Tuesday, January 24, 2017


The Bureau of Labor Statistics tracks all manner of information, including consumer prices.  Each month, they release a Consumer Price Index Summary, which you can find, for December, at https://www.bls.gov/news.release/cpi.nr0.htm.  A few highlights are:

The CPI for All Urban Consumers, or CPI-U, increased 0.3% in December, and 2.1% for 2016.  The shelter index was up 0.3% for the month, while gasoline was up 3%.  The food at home index declined again, while the food away from home index increased, with these two changes offsetting each other.  We have found that it is cheaper to eat at home than to eat out, regardless of the fluctuation in the prices of either.  And generally, it’s healthier as well.

picture credit: getwhatyouwant.ca

Excluding food and energy, the CPI-U was up 0.2% in December.  Of course, housing, food, and transportation are the three largest expenses for most households, so it seems appropriate to pay attention to those prices and costs.

The FairTax Act of 2017, H.R. 25, was introduced in the House on January 3, 2017.  The bill is a tax reform proposal which imposes a national sales tax on the use or consumption, in the U.S., of taxable property or services.  This national sales tax would be in lieu of the current personal and corporate income tax, employment and self-employment tax, and estate and gift tax.  There are exemptions from the tax for used and intangible property, property or services purchased for business, export, or investment purposes, and for state government functions.  The sales tax rate will be 23% in 2019, with rate adjustments in future years.

Under the bill, family members who are lawful U.S. residents receive a monthly sales tax rebate, known as a Family Consumption Allowance, based on criteria related to family size and policy guidelines.  The states have responsibility for administering, collecting, and remitting the tax to the Treasury.

Tax revenue would be allocated among 1) general revenue, 2) the old-age and survivors’ insurance trust fund, 3) the disability insurance trust fund, 4) the hospital insurance trust fund, and 5) the federal supplementary medical insurance trust fund.  No funding is authorized for IRS operations after FY 2021.

picture credit: haikudeck.com
Finally, the bill terminates the national sales tax if the Sixteenth Amendment to the Constitution, which authorized an income tax, is not repealed within seven years after the enactment of this bill.  We shall see.  This is akin to the Impossible Dream, and I’m not certain Congress has the intestinal fortitude to actually do this.

If your company sponsors a 401(k) plan, and you are an owner or a member of the executive team which oversees the plan, the first six weeks of the year is a good time to review plan operations.  Following are some items you may want to review, as it relates to the plan.

PLAN DESIGN – Does the plan continue to accurately reflect why you installed the plan initially?  Common reasons are either to maximize benefit to ownership, or to offer a meaningful benefit which enhances your ability to recruit, retain, and reward employees.

PLAN ADMINISTRATION – Have all required notices been sent to participants, in a delivery form which meets guidelines?  Are contributions made on a timely and consistent basis?  Is loan management working as it should?  If an auto-enroll feature is used, does this feature work in practice as it’s described in the plan?  Does the ownership questionnaire continue to reflect the ownership and relationship status of the employee population?

PLAN INVESTMENTS – Does the plan offer a Qualified Default Investment Alternative, or QDIA?  Does the array of investment choices meet 404(c) guidelines, and if not, is it intended to?  Have the plan decision makers chosen to use age based or risk based investment options, which in many cases make it simpler for employees to participate?  Is investment performance of the available funds and options in line with their respective benchmarks?

PARTICIPANT EDUCATION AND INFORMATION – Is there a well thought out, and consistent approach, to educating eligible employees about the plan, how it works, how to access it, and how they can benefit from it?  If so, is this plan executed consistently?  Does it communicate with participants and eligible employees in a manner that reflects how most consumers receive information?
picture credit: rolloveriraintogold.com

PLAN COSTS – Are costs charged to participants benchmarked for type and amount?  Are fund fees at or below averages?  Has the investment committee reviewed participant costs, and affirmed cost appropriateness for the benefits received by participants?  Are compliance, administrative, and advisory costs in line with norms?  Are types of costs charged to participants appropriate, or should some of them be considered “settlor” costs, and instead be paid by the company?

REGULATORY – Has the plan filed its 5500 on a timely basis?  If an audit is required, is the audit completed on a timely basis?  Are there proposed changes to ERISA guidelines which could impact plan management?
picture credit: app.emaze.com

Enough of all that.  It looks as if that, here in Georgia, the weather will be cooling off, and the sun will be shining, for the next week or so.  As it does, take a few minutes, and simply step outside to enjoy the day.  Your work will be there when you return.

Quote of the week:

“You can discover more about a person in an hour of play, than in a year of conversation.”   

Monday, January 16, 2017


Instead of focusing on the transition of power this coming Friday, let’s discuss something else.

First, the domestic stock market is off to a much less volatile start in 2017, by comparison to 2016.  That’s a nice start to the year.

Last week, the Senate voted to allow a partial repeal of the Affordable Care Act, using budget reconciliation as the tool of choice.  The House will likely follow suit.  While this is an interesting way to address the issue, it’s how the ACA became law to start with.  So far, we have seen little from our elected representatives about what’s next, regarding health care financing.

For several years, identity thieves have focused on hacking or accessing tax returns, as they are a trove of personal information.  As tax season is upon us, a few suggestions to help protect yourself, and your information, including tax returns, from hacking or theft.

1.       Secure your computer by using firewalls and virus protection.
2.       Encrypt files before sending them.
3.       Use passwords which contain upper and lower case letters, numbers, and symbols.
4.       Don’t carry your SSN in hard copy.  If you are more than 16 years old, have it memorized.
5.       Monitor bank and credit card statements regularly.  We would suggestion logging on to   accounts three times a week or more, simply to review activity.
6.       Check your credit report annually.  It’s free annually at www.annualcreditreport.com.

Credit to arts-wallpapers.com
Think U.S. politics is interesting?  Try Iceland.  The small island nation of about 330,000 is a parliamentary republic run by a directly elected president and a legislative assembly.  It is home to six political parties, at last count.  The Independence Party, with 24.6% support, currently governs the country.  Other parties include the Progressive Party, the Social Democratic Alliance, the Left-Green movement, and Bright Future.  The Social Democratic Alliance came to power in 2009 in the wake of Iceland’s financial and banking crash.

The Pirate Party, though, is the one that’s fascinating, and is probably the one Edward Snowden would belong to if he were an Icelander.  The party was founded in 2012, polls at 22.4%, second only to the Independence Party, and has emerged as Iceland’s dominant political force.  The party platform endorses direct democracy, freedom of information, and civil and political rights.

What has caused quite the uproar, and spurred the Pirate Party to popularity, is that Iceland’s new Prime Minister, Bjarni Benediktsson, who took office last summer, has been implicated in the Panama Papers for having an offshore account.  It appears that not only did he not disclose this information during the campaign, he also lied about it after the information came to light.  So, the Iceland libertarians, who have coalesced around the Pirate Party, are demanding change. 

It’s so refreshing that the behavior of politicians, which most of the world accepts as normal, has created such a storm among our Viking friends.  And, I so love the warrior heart and sense of justice among the youth.    You can read more of the story, and more of Iceland news and politics, at http://icelandmonitor.mbl.is/news/politics_and_society/2017/01/12/new_iceland_pm_says_maybe_a_mistake_not_putting_the/. 

The IRS recently announced the issuance of Notice 2017-10, which is scheduled for publication on January 23, 2017.  The Notice deems certain conservation easement (CE) transactions as potential tax avoidance transactions, and further designates them as “listed transactions” that require additional reporting.

The Notice appears aimed at those CE transactions which may contain an appraisal which isn’t “qualified”, within the meaning of the IRC, or greatly inflates the value of the CE property.  The Notice requires that those who have invested in a CE project since 2010 will need to file IRS Form 8886, Reportable Transaction Disclosure Statement.  Form 8886 must be completed accurately, completely, and timely.

What is known is that many CE projects are legitimate.  What is also known is that the IRS doesn’t care for approaches to tax planning that reduce federal revenue (in this author’s opinion).  The “home office deduction” is a case in point, though our friends at the IRS finally, after consistently losing in court, conceded this deduction.

What appears to be the case is the President-elect Trump has used conservation projects as a part of his personal tax planning, for a number of years.  What we don’t know is whether this particular ruling was influenced by the administration, though sitting presidents, regardless of their political affiliation, have a long history of meddling with the IRS, to serve their personal and political agenda.

Quote of the week:

“No man ever wore a cravat as nice as his own child’s arm around his neck.”
                                                                                                                                 Patrick Taylor

Monday, January 9, 2017


2016 is officially behind us, and it yielded fascinating results.  Public markets started the first six weeks with a massive sell-off, and finished the year strong.  Between early March and early November, markets did little, while we all waited for what seemed to be the most contentious presidential election in history to finally be over.

Looking at select market index returns, the 30 components of the Dow Jones Industrial Average, led primarily by financials and energy, were up 16.47% in 2016.  The S&P 500 was up 11.96%, while the Wilshire 5000 was up 12.6%.  In the small cap space, the Russell 2000 was up 21.31% and the S&P SmallCap 600 was up 26.56%.  Three year average annual returns are 9% and 9.5%, respectively, for the S&P 500, and the S&P SmallCap 600.
credit to: investec.co.uk

 International developed markets, as measured by EFA, were effectively flat for the year, with the 1.6% drop in price offset by the 2% dividend.  Emerging markets, as measured by VWO, were up 10.4%.  Three year returns are negative for both international developed and emerging markets stocks.

Short term bonds, as measured by BSV, were up 1.42%, and long bonds, as measured by BLV, were up 6.65%.  Three year returns are 1.25% for short bonds, and 7% for intermediate/long bonds.

A balanced portfolio, comprised of 32% short bonds, 19% intermediate/long bonds, 31% domestic large cap, 5% domestic small cap, 9% international developed, and 4% emerging markets, would have been up 7.21%.  

As we look at 2017, two questions come to mind.  Those questions are, “What makes for a healthy economy?”, and “What can we expect under the new administration?”.

Last week, we looked at long term population trends.  A healthy society does need people, and it benefits greatly from a prosperous, growing population. 

A healthy society also needs real, personal, and intellectual property rights which can be enforced on an equitable and timely basis by a competent court of law.  A healthy society needs freedom of association, access to capital, a culture conducive to rewarding entrepreneurial drive, and a skilled workforce.  A healthy society needs a tax structure designed to exact taxes from almost all citizens, without the tax burden impairing the desire to be productive. And a healthy society needs to be prepared to engage in a meaningful debate about whether those who live at the edges will be cared for by private funds, public funds, or some combination thereof.  Finally, a healthy society needs governors who will encourage all the above, and will choose to promote good, and thwart evil.

Turning our attention to the upcoming administration, it is obvious that President Trump will bring change.  President-elect Trump has already brought change.  For the half of you who voted for Trump, we encourage you to remember that this is politics, and Trump is human.  For the half of you who didn’t vote for Trump, be encouraged that this too, shall pass, in either four or eight years. 

What could a Trump presidency look like, and what might the economic outcomes be?  A few thoughts.

With Republicans controlling the White House, and both houses of Congress, the first two agenda items will likely be health care reform and tax reform.  There will be some changes to the Affordable Care Act, though we won’t make predictions about what those will look like.  We do expect insurance companies to survive and do well, as they operate on a cost plus basis.

Candidate Trump suggested a 15% corporate tax rate.  We expect something in the 15% to 20% range, possibly with incentives to repatriate what is estimated at close to $1 trillion in corporate cash, parked around the world, due the U.S. tax system’s taxation of all income, regardless of where earned.  Taxing only income earned in the U.S., whether personal or corporate, may be one of the positive changes that come from tax reform.

Trump also suggested a restructuring of personal income tax rates to three brackets, with the highest at 33%.  Along with this though, came some conversation regarding reduced itemized deductions.  It is likely that overall personal income tax rates will drop.  It is unlikely that tax reform will happen without favors built into the tax system, to reward those companies and individuals who write the checks that keep the politicians in office.

Based on the various leadership appointments to date, it appears the emphasis will be on business growth and military strength.  Trump has gone to the business community, rather than lifelong civil servants, for many of his appointments.  This fits his background, though it will be interesting to see how this plays out in effective administration.

In terms of foreign policy, expect Trump to break all traditional protocol.  We expect the Trump administration to be friendly to those who have historically been our friends, which should benefit Britain and Israel.  We also expect the Trump administration to play hard ball with those who harbor or support terrorists, or who don’t support U.S. interests at the U.N., and around the world.

Look for countries around the world, and especially across Europe, to shift right.  Look for leaders of these countries to work to gain favor with the new administration.
credit to: clker.com

Domestically, expect an emphasis on law and order, and substantial moral support for law enforcement.  Expect Trump to use his position to encourage companies to keep jobs stateside, and to promote business formation and growth.  Also, look for a repeal of all Obama executive orders.

There will be no wall.  Talk of building a wall between the U.S. and Mexico was red meat for the campaign trail.  There will be increased border security.  However, we believe that immigration will actually be easier for those from around the world going forward, especially if they have marketable skills, or bring money with them.  Trump is well aware of the need for ongoing immigration in order to support a robust economy.

However, in going along with the law and order theme, those from outside the U.S. with a criminal background won’t be allowed in, and those who develop one while here will be shipped out quickly.  Sanctuary cities will lose funding.  Places such as San Francisco, Berkeley, and Boulder will face continuing protests against the Trump administration, and will be the home to any number of lawsuits against domestic and foreign policy.  None of this will make a difference. 
The U.S. military will be told to go win wars and restore law and order in those places around the world which matter to U.S. interests.  The military will cease being a playground for social experimentation.

There is talk of infrastructure spending.  From a tax outcomes standpoint, this could be a repeat of the ‘80’s, when tax rates declined, and the federal deficit jumped, though Trump is certainly no Reagan.

Looking around the world, the EU is coming apart, as many nationals in the respective EU countries express their desire for local control and self-direction.  The surprise is that the EU has lasted this long.  Russia will stand down.  Putin knows that he now has a peer, and will mind his behavior.  Putin knows the U.S. has the strength, and with the Trump administration, the will, to return Russia to the dark ages, if Putin doesn’t mind his manners.

It appears that China may be making a recovery.  The plus for China is simply the massive number of people who live there.  The downside is the ongoing Communist mindset, and it’s negative impact on the country and its citizens.

In terms of economic outcomes, a Trump presidency should bode well for both those prepared to work, and those prepared to hire.  Those able bodied persons prepared for neither could have a tough few years.

The possibility of lower personal and corporate income tax rates, repatriation of hundreds of billions of dollars, the carrot and stick approach to keeping jobs stateside, a relaxed regulatory environment, and the possibility of substantial infrastructure spending should be a boon to the U.S. economy.

So, how to invest in light of these potential outcomes?  The following is how we are positioning.  Note that these aren’t recommendations for you, simply thoughts from us, based on our observations of the world and the markets.  Also be advised that, while there is optimism in some quarters regarding potential economic outcomes, we are also eight years into the current bull market.

The S&P 500 has three and five year returns above its long term mean return.  We are reducing exposure slightly to the S&P 500.

Small cap stocks are below mean return over three years, and above mean return over five years.  While this isn’t a clean call, we are increasing our small cap exposure slightly.  Industrials, energy and financials should perform above the mean. 

Short bonds are at their mean, and intermediate/long bonds are above their mean return, over both three and five years.  We are reducing exposure to intermediate/long bonds.

The economic and political climate in Europe is messy, and will remain so.  This can make for a challenging investment environment, though there isn’t the correlation one would think between economic outcomes, and short-term market performance.  International developed markets returns are below the mean over both three and five years.  We will maintain our current weighting.

Emerging markets have underperformed over the last three to five years.  We are increasing our exposure to these markets slightly.

We always enjoy hearing from you, and look forward to any observations you may have about what might be next for us, as a country, an economy, or in the markets.
Quote of the week:

“If we become increasingly humble about how little we know, we may be more eager to search.”

“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”
                                                                                                                                       Sir John Templeton

 “The only thing we have to fear is fear itself”.
                                                                                                          Franklin Delano Roosevelt

P.S.  This quote is from FDR’s first inaugural speech, given March 4, 1933.  You can read the entire address at http://historymatters.gmu.edu/d/5057/. 

Wednesday, January 4, 2017

2016 Wrap

Welcome to 2017!

In this first of the year issue of our commentary, we will summarize public market outcomes for 2016, and share thoughts about what makes for an economically healthy world.  Our commentary on the 9th will look at potential trends, with a new administration in Washington.

Credit to: PSDgraphics.com
Let’s take a look at the public markets for 2016, though with a couple of explanatory notes.  First, these numbers are approximate, as they were pulled a few days before the end of the year.  Second, we are using index ETFs as proxies for market segments and investment classes.  With those caveats in mind, here’s a summary of 2016.

Domestic large cap stocks, as measured by the S&P 500 (SPY), were up just over 11% for the year.  Domestic small cap stocks, as measured by the S&P 600 (VIOO), were up 24% for the year, with most of that coming after the election.  Long term bonds (BLV) were up 5.82%, and short term bonds (BSV) were up 1.11%.

Outside the U.S., international developed markets (EFA) were up 0.08%, essentially flat, and emerging markets (VWO) were up 11%.  Real estate (VNQ) was up 5.9%, Gold (GLD) was up 7.29%, and commodities, excluding oil, were up 13.85%.

Over the last three years, commodities, oil, gold, and both international developed and emerging markets securities have had negative returns.  Over the same three years, domestic large and small caps have been up 9% and 9.5%, respectively, while long term bonds have been up almost 7%.  Domestic small cap average annual return over the last three years is slightly below its long term average of 11%, while long term bonds are slightly above their long term average of about 5.5%.

A balanced portfolio for 2016, comprised of 4% cash, 32% short bonds, 19% long bonds, 31% domestic large cap, 5% domestic small cap, and 9% international developed, would have had a return, based on the indices, of 5.67% for the year.

So what’s the outlook for the next several years?  Business growth depends primarily on use and consumption of products by either consumers or other businesses, with consumers accounting for roughly 70% of overall demand.  Consumer demand for products and services is driven primarily by population and income growth.  Population growth is a function of immigration policy and family size, and income growth is a function of several things, including work and educational opportunity, as well as cultural, social, economic, and tax policy.

What does all that mean?  Create an environment which is friendly to capital and business formation, have a culture that encourages work, accomplishment, family growth and formation, and cultural integration, and you should have a growing economy.

Where do we stand with all this?  Let’s look just at population growth.  

credit to: becuo.com

The world’s population grew slowly until about 1920, when it reached 1.85 billion.  The rate of growth jumped at that point, with improvements in life quality, with the growth rate peaking in 1962 at 2.1% annually.  The world population has continued to grow, and currently stands at 8 billion, though the annual growth rate has declined since 1962, and currently stands at about 1%.  It is expected to go negative by the end of the century.

These trends aren’t a business positive.  Healthy societies and economies need growing families.  Developed countries around the world aren’t replacing their populations with new births.  And, in many parts of the world, societal and cultural trends and pressures suggest few or no children.

The driver of U.S. population growth is immigration, and the birth rate of immigrants, which tends to be materially higher than that of the native population.  In the U.S., most immigrants are of Latin origin.  The driver of population growth in Europe is also immigration, though most immigrants across Europe are from the Middle East and Northern Africa. 

Most of these immigrants to Europe are legitimately needy asylum seekers.  Unfortunately, there are a number of bad apples in these immigrant populations, just as there are in immigrant populations to the U.S.  The challenge Europe faces, and one which has been a problem stateside, is the unwillingness to name evil.

There are philosophical challenges with drawing lines between good and evil, and very few politicians are willing to sacrifice their position and power by drawing those lines.  Unless and until countries have leaders with the intestinal fortitude to make such distinctions, and do something to promote good and repress evil, there will continue to be chaos.

But, back to population growth.  The population of many countries in Europe is growing, and almost all of it is attributable to immigrants and their relatively large families.    

As noted earlier, population growth isn’t the only driver of business health.  Other factors, referenced above, also play a part.  However, it’s prudent of us, from an investment perspective, to be aware of where the people are, what the trends are, and where demand is, and is expected to be, in the coming decades.