http://www.youtube.com/watch?v=Dg5RRMAc1GY

http://greenspringwealth.com/greenspring-u/webinar/the-conflicted-world-of-financial-services/

Post World War II

Financial aid flowed overseas to rebuild Europe. Many European countries grew rapidly as they set up health care, pensions, lengthy unemployment insurance, job guarantees, etc., for their populations. By U.S. standards, these benefits were generous.

These and other benefits eventually became institutionalized in the labor force. The work rules made it difficult for companies to close unproductive businesses in favor of funding newer and more productive ones.

A unique characteristic of our American culture is to acknowledge the right to fail and try again. Steve Jobs, for example, had several companies that did not succeed before Apple’s recent run. Flexibility is required to grow and weather crises. One of the reasons the U.S. economy tends to bounce back sooner after a crisis (like the Great Recession) and adapt more readily is part of our national consciousness. Businesses were destroyed, workers displaced, but slowly we are making our way back.

It is a hardship when individuals lose their job. But frequently with re-training, employees find a job in a new type of business (as in the move from manufacturing to service industry employment). If companies can’t cease to exist and workers can’t be laid off, this flexibility and competitive advantage is lost.

In Europe, such a scenario is unknown. At a conference in October, Jill heard an international mutual fund manager say that the “joke” was let’s get a job in Belgium and get fired. If you are fired in Belgium, your severance package includes wages for several years!

Eurozone

This union of countries was launched in 1999 to improve trade and strengthen economies—to be more competitive as a trading block. The sum of the whole was to exceed its parts. Countries were required to follow specific financial guidelines (i.e., maximum 3% deficit of GDP) that were never enforced.

Most countries gave up their currencies in favor of the euro, with the European Central Bank as the equivalent to our Fed.

The southern European countries with the new currency were able to borrow at lower interest rates than their previous sovereign currency (think of Greece, Italy, Spain).

Northern Europe (think of Germany and France) could export its surplus to southern Europe, and its banks could lend southern Europe the money to buy the exports. (See link to NY Times graph “Europe’s Web of Debt”)

This plan worked until the debt became so large that it collapsed the system. The Global Financial Crisis of 2008 was the beginning of the end, and the Greek crisis serves as the most recent catalyst.

Response to the crisis

Northern European banks lent large amounts of money to southern banks and governments. With the value of the bonds declining, banks’ financial positions are precarious.

Many experts believe the European Central Bank (ECB) should be doing what the Fed did; buy the debt and keep the banks solvent. The Fed’s action is given a large share of the credit for bringing the U.S. back from the brink of the Great Recession. The ECB has not done as much to alleviate the situation.

The political response has been just as dismal. Germany has the strongest economy and a trade surplus. German editorials question why the Germans should work longer to pay for Greek retirements and “lavish” benefits while the Greeks don’t even pay their taxes. Conversely, Greek political cartoons depict Germany saying they finally won WW II.

Future

There is no clear resolution to the crisis in Europe. Recession, dissolution of the Eurozone, expulsion of certain members, and bank failures are just a few potential outcomes.

For the countries in trouble, leaving the European Union would be no panacea. They would likely see a collapse of the banking system in a depression-style run on the banks. Their sovereign debt would be devalued substantially. Greeks are already being arrested with suitcases of cash. Athens is out of safety deposit boxes.

Germany, on the other side, would be the strongest. But its currency could be so strong as to inhibit exports. Its banking system would also be suspect, since it holds large loans of other countries’ banks.

The ECB has been dragging its feet throughout the crisis. As U.S. banks and money market funds refuse to take the risk of owning European debt, the ECB might finally be forced to be a more active participant. There is some consensus that at a minimum, the ECB has to absorb government debt.

Former German Chancellor Gerhard Schroeder (1998-2005) recently called for the creation of the “United States of Europe.” In an interview with Der Spiegel, he said, “The current crisis makes it relentlessly clear that we cannot have a common currency zone without a common fiscal economic and social policy. We will have to give up national sovereignty.”

http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html

You would have slept through a very busy year:

• Triple-digit swings of 104 trading days on the Dow
• A spread between highs and lows of 3.9% per day on the S&P 500 in August
• Fretting about government default because of political bickering
• Downgrade of the U.S credit rating
• European Union’s distress (International developed country index was – 12%; emerging market index – 19%)
• Arab uprisings with regime changes in Egypt, Tunisia, and Libya
• Continued tensions over nuclear programs in Iran
• The Japanese tsunami tragedy and nuclear meltdown
• Regime change in unpredictable North Korea

You would have missed other sensational headlines:

• U.S. unemployment rate declined from its high of 10% down to 8.6% in December—its lowest level in three years
• Factory output rose
• Consumer spending was strong
• U.S. was a net energy exporter (the first time in decades)
• Corporate profits continued their upward trend

The flight to quality reduced interest rates even further, making government bonds the best performer in 2011.

 Usually, markets are driven by earnings and interest rates. Last year, political risk had the biggest impact.

 U.S. Deficits

No one will argue that the deficits need to be reduced. The issue is how to do it. Dr. David Kelly, Chief Strategist for JP Morgan, discussed his concern with how the deficit is cut.

Deficits are often discussed as a percentage of Gross Domestic Product (GDP). It was 8.7% the last fiscal year (government fiscal year is October 1 to September 30) and he anticipates 2012 to be 7.1%.

He is worried there will be a sharp decline in fiscal 2013 to 4.7% of GDP if the Bush tax cuts, payroll tax, AMT, and Medicare adjustments all expire in 2012. When there is a sharp drop to the deficit versus a gradual one, there is a huge drag on the economy because of the combination of increased taxes and spending cuts. Unemployment would also rise.

A gradual decline allows the economy to slow and absorb the changes as opposed to a potential recession with a suddenly slowed economy.

2012

Although there are some attractively valued investments, we still anticipate continued volatility in 2012 with so many issues in the U.S. and Europe unresolved.

 Large banks tend to offer more convenience—in terms of number of branches, ATM network, breadth of services, Internet presences, and types of accounts—whereas smaller banks tend to offer lower fees and higher yields on deposits.

 Before switching from your big bank to a smaller bank, be sure to be prepared for the change:

• Can you make do with fewer branches, especially if you travel?
• If the smaller bank’s ATMs are not near your home or place of work, will you be willing to carry more cash and/or use your debit/credit card more often?
• Will the smaller bank’s web site, mobile applications, and online bill payment system be sufficient for your use?

 If the answers to the above do not bother you, you might consider moving to or establishing an account at a smaller bank. Remember that there are probably multiple community banks and credit unions for which you qualify, so make sure to check out a few. However, beware that some banks have developed tactics to discourage your withdrawals. Robin Sidel wrote in the Wall Street Journal on December 2, 2011, that one bank required an in-person meeting before closing an account. (The deposit withdrew all but two cents from his account. The article can be found at: http://online.wsj.com/article/SB10001424052970204397704577072461772546658.html.)

 If you prefer to maintain your account at the bigger bank, make sure to maintain a sufficient balance to avoid bank fees—these fees will likely wipe out any interest that you earn and more—and keep outsized balances in accounts or banks that offer better yields.

 The Wealth Tip is this: You can have open accounts at different banks, not just your present one. Make sure that you have a bank and accounts that are appropriate for you. Avoid bank fees, even if it means sacrificing your interest-bearing account to maintain a necessary balance.

By way of background, each European bank has its own system whereas the United States is a single system. Regularly, European countries use their banks as tools for policy. For example, Madrid forced Spanish banks to treat one million naturalized citizens a superb credit risks for purposes of lending – even though they had no credit history. I leave the results to your imagination.

Companies, on the other hand, have issues with labor unions. Many are now using the current economic situation to reach a more realistic relationship with labor to help streamline the business. The speaker gave the example of Belgium companies having to pay salary for five years for workers laid off!

By streamlining their cost structure, European companies become more competative in the world.

So next time you consider your international allocation, don’t confuse the country situation with the potential quality of companies within the country.

• 401(k) plans are great for solo businesses and can also be very affordable for even the smallest businesses, including those with fewer than five employees!
• SIMPLE plans can resemble 401(k)s, but they are easier and less costly to administer. 401(k)s permit more savings, but SIMPLEs might be ideal for you.
• For high-earning businesses, a Defined Benefit Plan might be ideal.

In most cases, the deadline for establishing a SIMPLE plan for 2011 is the end of this month. Please contact us or your tax professional to determine the best retirement plan for you, whether or not you own a business.

The Wealth Tip is this: Learn what is the best retirement plan for you. Then try to fund it to its maximum. Doing this will increase your nest egg and may reduce your taxes.

-Brian Pon, EA, CFP®

Wealth Tips for the Emerging Affluent and the Middle Class

Many of our clients are between the ages of 50 and 65, and even in the later stages of their working careers, they still have opportunities to improve their outlook for retirement.

Brian was interviewed for a recent article in the Wall Street Journal titled “Saving Strategies for Older Singles” by Ann Tergesen. Brian noted that most couples have two incomes and shared economies for their expenses. Single individuals must rely upon themselves to save and invest more.

The article can be found at: http://online.wsj.com/article/SB10001424053111904787404576535213959457024.html.

Also, we wrote about “Nine Ways To Save More For Retirement” at http://www.financialconnections.com/wp/?p=119.

The Wealth Tip is this: It’s never too late to increase your savings. Doing this will improve your outlook for retirement and improve your peace of mind.

 Brian Pon, EA, CFP®

Wealth Tips for the Emerging Affluent and the Middle Class

He not only discusses the current situation but provides an historical perspective of what happens when the rich get richer and the poor get poorer squeezing the middle class. I recommend it as food for thought.

http://www.nytimes.com/2011/09/04/opinion/sunday/jobs-will-follow-a-strengthening-of-the-middle-class.html?_r=1&scp=1&sq=robert%20reich&st=cse

 BUT—was the U.S. really at risk of defaulting on its debt? Did investors sell treasuries because they were afraid they wouldn’t get paid? No. In fact the reverse was true. Investors just couldn’t buy enough treasuries. So the interest rate for the 10-year treasury declined to the low 2% level (and it closed today at 2.3%).

Economy

 There continues to be uncertainty in the economy. According to JP Morgan, a major concern is that the fear and panic investors displayed would become a self-fulfilling prophecy and the economy would stall. JP Morgan raised its estimate of the likelihood of a double dip recession to 30%.

 The first quarter’s slowing of the economy was largely due to the rise in oil. In the second quarter it reflected the interruption of the supply line because of the Japanese tsunami. But the price of oil has declined substantially, and the Japanese pipeline of supplies is once again moving forward.

 Unemployment and job growth continue to be a major problem. As our recent newsletter illustrated, the higher the education level, the lower the unemployment rate. In order for people with less education to find jobs in our economy, they need training. It usually occurs through government programs, which are now being cut back.

Washington

 No discussion is complete without taking Washington into account. As we mentioned in our last quarterly letter, this debt situation has occurred over many years and cannot be solved immediately. Our view is that tax cuts alone, without increased taxes (however you label them), is not realistic.

 Warren Buffet wrote “Stop Coddling the Super-Rich” in the August 14 New York Times:

OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

Below is the link for the full text:

 http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html

 Future

 We do not have a better crystal ball than anyone else. We do believe that volatility will continue, perhaps dramatically, in line with some of the following factors:

•  Automated trading programs—using computers, trades are initiated based on a strategy. The movement is fast and can cause the type of selloffs and purchases we’ve seen recently.
• Hedge funds—they frequently hold concentrated positions and, depending on their strategies, are quick to sell or buy, contributing to additional steep fluctuations.
• Global world—as technology spreads to all countries, the distance between borders diminishes. Information becomes instantaneous and so do reactions. Instead of pondering and dissecting information, many people let their emotions get the better of them and just react.

 What’s led to this recent downturn? There is certainly some concern about overall government debt levels in the U.S., parts of Europe, etc. There is also concern about the U.S. economy slowing. However, these concerns should also be balanced with the fact that U.S. corporate profits are robust. Approximately 80% of the companies composing the S&P 500 reported earnings above forecasts and revenues and earnings are up almost 13% from the same period last year.

 Many global investors have rushed to buy U.S. treasuries out of fear. The panic-led demand for treasuries have resulted in some bonds having negative effective yields (i.e. you spend $1,001 for the privilege that the government guarantees to repay you only $1,000). To us this would not be a logical investment decision.

 When fear subsides and fundamentals are viewed again with clearer minds, we anticipate the stocks will rise again.

 If you are taking periodic withdrawals from your accounts, you know we have several years of money strategy invested away from stocks and insulated from these volatile markets. If your money is for the long-term, we believe our portfolio design will lose less in this environment and participate when the market increases.