Reuters Money
Debt deal puts off tax decisions for another day
The legislation to lift the debt ceiling gives the country a framework for more than $2 trillion in budget cuts over 10 years and avoids default. But it also puts off discussion of taxes for another day — and it’s unlikely that we’ll see any movement on tax reform or significant tax changes until 2012.
“If I were at a roulette table in Vegas, I would put almost all my chips on a square marked ‘Lame Duck,’” says Clint Stretch, managing principal of tax policy in Deloitte Tax’s national office in Washington, D.C. “I see nothing that Congress will regard as a ‘must do’ in the tax area before a lame-duck session in 2012.”
In the second stage of the deficit reduction, a new Congressional super-committee will have a mandate to come up with some $1.5 trillion of savings by late-November. But while taxes could be part of that discussion, there are many obstacles: The two sides are very far apart, the timetable for the super-committee to do its work is very short (especially in tax terms), and the Republican victory on getting taxes off the table in the current deal makes it likely they’ll stay off a few months hence.
The tax reform efforts of 1986, 1993 and 2001 were all debated during their respective Presidential elections, and that’s likely to be the case today, too. While there have begun to be tax-reform proposals bandied about — from the Gang of Six, among others — these remain preliminary. “We have not begun a serious conversation about tax reform,” Stretch says. “It’s going to be the discussion of the next election. The President will eventually have a tax proposal, and the Republicans will have their competing proposal. Then we’ll have a bloody fight over it.”
At stake are key issues surrounding who should pay for the government to do its work, and at what level — issues of fairness and of complexity. What are the right tax rates, and should they be higher or lower than today? Should the wealthy pay higher rates? Should investment income be taxed like wages or at a lower level? Should homeowners continue to benefit from the mortgage interest deduction? Should taxpayers still be allowed to write off state and local taxes? And what about the Alternative Minimum Tax, the complicated alternate tax system? And those are just some of the questions for individual taxpayers.
In the meantime, of course, the Bush tax cuts are slated to expire at the end of next year, when the two-year extension they received last year runs out. Republicans favor continuing those cuts, while the Obama Administration had hoped to eliminate them for high-income taxpayers. Deloitte’s Stretch argues that as tax reform gets pushed off, the Bush tax cuts are likely to get another one-year extension and come up for discussion as part of broader tax-reform.
Also set to expire at the end of 2012 — though barely discussed during the recent deficit discussions — are the changes to the federal estate tax, which increased the exemption amount to $5 million and lowered the tax rate due.
Complaints surge over group coupon deals
Deal hunters are consuming deep discounts on everything from restaurant meals to boat tours, but they are also starting to complain about troubles with these offers in increasing numbers.
Both the Consumer Federation of America and Web watchdog SiteJabber.com have noted the surge in this relatively new genre of deal offerings. Consumers get lost in the marketing gimmick of the daily deal and don’t see what’s actually involved, including short expiration dates or requirements for additional purchases.
That trouble with the small print is the biggest problem consumer agencies also have seen with the coupons. “Marketers online are becoming increasingly misleading and aggressive in the way they sell products and services,” says Jeremy Gin, co-founder of SiteJabber.com, a community of consumers who evaluate web offerings. “As a result, it is now more than ever incumbent on consumers to do their research on online businesses — read reviews and read the fine print — before they buy.”
Gin says that Groupon had earned a three out of five rating on his site, and had more than 100 people warning against it, while LivingSocial rated two out of three and had 100 warnings; both sites were listed as “not recommended.” He notes many users also report snagging great deals without any issue.
“The major trend in consumer complaints we see on SiteJabber surrounds sites that market their services as one thing, but in the fine print they are something less desirable,” Gin adds. “This serves to increase sales in the short term at the cost of customer satisfaction and long-term brand loyalty. These types of sites are not so bold as scam artists who merely steal money and never return emails. But instead these sites often respond to complaints by pointing to the terms of service and essentially saying, ‘Sorry you agreed to it. No refunds’.”
Susan Grant, the consumer protection director at the Consumer Federation, only sees this trend growing. “I am not surprised that agencies have begun to get complaints about group coupons and would expect that to continue,” she says. ”Any time you have a new form of discount opportunity you’ll have problems with the terms not being clear.”
When Grant was working on the Consumer Federation’s recently-released list of Top 10 consumer complaints, another category that was growing was about the “recovery” scam, which this year targeted consumers trying to dump their unwanted timeshares. The Top 10 list was distilled from 252,000 complaints gathered from consumer agencies in 18 states by the federation, the National Association of Consumer Agency Administrators and the North American Consumer Protection Investigators.
6 ways to protect your portfolio after debt deal
With the U.S. debt ceiling crisis: It “ain’t over ‘til it’s over,” to quote my favorite philosopher Yogi Berra. And this one is definitely not over by a long shot.
Some $1.5 trillion in cuts in federal programs will be considered toward the end of the year. Credit agencies may still downgrade U.S. debt. And the harsh plan may ultimately damage the floundering American economy. Fortunately, you have time to protect your portfolio before another politico-economic reign of terror ensues.
Start with an assumption that the markets may frown on U.S. debt and the dollar in general. And there may not be much – if any – significant economic growth in the U.S. for some time. Here are six key portfolio themes that you can consider to bolster your portfolio and insulate it from global debt woes.
A bear market in U.S. bonds. The bull market that got its start in the 1980s may be at the end of its run. Will inflation or investor insecurity trigger a flight from what was seen as the safest debt in the world? If you’re really nervous about U.S. Treasuries, trim your holdings in the longest-maturity notes. To hedge against interest-rate risk depressing government bond prices, consider the Direxion Daily 20+ Year Treasury 1x Shares exchange-traded shares. If the index linked to these bonds goes down, the value of this ETF goes up.
A bear market in the euro and dollar. There’s no easy resolution to Eurozone and U.S. debt dilemmas. Are there “safer” currencies relative to the buck and Euro? You can either buy stocks or AAA-rated bonds in some of the better fiscally managed countries such as Australia, Canada and Switzerland, or currencies from those countries. A more precise way of hedging currency risk is to find a country like Switzerland that’s seen as relatively secure and invest in an ETF such as the CurrencyShares Swiss Franc Trust.
Dividends rule. Not subject to partisan wrangling or sovereign debt debacles, corporate dividends are based on real earnings. Most consistent dividend producers are multinational companies that derive their profit from global enterprises. To find a pool of regular dividend payers, invest in an ETF like the SPDR S&P Dividend ETF. The fund tracks a group of dividend “aristocrats” selected for their consistent payouts over time.
Emerging markets bonds. Though not in the same league as U.S. Treasuries – that may change – bonds issued by developing countries are worth eyeing for diversification and higher yield. The WisdomTree Emerging Markets Local Debt ETF tracks an index of such issuers.
Social Security, Medicare dodge bullet, but cuts loom
Social Security and Medicare dodged a bullet in the debt ceiling battle, but beneficiaries still have plenty to fear from the next phase of the deficit reduction war.
The agreement to raise the debt ceiling means seniors will receive their August Social Security benefits – something many worried about after President Obama said last month that he “couldn’t guarantee” the payments if default occurred. Likewise, Social Security and Medicare benefits both were exempted from the $917 billion in first-phase cuts that paved the way for the debt ceiling deal.
But major benefit cuts seem likely to emerge from the second phase of this process. A 12-member Congressional committee must identify another $1.5 trillion in spending cuts, bringing the total deal to $2.4 trillion in cuts over 10 years. That group will have a November 23rd deadline to finish its work, which will then go to an up-or-down vote – no modifications allowed – by Dec. 23rd.
What’s more, if the committee cannot agree on at least $1.2 trillion in savings, or Congress rejects its findings, automatic spending cuts totaling that amount would kick in starting in 2013. Medicare would be subject to the automatic cuts, although Social Security and Medicaid would be exempt.
The enormous pressure to identify $2.4 trillion in cuts boosts the odds that Social Security benefit cuts will be proposed. Re-stating what I’ve said so many times: this would be unfair and unwise. Social Security doesn’t contribute to the deficit, and it will be a critical source of support for recession-ravaged seniors in the decades ahead.
The most likely cutting tactic is the chained CPI measure of cost-of-living adjustments (COLA). This is the only way to get near-term savings from Social Security, since it reduces benefits for current retirees. By contrast, a higher retirement age would have to be phased in over many years.
A chained CPI could be implemented as early as 2013. The chief actuary of the Social Security Administration estimates that the chained CPI will rise about 0.3 percentage points less per year than the inflation measure used now, the CPI-W. With compounding, that translates to a monthly benefit cut of 8.4 percent for a retiree at age 92 (calculated from age 62, the first year of eligibility), according to the National Academy of Social Insurance.
While congress is busy beating the dead dog by cutting medicare and raising the social security elgibility age for people who worked all their lives and paid into the system why don’t they remove the cap on social security that stops rich people from paying social security tax after $110,100 income?
What you need to know about consumer-driven health plans
A mid-career engineer, Michael Eckman, 37, bounced back from a year of unemployment by recently landing a new job about 15 miles northwest of Philadelphia. It happened quickly. He sent the initial application on a Wednesday, heard back that Thursday, interviewed Friday and received an offer a week later.
Once employed, his benefit choices emerged quickly, too.
For health insurance, he had two options: He could access a traditional preferred provider organization, which would organize every aspect of his healthcare.
Or he could enter a “consumer-driven health plan.”
The latter option, he said, would give him an annual cash allotment earmarked for heath expenses.
It was intriguing. But one element of the plan made him nervous: The annual cash allotment wouldn’t roll over yearly. He’d have to spend it or lose it each year.
“I felt like it was asking, ‘Do you plan on being sick or healthy this year?’ ” he says. “What kind of a question is that?”
In the world of high-priced purses, beware quality fakes
Lan Tran, a systems analyst in Boston, wanted a Louis Vuitton purse which retails for about $1,500, but thought the price was a little too steep for her. So when she saw one listed on eBay for $300 from a top seller with only good feedback, she struck.
“With all those years shopping on eBay, I had my mind rest that it was truly a real deal,” Tran says.
Then she looked at some of the detailed photos and realized something about the stitching didn’t quite look right. She asked Cassandra Connors, whose company Bella Bag, is built around the idea making sure clients are getting the real deal, whether she could authenticate that the bag was, indeed, a real Louis Vuitton. Connors concluded it was a fake.
“I was extremely disappointed,” Tran says.
When it comes to designer handbags, as the price rises, so does the quality of the fakes. When a new bag sells for $300 or $400, there’s not enough profit margin in investing in building a quality phony product. But when you get into the $5,000 to $15,000 range, sophisticated counterfeiters join the game.
“There are truly good counterfeits and there are bad counterfeits,” says Connors, whose Atlanta-based company sells previously-owned purses — some have never actually been used — that range from $200 to $15,000 (she just sold a limited edition Channel bag for $9,800). She also offers an authentication service; for a fee, they’ll tell you whether you got a great deal or a great fake.
Connors says she has seen counterfeit bags selling for $1,000 in an attempt to replicate one that sells new for $12,000.
Structured products still should be avoided by yield chasers
Regulators have finally gotten the message that structured products can be hazardous to your wealth .
Structured products are notes that promise a high yield and are linked to derivatives sold by a bank or broker. After I wrote a column based on a study I conducted for The Nation Institute on May 17 exposing the dangers of these vehicles, the SEC and industry regulator FINRA issued two warnings.
The SEC followed up with a sweeps probe of brokers selling these products and released the results July 27. The agency found evidence of unsuitable recommendations, omission of material facts and “questionable sales practices.”
Why are regulators finally telling you to stay away from retail structured products? They carry embedded risks and high costs that brokers and banks are not clearly disclosing to you. Since the sales commissions on these notes are high, many brokers are aggressively selling them.
The Georgia Secretary of State, for example, is probing the sale of reverse convertible notes, which are bets tied to underlying stocks. The state has subpoenaed UBS AG, Morgan Stanley and Ameriprise seeking information on product sales and customers. The companies have denied wrongdoing.
Watchdogs have reason to be concerned as structured products are now finding their way into variable annuities. The pitch is beguiling: Do you want market gains with downside protection? Sounds pretty sweet, doesn’t it?
A structured product will pair an options contract linked to a securities index or zero-coupon bond. Of course, it’s rarely disclosed in plain language how those options are priced or how much the note will cost you. While at first blush it sounds like a good deal, when you add up the commissions and internal costs, it’s usually a dubious investment in which you’re stuck for a few years. And you could lose principal, so nothing is guaranteed.
Stock loans can put your securities to work as collateral
A few years ago, homes provided a deep and seemingly endless pool of loan collateral. Now, depressed real estate values and tight lending standards are prompting some brokers to float the idea of using stocks and other securities as collateral for people with healthy portfolios but limited borrowing options.
As the name implies, securities-based loans rely on the value of stocks, bonds or mutual funds as collateral. The most common form of a securities-based loan is a margin loan, which typically allows you to borrow up to 50 percent of the value of stocks in your account, and a higher percentage for less volatile assets such as Treasury or municipal bonds.
Another type of securities-based loan, called a non-purpose loan, follows similar collateral rules but often carries better rates and terms than a garden-variety margin loan. These are usually for larger amounts of $100,000 or more and are arranged by brokers or bankers for their most well-heeled clients.
In either case, custodial and retirement accounts, including IRAs, are off limits in these transactions.
While most people are familiar with margin as a way to finance stock purchases with borrowed money, the loan proceeds need not be used for investments. In fact, there are no restrictions on what you can do with the money and no set schedule for paying it back.
Margin loans fell out of favor in 2008, when the stock market crash forced many people to add collateral to their accounts at a time when they could ill-afford to do so. But the market recovery has sparked a comeback and over the last year margin debt at New York Stock Exchange-member companies has risen from $236 billion to nearly $316 billion.
While it’s hard to say how much of that money is going toward personal use, securities-based loans are filling a gap for some people whose borrowing capacity has been choked off by the recession.
“The most common form of a securities-based loan is a margin loan, which typically allows you to borrow up to 50 percent of the value of stocks in your account, and a higher percentage for less volatile assets such as Treasury or municipal bonds.
Most munis are tax-exempt, and you can’t buy tax-exempt bonds on margin. Tax regulations prohibit it.
The case for financial repression: Mild inflation, low interest rates
Rick Ashburn is a chartered financial analyst and the founding Principal Chief Investment Officer of Creekside Partners, based in Lafayette, California. The opinions expressed here are his own.
As the two – or is it three? – political parties in Washington lurch toward a budget agreement, what are the longer-term implications of the situation we find ourselves in? We have a lot of public debt combined with the rather serious economic headwinds that rapid deficit reduction always entail. And at the same time that we need to reduce our debt load relative to GDP, our real GDP growth is likely to be sub-par.
There has been a lot of commentary in recent months about the possibility of reducing the nation’s debt by means of inflation. Simply put, a dollar of today’s debt can be repaid with a dollar sometime off in the future. If in the future there are twice as many dollars floating around relative to the size of the economy, the repayment of the old debt is only half as burdensome. Debt that seemed high in 2011 is only half as high after some decades of even modest inflation.
If inflation averaged merely 3.5 percent per year for 20 years, debt incurred today can be repaid at an effective 50 cents on the dollar. The compounding of that 3.5 percent inflation over 20 years results in a doubling of the price index — and a halving of debt still denominated in “old” dollars.
Modest inflation of the genuine kind, where wages rise along with prices, has certain advantages to economic growth. Primarily, it encourages capital investment and risk-taking since companies have some confidence that prices for their products will go up over time, allowing them to recoup their investment. Banks like modest inflation since it means their loan collateral will not decline in value. Consumers tend to spend money more readily, helping stores turn over inventory and keep workers on staff.
For all the benefits of mild inflation, who does not benefit? Conservative savers and holders of long-term bonds, that’s who. A bond yield of 3.5 percent results in a zero rate of return after inflation. Savers with money tucked away in low-yielding deposit accounts fall inexorably behind.
Should inflation begin to accelerate, the bond market will drive up interest rates until bond yields are comfortably higher than inflation. Should this happen in the normal course of events, the cost of servicing the public debt will increase just as fast as inflation would normally drive it down. There is no net gain in debt reduction. What we really need in order to “inflate away” our debt is combination of high inflation and low interest rates.
An interesting piece Mr. Ashburn, and well-written. However, it is one of limited purpose (investment), and assumes stasis of a number of factors that seem destined to derail the trajectories you project.
I would be curious to hear your position on the interplay of just one of those factors: peak oil. It is widely acknowledged that in 2005, world oil production peaked. (U.S. oil production peaked in 1979.) Demand, however, has not peaked. In fact, all other things being the same, demand would be expected to grow substantially as the economies of the BRIC move forward and their infrastructure improves. Of course, all things will not be the same, and if we refuse to assume, without any basis other than optimism, that a replacement energy source will be developed, then we can expect demand to be conflated by increasingly oppressive prices.
Thus, declining production of fossil fuels alone, and particularly oil, will continue to drive inflation irrespective of the CBs’ money-printing policies. Energy depletion cuts across all sectors of the economy, and most sharply against those commodities that people (“consumers”) need the most: food, shelter and transportation. At some point, even communications can be expected to be impacted.
For these reasons, I believe your opinions are attractive, but only as a snapshot of where we are today. I frankly doubt they hold much predictive value over the long term. I’d be interested in how you would respond to that.
Answers to the 7 big “what-ifs” of debt default
The debt negotiations are getting down to the wire. Republican and Democratic lawmakers are scrambling to broker a deal to raise the country’s $14.3 trillion debt ceiling before Tuesday, when the Treasury will no longer be able to borrow funds to meet all of its obligations. That’s why major credit rating agencies are considering a downgrade of U.S. debt.
What does that mean for consumers? Here are some answers we compiled from Reuters Money experts:
Should I be worried that I won’t receive my Social Security benefit in August?
Not immediately. Social Security’s coffers are full enough to make the August payments. And cash flow is positive – the system generates more from current revenue than it spends on benefits and its own administrative costs. The main source of revenue is the payroll tax paid by employers and employees (the Federal Insurance Contributions Act, or FICA); other income sources include interest payments on bonds in the Social Security Trust Fund (SSTF) and taxes paid by higher-income beneficiaries.
Last year, revenue totaled $781 billion, while outgo was $713 billion. And even if funds aren’t on hand in a given week to pay benefits for timing reasons, the SSTF can redeem bonds to make up the shortfall.
But here’s the rub: the bonds are obligations of the U.S. Treasury back to the SSTF. A government debt default would put us in uncharted waters, and it’s entirely possible that the Administration could refuse to redeem bonds or divert payroll tax receipts to meet other pressing obligations.
Social Security advocates don’t agree on what might happen.
The first people who should not get paid are members of congress. They’ve been spending like idiots for 30+ year, and the result is the current mess. A downgrade is needed in order to bring these nutsballs to their senses. They’ve been doing D work and now want an A grade. Ridiculous.
