Maria Alcoke
About Maria Alcoke
Posts by Maria Alcoke:
Interest Rates Are Cut! So What?
It seems like every time I think about what to talk about I am always coming back to interest rates.
The Federal Reserve made another 25 basis point cut which most economists feel was unnecessary and useless. A review of the Fed Committee meeting indicates that there was NOT a consensus among its Board Members. This is not a bad thing but very different than when Bernanke and Yellen were running the Fed.
It is reasonable to expect short term rates, such as CDs and Money Market Funds to see lower rates in the future. This just makes these investments an even worse bet given that the interest you are being paid now by the banks is lower than inflation. This means while you are being paid interest you are actually losing purchasing power and getting poorer every day.
If you think the U.S. has a challenging interest rate environment let’s take a look at Europe. Mario Draghi (former head of the European Central Bank) cut rates deeper into negative territory before resigning as head of the ECB.
What amazes me about central bankers, particularly in Europe, is that these bonehead policies have been in place for so long but have done absolutely nothing for the European economy. I mean negative rates have yielded zero results (no pun intended) for any economy that has implemented them. What good is moving a rate from -0.4% to -0.5%?!?!
From an investment perspective, this will have little to no impact on how we are making decisions concerning how to invest now and in the future. This just gives the Talking Heads on TV something to argue about and possibly make for some interesting conversation at the backyard BBQ this weekend.
Have a great weekend.
My best,
Mark
Inverted Yield Curve?
There has been and will be a lot of talk about the yield curve and the term inversion.
Investopedia defines an Inverted Yield Curve as “an interest rate environment in which long-term debt instruments have a lower yield than short term debt instruments of the same credit quality.”
There can also be a partial inverted yield curve which is when the short term yield (debt of 5 years or less) is higher than the long term yield (typically the 30 year bond) but the intermediate yield (10 to 15 year debt) is at appropriate levels.
When an inverted yield curve is discussed by the talking heads on TV it is often followed with the comment that it is a predictor of a recession. But they never explain why.
Here is the concern. When the yield curve inverts it is harder for banks to lend money at a profit. The spread between long term rates and short term rates (which means the difference in interest rates) is negative. When banks can’t lend money for a profit they stop lending money. When corporations or individuals can’t get loans from the bank they stop spending. When spending slows down we have the beginnings of a recession.
For the inverted yield curve to impact the economy it must be sustained for a reasonably long period of time. So as of right now, we don’t know if the inverted yield curve is actually a predictor of the next recession. There is a second concern. What is the emotional or psychological impact of even a temporary inverted yield curve?
Investors sometime react without fully evaluating the economic situation or having all the information to understand what is going on in the markets.
How did we get here? Many in the investment community believe that the tightening or raising of interest rates by the Federal Reserve caused the inversion to happen. Because the Federal Reserve can only raise or lower short-term interest rates.
So when you hear the President pushing the Federal Reserve to move interest rates lower, part but not all of the reason is because we are seeing an inverted yield curve.
What should we do?
This is definitely a red flag. It will be important to monitor financial firms and corporate borrowing over the coming months to see how much of an impact this will have on economic activity.
I will keep you updated as we gather more information over the coming weeks and months.
My best, Mark
The Secure Act
The most terrifying words in the English language are:”I’m from the government and I’m here to help.” Ronald Reagan Last week the U.S. House of Representatives passed the Secure Act. It’s stated goal was to make your retirement more secure. But what does it actually do?
- It mandates that your 401(k) provider put annuities into your retirement plan. The Insurance companies even had congress mandate in the bill that annuity advertising be included in your 401(k) information package. While we believe annuities have their place in retirement plans, who is going to make sure that these annuities are not filled with fees and unnecessary riders which will eat away at your savings.
- It will change the age for required minimum distributions from 70 ½ to 72. Moving from 70 ½ to 72 delays the inevitable. It may also result in larger required minimum distributions which could result in a bigger tax bite.
- Require that all inherited IRAs be fully distributed within 10 years of death. The current law allows your children or even grandchildren to stretch their IRA payments throughout their entire life. This is a significant tax benefit for them. Under this bill, the money will be forced to come out of your IRA within 10 years which will result in the government getting more of your IRA money through higher taxes.
What should we do right now? It seems like the Senate is going to slow this bill down a bit but I never bet against the insurance companies. Some form of this bill will ultimately pass but probably not for this year. For those of you who were thinking of delaying your required minimum distributions to see if the bill passes I would suggest you not wait too long. Even if it is signed into law this year, there will be a 12 to 24 month period before it will be implemented. We are closely monitoring the progress of this bill and will let you know when or if it becomes law. We are also working with legal and tax experts to determine how the different parts of the bill will impact your retirement plan. In my next blog, I will discuss the new Fiduciary Rule the SEC just created.
Have a great week,
My best, Mark
