May 2014 - Forecasts & Trends

Forecasts & Trends is much more than just investment blog posts. You need to know the "big picture;" you need to have a "world view," especially in the post-911 world; and you need more information than ever before to be successful in meeting your financial goals. Gary intends to help you do just that.

Forecasts & Trends

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  • Fed Official: We’re Sitting On A "Ticking Time Bomb"

    It is very rare for high-ranking Fed officials to issue dire warnings, but that’s exactly what Charles Plosser – the president of the Philadelphia Federal Reserve Bank – did last Tuesday. Mr. Plosser is very concerned about the apprx. $2.5 trillion in “excess reserves” that banks have on deposit with the Fed. Plosser worries that if the economy strengthens as many expect, borrowing could surge and those excess reserves could pour out of the Fed and “that’s going to put [upward] pressure on inflation.”  This is "ticking time bomb" he warned about.

    For decades, the Fed paid banks no interest on reserves held at the central bank; however, in late 2008 the Fed began paying banks 25 basis-points (0.25%) annually on deposits. Since then, excess reserves held at the Fed have exploded to a record above $2.5 trillion today.

    Much of this money held at the Fed is owned by large banks and financial institutions which are designated as “primary dealers” from whom the Fed has purchased huge amounts of bonds as a part of its massive QE program. These entities have merely chosen to leave a large part of those bond proceeds on deposit with the Fed.

    The banks can remove all the excess reserves they hold at the Fed at any time. If inflation moves higher, the Fed could be forced to raise interest rates earlier and higher than it would like, which could slam the breaks on the economic recovery. I will explain this "ticking time bomb" problem as we go along today.

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  • Interest Rates Have To Go Up. The "Bond King" Says No

    The prevailing view on Wall Street and Main Street is that medium and long-term interest rates have to go higher in the months and years ahead. Interest rates have to get back to “normal” at some point, so we’re told. Yet in the last several months, yields on 10-year Treasury notes and 30-year Treasury bonds have fallen rather significantly. What’s up with that?

    Last week, PIMCO’s founder Bill Gross – aka the “Bond King” (because he runs the largest bond fund in the world) – predicted that medium and long-term rates are going down, not up. For reasons I’ll explain below, Gross makes a case for falling yields going forward. His latest prediction is clearly out of step with the mainstream, but I thought you would appreciate his thinking, even if you disagree.

    Next, some new data reveal that over 40% of retiring Americans start taking Social Security benefits at age 62, which means they will get less money overall than if they had waited until later. In most cases, you should delay taking Social Security benefits until age 70 if possible. Given that we are in the investment/financial planning business, we are often asked for advice on when to take Social Security.

    As it turns out, the best article I’ve ever read on this subject appeared over the weekend in RealClearMarkets.com. The piece is written by award-winning author and lecturer John F. Wasik. Today, I’ll reprint that article in its entirety. Even if you’ve already had to decide when to take Social Security, this article would be good to pass on to others who are nearing Social Security eligibility.

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  • Fed’s Zero Interest Rate Cost Savers A Trillion Dollars

    Get a group of adults together in a social setting and the conversation almost invariably gets around to a discussion about the paltry returns savers have been earning on their money in recent years. Three-month certificates of deposits are averaging only 0.23% nationally; one-year CDs are at only 1% if you can get it; and five-year CDs get you only about 2%. And rates have been at or near these depressed levels for the last four years.

    When the Fed realized in early 2008 that we were in a financial crisis, it quickly ratcheted down the Federal Funds rate from 5.25% to near zero where it’s been since late 2009. The Fed Open Market Committee adopted a policy of keeping the key rate between zero and 0.25% indefinitely. This is commonly referred to as "ZIRP" – Zero Interest Rate Policy. As the Fed moved to ZIRP, banks, money markets and savings institutions quickly lowered their savings rates accordingly.

    For the past five years, MoneyRates.com has calculated the cost of the Fed’s low-interest-rate policies in terms of how much purchasing power savers have lost to inflation as a result of today's artificially low bank rates. For each of the five years, those losses have exceeded $100 billion, and the running total at the end of last year was $757.9 billion.

    MoneyRates suggests that it has not been the Fed’s intention to hurt savers, but I would argue that the Fed knew very well that its policy of keeping the key Fed Funds rate near zero would cause saving rates to plunge. While there is a lot of support for low interest rates – from stock market investors, home buyers, business borrowers, etc. – it has not been a cost-free policy.

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  • Are “Currency Controls” Coming To America On July 1?

    Some very controversial regulations passed way back in 2010 and finalized in 2012 are scheduled to go into effect on July 1 of this year, and most Americans know little or nothing about this new law. Yet the effect of these new regulations could send shockwaves through the financial system worldwide. Basically, the regulations that take effect July 1 will make it very difficult and costly for Americans to hold money or investments outside the US.

    Starting in July, foreign banks and financial institutions will be required to report to the IRS any accounts they hold which are owned by Americans – including the owner’s name, address, Tax ID number (or Social Security number) and account balances of all offshore accounts if the combined amount is over $50,000. Many foreign institutions are up in arms about this, and some are kicking their US clients out to avoid reporting this information to the IRS. Most US investors who have money in offshore banks, funds, etc. will very likely close such accounts and bring their money home when they learn about this.

    The Democrats who passed this law (back in 2010 when they controlled Congress) say these new regulations were designed simply to identify “tax cheats” who do not pay the IRS taxes on their gains earned outside the US. But the unintended consequence may be a major disruption in the global financial system that could cause the US dollar to plunge. Some even believe it could threaten the US dollar’s status as the world’s “Reserve Currency.”

    Some analysts are calling the new law “currency controls,” which have never happened before in the US. As a result, ALL US investors need to know about this ASAP, not just those who have money or investments in offshore accounts, due to the potential for global repercussions. It’s complicated, and no one knows exactly what the outcome will be, but I will do my best to explain it today.

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