Our Thoughts on the Economy: December 2014

Stock Market GraphsAs 2014 winds down, the United States continues its painfully slow but steady recovery out of the Great Recession.

The Deficit

The huge Federal budget deficit that was created to help the U.S. economy crawl out of the Great Recession is shrinking faster than many people predicted, in part because of reduced Federal spending, but mostly due to significantly higher tax bills. The U.S. consumer is paying more in taxes but has also been a more prudent spender compared to the freewheeling habits of acquisition and consumption we saw only a decade ago. So the ongoing recovery will likely remain slow but steady.

Foreign Investment

With some of the world in war-torn turmoil much of the rest is experiencing economic stagnation, so it is not surprising that the U.S. is attracting lots of foreign investment money, much of which is buying companies listed on the S&P 500 index. In spite of a strong dollar (which makes the U.S. more expensive), foreigners are also buying U.S. Treasury Bonds, Real Estate, Shopping Centers or simply parking their cash here because it is the only place in the world still considered a safe haven. The U.S. economy is adjusting to the current low-interest rate and slow-growth global investing environment and we at SH&J recognize how the marketplace is changing. We continue to seek global opportunities, knowing that we can and should buy investments abroad while they are so cheap, but recognizing that we need time and patience for some of the economies to recover and ultimately reward us. As usual, we continue to balance our foreign opportunities with significant investments in all of the U.S. markets. We will continue this global approach into 2015.

Unemployment

The U.S. unemployment number in October was 5.8% – the best result since July 2008. We created 200,000 new jobs for the 9th consecutive month in the U.S. Meanwhile, Europe, with the exception of Germany, is in recession with painfully high unemployment rates, especially for those under age 35.  It has become common throughout Europe that the ambitious and college educated must seek employment opportunities elsewhere, and send money back to the old country to support those less fortunate. The European Central Bank has promised to provide some belated stimulus that may ultimately stimulate some activity, but this shift from austerity into stimulus is much more effective when implemented at the early stages of a recovery and not, as in the current situation, when teetering on recession.

Japan

Japan is trying hard to recover from over 15 years of stagnant economic growth. In an effort to get consumers spending again, the Bank of Japan is injecting huge quantities of money into their domestic and the global financial system by buying Government Bonds, Stocks, Real Estate, almost anything. It is making our Federal Reserve Quantitative Easing program look timid! The outcome is impossible to predict but it’s hard to imagine Japan will be able to print enough money, fast enough to get their economy moving when consumers are standing in the wings.

China

China is seeing its growth slow from an optimistic 7.5% to a more likely 7% or even less. The Party spending on infrastructure is shifting away to other priorities, and consumer spending is in need of stimulation. China is one of the few nations where consumer spending as part of their total economy has been actually shrinking for almost a decade, so the Bank of China is attempting to encourage more (non-housing) borrowing. The outcome of these programs is also uncertain.

Annual Rebalancing

We make selective changes in portfolios each January. We ask that each of you check your needs for cash for 2015 (New car? Trips? Tax payments? Help others?)  We will always keep sufficient cash in your portfolio to provide a small cushion for unexpected items, but if you need to replenish your personal reserves, contact us before we complete our rebalancing and reinvestments for you.

8 thoughts on “Our Thoughts on the Economy: December 2014

  1. We discussed our 2015 potential cash needs with Karlton.

    I am concerned that the distinction between the deficit and the national debt is not being more clearly drawn. It is good that the deficit has been reduced; the fact that there is still a deficit means that the national debt continues to increase, albeit at a lessen rate. Does this figure in SHJ’s long term projections and thus, strategy?

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    • The status of the Federal Budget deficit and the increase or decrease in the National debt is a critical part of our decision to buy US government securities and right now we own almost no US Government paper. The Budget Deficit has more impact on where taxes are likely headed and hence consumer spending but the National debt which is currently at post WWII highs (about 88% of GDP excluding the agencies) is modest compared with the rest of the G4 and the marketplace places a very small premium on the $14 Trillion we owe. The US is in the enviable position of having reasonable growth in GDP and a diminishing need to finance its spending.

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  2. Before I read this, I sent an e-mail to Karlton including the requested re-balancing info. If I need to re-send to someone else’s attention, let me, know.

    Happy Holidays to all. And thanks.

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    • Once you reach age 70 1/2 you have to take out what is called a Required Minimum Distribution from your IRA and other retirement plans. The amount is based upon IRS Tables created for this specific calculation. To determine the amount, you look at your account value on December 31st of each year and divide by the factor in the IRS Uniform Lifetime Table. (Similar to life expectancy) For example at age 70 the factor is 27.4. If your year end balance was $125,000 and you divide by 27.4 you would have a Required Minimum Distribution of $4,562.04. Each succeeding year the factor goes down. At age 71 the factor is 26.5. age 75: 22.9. 76: 22.0 and so forth. The tables actually go out to age 106.

      This is the standard calculation. There are several special situations that utilize different methodologies.

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