You don’t have to open the Wall Street Journal to know that prices are rising. Just fill up your car at the nearest gas station, then do a quick shop at the grocery store and you will find that you have a few less bucks in your wallet than you might have had a few years ago. Still, when the front page of the nation’s premier business news source is emblazoned with a front-page headline, “Inflation, Spanning Globe, Is Set to Reach Decade High” (By Andrew Batson), it does catch investors’ anxious eyes.
Way back in 2003, when Alan Greenspan’s Federal Reserve was keeping interest rates at 40-year lows, there were some peeps from the inflation hawks. Their fears were that while the Fed was busy worrying about deflation, that they may be sewing the seeds of future inflation. During that time and well into 2004, Mr. Greenspan maintained that inflation is “not likely to be a serious concern” and therefore, the Fed can be “measured” in its approach to raising short-term interest rates. To some extent, he was right-inflation was not a concern then, but four years later, your dollar buys you less than it did at that time.
To understand how prices started moving up, it is important to consider how they stayed so low for so long. In essence, the advent of globalization was the champion of the low inflation years. The events that allowed India, China, and so many other countries to become part of the global supply chain for services and manufacturing, as well as the transformative nature of technology and economic integration, kept prices low and helped consumers in developed nations purchase lower cost goods from developing countries and expand their already-high standard of living. The drop in prices was a direct effect of competition and manufacturing advances from emerging (mostly Asian) economies.
But things are evolving overseas – demand is still strong, but the exported downward price pressures are abating. As a result, the International Monetary Fund recently said that “consumer prices in the U.S., Europe and other rich countries are projected to rise 2.6% this year, the highest inflation rate since 1995.” While the overall level may not be terrible yet, the message is clear: the fruits of globalization may be behind us, not ahead of us. That said, there are mounting cases of a new syndrome that is spreading: I like to call it “inflation frustration”. I have a feeling this malady will be with us for some time to come.
Friday, April 11, 2008
Thursday, April 10, 2008
Bail-Tale
As I read through the various Congressional proposals to help struggling homeowners, I am of two minds: the cynic can almost see politicians drooling as they seize an opportunity to buy more votes in an election year (perhaps that stimulus check wont do the job), while the optimist hopes that lawmakers really do want to help.
I have expected officials to come up with a plan to assist homeowners who are under water on their mortgages. The issue gained more momentum after taxpayers helped to finance the J.P. Morgan-Bear Stearns deal. After all, if we were going to help an ailing firm, perhaps creating a way to support the masses is not so far-fetched. Still, unless the housing recession were to turn far uglier, it is unlikely that the government would actually buy mortgages. Instead, the Democratic plan would make available up to $300 billion in federally insured loans to help troubled owners (who meet stringent criteria) refinance adjustable-rate mortgages into more affordable 30-year, fixed-rate loans. The plan would not bail out everyone---speculators and those who are in trouble on vacation homes or investment properties would be out of the running for the re-fi chance. The taxpayer tab for this plan would be approximately $10 billion.
I have heard from plenty of homeowners who were patient enough to accumulate their 20% down payments and not bite off more than they can chew complain about any bailout plans. “Why should I have to pay for someone else’s financial mistakes?”; “How is this different than having the government bail out the dopes who bet big on the dot-com stocks?” and “Only with the pain of loss will people change their future behavior!” These are all valid points but it seems there is of course another side to the story. As Representative Barney Frank, (D-MA), the chairman of the House Financial Services Committee and the principal author of the leading Democratic plan said recently, “These are people who are guilty of having borrowed too much money for a home for themselves and their families. They didn’t shoot anybody. They didn’t rob anybody…they are guilty of not having anticipated that housing prices would drop.” (The cynic would pipe in at this point and add that many of these people are actually guilty of greed!)
But there are costs to society for letting homeowners fail--having millions of people enslaved to their homes is a negative for the entire economy. The reason is that if people are spending a lot to maintain their mortgages, then they have very little surplus to spend elsewhere, thus exacerbating the economic slowdown. For that reason, and perhaps mounting pressure, even the Bush Administration has capitulated on the issue.
While previously resisting the calls for bail out and promoting a hands-off approach to regulation, yesterday a representative of the Administration laid the groundwork for an alternative to the Democratic plan. Brian Montgomery, the commissioner of the Federal Housing Administration (FHA), said that his agency would start providing government insurance for some US homeowners who are under water on their mortgages and for some who are were late on three consecutive monthly mortgage payments—about 100,000 homeowners total.
The taxpayer cost of these proposals is not yet known. It is expected that this is among the first steps to expanded government assistance. It may not be a full-fledged rescue plan, but it sure is sounding a lot more like politicians of all stripes see the need to pounce on the housing issue. I expect to hear more as the “bail-tale” gathers steam.
I have expected officials to come up with a plan to assist homeowners who are under water on their mortgages. The issue gained more momentum after taxpayers helped to finance the J.P. Morgan-Bear Stearns deal. After all, if we were going to help an ailing firm, perhaps creating a way to support the masses is not so far-fetched. Still, unless the housing recession were to turn far uglier, it is unlikely that the government would actually buy mortgages. Instead, the Democratic plan would make available up to $300 billion in federally insured loans to help troubled owners (who meet stringent criteria) refinance adjustable-rate mortgages into more affordable 30-year, fixed-rate loans. The plan would not bail out everyone---speculators and those who are in trouble on vacation homes or investment properties would be out of the running for the re-fi chance. The taxpayer tab for this plan would be approximately $10 billion.
I have heard from plenty of homeowners who were patient enough to accumulate their 20% down payments and not bite off more than they can chew complain about any bailout plans. “Why should I have to pay for someone else’s financial mistakes?”; “How is this different than having the government bail out the dopes who bet big on the dot-com stocks?” and “Only with the pain of loss will people change their future behavior!” These are all valid points but it seems there is of course another side to the story. As Representative Barney Frank, (D-MA), the chairman of the House Financial Services Committee and the principal author of the leading Democratic plan said recently, “These are people who are guilty of having borrowed too much money for a home for themselves and their families. They didn’t shoot anybody. They didn’t rob anybody…they are guilty of not having anticipated that housing prices would drop.” (The cynic would pipe in at this point and add that many of these people are actually guilty of greed!)
But there are costs to society for letting homeowners fail--having millions of people enslaved to their homes is a negative for the entire economy. The reason is that if people are spending a lot to maintain their mortgages, then they have very little surplus to spend elsewhere, thus exacerbating the economic slowdown. For that reason, and perhaps mounting pressure, even the Bush Administration has capitulated on the issue.
While previously resisting the calls for bail out and promoting a hands-off approach to regulation, yesterday a representative of the Administration laid the groundwork for an alternative to the Democratic plan. Brian Montgomery, the commissioner of the Federal Housing Administration (FHA), said that his agency would start providing government insurance for some US homeowners who are under water on their mortgages and for some who are were late on three consecutive monthly mortgage payments—about 100,000 homeowners total.
The taxpayer cost of these proposals is not yet known. It is expected that this is among the first steps to expanded government assistance. It may not be a full-fledged rescue plan, but it sure is sounding a lot more like politicians of all stripes see the need to pounce on the housing issue. I expect to hear more as the “bail-tale” gathers steam.
Wednesday, April 9, 2008
Doth he protest too much?
Former Federal Reserve Chairman Alan Greenspan is back in the news—this time he is putting a full-court press on his reputation, which has come under scrutiny of late. Interviews with the Wall Street Journal, CNBC and anyone else who would print his great defense have highlighted his basic premise: “I am now being blamed for things that I didn't do.”
To give Greenspan credit, he also noted “I was praised for things I didn't do," but of course he never bothered to say that when people called him “Maestro” or hailed him as “the greatest central banker who ever lived.”
Pity poor Alan—he has gone from Maestro to goat as the low rates during his terms and his Ayn Rand hands-off regulatory approach are now seen as the culprits of today’s financial mess. Like markets that can turn on a dime, so too can reputations. Some of us have been harsh in our judgment of the retired Fed chairman. At the end of his 18-year tenure in December 2005, I wrote the following:
Greenspan’s legacy is “being too generous when it came to asset bubbles. The Fed’s responses to a number of crises in the nineties helped to foster the stock market bubble…In response to the bear market, 9-11 and the ensuing recession, Greenspan once again relied on easy money to prop up the economy… The 13 interest rate cuts, all the way down to 1%, helped fuel a housing boom.”
But don’t just take my word for it--if you want to read an amazing analysis of the Greenspan legacy, check out the recently published “Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve” by William Fleckenstein and Fred Sheehan. (Full disclosure: Bill is a family friend.) Using transcripts of Greenspan's FOMC meetings as well as testimony before Congress, the authors present a scathing indictment of Greenspan’s Fed and show how the Maestro may have caused or exacerbated many of the economic calamities that occurred during his tenure. “Greenspan’s Bubbles” also shines a light on the political side of the Maestro.
And what could be more political than Greenspan’s elaborate reputational defense? According to the Wall Street Journal, “Mr. Greenspan says he doesn't regret a single decision.” Is he kidding? Who among us truly does not regret a single business decision? I might have changed my view of Greenspan if he had engaged in an honest discussion of what he did well and not so well over the course of eighteen years. Instead I am left wondering whether he doth protest too much.
To give Greenspan credit, he also noted “I was praised for things I didn't do," but of course he never bothered to say that when people called him “Maestro” or hailed him as “the greatest central banker who ever lived.”
Pity poor Alan—he has gone from Maestro to goat as the low rates during his terms and his Ayn Rand hands-off regulatory approach are now seen as the culprits of today’s financial mess. Like markets that can turn on a dime, so too can reputations. Some of us have been harsh in our judgment of the retired Fed chairman. At the end of his 18-year tenure in December 2005, I wrote the following:
Greenspan’s legacy is “being too generous when it came to asset bubbles. The Fed’s responses to a number of crises in the nineties helped to foster the stock market bubble…In response to the bear market, 9-11 and the ensuing recession, Greenspan once again relied on easy money to prop up the economy… The 13 interest rate cuts, all the way down to 1%, helped fuel a housing boom.”
But don’t just take my word for it--if you want to read an amazing analysis of the Greenspan legacy, check out the recently published “Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve” by William Fleckenstein and Fred Sheehan. (Full disclosure: Bill is a family friend.) Using transcripts of Greenspan's FOMC meetings as well as testimony before Congress, the authors present a scathing indictment of Greenspan’s Fed and show how the Maestro may have caused or exacerbated many of the economic calamities that occurred during his tenure. “Greenspan’s Bubbles” also shines a light on the political side of the Maestro.
And what could be more political than Greenspan’s elaborate reputational defense? According to the Wall Street Journal, “Mr. Greenspan says he doesn't regret a single decision.” Is he kidding? Who among us truly does not regret a single business decision? I might have changed my view of Greenspan if he had engaged in an honest discussion of what he did well and not so well over the course of eighteen years. Instead I am left wondering whether he doth protest too much.
Tuesday, April 8, 2008
$109 Million Reasons to be an Ex-President
I never begrudge someone the opportunity to earn a buck, despite the excessive pay scales in lots of industries (finance, sports, acting). And of course unless an individual is a higher-up at a publicly-listed corporation, it’s impossible to know what someone really makes. That is, unless you are running for the highest office in the land.
Succumbing to pressure, the Clintons recently released their tax returns for each year since leaving office. To say that post-Presidential life has been good to the former first couple is an understatement. The Clintons earned $109 million between 2000 and 2007, according to tax information released by Mrs. Clinton’s presidential campaign. While at first glance, I thought that the numbers seemed astounding, after breaking everything down, it all made sense.
It is important to remember that the Clintons came into the White House with essentially nada. In my experience, when people who come from nothing get a taste of making big bucks, they really go for it. Perhaps it’s fear-based—the “I’ll never live like that again” mantra (or in the Clinton’s case, “I will never beg for a legal defense fund again!”) that compels folks to push onward. Regardless, if lots of organizations were willing to pay President Clinton $250,000 per speaking engagement, I have a sneaking suspicion that he made sure that his booker kept him busy.
To that end, President Clinton earned $51,855,599 from speeches since leaving the White House. In addition to that amount, the Clintons raked in approximately $40 million from their books (his two, “My Life” and “Giving,” totaled $29.6 million and Senator Clinton’s “Living History” $10.5 million). You might think that just under $100 million would be enough for the dynamic duo, but there is one more income source to add: consulting income, or as I like to call it “the smoking gun” of these returns.
President Clinton performed “consulting services” to billionaire investor and supermarket magnate Ronald W. Burkle. Since 2002, the former president provided investment advice and rainmaking as a consultant. Let’s be clear that nobody believes that Mr. Burkle needed investment advice from Mr. Clinton. What he did need was access to power players both at home and abroad. Clearly Mr. Clinton could open doors in ways that nobody else could, for which he was paid handsomely. The tax returns indicate that Mr. Clinton collected at least $12.6 million since 2002, and possibly as much as $15.3 million, from his work for Mr. Burkle’s Yucaipa Companies.
So here is my question: just who expects something in return for that kind of activity, if Mrs. Clinton were to win the White House in the fall? The sad part of the Clinton tax returns is like so much in their past, they just did not need to enter those muddy waters. Couldn’t Mr. Clinton have delivered just 9 more speeches each year to raise the extra $15 million? That’s just one question for the candidate who claims that she can best represent the needs of the working folks in America.
Succumbing to pressure, the Clintons recently released their tax returns for each year since leaving office. To say that post-Presidential life has been good to the former first couple is an understatement. The Clintons earned $109 million between 2000 and 2007, according to tax information released by Mrs. Clinton’s presidential campaign. While at first glance, I thought that the numbers seemed astounding, after breaking everything down, it all made sense.
It is important to remember that the Clintons came into the White House with essentially nada. In my experience, when people who come from nothing get a taste of making big bucks, they really go for it. Perhaps it’s fear-based—the “I’ll never live like that again” mantra (or in the Clinton’s case, “I will never beg for a legal defense fund again!”) that compels folks to push onward. Regardless, if lots of organizations were willing to pay President Clinton $250,000 per speaking engagement, I have a sneaking suspicion that he made sure that his booker kept him busy.
To that end, President Clinton earned $51,855,599 from speeches since leaving the White House. In addition to that amount, the Clintons raked in approximately $40 million from their books (his two, “My Life” and “Giving,” totaled $29.6 million and Senator Clinton’s “Living History” $10.5 million). You might think that just under $100 million would be enough for the dynamic duo, but there is one more income source to add: consulting income, or as I like to call it “the smoking gun” of these returns.
President Clinton performed “consulting services” to billionaire investor and supermarket magnate Ronald W. Burkle. Since 2002, the former president provided investment advice and rainmaking as a consultant. Let’s be clear that nobody believes that Mr. Burkle needed investment advice from Mr. Clinton. What he did need was access to power players both at home and abroad. Clearly Mr. Clinton could open doors in ways that nobody else could, for which he was paid handsomely. The tax returns indicate that Mr. Clinton collected at least $12.6 million since 2002, and possibly as much as $15.3 million, from his work for Mr. Burkle’s Yucaipa Companies.
So here is my question: just who expects something in return for that kind of activity, if Mrs. Clinton were to win the White House in the fall? The sad part of the Clinton tax returns is like so much in their past, they just did not need to enter those muddy waters. Couldn’t Mr. Clinton have delivered just 9 more speeches each year to raise the extra $15 million? That’s just one question for the candidate who claims that she can best represent the needs of the working folks in America.
Monday, April 7, 2008
Tax Time
With a week to go, it’s probably time to kick you in the tush to get going on your tax prep. The good news is that you still have an entire week to get this done. The bad news is that if you were hoping to get help with your returns from a tax preparation professional, you may need to go on extension—they are swamped and unlikely to get your return filed unless someone owes you a big favor. With time ticking, here are some tips to help you along.
Can I do it myself? It’s to prepare your own returns these days. Check out programs like Intuit’s Turbo Tax (turbotax.com), H&R Block’s TaxCut (taxcut.com) or you can go directly to irs.gov to e-file your return. The IRS has now partnered with a number of commercial preparers to offer free online tax prep as well as e-filing for taxpayers with adjusted gross income (AGI) of $50,000 or less. To find out more about free online filing, go to taxadmin.org.
Standard Deduction or Itemize: This is the first decision you have to make before you file. For many taxpayers, taking the standard deduction may seem like the easiest path to finishing your return. (If you are married filing jointly, the standard deduction for 2007 is $10,700; $5,350 for singles.) But 2002 research from the Government Accounting Office showed that over two million people (about 2% of the total number of filers) may have paid nearly a billion dollars more than they needed to in taxes, because of a failure to itemize. It’s likely that if you are paying mortgage interest, make charitable donations or live in a place with high property taxes, itemizing may make sense. Do a quick tally of the deductions to determine if the total is greater than the standard deduction available to you. You may find that itemizing allows you to save dollars.
If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2007, the itemized deduction phase-out begins at $156,400 ($78,200 if married filing separately).
New Mortgages or Re-financings: If you obtained a new mortgage or refinanced in 2007, don’t forget to deduct origination fees or any points (points are prepaid interest that people often pay lenders upfront to reduce monthly payments) that you paid. For a new mortgage, buyers can generally deduct all the points they paid in the year that they assumed the mortgage. BUT, the rules are different when you have refinanced an existing loan. On a re-fi, points are written off over the life of the loan. For those of you who are serial re-financers don’t forget to take your old points as an itemized deduction.
Moving Expenses: Many taxpayers will be able to write off moving expenses if they relocated to a new job that is at least 50 miles from your old house than your old job was. You can claim this even if you do not itemize other deductions.
Home Office: This is one of those deductions that the IRS loves to pounce on in an audit, so be careful how you claim it. The rules are that the home office must be your principal place of business, not a back up for when you don’t feel like commuting. Also, the office must not be used for anything else, even if it’s just a corner of your “great room.” If you pass the first test, then you need to calculate what percentage of your house your office equals. The number can be determined by square footage or number of rooms. You can then apply that percentage to your overall housing costs, including mortgage interest, utilities and upkeep. Don’t forget that when you sell your house, all of those juicy business deductions, including depreciation, must be recaptured as taxable gain.
Certain medical expenses: Qualified medical costs must exceed 7.5% of your AGI before they become deductible. While that’s a high benchmark, millions of Americans are hitting it.
Retirement Plans:
Some savings had to take place prior to the end of the calendar year (usually employer-sponsored plans like 401(k)s,) while others can help you right up until the tax filing deadline.
IRAs: Limits on IRA and Roth contributions for 2007 are $4,000 or $5,000 if you are over 50. You can make an IRA contribution up to tax filing.
Carry-forward losses: After you net out the short-term and long-term investment gains and losses for 2007, you still may have losses left over. If you still have losses, you can use $3,000 of those losses against your ordinary income. To see if you have carry-forward losses, pull out last year’s tax returns.
AND DON’T FORGET…
Tuition and fees deduction, Hope, life and tax credits, student loan interest deduction. The rules are confusing on all of these education plans, but take time to read them – it may save you money!
Can I do it myself? It’s to prepare your own returns these days. Check out programs like Intuit’s Turbo Tax (turbotax.com), H&R Block’s TaxCut (taxcut.com) or you can go directly to irs.gov to e-file your return. The IRS has now partnered with a number of commercial preparers to offer free online tax prep as well as e-filing for taxpayers with adjusted gross income (AGI) of $50,000 or less. To find out more about free online filing, go to taxadmin.org.
Standard Deduction or Itemize: This is the first decision you have to make before you file. For many taxpayers, taking the standard deduction may seem like the easiest path to finishing your return. (If you are married filing jointly, the standard deduction for 2007 is $10,700; $5,350 for singles.) But 2002 research from the Government Accounting Office showed that over two million people (about 2% of the total number of filers) may have paid nearly a billion dollars more than they needed to in taxes, because of a failure to itemize. It’s likely that if you are paying mortgage interest, make charitable donations or live in a place with high property taxes, itemizing may make sense. Do a quick tally of the deductions to determine if the total is greater than the standard deduction available to you. You may find that itemizing allows you to save dollars.
If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2007, the itemized deduction phase-out begins at $156,400 ($78,200 if married filing separately).
New Mortgages or Re-financings: If you obtained a new mortgage or refinanced in 2007, don’t forget to deduct origination fees or any points (points are prepaid interest that people often pay lenders upfront to reduce monthly payments) that you paid. For a new mortgage, buyers can generally deduct all the points they paid in the year that they assumed the mortgage. BUT, the rules are different when you have refinanced an existing loan. On a re-fi, points are written off over the life of the loan. For those of you who are serial re-financers don’t forget to take your old points as an itemized deduction.
Moving Expenses: Many taxpayers will be able to write off moving expenses if they relocated to a new job that is at least 50 miles from your old house than your old job was. You can claim this even if you do not itemize other deductions.
Home Office: This is one of those deductions that the IRS loves to pounce on in an audit, so be careful how you claim it. The rules are that the home office must be your principal place of business, not a back up for when you don’t feel like commuting. Also, the office must not be used for anything else, even if it’s just a corner of your “great room.” If you pass the first test, then you need to calculate what percentage of your house your office equals. The number can be determined by square footage or number of rooms. You can then apply that percentage to your overall housing costs, including mortgage interest, utilities and upkeep. Don’t forget that when you sell your house, all of those juicy business deductions, including depreciation, must be recaptured as taxable gain.
Certain medical expenses: Qualified medical costs must exceed 7.5% of your AGI before they become deductible. While that’s a high benchmark, millions of Americans are hitting it.
Retirement Plans:
Some savings had to take place prior to the end of the calendar year (usually employer-sponsored plans like 401(k)s,) while others can help you right up until the tax filing deadline.
IRAs: Limits on IRA and Roth contributions for 2007 are $4,000 or $5,000 if you are over 50. You can make an IRA contribution up to tax filing.
Carry-forward losses: After you net out the short-term and long-term investment gains and losses for 2007, you still may have losses left over. If you still have losses, you can use $3,000 of those losses against your ordinary income. To see if you have carry-forward losses, pull out last year’s tax returns.
AND DON’T FORGET…
Tuition and fees deduction, Hope, life and tax credits, student loan interest deduction. The rules are confusing on all of these education plans, but take time to read them – it may save you money!
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