By Edward Leone Jr. DMD MBA RFC
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This blog represents one year of effort to inform and entertain the reader regarding a variety of financial issues. I hope the 12 posted blogs have initiated some serious thinking about your financial future along with creating a more critical view of the US and global economy from your prospective.
It is appropriate, since we have just entered a new year, that I prognosticate on the potential for economic health in 2011. I have no crystal ball, but will give it a try based on my constant reading from a variety of sources on this subject along with my understanding of the forces which make the economy move. It is likely that we are moving into a sustained but slow-paced recovery. A key force in advancing the recovery will be consumer spending, It has crawled along at 2 to 3 % over this past year. Higher employment levels in 2011 should charge this element in economic growth. Inflation is likely to be modest between 1 and 2.5%. It is accelerating commodity prices which will be a key driver of inflation in the US partly due to the relatively weak status of the dollar against other international currencies. Fortunately, global commerce is mostly conducted in dollars. With continued advances in emerging economies, demand for US exports should continue to expand. This will stimulate job growth in the areas of heavy equipment, technology and a variety of other service areas which are in demand globally. The US Congress needs to adopt fiscal policy which will bring capital back into the US economy instead of continuing the policies which have kept capital parked overseas through the previous decade in order to further the effort toward improving domestic job growth. Potential head winds to continued economic growth in the US come in the forms of still unknown outcomes for the economic calamity occurring in Europe, possibly higher interest rates, actions taken by the Chinese and Indian governments regarding high inflation in their economies along with potential economic slow downs and the unknowns regarding geopolitical issues around the globe. The Federal Reserve has come under significant criticism over its activities aimed at growing the economy. I think the Fed is doing what it needs to do in order to avoid a repeat of the Great Depression by continuing its trend toward increasing liquidity in the money supply. This action also avoids the very experience which the Japanese government continues to perpetuate over the last 10 years with a tight monetary policy. The down side of the Fed activity is increased inflation in the future and a continued weak dollar on international markets. If the US Congress had taken appropriate fiscal policy initiatives over the last three years, we probably would have never heard about QE2. The US Congress also needs to take responsiblity for many obviously failed initiatives over an extended period of years which created the environment leading to the economic and credit collapse in our country and correct them. Along with the already mentioned necessary fiscal policy adjustments, changes to the operations of government involvement in the mortgage market along with enforcement of financial regulations regarding credit ratings and derivative markets are essential. Our government must understand that adopting strategies which grow the economy will increase government revenue sources. Government cannot continue to grow as a portion of GDP while crowding out the private sector and have prolonged economic successes.
Regarding equity and bond markets, I believe that equity markets will continue to rise at a slow but respectable pace. It appears that many investors are happy to take the low yields offered by Treasuries and investment grade corporate bonds at this time due to their terrible experience of 2008 with stocks. This attitude is likely to change as the population begins to gain further confidence in the economy and recognizes the potential accelerated income streams offered in equity markets. Where are the best values in which to place your equity investments? Seek the guidance of a highly qualified Chartered Financial Analyst to help with those decisions. Bond prices will clearly take a hit as interest rates go up. Considerations for maturity and duration are key elements in building a bond portfolio which meets your income needs over the long-term.
I must admit that the housing market has me scratching my head. I do not know what to think. The situation is bleak with the continued trend toward foreclosures. I believe that the paper chase involved in the stall of many foreclosures in 2010 is just going to prolong the agony. The inventory of housing available for purchase is at about an eleven month supply according to CNN Money. The number of new housing starts, according to the same source, is at a 50 year low. On the positive side, with the grand supply of available housing, pricing is down. That fact along with what are very modest mortgage rates at present, make buying a home much easier and affordable for those who can qualify for a mortgage. If employment increases, these factors could very well shrink the over-supply of available housing more rapidly.
Looking back at 2010, we cannot ignore the potential effects which two pieces of legislation passed by the US Congress are likely to have on the lives of all Americans. I am referring to Health Care Reform and Tax legislation. The impact of Health Care reform legislation began in September of 2010 with mandates in place requiring that there be no life time maximum benefit limits placed on health insurance coverage, there be no underwriting criteria for preexisting conditions and dependents may be covered under a family plan up to the age of 26 years. We are already seeing the effects of these mandates in the form of elevating insurance premiums. If you are a small business owner, look for the following changes in you benefit package strategies as a result of this legislation:
1. including the cost of health insurance on the employees’ W-2
2. a cap on FSA contributions at $2500 with no index for inflation
3. increased penalties for distributions from HSAs before the age of 59 for other than health related expenses
4. the ability to establish a Simple FSA for your employees
5. requirement to report all consumption of products and services over the amount of $600 on a 1099
6. the potential for tax credits on the costs you bear for providing health insurance coverage to employees.
There are also tax increases aimed at higher income earners to support Medicare. This legislation is not all good and not all bad depending on your interpretation. The fact of the matter is that the rules are changing when it comes to consumption of health care services. We all need to learn the rules and make input to the US Congress on what adjustments are necessary.
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 is a true piece of compromise legislation. There is a little something for many interest groups in the law. The key factor which it accomplishes is the continuation of marginal income tax rates at their current level for another two years. What after that–who knows? It also expands the federal deficit due to the many subsidies and credits contained in it. Congress needs to adopt an attitude which motivates it to act in the best interest of the entire country rather that taking steps to cater to special interests in their districts or financial support universe.
Given the fact that most of us will be filing our income tax returns in the next few months, I thought I would list the contents of a great article found in Kiplinger December 2010 written by Joy Taylor on “IRS Audit Red Flags”. To avoid an audit of you tax return avoid the following:
1. failure to report taxable income
2. claiming the home-buyer credit improperly
3. claiming large charitable deductions
4. taking the home office deduction
5. poor documentation of business meals and travel
6. claiming 100% business use of a vehicle
7. claiming hobby loss
8. poor records for cash based businesses
9. failure to report a foreign bank account
10. engaging in currency transactions
11. math errors
12. takeing larger than average deductions.
Well, a HAPPY NEW YEAR to all!!
For the Record:
DOWJIA 11,577.51
NASDAQ 2,652.87
S%P 500 1,257.64
Suggested Reading:
“Leading Quietly” by Joseph L. Badaracco Jr.
Leonesmoneymonitormonthly's Blog 
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