Heads Up!

by Thomas M. Riddle, CPA, CFP®, Founder & Chairman of the Board
Here is another big PLUS for Americans’ wealth. Home prices are trending up nicely and that trend could last for years and maybe decades. The reason: the U.S. is facing a housing shortage. And, what happens when demand outpaces supply? Prices rise! Home prices nationally rose 6.2% in the year that ended in January, roughly twice the rate of incomes and three times the rate of inflation, according to the S&P CoreLogic Case-Shiller National Home Price Index.

America’s housing shortage is more wide-ranging than simply the coastal states. The shortage stretches from pricey locales such as California and Massachusetts to more surprising places, such as Arizona and Utah. According to Barrons, some 22 states and the District of Columbia have built too little housing to keep up with economic growth in the 15 years since 2000, resulting in a total shortage of 7.3 million units. Home construction per household remains near the lowest level in 60 years of record-keeping, according to Jordan Rappaport, an economist at the Federal Reserve Bank of Kansas City.

At the same time, it is becoming more difficult to build all across America due to shortages of land, labor and materials – trends which will takes years, or maybe decades, to resolve.

Now is a good time for renters to reconsider how home ownership can significantly add to long term wealth.

Heads Up!

by Thomas M. Riddle, CPA, CFP®, Founder & Chairman of the Board

The next three decades hold extraordinary promise.  Breakthroughs in robotics, healthcare & biomedical, 3D print manufacturing, artificial intelligence, and many other fields collectively hold the potential to spectacularly raise U.S. living standards.   But, and there is a “but” unfortunately, the U.S. faces a significant obstacle to achieving this promise.  That obstacle is high and quickly escalating U.S. debt levels and the annual interest payments on it.

Within 5 years the U.S. may enter a vicious spiral when debt is growing, interest payments are growing even faster and Treasury debt holders start to doubt our government’s ability to repay.  At such a time interest rates could rise to compensate Treasury debt investors for taking the risk.  Higher interest costs will be financed by even more debt – and the spiral continues.

When the spiral starts, Washington will face difficult choices to attempt to fix the problem:  cut expenses (including Entitlements) or raise taxes.  Based upon my 45 years of work experience, including 3 years with the U.S. Treasury Department, I believe it is highly likely Washington will raise taxes.  The tax increase will have to be substantial to stop the spiral.

What will result when the U.S. dramatically raises taxes?  Wealth, and the breakthroughs funded by it, may move to other countries with lower tax burden.  You do not have to too look far to find examples of this phenomena on a local level.  What caused the many corporate high rises in Conshohocken and City Line Avenue to be built instead of the highly taxed Philadelphia?  Same for the incredible number of commercial buildings in Northampton and Lehigh counties instead of the higher taxed state of New Jersey.  Or, southern Wisconsin instead of Illinois/Chicago.  Or, Nevada instead of California.  The bottom line is the debt spiral will probably continue.

In the near future we will report on the signs to look for when investors lose confidence in a country’s ability to repay its debts – history is full of examples.

Heads Up!

by Thomas M. Riddle, CPA, CFP®, Founder & Chairman of the Board

We have started the research phase of a long term project to attempt to preserve your wealth. Importantly, as in any research project, a concise “statement of the problem” is needed to focus the research team and me in the beginning and to keep the team on track during the effort. Here is the statement of problem:

We have observed the U.S. Government is spending a massive amount more that it is bringing in (the “Deficit”).  This policy is causing the U.S. Government to go further and further into debt (the “Debt Burden”).  What are the implications to your wealth of this policy in 5 years? 10 years?  And, 20 years?  Which strategies should be considered to protect your wealth?  When and how are these strategies to be implemented (the “Action Plan”)?

We intend to keep you updated on our progress by issuing a running commentary of the issues, data, findings, implications…etc. Obviously, an important part is how the deficit affects your investments; however, insights into scientific advancement, educational needs, employment and national security and other topics are required also.

Heads Up!

by Thomas M. Riddle, CPA, CFP®, Founder & Chairman of the Board

Your account values may go lower, but history tells us in time they will bounce back and provide an attractive rate of return. There is no guarantee, but we know several things for sure. The recent drop is normal. The abnormal market was the 2017 market which only went up, up, up……

The consumer, the economy, and business profits are quite strong. It is highly unlikely the U.S. will encounter a recession in the foreseeable future. I recommend trying not to listen too much to the media’s description of the stock markets ups and downs. The media tends to distort conditions in order to grab your attention and keep you coming back for updates.

Hope this helps. Just remember the first sentence.

Heads Up!

According to Jeff Gundlach, a highly respected bond market expert, it is plausible that the federal budget deficit could double to $1.25 trillion in the fiscal year that begins in October 2018; and, we could be looking at roughly $2 trillion of new government debt being issued.

Economic experts have published a number of studies, some controversial, indicating the U.S. has a limit to how much debt can be issued before major problems develop. These studies deserve our attention so as to develop a long term plan for your investments.

Heads Up!

At the close of February, the IRS released an updated tax withholding calculator on IRS.gov and issued a new Form W-4. It is recommended that you review the online calculator to check your 2018 tax withholding following the passage of the Tax Cuts and Jobs Act in December. You can find the IRS Withholding Calculator on the attached announcement or by using the following link: https://www.irs.gov/individuals/irs-withholding-calculator

There are several reasons to check your withholding:

  • Checking your withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year.
  • At the same time, with the average refund topping $2,800, you may prefer to have less tax withheld up front and receive more in your paychecks.

If you are an employee, the Withholding Calculator helps you determine whether you need to give your employer a new Form W-4, Employee’s Withholding Allowance Certificate. You can use your results from the Calculator to help fill out the form and adjust your income tax withholding.

And please contact us if you have any questions.

Heads Up!

When the new tax law was passed late last year, many economists expected its effect to stimulate the U.S. economy. Now we are seeing how this stimulus is happening: (1) millions of employees have received or will receive bonus payments, (2) tens of millions of employee paychecks jumped this month because of lower tax withholdings, (3) corporations are transferring hundreds of billions from overseas to the U.S. This is serious amount of money which will most probably improve the economy and support the stock market.

Heads Up!

The probability of a bond market sell-off has risen during the past 3 months due to: (1) an increase in deficit spending due to the new tax law; (2) an increase in deficit as a result of the Bipartisan Budget Act; (3) the Fed’s decision to sell $200 to $400 Billion of Treasuries instead of buying Treasuries; and (4) Secretary Mnuchin’s statements on allowing a weaker dollar.

This is something we have anticipated for some time. Interest rates are beginning to move higher, from almost 10 years at historic lows. If interest rates were to rise sharply, the principal value of bonds and bond mutual funds already owned in your portfolio may decrease. Long-term maturities would decrease the most.  In preparation, our asset allocation models have substantially reduced the maturity of bonds in an attempt to manage the effect of a bond market selloff (if one were to occur). We are watching this event closely and will keep you posted on any further impact this may have on our overall fixed income strategy.

Heads Up!

The Bipartisan Budget Act of 2018 enacted this week changes the income tax law for…….2017!!!  How could Washington pass legislation in February to change last year’s tax law? What about the income tax forms and software already produced – how will they cope with these changes? What were they thinking? It doesn’t matter – we have to deal with the change.

First, the changes do not affect all income tax payers or returns. We have listed the areas which will be affected below. The affected taxpayers will have to wait for the software to be updated. IF YOU ARE NOT AFFECTED BY ANY OF THE CATEGORIES BELOW, WE CAN GO FORWARD AND COMPLETE YOUR TAX RETURN WITHOUT DELAY.

  1. Extends exclusion from gross income of discharge of Qualified Principal Residence indebtedness
  2. Extends mortgage insurance premiums treated as Qualified Residence Interest through 12/31/17
  3. Extends above the line deduction for Qualified Tuition and related expenses through 12/31/17
  4. Extends the credit for Non-business Energy Property
  5. Extends and modifies the credit for residential energy property
  6. Extends the credit for new qualified fuel cell motor vehicles
  7. Extends the credit for alternative fuel cell motor vehicles
  8. Extends the credit for energy-efficient new homes
  9. Extends the credit and adjusts the phase-out of the energy credit
  10. Modifications to hardship distributions and hardship withdrawals from cash or deferred arrangements

Heads Up!

If the stock market decline starts to snowball, you’ll hear about it from the news media—over and over. But we will pass along a thought based upon experience: Don’t become your portfolio’s worst enemy by allowing yourself to get caught up in the negative hysteria. Instead, remind yourself that the market has experienced 20 drops of 10% to 20% since World War II (plus 13 bear-market tumbles of at least 20%). Even so, the market has bounced back each time. Let’s go over some terms you will encounter in the news media:

“Correction” is an investment term being used loosely and often incorrectly by the media. A correction is a series of stock market declines over several days or weeks leading to a 10% to 20% decline from a stock market high. That would be a drop of approximately 2,700 points or more in the Dow Jones Industrial Average (a commonly used index to describe the stock market as a whole). And, most importantly, the stock market typically recovers in a relatively short time of 3 to 12 months.

A “bear market” is a decline of more than 20% from a market high over several days or weeks. A drop of 5,400 points or more in the Dow Jones Industrial average would be called a bear market. Bear market recoveries typically will be longer than corrections.

Market movements described above could happen fast. Trying to decide if a weakness in the stock market is turning into a correction or a bear market is known as timing the market. It’s nearly impossible to do. Just when you’re sure the 5 percent drop will turn into a 10 percent correction, the market rebounds and hits new highs.

Instead of using market timing, our strategy earmarks money you intend to withdraw during the upcoming years: 1, 2, 3, 4 or even 5 years. This money is assigned to more stable bonds and alternative strategy mutual funds. Secondly, we attempt to broadly diversify your portfolio across asset classes and sectors. That means holding a balanced mix of stocks, bonds, and alternative strategies. The stocks will attempt to profit from market upswings. The bonds and alternative strategies attempt to protect part of your portfolio from market drops.

The specific mix of stocks, bonds, and alternative strategies is called your asset allocation. It depends on your personal financial goals. If investors don’t need the money for years, then many investors will want to have a higher mix of stocks. Please contact me if you have questions about your portfolio’s asset allocation or whether enough money is earmarked for future withdrawals.