Positive developments in 2013
1) Lower expense ratios on many Exchange Traded Funds (ETFs). Last year, Schwab started the trend of lowering ongoing management fees on their ETFs and eliminating the transaction costs to buy and sell these products on the Schwab platform. This move attracted the attention of competitors and now many ETFs are cheaper to own than ever before. These products allow the broadest diversification across entire market segments at the lowest possible cost.
2) The government has increased the contribution limits for retirement accounts for the first time since 2008. Annual IRA contributions were bumped up by $500 to $5,500 for people 49 and under and $6,500 for 50 and over investors. Employer retirement plan contributions also increased. Individuals under 50 can contribute $17,500. The over-50 catch up contribution can add another $5,500 to get to $23,000 total.
3) Congress adopted higher federal estate tax thresholds ($5.25 million per person and $10.5 million per couple in 2013) than expected by most pundits. This effectively eliminates the prospect of paying federal estate tax for 99.86% of estates according to the Tax Policy Center. It also provided much more clarity for estate planning professionals who work with high net worth individuals on estate planning issues. Many states still have lower estate tax thresholds, however. For example, in Washington state the limit is $2 million. If a person dies with an estate value of $1,999,999 no state estate tax is due. But reach $2,000,001 and an estate tax return and payment are necessary.
4) Investors have returned to markets. According to Leuthold Group, through April 24, net cash flow into mutual funds was at its strongest pace ever with year-to-date positive cash flow $223 billion.
Trends that concern us:
1) Regarding that cash flow, the point of concern is that $106 billion of the incoming investments have gone to bond mutual funds. We think bonds will be severely challenged to generate meaningful returns over the next several years. Combine the premium many bonds are trading at with current low yields and the fact that total return could turn negative when interest rates rise and particularly U.S. government bonds will struggle to post returns anything like the past decade. By comparison, $22 billion of new investments have entered U.S. stock funds so far this year.
2) The low interest rate policy set by the Federal Reserve Board. This policy has lowered the borrowing costs for the U.S. Government, but it has also changed the way that we all invest. Bond investors who are searching for yield are taking considerably more investment risk with their fixed income portfolios than ever before. When the Fed finally increases interest rates, three things may happen: inflation could increase dramatically, bond default rates may rise, and returns for bonds could turn negative as investors seek newer bonds at different increasing interest rates.
3) Less affordable long-term care insurance. A few trends are becoming clearer for the LTC marketplace. A) most residents of nursing homes are women, b) Most baby boomers don’t have long-term care insurance because they either feel that it is too expensive or they don’t think that they will ever need it, C) Rates paid for LTC policies are becoming gender based, and although they have stabilized somewhat in the past year, the combination of the continuation of the low interest rate policies by the federal government and higher claims rates by women will force LTC prices to continue to grow at higher rates than inflation.
~ Allyn Hughes, CFP® — Brooks, Hughes & Jones – Partners in Wealth Management, Tacoma, WA
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Kicking cans toward the cliff – similarities between Europe’s crisis and the U.S. fiscal cliff
John Mauldin, an economist and writer who has focused much of his attention on the European monetary crisis, published an interesting article August 11. In his earlier articles on the subject, Mauldin identified two most likely outcomes for this crisis, either:
A third, less likely choice is that the Euro will break up and two different currencies—one for northern Europe and another in Southern Europe—will take its place. Mauldin admits that these choices are hugely expensive, and increase the risk that Europe will fall into a recession or depression in the near future.
In his latest article, Mauldin presents another possibility that I think is most plausible. That is that the politicians in Europe will (using a term that I have come to hate) “kick the can down the road” for as long as possible until they are forced to make a decision about saving the European monetary system. Then, they will choose to keep the euro. He paints this as the most expensive solution offered because all of the votes will come at the last possible minute, when the decisions will be made because they have to be made. He thinks that this solution is the only politically tenable way to deliver bad news to the voters/constituents of each country.
After reading this article I started thinking about the upcoming “fiscal cliff” here in the United States. This cliff is a series of decisions that Congress and the President have to make as a result of yes, “kicking the can down the road” on topics like increasing taxes on income, capital gains, and dividends at the same time as government spending is cut due to automatic budget triggers that have not been addressed. Mix in changing health care law and financial services regulations not yet fully implemented and there are a lot of decisions to be made. In theory, most of the fiscal cliff decisions should be made in the 76 days between Election Day 2012 and Inauguration Day 2013.
Why is it important that we get answers to the fiscal cliff questions? Business owners and managers are unsure how to proceed. They have talked about waiting until they receive some clarity around the fiscal cliff issues before they go out and hire more workers. These employers are scared that changes to their tax structure will force them to cut back on their growth plans, and the long-term plans for their companies.
My sense is that Mauldin’s analysis of the most likely outcome of the European Monetary crisis can also be applied to our Congress’ negotiations around the fiscal cliff topic. Instead of making decisions about the fiscal cliff and providing a clear path for Americans, I think that they will defer or postpone as many of them as possible. The fiscal cliff will never occur. Instead it will be a slope—gradual and convoluted.
This will cost American’s many millions or billions over the long run, but will be the way that most members of congress will keep their jobs. And what is more important—billions of dollars or the job security of your favorite politician?
~ Allyn Hughes, CFP, ChFC, CLU — Brooks, Hughes & Jones, Partners in Wealth Management Tacoma, WA
www.BHJadvisors.com
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Posted in Commentary, Economy, Taxes
Tagged budget, economy, euro, european debt, fiscal cliff, Hughes, taxes