Archive for November, 2015:

Why I think the Fed is stuck

Written on November 13th, 2015 by Jamesno shouts
A Soapbox on Interest Rates and why I think the Fed is stuck:
I will give you my theory on why I think that even with the recent interest rate volatility, I don’t quite see how the Fed could materially raise rates right now:
Back in the recession when the Federal Reserve started lowering rates and began their QE program of buying mortgage debt and bonds off of the banks balance sheets, many of us in the investment community (myself included) thought that surely this would be inflationary.  You have the Fed printing $4 trillion dollars to buy up their own Treasuries in the market place and buying up mortgage debt from the banks.  The theory was this money would find its way into the economy and begin to reinflate things rapidly (surely the banks would start lending again, right?). The general thought was this would destroy the dollar and ramp up gold, oil and commodity prices.  And it sort of did for a short time.  But in the past few years gold, oil and other commodities have been declining in value and inflationary pressures are minimal at best.  At the same time Japan, China and the European Union began their own forms of stimulus such as QE to try and ramp up their economies.  With the global central banks fighting to pump up their economies there was a flight toward the US dollar which has become the strongest currency in the bunch.  Not that the US balance sheet is any better than other countries, but we are sort of the best looking house in an ugly neighborhood.
So where am I going with this?  The fact is that the US dollar has propelled higher as more foreign investors tried to take advantage of the slightly higher interest rates in the US.  So, if you were a Japanese investor and your long term treasuries were yielding close to 0%, then borrow money locally then convert to US dollars and invest in a 10 year US treasury at 2.3%.  Almost a risk free trade.  If you are big Japanese investment fund do this with billions of dollars and collect the spread and go play golf all day!  Accept economics tells us this should not work for very long.  Something called interest rate parity says that if the US interest rates are at 2.3% and Japan is at 0%, then you can’t collect that spread risk free because the US dollar should depreciate by that same 2.3% amount over the year, so that even if you collected 2.3% in interest when you trade those US dollars back for Japanese Yen (home currency) you would lose 2.3% on the currency conversion and your result is no profit.
However, that trade has worked for more than a year as the dollar has strengthened instead of depreciating against foreign currencies.  A strong dollar is great for us purchasing foreign goods, but it makes for a very challenging time for US manufacturers to sell overseas.  So here is my rub.  If the Fed raises rates it will bring in more foreign investors into US Treasuries and cause the dollar to strengthen even more.  US manufacturers will scream if the dollar gets any stronger. Maybe I’m off on this or being overly simplistic, but with competing countries interest rates much lower than ours I cannot foresee the Fed doing much of anything, except jawboning about how they should raise rates.  Maybe a token 1/4% in December, but for those screaming that rates are going up big time from here, I just don’t see it for awhile.  For that reason, I’m still liking bonds at this juncture.  (the only thing that could change my mind is if the dollar started rapidly depreciating to erase the risk free gain foreign investors are getting, at that point they start selling their treasury holdings and maybe, just maybe rates start to rise)
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Personal Finance FYI: Episode 8 – Tony Robbin’s book review part 2

Written on November 9th, 2015 by Jamesno shouts

Today we wrap up the series with a review of the annuity and life insurance strategies discussed in Tony Robbins’ book, Money Master the Game

Social Security changes

Written on November 4th, 2015 by Jamesno shouts

It appears that  a popular Social Security claiming strategy for couples will be going away on May 1, 2016.  The “File and Suspend” strategy that couples at full retirement age have been using to collect enhanced benefits is getting the ax with the new budget deal.  The strategy worked like this:

  • husband and wife are full retirement age
  • husband is still working, but files for his benefits and then immediately suspends them (this allows his benefit amount to continue growing at 8% annually)
  • wife files for a restricted spousal benefit only.  This enables the wife to begin collecting 1/2 of his benefits as her spousal share, while letting her personal earned benefit continue to grow
  • At some later point husband retires and collects his larger benefit
  • wife waits until age 70 and then switches to her personal benefit as it has now grown larger than the spousal benefit.

In all fairness, I used the husband as the larger benefit but the roles could easily be reversed.