The Independent Investor: Tackling Taxes
President Donald Trump introduced a flurry of tax proposals last week. Tax reform, as well as tax cuts, was included in his plan. Give him an "A" for effort in tackling something that no politician has dared to do since Reagan.
Naturally, depending upon your political views, critics will disparage his efforts, claiming it is yet another tax break for the rich. Others will approve of at least some of his suggestions. On the surface, his plan would significantly reduce the marginal tax rates, increase standard deductions, repeal personal exemptions, limit itemized deductions and let corporations and businesses expense new investment, but not deduct interest expense.
His proposal would also cut taxes at all income levels. The biggest benefits would accrue to those who make the most money. Analysts estimate that if his proposal were passed as is federal revenues would drop by $6.2 trillion over 10 years. If you include interest costs over that decade, the country's federal debt will rise by $7.2 trillion.
The president originally campaigned on a 15 percent corporate tax rate, but upped that number to a 20 percent tax rate. It appeared that dropping it by the original 15 percent would be a budget buster. Still, that is a hefty reduction from today's 35 percent (although few corporations actually pay that rate).
One great idea is to allow a 25 percent tax rate for pass-through businesses. That would allow entrepreneurs that own their own businesses to pay a 25 percent tax instead of their personal tax rate. There is some controversy over exactly what kind of businesses could benefit from the pass-through rate. But since small businesses account for the majority of employment in this country, anything that helps them helps all of us.
In addition, Trump's plan eliminates some business deductions; it also offers U.S.-owned businesses the chance to repatriate overseas assets at a one-time lower tax rate. The rumors are that the rate could be as low as 10 percent.
But readers are probably more interested in Trump's proposed tax brackets for personal income. The plan specifies three tax brackets with the lowest rate at 12 percent. That would actually be a slight bump up for the bottom bracket, which is now 10 percent. Those in the 15 percent tax bracket would probably benefit the most. The middle tax bracket would be 25 percent, but the exact incomes in this bracket have not been spelled out. Finally, the top rate would be 35 percent (versus the existing top rate of 39.6 percent).
In order to fulfill his promise that taxes for the wealthiest Americans not decrease, there may be a fourth bracket. If so, the details would be the job of the congressional tax committee.
The president wants to make sure that any reformed tax code is at least as progressive as the existing one. He also is insisting that the burden of taxes does not shift from wealthy, higher-income taxpayers to lower and middle-income Americans.
In an effort to protect those who will see their tax rise (from 10 percent to 12 percent), the standard deduction will increase to $12,000 from $6,350. That would double for a married couple. For those worried about the home-mortgage deduction, relax. Those, as well as charitable donations, are going to remain as is. Other deductions are up for grabs.
Finally, the elimination of state and local tax deductions has caused uproar in certain quarters. Most of the people who take advantage of these deductions are wealthy and happen to live in Democratic states. For example, about one-third of the beneficiaries live in New York, New Jersey and California. However, in an effort to be even-handed, Trump is pushing to eliminate the estate tax, which would benefit the wealthy.
Before you get into a funk over this, remember that what is proposed today will not be the same proposal Congress will legislate. We have no idea whether or when anything will pass both houses of Congress. My advice is to consider it a beginning, but expect the end result to be much different. And give the president some credit for trying.
The Independent Investor: Time to Check Your Insurance Policies
With hurricanes to the left and right of us, maybe a review of your home owner's insurance policy makes sense. You may find out that at today's real estate values, you are underinsured.
If you are like me, the last time you visited the insurance subject was during the Katrina/Sandy hurricanes. Since then, houses in some areas have appreciated by more than 30 percent. If so, a devastating event such as the widespread destruction recently caused by Harvey in Texas and Irma in Florida could really decimate what is probably your most valuable asset.
Given the fact that hurricanes seem to be sprouting up all over the place, if you have been spared thus far doesn't mean that you will miss the next one. The sad facts are that according to a real estate data company (Core Logic), over half of all homeowner insurance policies have a payout that is less than the cost of rebuilding a home in the event of a catastrophic loss.
Remember, too, that for most homeowners, the insurance policies you have purchased automatically low-ball the replacement cost values of your home. As far as the insurance industry is concerned, it is your responsibility to make sure you have the appropriate amount of protection.
And as a starter, did you know that most home owner's insurance offers limited coverage for hurricane and tropical storm damage? If you want something like hurricane coverage, it often comes with its own high deductible. In some coastal areas, you may need to purchase separate windstorm coverage.
"It is important to know," says Michelle V. Orlando, president of Cross Surety Inc., an all-encompassing insurance company based in the Berkshires, "that most homeowner's policies will not cover damage resulting from flood. A separate flood policy would be needed but there is typically a 30-day window before coverage can be put into place.
In general, flood and wind damage are considered separate events and are rarely covered under one policy. And unfortunately, most people in hurricane zones don't qualify for flood insurance. For that, you have to go to FEMA.
What can you do now (besides reviewing your policy and calling your agent) to prepare for a hurricane or flood in your area? Document your property. It should have been done a long time ago, but even if you did, I am sure you have made new purchases, improvements, etc. In the day of cell phone photos, it is also a good idea to photograph certain valuable pieces of property or possessions. Make sure all your outside items are stored inside. Park your vehicles in the garage and move anything near trees to a safer spot.
But let's say you do get hit by a weather-related event. Be quick to file your claims. And when you do, take careful notes, write down all claim numbers; keep the insurance adjuster's name and phone number. If you have out-of- pocket expenses for immediate repairs or hotel bills (in the event you are forced out of your home), make sure you keep the receipts.
Of course, for those who live in parts of Texas or Florida, it is too late to protect yourself. These homeowners have unfortunately learned a hard lesson. While they may have saved on premiums, due to a low replacement cost, they may have lost thousands, if not everything, as a result. Don't be penny-wise with your insurance, because the next storm might pound you into oblivion.
P.S.: for those living in the Northeast, you may want to call your insurance agent today. Reports are that Hurricane Maria may be taking aim at the Northeast by sometime next week.
The Independent Investor: The Price Tag of Disaster
|Damage from Superstorm Sandy back in 2012.|
Over the past four weeks, just two hurricanes have cost the country upwards of $300 billion. This has easily surpassed the 2005 hurricane cost of $200 billion, which included Katrina, Wilma and Rita combined. The cumulative cost of weather continues to escalate and with good reason.
Before you leap to the conclusion that global warming is the culprit, let me lay out some facts. Coastal storms are no more (or less) frequent an event now than they have been throughout our history. So what gives?
The answer lies in population growth and demographics within our own society. A few years ago, a study funded by the National Oceanic and Atmospheric Administration, found that although hurricane intensity varied decade to decade, there has not been a spike in either the number or intensity of hurricanes, nor is there any evidence that global warming is the culprit.
The study pinned the blame for the elevated level of property damage and deaths on the growing concentration of people and property in coastal hurricane areas.
Today, well over 55 percent of the nation's population lives in roughly 673 coastal counties. That's over a 30 percent increase since 1980. The Southeast had the largest rate of change, with a 58 percent increase during that time. The Pacific region and the Northeast are also seeing the same phenomena. At this point, over half of us are crowded together on only 17 percent of America's land mass (excluding Alaska). As a result, some catastrophe modeling companies predict that losses because of coastal storms will double every decade or so due to this trend.
Where there are people, there is also infrastructure — roads, bridges, ports, schools, hospitals, etc. There are also businesses such as stores, restaurants, factories, movies and the like.
Finally, there are homes, from hi-rise condos and apartment buildings to row after beachfront row of single and multi-family dwellings. More than 55 percent of the nation's housing stock sunbathes along our coasts. This social migration is happening all over the world. Whether scientists look at Europe, Asia or anywhere in between, the results are the same. People are deliberately putting themselves and their property in harm's way at an alarming rate.
Today, when even a middling hurricane makes landfall, the chances of $1 billion in damages and greater loss of life is higher than ever before.
The same can be said for earthquakes, according to FEMA. Its studies found that although the number and intensity of earthquakes have stayed the same (more or less) over the last hundred years, damage has skyrocketed due to "significant growth in earthquake-prone urban areas and the vulnerability of older building stock, including buildings constructed within the last 20 years."
At some point, when the cost of insuring "home, sweet home" on our nation's coastal areas grows to be greater than your mortgage payments, the trend will reverse, or at least we hope so. But in the meantime, as long as one keeps wishing for that place by the shore, the economic costs will continue to grow. It's your move, America.
The Independent Investor: America, the Battered
Extreme weather and other climate disasters appear to be occurring far more frequently than we would like. The loss of life and economic damage also seem to be increasing. But does the data support those opinions, and if it does, what price do we pay for all of these perfect storms?
Long-time readers may recall my columns of four and five years ago, where I examined the price tag the world (and the U.S.) pays for weather-related disasters. Given the fact that we are between hurricanes (Harvey has departed Texas, while Irma bears down on Florida); it may be a good time to educate new readers on the economic cost; not to mention the loss of life.
In 2016, the U.S. suffered twice the amount of weather-related economic damage versus the prior year, according to the National Oceanic and Atmospheric Administration (NOAA). Weather and climate were responsible for 297 deaths and $53.5 billion in damage in 2016. Fifteen of these events cost at least $1 billion and covered 38 states.
In 2015, the costs were $21.5 billion. If you look back even further, over the past six years, there were at least 66 extreme weather events in the U.S. with a price tag of $1billion or more. Weather-related events caused 1,628 fatalities and $297.6 billion in economic losses throughout 44 states.
And now let's see what has happened so far in 2017. As of July 7, there have been nine weather events of $1 billion or more across the country, which caused 57 people's lives. And then came Harvey. Estimates so far put the price tag at $190 billion in damage with an additional 70 lives lost.
While Hurricane Irma, which some call "the largest storm in modern history" has yet to make landfall, most forecasters predict it will hit Florida dead-on by this weekend. Assuming it does, the economic damage could easily exceed $100 billion. No one knows how many lives will be lost. But by the end of this month, we could easily see as much as $300 billion in damages from these two events. And in the wings, Hurricane Jose and Katia are strengthening in the Atlantic.
If the magnitude and number of disasters appears unprecedented, it is because they are. Back in the Eighties and Nineties, according to the National Climatic Data Center, which is part of NOAA, it was rare to see more than two or three $1 billion, weather-related damage events annually. We had many years where the losses totaled less than $20 million a year. But today, billion-dollar events have become twice as frequent as they were back in 1996 as well as in the proceeding 15 years.
Looking at the time period from 1980-2016, the average number of annual weather events, according to NOAA, was 5.5 events per year. For the most recent five years, we have had twice that many events. And this year we have already hit 11 (and possibly number 12) by this weekend.
Expense-wise, we have also witnessed a big up-tick in the economic cost of these catastrophes. In October 2012, Hurricane Sandy, the "Super Storm," hit the New Jersey, New York coast killing 131 people. The estimated damages peaked at $50 billion. Only weather catastrophes in 2005, the year of Hurricane Katrina, Wilma, Rita and Dennis, generated more deaths (2,000) and worse damage ($187 billion).
All of the above, however, is small potatoes considering that in just the last two weeks we face possibly more damage than all of these hurricanes combined. In my next column, I will examine some of the causes of both the increase in weather events, as well as the severity of the economic damage.
The Independent Investor: The Market's Half-Time Report
Financial markets worldwide ended the first six months of the year much better off than they started. Here in the U.S., the Dow and the S&P 500 Indexes both gained 8 percent, while NASDAQ delivered 15 percent.
The Russell 2000, the small cap index, underperformed (up 4 percent) and the Transports gained 5 percent. All-in-all, it paid to be in large-cap, especially the large cap growth sector for the first half. At the same time, the Volatility Index continued to make new lows, despite the fact that at least half the investing population was/is worried and fearful of our new president's agenda.
All of the top 20 economies around the world are growing this year. That recovery is broadening out to include emerging markets as well. It's the best global growth investors have experienced in five years. And economic forecasts have continued to indicate gains, especially in Europe. While over in Asia, recession-ridden Japan has managed to gain ground (up 8 percent).
Their economy is stronger than at any time in the last 10 years.
As a result, international developed markets outperformed our own stock market. The French market gained 15 percent, Germany 16 percent, while Spain and Italy also gained by double digits.
Emerging markets have done even better, racking up a 17 percent gain. Individual countries like Hong Kong were up 16 percent, while China lagged (only up 12 percent). Most investors do not realize that the decline in the dollar since the beginning of the year had a lot to do with that overseas performance.
As the greenback fell, the foreign currency-denominated stock prices overseas gained.
Just this currency effect alone boosted foreign returns by 5 percent or more. If you subtract out the currency impact, foreign stocks actually lagged their U.S. counterparts, despite stronger economic growth. All of this was especially impressive given the political climate, as well as the changes in monetary policy here at home.
For years, investors have been concerned with what might happen to the stock market once the easy money policies of our central bank ended. Dire predictions of major declines caused by Fed tightening have not come true. Given that we have weathered three rate hikes since December and stocks are at or near record highs, says volumes about those overblown fears.
Two variables have saved the market from those bearish predictions. The economy and employment are both gaining with the jobless rate hitting historical lows over the last six months.
Low foreign interest rates have also kept a lid on rising rates here at home. Believe it or not, even at these low rates, foreigners are buying our bonds because interest rates and bond yields are much lower in their own countries.
But what about all this crazy partisan politics, tweets and the like, why hasn't this political turmoil decimated the markets as so many expected? Well, I come to discover (thanks to work done by Ned Davis Research, the Fed and Liz Ann Sonders, Charles Schwab's equity strategist), that "stocks rise faster when partisan conflict has been elevated on an absolute basis and relative to the recent past." There have been times since 1984 when the S&P 500 Index has made gains of 17 percent annually under these circumstances.
It simply proves that stocks do climb a wall of worry. But what is in store for us in the second half of the year? It appears that as long as the same set of circumstances prevails, we should have another strong year in the stock market. Let's hope they do.