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Welcome!
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John R. Deitrick, CFP®
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Portfolio Manager's
Commentary
The Portfolio Manager's Commentary
will be provided on a weekly basis. Enjoy!
Please click on the link below.
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Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
501 North Cattlemen Road, Suite 106, Sarasota, FL 34232
Tel (866) 641-2186
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Synopsis
- The Fed's decision to drastically cut interest rates prevented the financial
crisis from deepening, but it has remained in place for far too long.
- Low interest rates do encourage consumers to spend more money, but
there is a point where the drawbacks outweigh the benefits to the economy.
- The absolute best outcome for our economy is a return to a more normal
interest rate environment, and the Fed is only holding us back by keeping
rates at current levels.
Time To Change
The Federal Reserve Bank (Fed) has maintained a policy of artificially low rates since the depths of the financial crisis, and the extreme measures they took prevented our country from falling into a depression.
That being said, this monetary policy has overstayed its welcome and currently represents more of an economic headwind than the tailwind it provided in years past. The chart below explains why in greater detail.
This chart plots the 10-year Treasury yield on the horizontal axis and the personal savings rate for U.S. consumers on the vertical axis for each month since January 1980. I drew two red lines to approximate a "v-shaped" trend, which represents the crux of
my argument.
NOTE
: The 10-year Treasury yield is considered to be a "benchmark" interest rate since it is used as a basis for so many loans, such as mortgage rates.
The longer red line indicates that a higher benchmark rate corresponds to a higher savings rate. This relationship makes sense because higher interest rates will make loans more expensive for houses, cars, and other big ticket items.
If consumers are not spending their money because interest payments make goods unaffordable, then they are saving it, which increases the personal savings rate. On the flip side, lower interest rates on goods should incentivize consumers to spend more and save less.
However, there is a line in the sand where this relationship changes. The shorter red line indicates that once benchmark rates fall from around the 4% level, the savings rate reverses course and actually rises.
This pattern is much less intuitive because one would assume that even lower
interest rates would encourage consumers to take out even more loans, but the opposite appears to be the case. I believe that there are two main reasons for this behavioral shift.
- No Income: Super low interest rates also generate super low returns on ultra-safe investments. Those households who rely on income from government bonds and bank CDs, particularly retirees, cannot spend money because they are not earning money.
- Bad Signal: Super low rates have only been used during extreme situations like the Great Depression. Keeping rates this low is inadvertently signaling that the economy remains perilous, and a worried consumer tends to spend less and save more.
Combine these two headwinds, and the Fed has created an environment where no matter how attractive loans become, consumers cannot or will not spend money.
This is a problem for an economy that is predominantly driven by consumer spending.
Simply put, lower benchmark interest rates do encourage consumers to spend more and save less, but only until the point where the pain from earning nothing on ultra-safe investments exceeds the benefit from cheap loans.
Implications for Investors
The Fed employs some of the brightest economic minds in the world, and Chairwoman Yellen is a highly accomplished economist who likely understands unemployment better than anyone else alive. There is no question that these people are experts at analyzing data and observing trends.
I do not claim to be such an economist, but I do try to be a realist, and even though I cannot provide any statistically significant evidence to support my theory above, I have learned through experience that not all economic theory taught in textbooks accurately reflects human behavior.
In this case, trying to model the fear of running out of money during retirement into consumer spending trends would most likely yield an outcome that is too imprecise for most economists. However, to me, there is no reason to even try because the observation alone is more than enough evidence to conclude that ultra-low interest rates need to go.
Being a realist, I also recognize that my views on interest rates will never get incorporated into our monetary policy. Even if the Fed were to read my writings, they would likely counter with their standard defense that they are doing no harm since inflation remains below their target range (clearly nobody at the Fed has to pay rent, buy groceries, or cover medical bills that seemingly double every four years).
Therefore, my goal is not to advocate the Fed to move but rather explain to investors why they should not fear the day when rates begin to rise. All that will be happening is a move back to the point on that curve where consumers can spend more and save less, which will make our economy even stronger.
The bottom line
is that the Fed has kept their extreme policy measures on for way too long, and the best possible outcome for our economy would be to return to a more normal interest rate environment in an orderly fashion.
This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private Capital is an SEC Registered Investment Adviser.
Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
501 North Cattlemen Road, Suite 106, Sarasota, FL 34232
Tel (866) 641-2186
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BY THE NUMBER$
NOT THE MOST - Household median income in the USA was $56,516 in 2015. The highest level of household median income recorded was $57,909 in 1999, a total that has been adjusted for inflation (source: Census Bureau).
THEY EXTRAPOLATE - The government surveyed 95,000 American households to compile the "household income" statistic, or less than 0.1% of the nation's 118.3 million households (source: Census Bureau).
HAVING BABIES - The birth rate in the United States is 13.42, i.e., 13.42 births per 1,000 citizens. The birth rate in Mexico is 19.02, i.e., 19.02 births per 1,000 citizens, or +42% higher than that of the United States (source: CIA World Factbook).
TAX DATA - The 6.22 million tax returns from 2014 that reported at least $200,000 of adjusted gross income (AGI) represent 4.2% of all returns filed, received 34.2% of all AGI nationwide and paid 58.2% of all the federal income tax that was paid nationally in 2014 (source: Internal Revenue Service).
RISING PRICES - Over the 5 years 1977-1981, inflation (as measured by
the Consumer Price Index) advanced by +61.5%, an increase of +10.1% per year. Since then, only 1 calendar year (1990) has produced annual inflation of at least +5%. Over the 12 months ending 8/31/16, inflation advanced +1.1% (source: Department of Labor).
MORE THAN TEN BILLION A DAY - With less than 2 weeks remaining in fiscal year 2016 (i.e., the 12 months that will end on 9/30/16), the government is projecting fiscal year spending of $3.88 trillion, equal to $10.6 billion of daily outlays (source: Treasury Department).
COST OF DOING BUSINESS - Based upon June 2016 data, 69% of the total employee cost that an employer pays in the private sector is for wages and salaries. The other 31% is for the various benefits that are legally required (e.g., Social Security) or are simply provided to attract and retain workers including insurance, retirement plans and paid leave (source: Department of Labor).
FED ACTION - When the Fed raised short-term interest rates on 12/16/15, their post-meeting press conference included a forecast of 4 rate hikes in 2016 that would result in a one percentage point increase, i.e., 4 hikes spread over 8 scheduled meetings of ¼ of 1 percentage point each. Through the first 5 meetings of 2016, the Fed has not raised rates. Meeting # 6 of 2016 will take place this week (source: Federal Reserve).
THEY DIDN'T AGREE - This week's Fed meeting is the 21st of the Janet Yellen era. Yellen became the Fed chair on 2/03/14. There have been 13 dissents to her interest rate recommendations from her first 20 meetings, cast by just 5 different members of the Federal Open Market Committee (source: Federal Reserve).
NOT UNTOUCHABLE - When a 1983 Social Security committee (chaired by Alan Greenspan) implemented changes that gradually increased the age from 65 to 67 at which a retiree would receive full social security benefits, only Americans that were 20 or more years from turning 65 were impacted (source: Social Security).
EARN LESS, PAY IN MORE - The trustees of the Illinois Teachers' Retirement System (TRS) pension plan voted to reduce the plan's discount rate from 7.5% to 7% on Friday 8/26/16. This action will force the pension plan to increase its annual plan contribution by $421 million to $4.3 billion a year (source: TRS).
ARE YOU READY FOR FOOTBALL? - 35% of the NFL football players on the opening day rosters for 2016 graduated from high schools in just 3 states - Florida, California and Texas. Only 2 states (Alaska and Maine) do not have a player on a NFL roster this season (source: MaxPreps).
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I hope you find this information adds value. If you would like to talk to John regarding these, or any other financial concerns, please feel free to call us at (614) 602-6506 and we will be happy to schedule a visit.
If for whatever reason you no longer wish to receive this newsletter, it's very simple to unsubscribe at the bottom of the page.
Make it a Great Week!
Enjoy His gift of today!
Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser. Past performance is not indicative of future results. This commentary is not intended as investment advice or an investment recommendation it is solely the opinion of our investment managers at the time of writing. Nothing in this commentary should be considered as a solicitation to buy or sell securities. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company, and are not offered through Global Financial Private Capital.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and the federally registered CFP (with flame design) in the US., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
AssetLock® is tracking software used to monitor the performance of a client's portfolio, and to predetermine the amount of downside the client is willing to tolerate. It is NOT an actual stop order and will NOT automatically sell the individual securities in the portfolio. Therefore, the AssetLock® value is a reference point to encourage a conversation between the advisor/firm and the client to determine if the client's portfolio should remain unchanged, reset the AssetLock® percentage by reallocating to a different risk profile, liquidate part or all of their portfolio or opt out of AssetLock®.
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John R. Deitrick
CFP®
Advanced Retirement Design LLC.
7263 Sawmill Rd.
Suite 150
Dublin, OH 43016
Office: 614.602.6506
Fax: 614.259.6094
Email: jdeitrick@advancedretirementdesign.com
advancedretirementdesign.com
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