures gained 19.2 across 2010. The Dow Jones-UBS Commodity Index followed its 19.0% 2009 gain with a 16.8% advance for 2010.23
The U.S. Dollar Index gained 1.41% for 2010 and the real yield of the 10-year note went from 1.48% on December 31, 2009 to 1.00% a year later (a 32.4% decline).24,25
REAL ESTATE
This is an annual review, so let’s talk about the numbers that really matter when it comes to the housing market: the year-over-year change in home sales and home sale prices. The latest available data we have, of course, comes from November 2010 – so let’s reference those figures. In November, existing home sales were down 27.9% from a year ago, though the median sale price improved by 0.4% in that time. New home sales were down 21.2% from 12 months ago, with a median sale price of $213,000 – a year-to-year retreat of 2.0% from $217,400 in November 2009.26,27,28
Has the housing market hit bottom? Will we have to wait until sometime in 2011 … or 2012 … to see a bona fide recovery? As the biggest drag on the real estate market is actually unemployment, and as unemployment will continue at high levels for the foreseeable future, the near future of the sector does not look too bright.
Mortgage rates moved downward for most of 2010; new record lows seemed to be set every week during the summer and fall. Rates were on the upswing in December, at least in the short term. When Freddie Mac assessed matters on December 30, they noted the following year-to-year movement: average rates on conventional 30-year FRMs had moved down to 4.86% from 5.14%; rates on 15-year FRMs were averaging 4.20%, down from 4.54%; average rates on the 5-year ARM were at 3.77%, down from 4.44% a year prior; average rates on the 1-year ARM had descended to 3.26% from 4.33%.29
LOOKING BACK … LOOKING FORWARD
It is hard to forecast the future; just ask the experts. At the start of 2010, some analysts were predicting growth of more than 3% for the U.S. economy (didn’t quite happen), an unnerving double dip in housing prices after the end of the homebuyer tax credit (this only happened to a minor degree), and a jobless rate well over 10% (it stayed below 10% from January-November). Some voices worried about deflation; that hasn’t happened either. And Harry Dent – the author of The Roaring 2000s who famously predicted the Dow would hit 40,000 during the last decade – forecast a severe bear market beginning in 2010 (as you can see below, that hasn’t happened at all).8,30
% CHANGE 2010 2009 5-YR AVG 10-YR AVG
DJIA +11.02 +18.82 +1.60 +0.73
NASDAQ +16.91 +43.89 +4.06 +0.74
S&P 500 +12.78 +23.45 -0.15 -0.47
REAL YIELD 12/31 RATE 1 YR AGO 5 YRS AGO 10 YRS AGO
10 YR TIPS 1.00% 1.48% 2.06% 4.03%
Source: cnbc.com, bigcharts.com, ustreas.gov, bls.gov - 12/31/101,35,31,32
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.
The fact is, we don’t know what 2011 will bring. There seems to be less talk of a double-dip recession in the air; the tax deal forged in Washington certainly eased the minds of the affluent (lenient estate tax, Bush-era cuts preserved) and the middle class (2% payroll tax reduction). Are we going to see a greatly improved real estate market in 2011? How about a big reduction in the jobless rate or a big jump in GDP? It doesn’t seem likely. The economy and the stock market have some momentum going; if the geopolitical climate remains relatively placid and indicators continue to pleasantly surprise, 2011 could be a better year for Wall Street and Main Street than 2010.
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.
Thursday, January 6, 2011
Structural Fallacies
Structural Fallacies
Suddenly, the U.S. jobs picture is in the economic news, and for once the news is actually pretty good. I think it helps, from time to time, to be reminded that not everybody is highly-qualified for the job market, as this video subtly suggests:
You Tube Video Link
And if you're curious about what job interviews looked like in a simpler age, this might prove educational:
You Tube Video Link
The good news? Payroll services provider ADP said Wednesday that private employers added a net total of 297,000 new jobs last month, the most in the ten years that ADP has tracked the data. Meanwhile, forecasters seem to be scrambling to raise their job gains forecasts after the Labor Department's encouraging report on a decline in applications for unemployment benefits.
On Friday, the U.S. Labor Department is expected to make headlines, reporting that the unemployment rate has fallen to 9.7%
Even so, you're likely to hear pessimistic views about job growth and unemployment; indeed, in the January 3 issue of The New Yorker, James Surowiecki says that some economists are warning that there is a long-term mismatch between the jobs that are available and the skills that workers are bringing to the job market. If people don't have the skills to work in the fields where the jobs are (so the argument goes), unemployment will continue to plague our economy. (You can find the article here: New Yorker Article.)
There are two problems with that argument, Surowiecki notes. If we were indeed suffering from "structural unemployment," then companies would be having trouble filling their skilled vacancies, have to pay their existing workers more and work them longer hours to make up for the shortage of people they can't hire. As it happens, the opposite seems to be true. Payrolls have been slashed across manufacturing, retail, wholesale, transportation and information technology sectors. The percentage of small businesses with "hard to fill" job vacancies is near a 25-year low, Surowiecki reports, and people who are lucky enough to have jobs haven't seen their work hours go up in the last year.
The second problem is that this exact same "structural unemployment" argument has been made before, and it has not always been a perfect forecaster of what happens in the future. During the 1981-82 recession, prominent economists warned that structural issues would permanently raise unemployment levels, but by 1984 unemployment was back to where it had been before the recession hit. In a 1964 survey of economists, more than half reported that structural unemployment played a significant role in limiting the number of jobs. Three years later, unemployment was below 4%. During the Great Depression, President Roosevelt thought unemployment might be stuck at a permanently high level.
The point: recessions are crises of confidence, and this lack of confidence leads us to believe that this time it's finally different, and we are in a hole we cannot possibly climb out of. If the historical evidence is to be believed (and it always seems to be a better indicator than the panic of the moment), then the jobs report on Friday will be something to celebrate, a sign that things are getting a little better, that the sun is starting to peek through the clouds, and this long hangover from the Great Recession won't go on forever.
Job reports data: Jobs Report Data Link
New Yorker analysis: New Yorker Analysis Link
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.
Suddenly, the U.S. jobs picture is in the economic news, and for once the news is actually pretty good. I think it helps, from time to time, to be reminded that not everybody is highly-qualified for the job market, as this video subtly suggests:
You Tube Video Link
And if you're curious about what job interviews looked like in a simpler age, this might prove educational:
You Tube Video Link
The good news? Payroll services provider ADP said Wednesday that private employers added a net total of 297,000 new jobs last month, the most in the ten years that ADP has tracked the data. Meanwhile, forecasters seem to be scrambling to raise their job gains forecasts after the Labor Department's encouraging report on a decline in applications for unemployment benefits.
On Friday, the U.S. Labor Department is expected to make headlines, reporting that the unemployment rate has fallen to 9.7%
Even so, you're likely to hear pessimistic views about job growth and unemployment; indeed, in the January 3 issue of The New Yorker, James Surowiecki says that some economists are warning that there is a long-term mismatch between the jobs that are available and the skills that workers are bringing to the job market. If people don't have the skills to work in the fields where the jobs are (so the argument goes), unemployment will continue to plague our economy. (You can find the article here: New Yorker Article.)
There are two problems with that argument, Surowiecki notes. If we were indeed suffering from "structural unemployment," then companies would be having trouble filling their skilled vacancies, have to pay their existing workers more and work them longer hours to make up for the shortage of people they can't hire. As it happens, the opposite seems to be true. Payrolls have been slashed across manufacturing, retail, wholesale, transportation and information technology sectors. The percentage of small businesses with "hard to fill" job vacancies is near a 25-year low, Surowiecki reports, and people who are lucky enough to have jobs haven't seen their work hours go up in the last year.
The second problem is that this exact same "structural unemployment" argument has been made before, and it has not always been a perfect forecaster of what happens in the future. During the 1981-82 recession, prominent economists warned that structural issues would permanently raise unemployment levels, but by 1984 unemployment was back to where it had been before the recession hit. In a 1964 survey of economists, more than half reported that structural unemployment played a significant role in limiting the number of jobs. Three years later, unemployment was below 4%. During the Great Depression, President Roosevelt thought unemployment might be stuck at a permanently high level.
The point: recessions are crises of confidence, and this lack of confidence leads us to believe that this time it's finally different, and we are in a hole we cannot possibly climb out of. If the historical evidence is to be believed (and it always seems to be a better indicator than the panic of the moment), then the jobs report on Friday will be something to celebrate, a sign that things are getting a little better, that the sun is starting to peek through the clouds, and this long hangover from the Great Recession won't go on forever.
Job reports data: Jobs Report Data Link
New Yorker analysis: New Yorker Analysis Link
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