Dirty Laundry

I’ve been thinking about washing machines.

Once luxuries, these appliances are standard fixtures in most households. I remember my first washing machine and the pure joy that came with knowing I would no longer have to hunt for quarters or wait for an empty machine in the laundromat. These days, we think of these machines as part of a pair—washing machine AND dryer. Because who has time for clothesline drying? And who wants their wet unmentionables flapping in the breeze?

In 2016, 80% of the washing machines imported into the US came from China. Chinese washing machines cast a wet blanket over US washer production, leading the Obama administration to impose protective tariffs on the item. The tariffs were specific to Chinese-produced machines, so they just moved to Vietnam and Thailand. We continued the spin cycle with little effect on consumers.

But in 2018, the Trump administration put all foreign machines in hot water, instituting tariffs on imported washers, regardless of the country of origin. Now, I’m not a fan of protective tariffs, and we never seem to learn our lesson on them. It’s like putting that red pair of underwear in your load of whites. Pink is going to get on everything, and we’ll all suffer.

The latest tariffs on washing machines resulted in higher prices to consumers, 12% higher. That means a $500 washer now costs $560, on average. While foreign companies pay the tariff to our treasury, they make sure their cost is covered by raising the price on the item in question. The idea behind a protective tariff is to protect US jobs. In this case, some of those appliance manufacturing jobs did reappear, but at what cost? Are we all paying 12% more for clean clothes just to get a 1% benefit on manufacturing jobs?

Strange thing about those washing machine tariffs… dryers were exempt. The washers’ twin was not burdened with the extra tax of a tariff, but that didn’t stop companies from raising the price of dryers 12%, as well. Now that burns me up!

Every country is trying to load the system in their favor, but competing tariffs often lead to an off-balance market that just costs consumers. This time around, each new job created by the tariffs cost $817,000. That’s a lot of dirty laundry!

Picture This!

I follow Liz Ann Sonders on Twitter (@LizAnnSonders). Liz loves pictures! Namely, she loves graphs and knows a picture really is worth a 1000 words. Lately, Liz has been posting pictures of the yield curve.

What is this thing we call "the yield curve," and why do we pay it such homage? The yield curve is a graph of a bond's interest rate (yield) and its time to maturity. Normally, you would expect yields on short-term bonds to be lower than yields on long-term bonds, right? After all, there is more risk in holding a long-term bond, so investors should expect a little something extra for their trouble.

But sometimes that curve gets a little whacky, and that's when investors take note. When the yield curve changes from its normal upward slope to something more akin to a flat line, that often signals trouble ahead. Liz shares her thoughts on the yield curve in her blog. She looks at the history and the current economic indicators that are shaping this curve.

A flat curve means investors are expecting rates to be lower in the future. So what? Well, lower future rates usually accompany recessions or economic slowdowns. On Friday, the yield curve went beyond flat to an inversion. That's when shorter-term bonds are yielding MORE than longer-term bonds. Yield curve inversions are like flashing red lights at the railroad crossing. So investors pulled back and got off the tracks resulting in a 2% decline in markets.

Will the trend continue? We don't know. Economies around the globe are slowing, but the US is still holding up. But there are some worrying signs. Just today, we see that housing starts dropped 9% in February and housing price gains are slowing. Our long bull run is still rewarding investors, but it's starting to experience fits and starts.

So keep your eye on that yield curve. Flat lines may nudge investors, but inversions cause us to sit up and pay attention. While not every inversion signals an upcoming recession, every recession has been preceded by an inversion. If you want to have a little fun, check out the dynamic yield curve. This shows the changing curve alongside the stock market.

Annual CFA Forecast Dinner

The annual CFA Forecast Dinner is always a stellar event. Great food. Wonderful dinner companions. And a panel of financial experts ready to expound on the topics of the day. The CFA Society of Mississippi serves as host for the event that is held at the Jackson Country Club, which is a chance for us to fete our clients while also spending time at the feet of experts who love talking finance and economics.

Selena Swartzfager, Executive Director of the MississippiCouncil on Economic Education, served as moderator. She took the opportunity to explain the mission of her organization—financial literacy for Mississippi students. The marriage of this group to our society seems a natural.

We had four outside panelists:  1) Andrew Patterson, senior economist at Vanguard, 2) Alex Dryden, global market strategist at J.P. Morgan, 3) Chad McKeithen, managing director or Fixed Income Strategies and Research, and 4) Dr. Ormala Krishnan, head of international and emerging markets for Mondrian Investment Partners.

What did we learn?

While US markets are still healthy, the challenge this year is in emerging markets. The slowdown in China, along with the trade tensions, will be a drag on international markets. This may bleed into our markets, as well.

All agreed that Federal Reserve Chair, Jerome Powell, had done a good job in his first year. Investors were spooked by some of the aggressive comments out of the Fed, but Powell backtracked and indicated moves would be gradual. The Fed will continue to unwind its balance sheet, but they are doing so in a strong market. Dryden likened it to removing the training wheels off a bicycle. You only do it when you think your kid CAN ride on his own, but you expect some wobbling when the supports are removed. So it will be with our markets. Expect volatility.

Dryden (the Brit) was the hands-on favorite for the evening. He was quite entertaining. He pooh-poohed the trade war. What trade war? He called it more of a skirmish. I’m not sure I agree with this assessment, especially since investors appear to be keeping an eye on negotiations. Of course, everything sounds better with a British accent!

What were their forecasts?

Most think the S&P 500 has gained all the ground it can already, with expectations of minor additional gains or a remaining flat market for the year. One panelist even expects the S&P 500 to be less at the end of the year. And most think increases in the yield of the 10 year Treasury will be modest, at 3% or less.

I hope you’ll be able to join us next year, when we put these prognostications to the test!

Self-Inflicted Government Pain

This post was a collaboration between Nancy Anderson and Bella LaRosa!

Self-inflicting pain is never the route to go. It’s not good for personal growth and it’s certainly not good for economic growth.  The US government has done this exact thing through the government shutdown. 

The Congressional Budget Office released data on January 28, 2019 explaining how the government’s five-week shutdown affected the economy. It states, the shutdown “delayed approximately $18 billion in federal discretionary spending.” Paired with this, what began in the fourth quarter of 2018 as a $3 billion loss to GDP continued to injure us through the first quarter by $8 billion. This combines as a whopping total of an $11 billion loss to GDP, all self-inflicted. We expect to claw back some of these losses in the following quarters, but the CBO still expects $3 billion of the loss to be permanent.  

Since December, consumer sentiment, which directly correlates with consumer spending, has decreased. Consumer sentiment, according to the University of Michigan, dropped from 98.3 in December to 91.2 in January. Consumers in the US feel less assured about the economy and, as a result, are less likely to spend money. In the 3^rd quarter of 2018, consumer spending made up 68% of GDP, according to the Bureau of Economic Analysis. A decrease in consumer sentiment discourages consumers from spending, which then decrease GDP. While the government is reopened, it is temporary and leaves consumers with more uncertainty which leads to a decrease in spending which leads to a decrease in GDP. And round and round we go—more self-inflicted pain.  

For investors, this unease is coupled with the concern of a decrease in overall global economic growth. According to the World Bank, China’s expected GDP will be drop to 6.2% in 2019. This would be the lowest since 1990 and is expected to stay stagnant at 6.2% growth till 2021 where it is predicted to drop to 6.0%.  The article, “Eurozone Slowdown Feeds Fears About Faltering Global Growth,” (Hannon & Sylvers, WSJ) explains how the Eurozone grew at the lowest rate in 2018 in four years. Hannon and Sylvers point to Italy’s GDP receding for the second quarter in a row, indicating a recession. Furthermore, the article also states that the German government decreased their forecasted GDP growth from 1.8% to 1.0% for the first quarter of 2019. They attributed this to their increased “geopolitical and trade risks.” 

All this to say, government shutdowns are like self-inflicting pain upon our GDP. They unnecessarily decrease our GDP through a decrease in spending.  They decrease consumer confidence, and therefore hinder GDP more through consumer spending. With the overall world economy showing signs of slowing, it’s like shooting ourselves in the foot when we’re just dealing with an ingrown toenail.  

A Little Something For Everyone

This episode of MPB's Money Talks originally aired January 22, 2019 and will be available online at http://www.mpbonline.org/moneytalks/

On the radio, Java and I sat down to discuss the ever-looming topic of retirement. This itself is a big topic with a ton of branches, but the callers made the show (as ever). We had calls about mortgages, getting kids interested in investing and some technical points about retirement accounts. I'll break down the show here, and flesh out some of these topics later!

The Alphabet Soup of Retirement Accounts

To start, we had to discuss the jargon that everyone encounters when opening accounts. There are IRAs, Roth IRAs, 401(k)s, SIMPLE and SEP IRAs, 403(b)s and governmental 457s, to name a few. The important thing to remember is that there are essentially three styles of account:

• Regular/Taxable. This is just a plan vanilla account. It can be in your name or you and a partner (individual or joint). There are generally no special tax rules or limits for putting money in or taking it out. You get no tax benefit to put money in, and none for taking money out. It is like a bank account where you only have to pay taxes on the income within the account. If you invest this money, there may be some tax advantages depending on what you invest in, some bonds pay interest tax-free, most stocks and stock funds grow and the gain that you earn isn't taxed until you sell it, giving you control of when you owe your taxes, and may have a favorable tax rate on that gain.
• Tax Deferred. This is an important one to retirement as it is classically the style of most employer retirement accounts like the traditional 401(k). Like the name suggests, this account allows you to defer income for tax purposes. You put money in this year, reducing your income for tax purposes and saving money on your taxes. You can invest the money and let it grow tax free while you don't need it. When you take money out in retirement, it counts as income. Since this account has special tax benefits, it also has tax limits. You are limited in the amount you can actually defer, and there are penalties for taking money out before retirement age.
• After Tax or Tax Free. This is a Roth style account and its tax treatment is the reverse of the tax deferred account. You put money in after you have paid taxes on it, it is tax free all while it remains in the account, and you do not pay taxes on qualified withdrawals. This is another style of retirement account and is becoming a more common feature of 401(k)s as well. Since there are special tax benefits, there are also limits on how much you can contribute and rules on when you can take the money out.

If you talk about retirement accounts, you have to cover the updated contribution limits for 2019. We have written about those previously here, but they bear repeating: 

• IRA contribution limits, for Roth or Traditional, are $6,000 with a $1,000 additional catch up if you are over 50.
• 401(k) and similar plan employee contribution limits are $19,000 with a $6,000 additional catch up if you are over 50. The maximum, including employer contributions, is $56,000.
• SIMPLE IRA employee contribution limits are $13,000 with a $3,000 additional catch up if you are over 50.

Retirement Checkpoints!

One our first callers asked about savings checkpoints. How much should you save for retirement and how much should you have at certain ages. I cited the JP Morgan Guide to Retirement which is a great resource for understanding how to view the financial aspects of retirement.

In general, the amount to save and the amount you need will depend on how much you will be spending and how long you plan on living. This translates to higher earners needing to save a higher percentage of their income, and having higher savings checkpoints, than lower earners. The reason for this is that Social Security will replace income for everyone, but due to income limits and progressive calculation, it replaces a higher proportion of income for lower earners. The charts in the Guide to Retirement can give you an idea of where you might fall on the spectrum.

In general, we recommend that people save 15% of their income for retirement. The general idea of this is that if you save and invest 15% of your income over a working career of 35-40 years, with investment returns around 6%, you will be able to support your previous lifestyle entirely out of what you have saved. There are obviously a ton of variables here, and the calculation will be different for you, but that is the general idea.

Annuities in Retirement Accounts?

I told a caller that this is generally not a great idea. There is a weird little benefit to keeping annuities in retirement accounts when it comes to RMDs, but I generally find that is not worth the expense of the annuity in the first place.

He said that his annuity had a guaranteed 7% return. While I don't know the details of his policy, it is important to know that annuities are not the same as a fund, where you own the money. An annuity is a contract. It being a contract allows the issuing company to guarantee returns and distributions, but it is not the same as someone guaranteeing that you will get a guaranteed return on an account that you own and can put your hands on the money. Like any contract, there may be strict strings and limits that allow the bells and whistles to sound so appealing.

As always with annuities, read the fine print and get a second opinion.

Who Makes This Up Anyway?

A caller from deep in North Alabama (thanks for listening, Ginger!) called with a problem. She had a hard time finding contribution limits to her retirement account and wasn't sure she was contributing the right amount!

The IRS sets these limits, and while they get a bad reputation for customer service, their website is fairly straightforward if you know what you are looking for. Most things you will be able to find a black and white answer to a specific question. There are both maximum amounts that can go in, and limits that relate to your income. See the above information on contribution limits if you are interested.

How To Buy A House When You Have Student Loans?

I'm sure proud of our caller Denise, who called in ready to buy a house. She had student loans, and wasn't sure how that would affect her getting a loan. While there are several different companies setting different standards for mortgage loans, treatment of student loans in the calculations have generally gotten more generous. She mentioned that she was on an income based plan (which limits her loan payment as a percentage of her income) and was eligible for some forgiveness (which would lower her overall debt burden at some point). Having a mortgage broker who took all this into account would be important to her.

For your specific situation, do what I recommended to Denise and call a mortgage broker (or two, or three!) to see how much house you can afford and what the terms of the mortgage might be. Bear in mind that some mortgage brokers may have different areas of expertise, so finding one that is a good fit and experienced with your unique situation is fairly important!

Giving Kids Money

We had two calls on the topic of how to give money to kids. One was a parent and another a grandparent. Trisha asked about the appropriateness of setting up a roboadvisor account for her children. Roboadvisors are great tools for getting people into the good habits of investing. They take care of most aspects automatically and often display account information in a very informative way. My experience is mostly with Betterment, one of the largest and best known roboadvisors out there. I noted that while there are some problems to be considered, Betterment was probably a good choice for what she wanted to accomplish. Without a lot of background knowledge, you can set up an automatic draft to fund the account, set goals and get guidance on how to attain them and have the account automatically invested in line with the goals and tolerances of the account owner. Downsides include excessive trading leading to a lot of paperwork at tax time and the potential for big changes without you getting a heads up.

Tim called in wondering what the best account for starting his grandchildren's savings would be. He didn't want to save strictly for their college education, so he didn't need a 529. I recommended that he look into opening a custodial account, where he would be the "custodian" of the child's money before they reached the age of majority. The money is theirs, but a responsible adult is in charge of it. I noted that there were disadvantages to this sort of account around the time they apply for financial aid, but that otherwise, it was probably the easiest way to designate money for them.

Don't forget to tune in or subscribe to Money Talks at 9 AM every Tuesday on Mississippi Public Broadcasting, or online at http://www.mpbonline.org/moneytalks/. This episode is available online.