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Economics 101
Still Think Inflation Is Coming?
As
you have no doubt noticed, Americans are worried about inflation.
You need only to watch TV for an hour to gauge the mentality: the
airwaves are full of infomercial ads about the need to protect yourself
from the coming inflationary collapse by buying gold coins-NOW.
The
good news is that the dire forecasts of inflation are likely to be
wrong. The bad news is that what is coming could be
worse-deflation, the condition of falling consumer prices. Given recent events, this view might seem
preposterous. Didn't the Federal Reserve double the monetary
base, and doesn't the Federal Government continue to spend record
amounts of money it doesn't have? The answers, unfortunately, are
"yes" and "yes." All else equal, these factors would cause inflation,
but there is more to the economy than government actions. The
deflationary forces of the private sector-the paying back or
nullification of loans by consumers and businesses, and the slowdown of
what economists call the "velocity of money"-are more than offsetting
the inflationary actions of the Fed and Congress. For a case in point,
take a trip to your local Wal-Mart. If you want a gauge of where
the prices of real, everyday items are going, Wal-Mart is a good
barometer. And the "Wal-Mart indicator" still points to lower
prices.
Consider this Associated Press headline
from the end of May: "Wal-Mart makes splashy price cuts to get mojo
back" Wal-Mart has dropped the price of ketchup bottles to $1 and the
price of cases of Coke to less than $4, among other cuts. And
when Wal-Mart makes a move, its competitors have no choice but to
follow. As the Associated Press continues, "The sharp cuts at its
U.S. Wal-Mart stores, which came ahead of Memorial Day weekend, have
already pushed rivals such as Target into price wars. And the markdowns
are expected to keep coming throughout the summer." Price wars among major retailers can mean only one
thing: lower prices for consumers. This is great, of course, if
your income is secure and you have no risk of job loss. The
problem is that most people do not have that kind of security.
And as economic reality forces companies to keep prices low, they must
also keep their own costs low-including labor costs. This means that we should expect unemployment to
remain elevated for years. It may improve slightly from its
current levels around 10%, but our days of 4% unemployment are almost
certainly gone for the foreseeable future. High unemployment, in
turn, means weak consumer demand and thus weaker consumer prices,
causing the cycle to continue. It is important to avoid getting too pessimistic; we
will indeed see good economic times again, even if it is years from
now. In the meantime, we will have to navigate some rather
difficult waters.
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Steps to Retirement Planning
Leverage, Laggards, and Lunch
It
was probably the lunch in the title that caught your attention, but the
final episode in this series will focus mostly on picking mutual funds
and how leverage can work against you, before a brown-bag reminder.
When speaking of laggards, we're really talking about those
mutual funds that most of us have owned at one time or another that
under-performed. Let's face it - it's hard to find the winners. Sure,
there are funds with great 10-year records. But you can't buy their
past performance - you get the future. If you aren't confident in your
own abilities to choose a mutual fund and aren't willing to invest with
an advisor to closely monitor your account, you may want to consider
either index funds or exchange-traded funds.
Leverage is what we
all hope to achieve by investing a small amount and getting a
large(sometimes a lot larger) return. But leverage bites if you get it
wrong. Most people wouldn't dream of borrowing money to buy stocks, yet
consider it prudent to borrow 90% of a home's purchase price. Because
of the long-term returns on real estate, normally, your leveraged bet
will work out just fine. Hopefully, you don't have to sell suddenly,
just as real estate prices are sinking.
And, finally, what may
be the most important lesson of all. You can't get rich by spending
money. The folks with the big house, fast cars, and designer clothes
are, no doubt, loaded. But it just may be that it's debt they're
loaded with. There is only one way to create wealth and that is to save
(the reference to brown bag lunches), invest wisely, and pay attention.
You have to determine how much you're willing to sacrifice in fast-food
lunches today, for a comfortable retirement tomorrow.
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Last month's quiz posed the question, "What has been
the costliest natural disaster in the United States?" (good thing
we can't count the recent oil spill in the Gulf of Mexico since it
hasn't been quantified yet)
The correct answer is Hurricane Katrina.
Congratulations to Niki Washburn, U.S. Dept. of Health & Human
Services, Des Moines, Iowa, for being the first to
respond with the correct answer. Thanks to all who responded! |
All right baby
boomers, who remember watching early television on the black and white
screen. For a nifty prize, be the first to correctly answer the
following question.
Steve McQueen had an early television success as a bounty hunter in which western series?
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| Contact Us
202 West 7th St.
Carroll, IA 51401
Email: federal.info@sklenar.com
Phone: 866-792-6668 (toll free)
712-792-6400 (Local)
Fax: 712-792-6670 |
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Alphabet Soup
Health Care Flexible Spending Account
Your
Health Care Flexible Spending Account allows you to save up
to $5,000 per year on a pre-tax basis. These funds can then be
used to pay for eligible health care expenses (there's also a flexible
spending account that covers dependent care) not reimbursed by
your Federal Employees Health Benefits Plan or any other medical,
dental, or vision care plan you or your dependents may have. Eligible
dependents include anyone you claim on your federal income tax return
as a qualified dependent and/or with whom you jointly file your tax
return - even if you DON'T have self and family health benefits
coverage.
The maximum annual amount that can be allotted for
the HCFSA is $5,000, but you can set aside less. You'll want to
consider this closely during open season (November 2010) because the
annual limit is reduced to $2,500, beginning in 2013. If you
have an elective treatment you've been putting off, 2011 or
2012 might be the time to consider having the work done while you can
still maximize the HCFSA with $5,000 in tax-free savings.
Because
the Federal workforce includes a number of employees who are married to
each other, if each spouse/employee is eligible for FEHB coverage, both
may enroll for an HCFSA up to the maximum of $5,000 each ($10,000
total). Any health care expenses submitted for reimbursement can
only be paid by one account (each spouse could not submit the same
expense for reimbursement). |
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Top of the Class
The top 2 students from the 2010 graduating class
at the United States Military Academy at West Point are female cadets,
the first time ever in West Point's history. Liz Betterbed
graduated # 1 in the class and Alex Rosenberg was the class
valedictorian. Both ladies are also Rhodes Scholars (source:
Forbes). |
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TSP Returns
May 2010
G Fund
May: .28%
YTD: 1.37%
F Fund
May: .85%
YTD: 3.75%
C Fund
May: (7.99%)
YTD: (.63%)
S Fund
May: (7.51%)
YTD: 7.7%
I Fund May: (11.2%)
YTD: (12.72%)
LIFECYCLE FUND RETURNS
L Income May: (1.5%)
YTD: .73%
L 2010
May: (1.64%)
YTD: .72%
L 2020
May: (4.98%)
YTD: (.91%)
L 2030
May: (6.07%)
YTD: (1.2%)
L 2040
May: (6.97%)
YTD: (1.53%)
Returns courtesy of : |
Biggest Worry
More American workers (17%) identify the rising
cost
of health care insurance as the economic risk that concerns them the
most as they approach their retirement years. Other perils ranked high
on the
list included inflation fears, the cost of long-term care,
the ability to maintain a desired standard of living and failing to
leave an inheritance to heirs. (source: Society of Actuaries).
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Brown Bag - Lunch 'n Learns
With
the S&P 500 (and thus the C Fund) being down nearly 8% in May, are
you worried about the value of your Thrift Savings Plan? Now might be a
great time to bring in our popular "Allocating Your TSP in Volatile
Markets" to your agency.
The
program covers reviewing your risk tolerance (or lack thereof!),
understanding the five funds within TSP, and creating a strategy for
the future.
Contact
my office to schedule your program or to learn about our complete menu
of available topics. Call 866-792-6668 for more information. |
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Letter from the Editor
There's
a famous Wall Street expression, "Sell in May and go away", which is
supposed to reflect that historically, if investors had simply sold off
their entire portfolio in May prior to leaving for some far away
summer destination and returned to reinvest in September, their
investments would be no worse for the vacation. This maxim
proved itself once again May, 2010. The final monthly
numbers: Dow -7.9%, S&P -8.2% and
Nasdaq
-8.3% reflect what is probably one of the most interesting months in
Wall Street history (positive as a learning experience, negative
as a, well, that's obvious). Mixed economic data, Europe
collapsing, foreign currency downgrades, oil spills, problems in China,
financial reform, and a flash crash all contributed to increased
volatility, uncertainty, and a lot of unhappy investors. The drop
in the Dow was the largest monthly drop since the downfall in February,
2009.
All of
these factors are out of your control and simply amplify the fact that
you need a plan for your TSP (and other retirement accounts), if
you're going to withstand the current economic storm. With a
well-thought out strategy, whether you decide to "sell in May and go
away" or not, you should end the summer months with a smile and a tan.
If you would like help in establishing a plan for your retirement accounts, feel free to call or e-mail me for assistance.
Cordially,
John Sklenar
CPA/PFS, CFP
Chartered Federal Employee Benefit Consultant
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