- The big news during the past two weeks has to be the employment numbers that came out about 10 days ago. Most economists were looking for about 165,000 jobs being added to the workforce, but the June number came in at 195,000 jobs. This was higher than even the highest estimates. Perhaps as important were the revisions for April and May with April increasing from 149,000 to 199,000 jobs and May increasing from 175,000 to 195,000. Unfortunately, the unemployment rate remains stuck at 7.6%. While private companies added jobs, especially in the hospitality and healthcare sectors, government continued to shed them.
- In November we reported that the holding company which owned Hostess Brands was declaring bankruptcy in the face of labor unions going on strike. At that time, it appeared that the infamous Twinkie was on its last leg. In fact, they haven’t been produced for the last seven months and they haven’t been on the shelves since early this year. But Hostess Brands found a white knight in Metropoulous and Company. They are going to start producing them again, and will use the same formula. Thus, Twinkie lovers will be able to get their fix in the not too distant future. Are you ready to satisfy your sweet tooth?
- Most investors have been anticipating a significant amount of inflation as a result of all of the money that has been created by the Federal Reserve over the past several years. Commodities usually rise when inflation is expected and they did see a large spike in their prices, most notably led by gold which rose to nearly $2,000 an ounce. But now most commodities have declined dramatically with gold down nearly 40%. Oh where, oh where has the inflation gone?
- When the first round of quantative easing occurred it was designed to allow the banks to take some of the toxic assets off of their books with the Federal Reserve buying them and thus giving the banks cash. This helped shore up the banks’ balance sheets and kept depositors from starting a run on the banks. Unlike times in the past when the Federal Reserve flooded the system with cash, the banks didn’t lend the money out because they had to keep it to remain healthy. After the initial shock wore off, the banks went back to the way they did business 30 years ago by lending money to the people who didn’t need it, but could pay it back. In other words, credit tightened dramatically and it’s still very tight.
- Historically, when the Federal Reserve printed money from its magic checkbook and bought assets from the banks, it is estimated that every dollar got re-loaned up to eight times. Now it’s only being loaned at a rate of about 3.3 times. In short, banks are continuing to be very conservative. Because the money from the Federal Reserve is only being turned at about 40% of its historical rate, we’re not getting the growth in our economy that is typically expected during a recovery. If the banks were to move back to the traditional eight times, it is estimated that $16 trillion would flood the economy. This equals the size of our GDP and it represents about four years worth of revenue to the U.S. government. Obviously, it is not a trivial amount. But because the banks haven’t turned the money, we haven’t seen the inflation. That said, when they do begin to lend all of the money, it’s entirely possible that the inflation everyone expects will actually happen. But then what everyone expects, often doesn’t happen.
- In late May, Federal Reserve Chairman, Ben Bernanke testified before Congress and mentioned that as the economy improved, the central bank would begin cutting back (tapering) the monthly $85 billion bond purchases. This led to a mini shock in the market, but it quickly recovered. Then in June when the central bank met and he repeated those comments, we saw a pullback in the market once again. What is the likelihood that the Federal Reserve will stop buying bonds anytime soon? It may be later than most people think. Why?
- Bernanke is a student of the Great Depression and he realizes that the mistake the Federal Reserve made then was taking money out of the system too soon. By 1937 the U.S. economy had recovered in such a positive way that the government raised taxes, cut spending, and the Federal Reserve took cash out of the system. This caused the economy to tank and by 1938, President Roosevelt started deficit spending once again. But it wasn’t until World War II started that the economy started to hum.
- In January of this year the government raised taxes and in March they cut spending. The last thing we need is for the Federal Reserve to discontinue to fund the economy. Bernanke understands that and in our opinion will not make the same mistake that was made in 1937. That is also why he made it clear that should they begin to taper and the economy suffers, they won’t hesitate to jump back in.
- At the end of this past session, the Supreme Court struck down a section of the Defense of Marriage Act (DOMA) which essentially gives same sex married couples the same rights and benefits under federal law that have been enjoyed by opposite sex spouses. At the same time, in a separate case, they let stand a ruling that found Proposition 8, a 2008 voter initiative that ended same-sex marriage in California, unconstitutional. These two decisions have significant implications for those who have been married in the District of Columbia and the 13 states that allow same-sex marriages. While there is still a lot to be answered, here are a few of the impacts on same sex married couples. From an income tax standpoint, they will now be able to file a joint return. This will be especially helpful to those couples where there is disparate income, but for two high wage earning couples, they could end up paying more. Depending upon how a couple filed their income tax returns in the past, it may be worthwhile to consider re-filing if it is tax advantageous. What happens if a couple is married in one state that recognizes same-sex marriages and moves to a state which does not? Traditionally, the IRS has looked to the state of residence to determine who can jointly file. This could also spill over into other tax areas like estate and gift taxes. The unlimited marital deduction for both gift and estate taxes is now in place between same-sex married couples. They should also be eligible for health insurance coverage through a spouse’s employer's plan. A major benefit of the Supreme Court's decision will be applied to retirement plans where same sex marriage partners will have the same flexibility of survivor and death benefits. Spousal rollovers will now be available, as well. There are lots of other issues to be decided, and the government will be working furiously to bring some consistency to federal law.
- It is with great sadness that we share the passing of Patricia Bishop. She served as Administrative Assistant to Ray, Kim and Nancy, and was a part of the ProVise family for 19 years. Many of you had an opportunity to meet or at least chat with her during that time. Twice a month, it was she who typed and distributed the Bullets. She leaves behind her daughter, Jessica, and a 19 month old granddaughter, Matilda. Please keep them in your prayers.
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for over 26 years.
RAY, KIM, ERIC, BRUCE, LOU, NANCY, TINA, JON, STEVE, and DOROTHY
© 7/15/13 ProVise Management Group, LLC
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