September 2009

September 25, 2009 01:45 p.m.
IRS Lets People Reverse 2009 RMDs

Late in 2008, Congress suspended required minimum distributions for IRAs for 2009. If you are over age 70½, you don’t have to take an RMD for 2009. Some people did not receive word of the suspension before they took their RMDs in early 2009. Others had periodic distributions scheduled, and the distributions could not be suspended or rescheduled in time to avoid some distributions in 2009.

The IRS announced September 24 relief for people who took RMDs in 2009 and did not want them. The distributions can be rolled over by the later of Nov. 30, 2009, and 60 days after the distribution was received. Details of the rules can be found on the IRS web site here.

There was a lot of excitement about the recent release of the leading economic indicators. The LEI has been rising for months, and analysts point to this as a sign the economy is recovering and will resume growing soon. But there are reasons to be cautious. For one thing, the LEI did not forecast the downturn this time. For another, the LEI is based on a traditional economic cycle. It puts a lot of weight on the stock market and monetary policy. Usually they can forecast an economic turnaround. As I have said money times, this is not a usual economic cycle. We are in a long-term deleveraging process. I think it unlikely that the stock market will forecast a recovery as it has in the past or that monetary policy will have the same ability to boost the economy is usually does.

We’ve been expecting the current year’s estate tax to be made permanent this fall. Suddenly, that is less likely. The President and Congressional leaders do not want the tax to expire next year as scheduled, but they can’t agree on the action to take. And they are too busy with health care changes to work out their differences. Details are here.

Occasionally I point you to research on happiness, its relationship to money, and related topics. Here is an article on Jacob Needleman, author of Money and the Meaning of Life, summarizing his thoughts on the consumer culture, spending, and how money related to the meaning of life.

The Bernie Madoff continues to offer interesting layers. It turns out about half Madoff’s investors and victims didn’t really lose money, according to prosecutors. Madoff continued the scam for decades, and investors were allowed to receive regular income payments. That is one major way he inspired confidence for so long. The prosecutors says the customer accounts they reviewed show real losses at about $13 billion, because of the number of investors who took withdrawals that exceeded their initial investments. Details are here.

If you want to see a unique and somewhat scary analysis of the future course of the dollar, listen to the video here. The rise in gold is tied to the decline in the dollar, this analyst says, and interest rates will have to rise to keep the dollar from collapsing. He says be prepared for the Fed to raise interest rates to protect the dollar even if unemployment is not falling and the economy is weak. He also says the Fed wants to reduce the value of the dollar in half over 14 years. If the decline does not happen gradually, rates will have to be increased.

I pay attention to David Rosenberg, who used to be at Merrill Lynch. His latest analysis is that, unlike past post-collapse bull markets, stocks were not cheap at the March 2009 bottom. After the rally, they now are more expensive than they have been in seven years. Rosenberg believes we are at risk of something similar to a 2007 high. Stocks could keep rising a bit more, because they have momentum. But valuations are very high, and it is dangerous to keep a lot of capital in U.S. stocks at this point. Read the details here.

September 19, 2009 02:30 p.m.
Even the Wealthy are Budgeting

It’s amazing what tough economic times can do. People who believed they did not have to pay attention to the basics of personal finance suddenly decide they do. The New York Times reports that very wealthy people are budgeting, watching where discretionary cash flow goes, and limiting their consumption. It is not really surprising. During boom times, people believe they can relax. A few wasted dollars are not important, because they are easy to make up. Another way to look at it: During the holiday periods people are prone to overeat and gain some weight. After the holidays, they might exercise some more and eat more carefully. Read the hard times of centimillionaires here.

In case you missed all the hoopla about the first anniversary of the bankruptcy of Lehman Brothers, one of the better round ups is here.

Commercial real estate remains the next worry on the radar screens of many analysts and economists. Here are a couple of reasons why. The man who manages more shopping malls in the U.S. than anyone else says here he expects property prices to settle in around their 2003-2004 levels. That is giving up a lot of ground.

And here we have a report on commercial real estate in the Washington, D.C. area. This is supposed to be one of the more stable areas. The federal government is growing, and it is a big part of the local real estate market. Yet, new buildings are mostly empty and vacancy rates for other office properties are soaring.

Here’s some good economic news from a unique perspective. The economist for Google monitors advertising on the site. He sees from the volume of ads and the type of advertisers positive signs for the economy. This is a new approach to economic forecasting, so we’ll have to see if it works.

There also is less-positive news out there. In case you missed the attention given to the “ghost fleet” of commercial ships, look here. About 80% of the world’s goods travel by ship, so having a large portion of the world’s fleet idle means economic activity still is very low.

Nobel-winning economist Joseph Stiglitz is not an optimist. He says here the banking system is in worse shape than it was before Lehman Brothers went bankrupt. He is among those who believe government officials are ignoring the problems or making them worse by allowing the biggest banks to become bigger.

Another group of prominent economists has assembled the data and concluded the fiscal stimulus plan did not help the economy. It cost more than it produced. Read the details here.

I don’t usually get involved in political issues in the newsletter or web site, but the health care reform effort is important and is likely to have a strong effect on seniors. I thought this commentary from the perspective of someone from the U.K. on how government health care is likely to affect seniors would interest you.

September 9, 2009 04:00 p.m.
What You Might Have Missed During the Holiday Period

The markets have been fairly quiet since our last Journal entry. They fell over 1% last week. But the climbed up from the bottom at the end of the week and continued small, quiet gains this week.

Investors are waiting. Earnings season is over, with its mixed results of low revenues and earnings beating very low expectations. The economic data recently, especially the employment report, was mixed enough to support the views of both optimists and pessimists. I suspect the market is well ahead of the economy and believe we are not going to have the traditional strong post-recession recovery most investors seem to expect. Below I provide some links supporting that view, and also have links to other writing that is well worth your time.

The Chinese economy and stock market seem to greatly influence the direction of U.S. counterparts. I have long wondered how people can trust data from China and had a link about that in the last entry. Here we have something close to confirmation that the Chinese government manipulates its stock market to get the results and it wants and will continue doing so until a big anniversary passes in October.

Are you wondering where your tax dollars went. This entry from CNN reports some of the unusual projects funded by the stimulus bill passed earlier this year. And this article from Vanity Fair delves into the money given to the big banks in late 2008. The article says Treasury did not track the money and never intended to. It hoped that throwing a large sum of money into the economy would stop the decline.

We are coming up on the one year anniversary of the bankruptcy of Lehman Brothers, which led to the nosedive in the economy. The Guardian has a pretty good interactive review of the unhappy events here.

The crisis might not be over. Today’s media report on a forecast of the next wave of mortgage foreclosures, many of which will be in what were once called prime mortgages. This wave will contain some people who lost their jobs, but many of the foreclosures are estimated to be people who took out the exotic low-rate mortgages two or three years ago. Now, their interest rates are being reset to much higher levels, which they cannot afford. Read an article on it here.

You don’t have to be a nut to believe in conspiracy theories, at least some of them. Scientists studied the world’s stock markets and concluded that most of the world’s stocks are controlled by a select few people and institutions, especially in the developed world’s markets. Read the details here.

Last time I linked to a summary of the SEC’s report on how Madoff was able to avoid the SEC. Now, we have the full report and articles on it. Read a review here.

Congress tried to resolve the housing crisis by urging the Federal Housing Administration (FHA) to ramp up lending, increase loan limits, and lower lending standards. It did so and now is estimated to control about 80% of the mortgage market. It also is teetering on the edge of failure. Read about it here. Subscription might be required.

It turns out that during the crises of 2008 a reporter from Vanity Fair was allowed periodic open-ended interviews with Treasury Secretary Hank Paulson. Paulson was candid in his comments, because a condition of the interviews was that they not be published until after he left office. You can read the article here, including Paulson’s explanation of why Lehman Brothers was allowed to fail.

Another sign of the failure, or at least unintended consequences, of all the bailout actions is that the big institutions that caused the problems are becoming bigger thanks to their partners in the government. Many of these institutions are zombies and still don’t know what they are doing, but they are squeezing out the competition. Read about it here.

Are the markets more like a social epidemic or contagion instead of efficient processing mechamism? I argued as much in my book, Invest Like a Fox…Not Like a Hedgehog. Yale’s Robert Shiller makes a similar argument in the New York Times and argues the stock markets surged off their March lows so quickly because of the social contagion and re-enforced feedback loop that is the markets. Bespoke Investments analyses his article here. The mechanism could lead the markets higher and bring the economy along with them. But when news stops being arguably good, the same mechanism could lead markets sharply lower. That’s why it is a good idea to invest on fundamentals, even when the markets move against fundamentals for a while.

In the economic downturn, seniors are taking on more debt than other age groups. Often the debt apparently is to pay for medical expenses no longer covered by reduced insurance coverage, declining home equity, or other losses. Read a summary here.

Finally, it is not too soon to think about your 2009 tax return. Forbes reports that because of the stimulus payments and other factors, even those who take the standard deduction are going to have complicated returns this year. Schedules are needed to support the standard deduction to make sure you aren’t cheating by claiming the stimulus credit when you aren’t eligible for it and for other reasons.