Blog/ ArticlesWhat You Should Know About Today's Economy
Written by Hank Brock
The following excerpt is taken from a conversation between Hank Brock, President of Brock and Associates, LLC and his daughter Andrea in February of 2008. It is in question/ answer format, and will be followed in the next posting by an in-depth commentary on current economic conditions, and how to prepare for the future.
Q. Dad, if it is good for one family to save money against misfortune, why is it not then good for a nation to save money?
A. Depends: In your question does "nation" mean government? If so, then no, a government should be neutral, and not taxing us to a surplus and then saving our money for us. But neutral also doesn't mean spending us into debt, especially if it becomes too much of GDP (% of total economy). If "nation" means the people, then yes, you are right--the people should save. Some would argue this slows the consuming economy, but only short-term. It provides capital for investment, some of which is going to be deployed in R&D, increased efficiency & productivity, lower inflation, and expansion long-term. But, which politico, or stock analyst, is interested in the long-term?
Q. It seems a little bit like Pharaoh and Joseph in Egypt. Why is the government letting the grain out of the store house when the famine has yet to hit? (These rebates are intended for people to consume, NOT save, pay bills, etc…).
A. Yes, exactly. Get your seven-year supply of wheat. (The spending will mean very little).
Q. I just read an AP article that said this will add 117 billion dollars to our national deficit. So much for good economic sense.
A. And $117 billion is a tiny impact on a $14 trillion economy (approximate). Worse, it is inflationary. Incidentally, a $10 increase in the cost of oil has the same drag on the economy as a $200 billion tax increase. Both are bad on jobs, inflation, lowering tax revenues in the long-term, and increasing the long-term deficit.
Incidentally, cost of oil, adjusted for inflation, today’s prices = 1988, the last time we had shortages. Oil & utilities have been the two dog sectors of stock market from 1989-2004. The companies are just catching-up. The increased cost is due to (1) China/India’s 25% annual increase in demand to produce cheap goods for us, and (2) refinery capacity at 100% - no refineries built since 1970's, one generation ago. Refinery cost = so great not even Exxon builds one alone, but only joint ventures with other oil companies. Remember: profits = money to build refineries. Building a refinery cannot be taken as an expense against income. It must be capitalized and then depreciated/expensed over decades.
Q. What is the deal with the government buying people out of their bad decisions when it comes to mortgages?
A. You may not remember the 1989-1991 mortgage crisis when congress had to borrow to bail out the FSLIC (Federal Savings and Loan Insurance Corp). S&L's failing, Frank Keating, etc. This time, it is the FDIC, the banks, that are in trouble, many, many multiples the size.
Q. Everyone knew the day would come when these mortgages would be due. Everyone knew there would be problems. I think the banks were counting on this and factored it into their loan approval process. But now, great, like a parent, the government is bailing people out of their bad decisions.
A. Yes. "Compassion" delivered en masse is just more government welfare.
Q. I guess I'm just a little bitter because we didn't take advantage of the bad loans that were available four or five years ago . . . we recognized them for what they were, and didn't get ourselves into the situation. If we did, we'd have 3x's the house and the government would essentially take away the consequences of a bad mortgage decision and let us stay in our home that we never could legitimately afford. So what about the rest of the country?
A. We will pay for it in higher taxes or higher inflation (which is another tax engineered by the government so it can pay off its debts with pennies on the dollar.)
Q. Does this smell a little of socialism?
A. Not just a little.
Q. So, without the clarity of actual conversation to sort out my thoughts - aren't these two acts basically yet another step of big government to push us into socialism (from which we will never be able to revert due to the complacency of technology--but that's another conversation all together).
A. It was all put into place under Franklin Roosevelt’s "New Deal," expanded under Lyndon Johnson’s "War on Poverty," and maintained by both parties ever since. Goes back to Thomas Jefferson’s comment about the demise of the Republic as soon as the people discover they can vote themselves largesse from the government treasury. Really started with the 16th Amendment to the Constitution when the people & States voted on the government's ability to tax income, and the 17th Amendment when Senators began getting elected by the people instead of the state legislatures--until then they represented the states, were accountable to state legislators, we had federalism, and we would not have the concentration of power and government programs/solutions in Washington. The Founding Fathers don't get enough credit for their genius/ inspiration.
Q. If you can explain the economic sense (or in my opinion nonsense) that drove these bills to pass, let me know.
A. Sorry, I can't explain it. But, even though the fed is "lowering" interest rates, actual long-term rates are (or must very shortly) skyrocketing, hence the falling stock market. We are living in 1977, maybe 1978. To understand that, you need to look at 1979-1981 just before Ronald Reagan took office: inflation rate (13%), unemployment rate (13%), interest rates (21% prime), mortgages (17%), gold ($800), silver ($50), money market funds (18%), new construction or home selling (0%), etc. The Jimmy Carter years--one generation ago--the last time the Democrats had control of all 3: House, Senate, and Presidency. Democrats had House & Presidency for the first 2 years of Bill Clinton’s Presidency in '92--'94. November '08 has: Senate, current Democratic majority 51 to 49. Seats up for re-election in Senate: 9 Democrats and 23 Republicans-- guess who'll lose seats? House: currently 31 more Democrats--seats up for re-election in house: all but 28 Republicans are retiring. Problem = House, Senate, President in same party. People don't like gridlock? Wall street/economy likes gridlock. Polls may say McCain over Hillary or Obama 47% to 45%. Percentages don't elect. Twice as many Democrats are showing up at their primaries as Republicans.
Q. I’ll ask you: Who are those that can veto the laws passed by congress? Veto the President's policies? Veto the Fed's policies and actions? And make them null & of no effect? Are many of those with veto power even U.S. Citizens?
A. The freely-traded bond market-- those that finance the deficit, and allow us to spend and spend without a day of reckoning. And those voters have been the Chinese, the Saudis, and the Japanese, in that order. With the plummeting dollar (down 50% in past 2-3 years), they want much higher interest if they are going to continue to use their surpluses to finance our deficits instead of Euro deficits, because they want their dollars returned to them adjusted for the currency exchange rate. Ultimately, inflation = value of the dollar, hence current gold & silver prices. No matter what, government will not default on its T-bonds, even if it means 13% or 15% unemployment and deep, deep recession, because then it couldn't borrow any more. So it must (no choice about it) raise interest rates, which will slow economic activity even more. When Bush Sr. was voted out of office in 1991, the recession had unemployment at 7%, which is 2% above "full employment" (5% of pop are changing jobs at any given time anyway. 13% is 8% above full employment, or 4x as much as the 2% that lost Bush Sr. the election of ‘91.)
In about 1995 Sweden’s parliament (socialist) passed a bill and within days free-market interest rates on their government bonds jumped to 200%. No government can survive on 200% interest rates. Parliament reversed itself within few days. No-one has to buy our U.S. Government bonds. They'll only buy at what price they decide. So, the Fed is band-aid short-term stuff. Watch the bond market especially & stock market to predict what's going on.
"The economy is resilient." --Bush, January 31, 2008. "The economy is a fragile thing." --Hinckley, October 3, 1998. (In credit to Bush, his responsibility is to say that, because he cannot contribute to a market- public panic.)
Well, just a few thoughts on your questions…
--Dad (Hank Brock)
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The Measurable Benefits of Having a Financial Plan in Place
Last Updated (Tuesday, 19 August 2008 09:10)
Written by Hank Brock
The psychological benefits are yours. You keep them. They include things like increased peace of mind, progress toward reaching your goals, without worry about unfinished business.
What about the monetary benefits? This is how most planners must justify their existence, their employment. For now, don't even consider the long-term strategic benefits of having a plan. For now, look at just the first couple of years. The typical client will usually see a cash-an-cash measurable, identifiable return of anywhere from eight to 30 times the fee. In other words, if your fee is $1,000, you will see anywhere from $8,000 to $30,000 in identifiable returns within the first 24 months. What kinds of returns? Income tax savings. Improved returns on investments. Savings on legal fees. Savings on insurance premiums. Increased cash flow.
Can your planner guarantee that return? No, of course not! That would be most unprofessional. But a good planner can guarantee that, regardless of what you see during the first few years, you will absolutely benefit in the long term from a solid, well-thought out financial plan designed by a professional planner.
And a good planner should be busy enough with an already active clientele that he will guarantee that, if at the conclusion of the exhaustive data-gathering interview, he doesn't feel he can accomplish something for you that will be very meaningful, then he will bow out of the engagement.
No planner worth his salt wants to do busy work. You don't want to hire him to do busy work, and he doesn't want to do it. He is in his career because he loves what he does. He knows that his clientele only grows when he has satisfied clients, and they refer him to their colleagues and neighbors. To do that, he's got to have meaningful long-term client relationships, where they get ahead financially.
Only then, do all prosper. Only then, does your planner stay employed by his employer: you. Only then, do you introduce him to neighbors and colleagues.
And that is as it should be, because like all laws governing money happiness, everyone benefits from complying.
Hank Brock is president of Brock and Associates, LLC, a St. George, Utah based financial consulting firm. To learn more about the benefits of having a financial plan, please schedule a time to meet with Brock and Associates.
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What You Should Know About Tax Advantaged Investments
Last Updated (Tuesday, 07 October 2008 15:21)
Tax advantaged investments are not “loopholes” in the Tax Law that the IRS is out to close up. They are not morally wrong, as some would have you believe. A common fallacy is to confuse tax evasion with tax avoidance. Tax evasion is illegal and punishable. Tax avoidance, however, is legal and is encouraged by the lawmakers. The United States Congress promotes the shifting of funds from the taxable sectors of the economy to areas of public need or good by passing laws which create tax deferred; tax sheltered and even tax free investments.
Many, uninformed of the nature of the tax advantaged investments, would have you believe that you are “robbing” the economy of tax dollars by not giving your taxes to the government to spend in their great wisdom. Such advocates are ignorant of the fact that tax advantaged investments are put into housing, energy, food, strategic metals, research and development, medical needs and transportation. These tax advantaged investments are actually a boon to the economy.
Rather than being filtered through bureaucratic mazes to the economy, these otherwise diverted tax dollars are being applied directly to where there is a need - creating new jobs, expanding specific industries and adding to the growth of the country. The famous jurist, Judge Learned Hand, remarked that, "There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible."
In another famous quote, Judge Hand wrote: "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes" Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).
It is important to note that understanding tax advantaged investments should be a prerequisite to becoming involved in them. Many tax advantaged investments carry only minimal risk to the investor. Allocating funds into municipal bonds, life insurance, IRAs, etc. can provide excellent tax incentives.
On the other hand, some tax advantaged investments, such as oil and gas limited partnerships or real estate limited partnerships, can be and often are risky (note: this is not a comprehensive list of risky tax advantaged investments). Although there is the possibility of substantial returns with such endeavors, many have and many will continue to chance the loss of their investment. Yet when compared with the alternative, a 100% chance of loss when paying tax, such investments can look quite attractive to some investors. After all, which investment will offer the greater possibility of providing you income in your golden years or at any other time?
Individuals also need to remember that Congress has passed tax incentives because such investments are risky. Tax advantages are provided to encourage investing in high-risk areas that further the social good of the country.
Being involved with a tax advantage investment requires a proper frame of mind. Peace of mind is what you have to lose if you are uncomfortable with such an investment. Tax advantaged investments can be complex -- particularly with the ever-changing tax laws. Working with a knowledgeable and licensed investment advisor will help you avoid many of the pitfalls and help you keep more of your hard-earned dollars from taking a one-way trip to the IRS.
Brock and Associates, LLC is a fee-based financial planning firm that specializes in retirement, estate, and tax planning. For more information regarding tax planning strategies, please contact our office.
The Financial Planning Process: 5 Essential Steps
Last Updated (Wednesday, 13 August 2008 09:30)
Written by Hank Brock
The financial planning process involves five basic steps. After the initial meeting with your financial planner, the five steps to the financial planning process include: data gathering, plan preparation, plan presentation, plan implementation, and on-going monitoring.
Financial Planning Process: Data gathering.
Data gathering is a marathon. It usually takes place at your home. It may take two hours or all day. Your planner will need to examine all your documents: Tax returns. Balance sheets. Income statements. Employee benefit plan booklets. Retirement plan documents. Wills. Trusts. Insurance policies. Investment statements. Brokerage house statements. Bank statements. These are the tangible bits of information.But there's also subjective information, such as: What are your lifestyle goals? How do you want to distribute your estate? At what age do you want to retire? How much income do you want during retirement? Then there are the assumptions that need to be figured into the whole process. What's going to happen to interest rates? Where is the economy headed? How much inflation will occur? Your planner will want your feelings on these things to see if expectations are realistic.
Finally, your planner will consider your personal attitudes -- toward risk tolerance, toward tax aggressiveness, toward simplicity in your financial affairs. By the time all the data is gathered, your planner has a very good idea of where you are now and where you want to be.
The next step in the financial planning process is plan preparation.
Financial Planning Process: Plan preparation.
Preparing your plan typically takes three to four weeks, as the planner does an analysis -- the diagnostic work. The planner knows where you are, and where you want to be. Now he needs to figure out the most efficient way to get you there.For example, maybe it's a family partnership. Or a family corporation. Or a family trust. He'll look at all the pros and cons -- then prepare written recommendations. Some will be major strategic recommendations. Others will be minor tactical recommendations. They will all fit together.
The next step in the financial planning process is plan presentation.
Financial Planning Process: Plan presentation.
After all the recommendations are in writing, your planner will present them to you. During the first interview, he'll present the plan to you and review the major areas. Then you'll take the plan home. Read it. Study it. Go over it with your spouse. Jot down any questions you may have about it.When you get back together with your planner, you'll go over the plan in detail. He'll answer your questions. Clarify details. As you agree on each recommendation, your planner will prioritize them into an "Implementation Check List." It's simply a "To Do" list for you and your planner.
The next step in the financial planning process is plan implementation.
Financial Planning Process: Plan implementation.
The first three steps move quite quickly. In fact, you will probably get through them in about a month.Step four, implementing the plan, takes a lot longer-usually about five or six months. During that time, you'll meet with your planner to go over tax planning, retirement planning, estate planning, and insurance issues. Your planner may bring in other experts -- such as attorneys to help resolve certain issues.
In the end, your plan might have as many as 25 recommendations. A few recommendations will be major, broad, strategic recommendations, each worth thousands of dollars to you. The remainder will be fine-tuning recommendations -- crossing the T's, dotting the I's, and making sure your financial affairs are really in order.
The last step in the financial planning process is on-going monitoring and maintenance.
Financial Planning Process: On-going monitoring and maintenance.
Here the planner should be retained to provide periodic updates and on-going advice. Perhaps there are a couple of tax-planning sessions each year, portfolio reviews, insurance updates, etc. Perhaps you need some questions answered about whether you should refinance your mortgage, lease or buy a car, etc. Your planner should alert you to changes in conditions that directly affect your plan.Hank Brock is president of Brock and Associates, LLC. He has helped thousands of clients meet their goals through the financial planning process.
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How to Approach Will and Trust Preparation
Last Updated (Thursday, 07 August 2008 08:19)
Will your family know what to do when you die? Will all the members affected know how to act in response if you become disabled? Are you personally prepared to deal with a disability-related early retirement? If not, it will not be your plans that fail. The problem will be the failure to plan!
Common Will and Trust Preparation Pitfalls
Every year, every family, should be sure to educate themselves to be prepared for the worst of circumstances. Yet, most people do not bother to take the time to implement some essential measures.Many do not have adequate amounts of life insurance. Others neglect their wills. Many people with complex needs have only a crude will when a carefully drawn out trust is really needed. Some even haphazardly purchase financial products and have not spent the necessary time developing an overall financial plan.
Everyone's estate is planned, either actively or passively. Either you maintain control, or the government controls it for you. If you do not bother, your family may suffer undue pressure and expense because of court proceedings. You can avoid all this by understanding the need for will and trust preparation and planning ahead.
Reasons to Plan Your Will and Trusts
For example, suppose you have a minor child. You would not think of leaving him/her alone without a baby sitter. Nor would you allow someone else to decide who that baby sitter should be. Correspondingly, you will want to select a guardian (and alternate guardians) in your will.Your family members or even your spouse cannot be expected to know all your financial arrangements. You can save them a lot of anguish by keeping records current, including bank account numbers, insurance policies, real estate deeds and records, stocks, bonds and other investments, wills, trust agreements, employee benefit records, birth certificates, marriage license, military service records and Social Security information.
Employee benefit accounts and beneficiary arrangements change frequently, and often it is appropriate to change prior elections.
It is important to keep an inventory of all your property, mortgage information and an informal letter of instructions regarding estate administration.
It is also essential to make sure you are doing everything possible to guarantee adequate income at retirement. Take full advantage of savings, investments, insurance, individual retirement accounts and all the products and services available to you. Your professional financial planner may help you understand the advantages and disadvantages of each.
Special Arrangements May Be Needed
You owe it to yourself and your loved ones to become informed, and to teach them now, how to make decisions and properly handle money. Maintaining your financial safety often means that you or your spouse, if you are not well, may not have to handle money, run a business or manage an investment portfolio. It would be unfair and unwise to thrust these burdens on to the wrong person.If you have a mentally challenged, learning disabled or physically handicapped child, you must plan ahead. Such children may never be able to care for themselves. The same might apply to a parent or dependent sibling. Such cases call for special legal arrangements, and frequently require special funding efforts to be effective.
Every closely held business owner should consider what will happen if a business partner dies or becomes disabled. What will happen to your successors if you meet with an accident? Could your spouse or children take over if they had to? Would you want them to? If there are no written and binding plans, could the wrong people take control of your business?
Suppose you are single. Who will act in your behalf later, if you do not act for yourself now?
You may have important charitable objectives. Government cutbacks have shifted some responsibility for social services back to the public, and many worthwhile organizations have an even greater need for funds. You may be contributing both your time and money now -- what about a legacy after your death?
Benefits of Planning
Controlled estate planning will systematically uncover problems and gaps in your estate and provide solutions. For example, you can plan against:- Excessive transfer costs - The improper plan or group of documents might cause too much tax, payable too soon, coupled with other needless expenses.
- Lack of liquidity - Or not enough cash to pay taxes and other predictable expenses. This could result in the forced sale of your liquid assets or other income producing property. This is an especially critical factor for owners of closely held businesses or investment real estate.
- Improper disposition of assets - This could result in the estate being disposed of in equal but inequitable shares among your children, even if their needs vary greatly. It may also be an improper dispersion of assets to leave two or three hundred thousand dollars in life insurance to a 21-year-old child or to a spouse - without the benefit of a trust arrangements to prioritize for proper investment - or to preclude wild spending.
- Inadequate income if disability occurs - Electing the maximum benefits from your employer-sponsored plans, and filling in the gaps with personal disability coverage and insurance waivers of premium.
- Inadequate income for your family at your death - To maintain your standard of living, the family will typically need 80 percent of your present gross income (though often it can be even higher). This must be adjusted periodically for inflation, additional debts incurred, education funding needs and special family circumstances.
How to Proceed With Will and Trust Preparation
The best place to begin is to sit down with a qualified financial advisor and check all your insurance. Then review your will and trust, making sure these documents will do what they are supposed to do in the most effective manner.Inform your heirs, before they become heirs, where your personal and financial documents are located -- especially a durable power of attorney. If you are married, measure your needs each year, establish your priorities, and then develop and put into effect plans to make sure that your financial future is protected.
It is not necessary to cancel and entirely redraw your legal instrument. A will can be modified by a codicil (amendment), and some forms of trust agreements are also subject to alteration. Of course, your estate planning attorney will be familiar with the correct procedures.
The time to implement adequate will and trust preparation is now. Schedule time to meet with your qualified financial advisor at Brock and Associates, LLC, and make sure that you control your assets and your future.
Brock and Associates, LLC is a Utah based financial planning firm. We specialize in retirement, estate, legacy, and tax planning.
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