By Edward Leone Jr. DMD MBA RFC
Contact Information
Dental www.leonedmddentalcare.com
Financial Planning leonee@vzw.blackberry.net
As I stated in the August Blog, one of the goals and purpose of this blog is to have an interactive exchange of information and ideas. We did have a respondent to the August Blog. The respondent forwarded a paper done by David Kaiser PhD, a respected historian. Dr. Kaiser is currently a professor in the Strategy and Policy Department of the United States Naval War College. He dedicates this paper to a comparison of conditions in the US today with conditions in Germany during the middle 1930’s. It is scary, but a great read. Google it. Read it and let us know what you think!
Before I go into the variety of money and finance happenings over the month of August, I would like to spend some time sensitizing the reader to a very important financial planning issue that I find being over looked by many prospective clients. The question I pose is “What four documents must every individual have as a part of financial and life planning?” Those four documents are: 1. Advanced Health Care Directives (Power of Attorney for Health Care Matters) which grants on your behalf a person or entity to make health care decisions in your incapacity to do so. With out this document some judge in a court room may perform this duty and perhaps not to your expectations. 2. A Living Will which give directives on resuscitation and life support issues in the event you are faced with such conditions. 3. A Durable Power of Attorney for Custodial Matters in the event that you are incapacitated to the extent that you are unable to care for yourself and perform financial duties on your own. 4. A Will or will substitute to express your wishes regarding the disposition of property upon your passing. Without this, a judge will perform this duty based on law existing in the state of your residence and perhaps not in a tax efficient manner. If you have not addressed these issues, seek out a financial planner and an attorney to get this portion of your financial and life planning acomplished.
We are hearing and reading much about health care and the elements of the Obama Health Care Reform Act of late. This legislation appears to be as much a piece of tax legislation as it is related to health care. The mandates for production of a form 1099 by businesses on all expenditures above $600 is unworkable and under consideration by some in the US Senate for repeal. The tax on medical devices (we do not yet have a definition of what is a medical device) can also be unmanageable when we consider the potential for what may constitute a medical device. There is also talk in the Congress about repeal of this portion of the legislation. The 1099 issue will put businesses in a difficult situation regarding compliance. The record keeping and paper work associated with this will likely suppress business entity consumption of many products leading to a slowing of economic growth. It is also likely to be the full employment act for accountants. The tax on medical devices is a great way to reduce health care costs since demand will be suppressed. Such high-tech device purchases as the MRI Imaging device will be less frequent making the benefit of this diagnostic less available to the public. Such common devices of more modest cost will also see a slump in demand by those who cannot pay these additional costs. Devices such as dental implants, knee and hip implant devices will be less utilized unless third-party payers are willing to pay the tax instead of making it an exclusion in the plan designs they offer. We are also likely to see numerous adjustments in the financial reform legislation as more of the details unfold also.
I just touched on economic growth in the last paragraph. You need to know that economic growth in the second quarter of 2010 slowed to 1.6%. This is certainly not a sign that good times will be returning soon. There are many factors that play into this happening. Only time, the election and the actions of the US Congress which can stimulate confidence in the future for the business universe or perpetuate uncertainty for business activity will tell the story.
What does the average investor do in this climate and how is it best to strategize savings for retirement? These are very difficult decisions to make. Continued volatility in equity markets, particularly the slow downward trend we are witnessing has driven $380 billion into bond funds so far this year. The assumption of many investors is that bonds are safe. Certainly the yield is relatively safe, but market risk has to be a real concern now and into the future. Long term rates are at a low 2%. The only direction for interest rates is up. We just do not know when. It is common knowledge that the relation between bond prices and interest rates is inverse. When interest rates go up, bond prices decline. It is likely that bond portfolios will experience loses in the future as interest rates trend upward. There is no perfect investment for safety under all conditions. Many are driven to annuities with a guaranteed return which looks attractive in these troubled times. The price paid for that guarantee and the restricted access to your money are serious considerations before purchasing and annuity. Certainly short-term financial needs should be kept in cash or cash equivalents. Other investments may be placed in a diversified variety of longer term investments with the allocation tailored to the investor’s risk tolerance and time horizon. Please use a professional to help with this work. Nouriel Roubini in his book “Crisis Economics” suggests that a return to the restrictions put in place under Glass-Steagall where there was a full separation between commercial banks and investment banks is what we need to do. This business of to big to fail has to end. It does appear that there is some rethinking occurring in the US Congress regarding the status of Fannie and Freddie. The transparent trading of derivatives and swaps will also be helpful while a turn around in the real estate market is projected to take some time.
It is clear that we live in a global economy where a shift is occurring according to the McKinsey Quarterly from developed to developing economies as it relates to rate of economic growth. Technological advances in rapid communication and low-cost labor markets will continue to perpetuate this trend. Emerging markets with younger populations will provide not only consumer demand, but also a source of capital, talent and innovation. The risks associated with international business transactions focus around protection of intellectual property, currency exchange rate volatility, geopolitical instability and quality standards. As you can see all is not perfect, but it appears that the risk reward ratio is favorable for some businesses. When it comes to exchange rates, Jason Van Bergen of Investopedia tells us that six factors are at play: 1. differentials in inflation, 2. differentials in interest rates, 3. currency-account balances, 4. public debt, 5. terms of trade and 6. political stability and economic performance. The US is still perceived to represent quality in these areas; however, our status at present is clearly somewhat compromised. At Investors.com, an IBD Editorial presents our public debt standing at 62% of GDP and trending to 90% in the immediate future with a potential for it to be 146% of GDP by 2030 as our biggest problem.
Among US international trading partners, China reached a new mile stone this past quarter achieving status as the #2 economy globally surpassing Japan at about 1/3rd the size of the US economy. Not all is rosy in the Chinese realm, though. We will spend more time on that in future blogs. Bribes as a part of doing business in China is a drag on the economy to the tune of 10-13% and there is more to come.
On a final note, we observed a variety of primary election events over this past month. Some, I am sure are thrilled with the results, and others probably not. I took particular note of the Arizona Republican primary where Senator McCain prevailed after spending more that $20mil on a campaign. I sometimes wonder what the difference may be between a bribe in China and a political campaign contribution in the US. Look forward to discussions on social security, the national debt and derivatives along with more on the Chinese economy in future blogs.
For The Record:
DOW 10,150.65
NASDAQ 2,153.63
S&P 500 1,064.59
Suggested Reading: “Wall Street Words” by David L. Scott
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