by Thomas M. Riddle, CPA, CFP^®, Founder & Chairman
A group of decision makers at the Federal Reserve Bank (the “FED”) meets periodically during the year. Last week’s meeting led me to strongly suspect the FED will raise interest rates sometime in 2022 and continue through 2023. This action will increase interest rates on variable rate loans such as home equity loans. The reason for the increase is that many home equity loans use a formula to compute interest due on the loan such as the Prime Rate (currently 3.25%) plus 1%, for example. During 2022, some experts are forecasting the Prime Rate may rise from 3.25% to 3.75% – 4%.  And, to 5% by the end of 2023. That means borrowers may see their variable rate home equity loan rate soar to 6% during the next two years. 

ALERT: Variable rate home equity loan rates will rise in 2022 and 2023 so now is the time to refinance using a fixed rate home equity loan. Another viable option is to combine the variable rate home equity loan with your mortgage and consolidate into a single fixed rate mortgage. Not every bank offers a fixed rate home equity loan. I have surveyed banks in the Lehigh Valley, and I have located two banks which do. Contact me at triddle@valleynationalgroup.com and I will be happy to share the information with you.   

PERSONAL NOTES: My family and I are well. My two daughters, their husbands along with my four grandchildren live only 10 miles away (all in the same development). There is a well-worn groove in the road between my house and theirs! Grandchildren are powerful magnets. 

Message from the CEO
Charles Schwab and Co. made history this week announcing that on October 7^th, 2019 they will begin charging ZERO commissions on equity, ETF, and options trades. This means all our Schwab custodied investment clients’ cost of ownership for stock and ETFs portfolios will be lowered significantly. We expect all major custodians to follow suit in the weeks to come. At VNFA, we are constantly searching for ways to improve the client experience. We are proud that our business partners led the way and we look forward to many new innovations that we can pass on to you, our trusted clients.

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

We spend a lot of time with clients planning for living in retirement and the eventual transfer of wealth. When your plan involves multiple generations, it is important to arm adult children and grandchildren (and in some cases, parents and grandparents) with appropriate financial knowledge.

Does that mean you have to lift the curtain on all the details of your personal financial life? No.

But a well-timed family meeting with your Financial Advisor can bring generations together to understand your goals and values, outline expectations and responsibilities, establish good financial habits early, and know who to turn to for help with individual or family financial questions.

Talk to your family about their financial choices. We can help get the conversation started by structuring and leading a meeting for you to discuss finances with your family. For convenience, we can host by video or teleconference. Also, your advisor may have available evening or weekend appointments – just ask us!

by Thomas M. Riddle, CPA, CFP^®, Founder & Chairman of the Board
Many banks are taking advantage of savers by paying VERY LOW INTEREST RATES on bank savings accounts. A review of Bank of America and Wells Fargo Bank indicates both are paying .03% on bank savings accounts – this equates to $13.50 of annual interest on a balance of $45,000. Meanwhile, a number of U.S. Government only money funds are earning above 1.3% which yields $585 per year. And, a one-year maturity U.S. Treasury Bill yields more than 2.25% which generates $1,012.50 of interest per year. It pays to keep an eye on the interest rate being earned on your idle cash and emergency funds. Contact our office for details.

by Timothy G. Roof, CFP^®, Vice President
If you currently own a variable rate home equity line of credit you may want to consider other options.  Many variable rate lines of credit are based off a widely published interest rate, such as the prime rate.  The prime rate is currently 4.75%, so borrowing against your home is becoming more expensive.  The Federal Reserve expects to raise interest rates two more times in 2018 and may continue to raise interest rates beyond 2018.  This means your cost of borrowing will increase.  Additionally, recent tax reform may affect the deductibility of mortgage interest paid on these loans.

The good news is you have options.  You could consider locking in your interest rate with a fixed term home equity loan to pay off your line of credit, or pay off your loan if you have funds available to do so.  Please contact us if this pertains to you so we may discuss your situation.

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.

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

by Thomas M. Riddle, CPA, CFP^®, Founder & Chairman of the Board
CLICK HERE TO GET TO KNOW TOM

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.

by Thomas M. Riddle, CPA, CFP^®, Founder & Chairman of the Board
CLICK HERE TO GET TO KNOW TOM

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.

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.