Myths about fiscal austerity: A cut too far? | The Economist

I don't know whether to feel good about this or not.

I had a post last week where I shared my concerns (more eloquently written by Paul Krugman) that global governments were beginning a process of tightening fiscal and monetary policy at a time that the economic recovery is still fragile.

This was the pattern that the Japan followed in the 1990's, and the U.S. in the late 1930's - rather than try to encourage fledgling growth, the government authorities acted too soon, snuffed out the recovery, then had to come to the rescue again.

Not to worry, according to The Economist. Most of the conversations coming from government officials is mostly rhetoric:

Fortunately, however, the G20’s rhetoric is far tougher than the likely reality. Contrary to Mr Krugman’s fears, there is little evidence from actual budget plans that the world’s finance ministers are embarking on an immediate collective austerity drive. American politicians are still debating a second mini-stimulus. Even in Europe, where the focus on deficit reduction is greatest, the impact will in the short term be relatively modest.

But is this good? The Economist continues:

A calm look at the numbers, then, suggests that the odds of a collective G20 blunder towards recovery-wrecking austerity this year are low. The real danger of the current embrace of austerity is not that it is reckless, but that it is thoughtless—missing an opportunity to make the policy changes that will help economies most in the future.

More to think about.

Myths about fiscal austerity: A cut too far? | The Economist

UAW Fund Faces Bankruptcy: Headline from 2015 Wall Street Journal

This article appeared in this morning's Wall Street Journal concerning the UAW's Fund.

(Unfortunately you have to subscribe to the on-line version of the Journal to be able to read the whole piece, but there was one paragraph that caught my eye.)

First, some background: in January of this year, as part of their settlement with General Motors, Ford and Chrysler, the UAW assumed the responsibility for paying for the health care benefits for 800,000 retired members and their spouses. The fund - named voluntary employee beneficiary association, or VEBA - is huge, totalling some $45 billion.

Here's the part that interested me (quoting):

Earlier this year, consultant Ennis Knupp & Associates, Inc. conducted a study of the benefit obligations to the UAW retirees. The trust then adopted a plan to put half of its funds in global stocks, 25% in core fixed income and 12.5% each into Treasury Inflation-Protected Securities (TIPS) and long-duration fixed income.

In other words, according to the folks at Ennis (who I have worked with in the past, by the way), the best way for a large pool of assets whose liabilities will stretch for years is to put half of the fund in securities with a blended yield around 3%, and the remainder in stocks outside of the United States.

This to me is a recipe for disaster.

First, it seems that Ennis cannot make it mind: is it worried about inflation (the allocation of 12.5% to TIPS, whose yields are around 1.5%) or deflation (12.5% to long-duration bonds, which will only help if interest rates stay steady or move lower)?

Second, why global stocks? U.S. large cap stocks currently are among the most attractive in the world both on a valuation basis as well as offering reasonable dividend yields.

Third, whatever happened to buy America? Is Ennis so bearish on the future of this country that the only opportunities they see are overseas? Mind you, I am a big fan of international diversification, but it used to be that the UAW was one of the most strident proponents of staying invested in the U.S. Do their members really want to invest in companies that have taken jobs from their members?

And, finally, why would a fund that has a longer term time horizon (as VEBA should) have only half in stocks? True, the last 10 years have not been kind to the stock investor, but history suggests that the next decade should have better returns than most other asset classes.

Attention American taxpayer: Bailout Ahead.





UAW Fund Holds Promise for Money Managers - WSJ.com

Interest Rates Could Stay at Record Low Till 2012 - NYTimes.com

If my view of the way things are playing out on the global scene is correct, it will be several years before we see a significant increase in interest rates on either short or long maturity bonds.

Based on this article in today's New York Times, looks like at least the Fed's internal staff agrees.

Here's an excerpt:

And while a few Fed officials have argued that extraordinarily low interest rates could lead to new price bubbles, or excessive leverage and speculation by banks, Mr. Rudebusch argued that the relationship between short-term interest rates and financial imbalances was “quite erratic and poorly understood,” noting that Japan had very low interest rates for about 15 years without those problems.

In addition, Mr. Rudebusch said the federal funds rate was less central than in the past because the Fed has been buying mortgage bonds and Treasury securities to hold down long-term rates.

“Changes in long-term interest rates have much larger effects on the economy than equal-sized changes in short-term interest rates,” he wrote.

Interest Rates Could Stay at Record Low Till 2012 - NYTimes.com

Madame Non and Monsieur Duracell: German-French Relations On the Rocks - SPIEGEL ONLINE - News - International

And so the internecine war amongst the European leaders continues.

The personality clash between Chancellor Merkel of Germany and President Sarkozy of France comes at a time of huge stress on the euro, and is obviously not helpful. However, it does once again illustrate the basic problem in the euro block; namely, the coalition consists of 16 different countries whose interests are not necessarily compatible.

Here's an excerpt from this article from the German magazine Der Spiegel:

Can the German-French marriage be saved? According to a diplomat from Paris, that will require Germany to become a little more French and France, in light of the crisis, to become a little more German. In other words, it is time for the French to finally save money and the Germans to spend more of it.

For the moment, however, Germany is still looking very German.

Madame Non and Monsieur Duracell: German-French Relations On the Rocks - SPIEGEL ONLINE - News - International

Why You Shouldn't Convert to a Roth IRA - WSJ.com

Interesting piece from the Wall Street Journal.

What I have found in conversations with clients is the decision to convert is never totally obvious.

The best candidates for conversion, in my opinion, tend to be older, usually widowed clients, who are looking to reduce their estate tax burden as well as give their heirs more assets tax-free. By converting to a Roth, and paying the taxes now, you take funds out of your estate to pay the taxes, which means the estate tax burden could conceivably be less. Moreover, the beneficiaries of the Roth will receive tax-free distributions, assuming all of the various Roth conversion rules are followed.

In other cases, however, it can be more complex, as this article suggests.

The whole piece is worth a read (it really isn't that long) but here are the five reasons cited:

1. The tax bite is too big.

Clients often come to advisers asking about the Roth IRA conversion opportunity without realizing the immediate tax implications: They will have to pay income tax on any money they move out of a traditional IRA into a Roth account.

2. Retirement is too close.

The problem here is that it can take 15 to 20 years for the tax-free growth of a Roth IRA to make up for the taxes paid at the time of conversion, advisers say. And that period can be extended if the investor starts withdrawing money from the account. That makes conversion an iffy proposition for people who are nearing retirement.

3. The investor's savings are too concentrated.

Age is even more of an issue for investors who are looking to their IRAs as their primary source of income in retirement. That's because they will need to take distributions from the fund sooner than investors who have other resources, and in larger installments—leaving less time for investment gains to offset the conversion's initial tax bite.

4. Tax brackets often change in retirement.

Interest in conversions is being spurred by anticipation of higher tax rates ahead. Some investors figure they will come out ahead by converting to a Roth IRA now and paying taxes at current rates on the amount they transfer, rather than leaving their money in a traditional IRA and paying taxes at a higher rate when they make withdrawals in the future.

But there's a catch in that scenario: Most people fall into a lower tax bracket when they retire.

5. The income can change your tax bracket now.

If an investor is receiving Social Security benefits, the spike in income could force them to pay taxes on their Social Security money, he says. It also could interfere with efforts to receive financial aid for children's college tuition. And, he adds, if an investor is going through a divorce, the additional income could affect the settlement.

Why You Shouldn't Convert to a Roth IRA - WSJ.com

Wealth Matters - Confusion Over Estate Tax Keeps Advisers Busy - NYTimes.com

Good discussion in today's New York Times about the current state of estate planning.

If you have the chance to read the whole piece, you'll probably notice that the author raises more questions than provides answers. This unfortunately is where most financial planners are in June 2010 - since there is no clarification on "the rules", it is hard to advise clients how best to structure their affairs.

An excerpt:

The real problem comes for the merely rich — individuals worth more than $1 million and less than $3.5 million and couples with net worths of $2 million to $7 million who previously did not have to worry about the estate tax. If Congress fails to act again this year, the estate tax laws next year will revert to their levels before 2001, and that could snare a host of people who set up the estate plans on the assumption that there would be no tax when they died.

“If Congress does nothing, there would be a sevenfold increase in the number of estates subject to the tax than if the exemption stayed at $3.5 million,” said John Dadakis, partner at the Holland & Knight law firm.

As the law stands, the heirs of a single person who dies next year with more than $1 million would be subject to a 55 percent tax. (For couples, it is $2 million.) Heirs of that same person, with a $3.5 million estate, would have paid nothing in 2009 but could pay as much as $1.375 million in 2011, depending on the level of planning. And while this wealth may seem high in many parts of the country, it has professionals on the coasts grumbling.

The best advice seems to be: Stay Tuned.



Wealth Matters - Confusion Over Estate Tax Keeps Advisers Busy - NYTimes.com

FT.com / UK - The best a man can get: Japan's government bonds given hard sell

Ironic story in yesterday's Financial Times.

Apparently the Japanese government has hit upon a novel way to sell its bonds:

A high-profile advertising campaign to persuade millions of small-time investors to buy the country's sovereign debt has gone for raw sex appeal: "Women have a thing for men who own JGBs!! . . . right!?"

Owning bonds might not be everyone's idea of the way to a woman's heart but, according to the finance ministry advert, women prefer men who invest in solid government debt because they are sensible investors.

Of course, when you are offering yields of 0.4% on 5 year notes, and 1.2% for 10 years (which is what JGB's yield), you have to come up with something new!


FT.com / UK - The best a man can get: Japan's government bonds given hard sell