At some point, an economic problem deepens so much that the piper has to be paid. Both in the U.S. and globally, one of those problems appears to be mountains of debt.

Jim Rickards recently issued a dire proclamation about the global debt situation:

Current global debt levels are simply not sustainable. Debt actually is sustainable if the debt is used for projects with positive returns and if the economy supporting the debt is growing faster than the debt itself. But neither of those conditions applies today.

In other words, most of the global debt we’re racking up isn’t being used for productive purposes. Instead it’s being used to service “benefits, interest and discretionary spending,” according to Rickards.

This debt growth should continue. According to the Institute of International Finance (IIF), global debt is expected to pass $255 trillion by the end of this year, and they don’t see the pace of debt accumulation slowing down.

In fact, you can see how the official global debt has already skyrocketed from about $80 trillion in 1999 to this new record.

Zero Hedge reports that, by year’s end, the global debt will be “roughly equivalent to a record 330% of global GDP.”

With debt outpacing growth by such a large margin, we are fast approaching a day of reckoning.

Another Zero Hedge article reports:

The world bank looked at the four major episodes of debt increases that have occurred in more than 100 countries since 1970 — the Latin American debt crisis of the 1980s, the Asian financial crisis of the late 1990s and the global financial crisis from 2007 to 2009.

The bank says that we’re in the fourth episode now, and their prognosis isn’t good. In fact, they called the failure to properly manage the global debt “complacency”:

“The increase in debt globally has already been larger, faster, and more broad-based since the Great Financial Crisis than in the previous three waves. This should be seen as a leading indicator for the possibility of financial crises ahead and shake up the complacency that is evident in macroeconomic policy making today with regard to increasing levels of both public and private debt.”

Jim Rickards thinks the “trigger” for an imminent global debt crisis, if one happens, would boil down to rates:

Low interest rates facilitate unsustainable debt levels, at least in the short run. But with so much debt on the books, even modest rate increases will cause debt levels and deficits to explode as new borrowing is sought just to cover interest payments.

 

Four Charts That Could Define The Next Decade
1 – Annualized Returns

are one of the more “mean reverting” series in the financial markets. Decades of high returns are inevitability followed by subsequent low, and even negative, returns. Buy and Hold will not work for retired investors during this period.

 

 

2 – Household Net Worth as a Percentage of GDP

is pushing record levels. While not in itself a “bad thing,” the benefit has been confined to the top-20% income earners. Importantly, asset growth has far outstripped economic growth which is unsustainable long-term. This series too, will mean revert.

 

 

3 – Corporate Debt To GDP

is also pushing unsustainable levels. Debt ultimately has to be “cleared” before the system can re-leverage for the next growth cycle. The next reversion cycle will be brutal on a large number of publicly traded companies which have relied on “cheap debt” to sustain poor fundamental business models. Be careful what you own.

 

 

4. – Melt-Ups In Markets

Can Seem Rational in the heat of the moment. However, when “reality”inserts itself, the eventual reversion tends to be brutal.

 

 

What You Need to Know About The SECURE Act

The week before Christmas has been just a little busier than usual. Even with all of the additional political hubbub, it looks like politicians did have time to get one thing done: The SECURE ACT.

The SECURE ACT has finally been sent to President Trump’s desk to be signed. This bill does accomplish several good things for small businesses and the average worker, but it does eliminate one key element for IRA beneficiaries which is the ability to stretch IRA funds generationally. Currently, non-spouse beneficiaries have the ability to stretch distributions from an inherited IRA over their life span. Unfortunately, with the passing of SECURE ACT this is no longer the case. Now, non-spousal inherited IRA funds must be distributed within a 10-year time frame. Who’s the winner here? It’s clearly Uncle Sam as they find more ways to get their hands on your hard-earned dollars. This is just another reason to explore Roth conversions and to take a hard look at where you park your funds. I fear having the flexibility of where to take distributions from will become all the more valuable in the coming years.

 

SECURE will take effect on January 1, 2020. Here are the highlights:
1. IRA Contributions

The Labor Force Participation Rate growth rate for those age 75 is up 76% since 2000. There are many reasons for this with the most prominent being this cohort needs the money.

The SECURE Act gets traditional IRAs in line with traditional 401(k) and Roth IRAs and will allow working older Americans, 70.5+, to continue to contribute to their pre-tax retirement accounts. Let me say this is no big deal. In fact, I’m very concerned this provision may lead retirees along with advice from mainstream financial professionals, to continue to overfund pre-tax accounts for absolutely no reason.

2. Required Minimum Distributions

(RMDs). Simply, if you haven’t turned 70.5 by the end 2019, you’ll be provided the privilege to wait until 72 to begin required minimum contributions. On a positive note, at least it’ll be easier for people to figure out when to begin their RMDs.

On a disappointing note, why older Americans who remain or return to the workforce are required to take distributions when they should be given the choice to wait is the most egregious ignorance of the tax elephant in the room and the issues seniors face today when it comes to making ends meet, in my opinion.

The Act should have allowed older employed Americans to postpone distributions until they, well, RETIRE.  However, we will need to make the best of it. Along with reform around life expectancy tables expected in 2021, many taxpayers should experience a bit of relief on taxes as life expectancies have increased.

We’ll break this down for you by date of birth.

You were born before 1949…

Business as usual if you are already taking RMD’s. The SECURE ACT does not impact you. Continue to take your RMD’s as scheduled.

If you were born between January 1st and June 30, 1949…

Again, business as usual. Since you turned 70 ½ in 2019 hopefully you have already taken your RMD. However, if you didn’t make your distribution in 2019 you’re in luck. You can still take your 2019 distribution as long as you do so prior to April 1, 2020. Remember you will still be on the hook for your 2020 RMD as well as last year’s 2019.

You were born between July 1st and December 31st, 1949…

Winner, winner chicken dinner! The SECURE ACT does affect you. Your first RMD is now 72 instead of 70 ½.

You were born after 1949…

Ding, ding, ding you won the SECURE ACT. Your first RMD doesn’t happen until you’re 72.

3. The bill permits penalty-free withdrawals from retirement plans for expenses related to the birth of a child or adoption

I’m torn over this one as it adds another element of ‘leakage’ to accounts that shouldn’t be touched until retirement. However, if it assists a family to adopt a child, I’m compelled to support it. Now, Congress could have removed the penalty-free withdrawal provision for a first-time homebuyer as we believe at RIA, if you need to tap retirement accounts to make a down payment on a house you clearly can’t afford to own one. In addition, and I know we can argue about this all day, a primary residence is NOT an investment. It’s a consumption asset.

4. The bill creates a new three-year tax credit for small employers for startup costs for new pension plans that include automatic enrollment.

Occasionally, probably by accident, there’s a jewel among the government rubble.  The new bill allows for a $500 tax credit for small employers to start retirement plans that must utilize automatic enrollment. Empirical studies outline how auto-enrollment has increased retirement plan participation.

5. Pooled Employer Plans

(Sec. 101) The bill amends the Internal Revenue Code to revise requirements for multiple employer pension plans and pooled employer plans. It provides that failure of one employer in a multiple employer retirement plan to meet plan requirements will not cause all plans to fail and that assets in the failed plan will be transferred to another plan. It also establishes pooled employer plans that do not require a common characteristic.

This Section will allow small employers to pool their resources to create 401(k) plans. A great dilemma we face as a country is lack of retirement plans available to employees of small companies.

6. Annuities Offered in Your 401K

Rarely, are guaranteed lifetime income options in the form of annuities provided in company retirement plans. Now, that can change. I fully support this initiative, but the endorsement comes with a caveat. I’ll explain.

First, overall this is a positive. The loss of pensions has clearly created a retirement saving crisis in America. To offer a lifetime retirement income option among the sea of variable assets of stocks and bonds is indeed a positive ballast.

However, if you believe your employer does a challenging job with the selection of mutual funds, just wait to see what happens with annuities. It’s going to be absolutely crucial (and I cannot stress this enough), that you work with a fiduciary partner with extensive insurance experience that can help you assess the annuity your employer selects and whether or not you should consider it.

7. No More Stretch IRAs

This is a significant change. The SECURE Act will require owners of larger pre-tax retirement accounts who plan to leave a legacy to family through IRAs, to review and possibly restructure their estate plans, ideas, in the coming years.

Currently, non-spouse beneficiaries such as children, can stretch inherited IRA distributions over their life expectancies. The SECURE Act beginning next year would require non-spouse beneficiaries deplete IRAs over a ten-year period. Non-spouse beneficiaries who are currently taking distributions should be grandfathered and not affected.  Along with taxes, this change can be detrimental to your legacy planning.

Again, this is one reason why we focus so much on surgical Roth IRA conversions and favor Roth over traditional, pre-tax accounts in almost every circumstance. Sure, the accelerated distributions are the same. However, the acceleration of depletion due to taxes is a tremendous negative to the wealth you plan to leave to others.

8. Roth IRAs

Do you have a child or grandchild that has worked this year? No, we aren’t talking about those with babysitting or lawn jobs that never get taxed. The IRS defines earned income as “all the taxable income and wages you get from working… for someone who pays you or in a business you own.” Key word taxable.

You can contribute to a Roth or Traditional IRA depending on income limits, but considering they’re children let’s assume they fall under the income limits. With these assumptions, I would go with the Roth. Having the ability to put funds aside at a young age in an account that will grow tax free without income taxes taken out in retirement is a no brainer.

The max you can put aside for 2019 for your worker is up to their earned income or $6,000… whichever is less.

9. 529 Plans

529 plans are an excellent way to put funds aside for college without the child getting control of the assets at the age of 18. A 529 plans biggest benefit is its tax-free growth if the funds are used for higher education.

Annual contributions to a 529 plan for 2019 can be up to $15,000 per year or a lump sum contribution of $75,000 for a 5 year period. Be careful not to trigger gift tax consequences. 529 plans are issued for each state, if you live in a state with state income tax check to see if your state plan offers tax benefits for your contributions. If you live in a state without state income tax pick the plan that’s most appropriate for you.

These gifts may seem boring and fall on deaf ears for the time being, but I can assure you as your kids or grandkids age they will be more valuable and meaningful than any toy or trinket they could receive.

 

Observations From Michael Lewitt

After seeing dozens of 2020 forecasts, I found Michael Lewitt’s the most thought-provoking so far. Others try to cut through the fog; Lewitt explains why fog is the problem.

Key Points:
  • We are in a world where everything’s value is elusive because the ideas behind them lack substance, character and integrity.
  • In trying to minimize human elements, investors see a level of control over human affairs that doesn’t really exist. This illusion will ultimately cause the next financial crisis. Read those 2 sentences again.
  • Stock buyers are giving tech-company valuations to companies that, while they use technology in new ways, are not themselves technology makers.
  • Low growth stocks are and will keep trading at high multiples because ETFs will keep indiscriminately buying them.
  • Fed easing, passive investing and corporate buybacks will support markets but leave investors picking up pennies in front of steamrollers.
  • Paltry coupons and lack of covenant protections will put bond investors in a tough position if economic growth doesn’t pick up soon.
  • The Fed will, despite its latest dot plots, cut rates again in 2020 under pressure from President Trump.
  • China’s domestic economy is now slowing due to excessive debt.
Bottom Line:

Lewitt concludes: “A global economy whose two largest economies are devoting increasing amounts of financial and intellectual capital to debt management is decidedly unhealthy.” True, and the debt is near-impossible to manage when the underlying assets are illusory or overvalued. The situation may not blow up in 2020 but still leads nowhere good.

 

Hedge Funds

Hedge funds have been boosting their exposure to US equities. The unwind of these positions could get ugly.

 

 

Stock Buy-backs

Will share buybacks remain strong in 2020?

 

 

Good News for the Markets
  • Holiday sales on the final Saturday before Christmas hit a new record.
  • New home sales are also at multi-year highs.

 

Bad News for the Markets
  • Banks are making the biggest round of job cuts in four years as they slash costs to deal with a slowing economy and adapt to digital technology, Bloomberg reports, citing filings and labor unions. Morgan Stanley (NYSE:MS) is the most recent bank to join the spree, cutting about 1,500 jobs, according to people familiar with the matter. Overall, more than 50 lenders have announced plans to get rid of a combined 77,780 jobs this year, the most since 91,448 in 2015. European banks, which face negative interest rates, account for almost 82% of the total.
  • Corporate Defaults in China Hit Record High.
  • Chinese corporate defaults reached a record high (FT) of more than $18 billion in the last weeks of 2019, according to Bloomberg.
  • The Richmond Fed regional manufacturing index was back in negative territory in December.
  • The December Kansas City Fed manufacturing report was terrible.
  • This year’s decline in Japan’s industrial production was the worst since 2013.
  • The RSI indicators suggest that the US stock market rally is becoming stretched.
  • Economists expect US growth to dip below 2% this year. The current 10 year economic expansion remains the slowest in the post-WW2 era.
  • Iran-backed regional forces:

 

 

 

Decker Retirement Planning Inc. is a registered investment advisor in the state of Washington. Our investment advisors may not transact business in states unless appropriately registered or excluded or exempted from such registration. We are registered as an investment advisor in WA, ID, UT, CA, NV and TX. We can provide investment advisory services in these states and other states where we are exempted from registration.