Bob’s Journal for 5/11/23

Some Notable Events That Grabbed My Attention This Week

The cost has dropped for one of the top long-term care (LTC) insurance policies, according to my favorite industry expert and friend, David T. Phillips.

David’s favorite policy now provides 25% more benefits for your premium dollars than it did from June 2022 through March 2023. The insurer also created a new version of the policy that can increase your benefits even more. This is a permanent life insurance policy with long-term care benefits.

For more details, my subscribers can receive a free “The Return of Premium LTC Special Report – Third Edition.” Simply click this link and, on the order page, be sure the discount code “CARLSON” is included.

The Banking Crisis Isn’t Over

Many investors and policymakers were relieved when First Republic Bank was sold to JP Morgan Chase. The action, preceded by liquidations of Silicon Valley Bank and Signature Bank, seemed to indicate regulators are on top of things and the major problems are in the past.

But many banks suffer from the same problems that plagued those three failed financial institutions. Those three were merely the banks in the worst shape.

The first problem is that many banks are holding assets in which they have significant losses. They bought long-term treasury bonds and mortgages when cash was flowing, and interest rates were dirt low. Those assets lost value as interest rates rose during 2022, and the banks apparently didn’t sell the assets or hedge against the losses.

Regulations don’t require banks to report their assets at market value. If they did, many banks would show significant declines in net worth, profitability and ability to continue operating.

The second problem is depositors are taking money out of low-yielding checking and savings accounts. Money market funds and other alternatives pay yields of around 5%. As more and more depositors recognize this, they are taking their money out of banks.

This is another big hit to bank profits. They were borrowing money from depositors at close to 0% and lending to either the federal government or businesses at higher rates.

The result is many banks now are what often are called zombie companies. They continue to exist and operate. But they steadily are losing money. They’re tapping capital to make up the deficits. The capital is declining, and there is no viable way to increase capital.

Another consequence is there are fewer buyers for all the treasury bonds that will be issued to fund the deficits after the federal debt limit is increased. Banks were big buyers of government bonds in recent years. Now, they don’t have the capital to buy as many bonds as in the last few years.

The bond market must find buyers to replace the reduced investments from the Fed and the banks.

A third consequence will be reduced economic growth. Since banks have less capital, they will make fewer loans to businesses and will charge higher interest rates on the loans they do make. That’s bound to reduce economic growth, unless businesses can find other sources of loans and capital.

I don’t think we’ve heard the last of problems in local and regional banks. Most of the banks with problems probably will sell themselves to larger banks or merge with other regional banks if the combination will improve their combined capital position.

It is possible the Fed will decide the banking problem is so severe that it will put the fight against inflation on hold. It might reduce interest rates and increase the money supply to help the banks.

In the short run, the Fed has done that. The monetary base increased a lot after the problems at Silicon Valley Bank surfaced. We’ll wait to see if that was a short-term change or if the Fed keeps the efforts to contain inflation on the back burner.

Don’t Fall for this Tax Scam

A tax scam involving charitable trusts and annuities is being promoted to retirees. Be aware that the scheme doesn’t comply with the tax law, so it doesn’t produce the results the promoters claim.

In the strategy, people with highly appreciated property, such as stocks or real estate, donate the property to a charitable remainder trust. The trust sells the property. The gains from the sales are tax free because the trust is charitable.

The trust uses most of the sale proceeds to purchase annuities, and the taxpayers who donated the property receive annual distributions from the trust equal to the annuity payments.

So far, all that is a good, standard tax plan.

But the promoters say that the annuity payments from the trust are tax free to the donors. They say that since the trust is charitable and doesn’t pay taxes, then distributions from the trust also are tax free.

But the tax law doesn’t work that way, as the Tax Court recently told an unfortunate family that followed the strategy.

The tax code and prior cases show that distributions from the trust are taxable to the trust beneficiaries.

There’s a second unfortunate part of this case. The donors could have argued that most of the distributions to them were long-term capital gains, since they donated long-term capital gain property to the trust.

But they were so confident the court would rule the distributions were tax free that they didn’t make an argument in favor of taxing the distributions as capital gains. So, all the distributions were taxed as ordinary income, costing the donors far more money than if they had sold the assets, paid the capital gains taxes and reinvested the after-tax amount.

(Gerhardt v. Commissioner, 160 T.C. No. 9)

Investors Leave Crypto for Gold

The price of gold has been rising, though inflation’s been falling.

One reason is that some investors who previously were attracted to Bitcoin and other digital currencies soured on those assets. Instead, they’re diversifying into gold, according to The Wall Street Journal.

Searches on Google and other search engines are one way to track this change. There’s been a surge in searches for both “gold” and “crypto.”

Another sign of the new interest in gold is that searches for “how to buy gold” recently reached their highest level since the compilation of Google search trends began about two decades ago.

It’s not a big surprise. Gold is less volatile than Bitcoin and other digital currencies. The factors that affect gold’s price also are better known.

Gold has proven to be a good hedge against inflation and crisis, while Bitcoin doesn’t have a track record in either scenario.

The banking crisis has been good to gold investors. The iShares Gold Trust (IAU) is up 10.70% for the year to date and 7.62% over the last three months.

The Data

The Consumer Price Index (CPI) increased 0.4% in April, compared to 0.1% in March. Over 12 months, the CPI increased 4.9%, down from 5.0% in March.

The core CPI, which excludes food and energy, increased 0.4% in April, the same as in March. Over 12 months, the core CPI increased 5.5%, down a little from 5.6% in March.

Consumer credit outstanding increased by $26.51 billion in March, and February’s level was revised higher to $15 billion. Over 12 months, consumer credit increased 6.6%.

Revolving credit, mostly credit cards, increased 17.3% in March. Vehicle and student loans increased 3.0% in March.

The Small Business Optimism Index from the National Federation of Independent Business (NFIB) declined to 89 in April from 90.1 in March.

Finding qualified workers to fill jobs was identified as the top problem by the most businesses. Inflation is the second biggest problem, but business owners report that inflation appears to be easing.

The percentage of business owners expecting better business conditions over the next six months declined and is much lower than the percentage who are not optimistic about the next six months.

Nonfarm productivity declined by 2.7% in the first quarter, according to the first estimate. Productivity increased 1.6% in the fourth quarter of 2022.

Unit labor costs rose by an annualized rate of 6.3% in the first quarter after climbing 3.3% in the fourth quarter. The first quarter cost increase includes a 3.4% jump in hourly compensation and the 2.7% decrease in productivity.

In the past 12 months, unit labor costs increased 5.8% as of the end of the first quarter, down from 6.3% at the end of the fourth quarter.

The labor market remained strong for workers in April, according to last week’s Employment Situation reports.

There were 253,000 new jobs created in April, up from 165,000 in March. Of the new jobs, 230,000 were in the private sector and 11,000 of those were in manufacturing.

Average hourly earnings increased 0.5% in April, compared to 0.3% in March. Over 12 months, earnings increased 4.4% through April, up from 4.3% in March.

The unemployment rate declined to 3.4% in April from 3.5% in March.

New unemployment claims increased by 13,000 to 242,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.805 million from 1.843 million.

The Markets

The S&P 500 rose 0.02% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 0.33%. The Russell 2000 increased 1.07%. The All-Country World Index (excluding U.S. stocks) added 1.28%. Emerging market equities advanced 1.42%.

Long-term treasuries lost 2.51% for the week. Investment-grade bonds fell 1.26%. Treasury Inflation-Protected Securities (TIPS) declined 0.29%. High-yield bonds decreased 0.35%.

In the currency arena, the U.S. dollar declined 0.11%.

Energy-based commodities increased 2.19%. Broader-based commodities rose 1.34%. Gold gained 0.78%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here, respectively. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

IMPORTANT ANNOUNCEMENT: We are having our Eagle Virtual Trading Event on Tuesday, May 16. If you haven’t signed up for this yet, there’s still time. Just click here now to sign up for free. Believe me, you won’t want to miss this online event — as we bring together all of Eagle’s investment experts at the same time to reveal the Second Half Outlook: 7 Ways to Beat the Market. Reserve your seat now by clicking here.