The Independent Investor: Is Bitcoin Broken?
Bitcoin, Ethreum, Ripple and a number of other crypto currencies have had a terrible week. Some of these digital dollars have lost 25 percent overnight, if not more. Today Bitcoin, itself, is down almost 50 percent from that level. Those who warned that this mania would come to a tragic end are crowing now. Are they right?
Last July, I wrote my first column on the phenomena of crypto currencies. Since then, Bitcoin vaulted to historic highs, briefly touching $20,000 on Dec. 17. Since then clients, friends, relatives and yes, even my mother-in-law, have asked me if I thought crypto currencies were a good investment.
The answer will always depend on the price I'm willing to pay for something. Until now, I have simply sat back and watched as the mania unfolded. Today Bitcoin is down almost 50 percent from the highs. Many financial historians have compared the run-up (and decline) in crypto currencies to the great Tulip Bulb Mania of the 17th century. Back then, one tulip bulb in Holland was said to be worth 10 times the annual income of a skilled craftsman. The craze ended in disaster for one and all.
Since even I am not old enough to remember the Tulip Bulb craze, let's look instead at the Dot-Com boom and bust. I do see a lot of similarities between the insatiable demand for anything with Bitcoin, crypto or Block chain in the name today, and companies in the early 2000s that doubled and tripled simply by changing their name to something "techy."
The question to ask is whether or not crypto currencies represent anything more than "animal spirits." In a global market where just about every other investment vehicle is gaining ground, why not Bitcoin? In other words is it simply part of the "greater fool theory" where you're buying Bitcoin simply to sell it at a higher price to someone else?
The crypto cheerleaders will tell you that investments like Bitcoin are real. The currency can be used to purchase things, products, etc. Another argument-the scarcity of crypto currencies compared to the world's traditional currencies. Others say the block chain technology that drives Bitcoin and other crypto currencies is "secure" because the underlying technology records and verifies every transaction using exact copies of a database spread on computers all over the world.
Some of those arguments may hold water, but not all of them. The fact is that it is notoriously difficult to buy anything with this stuff. The currency network is slow and buying anything small takes a lot of effort and time. Besides, who would want to spend this electronic money on a television or cup of coffee when next week the price might be 20 percent higher than it is now?
The fact that more and more crypto currencies are popping up kind of flies in the face of the "scarcity" argument. There is nothing to prevent an inexhaustible amount of these currencies to flood the world over time. And just because no one has figured out how to hack the block chain technology doesn't mean that they won't.
There have been several cases already where millions in crypto currencies have been stolen or hacked throughout the world. Finally, various governments are bound and determined to either regulate this free-wheeling market, or shut it down completely. In this example, China and South Korea come to mind.
While the controversy rages, crypto currencies will continue to trade and plenty of money will be made on both sides of this market. It appears that as time goes by, technical analysis is beginning to work in assisting traders in determining which way these currencies are going, at least in the short term. Right now, the betting is that Bitcoin will bottom out around here, only a little below the price where it traded overnight ($9,969).
The Independent Investor: The Cost of MAGA
It is the guiding principle behind the Trump administration, but to "Make America Great Again" the U.S. may have to break some eggs. Are you ready for that?
"MAGA" is much more than a marketing gimmick. Almost every day, we uncover additional evidence of how the President and his supporters in Congress are dismantling regulations, taxes, and on the foreign front, trade deals.
For example, while the president professes to have "a great relationship" with China and admires its president, Xi Jinping, at the same time, he is working behind the scenes to apply more pressure to our sometime-friend, sometime-nemesis.
This week we will have surely upset China when the House passed two bills that will make it easier for high-ranking Taiwanese officials to exchange visits with counterparts in the U.S. The second bill would promote Taiwan's participation in the World Health Organization.
Mainland China has long held a policy of "One China" (since 1949). The Communist government considers Taiwan a rebel province, which will one day be reunified with the mainland, even if that means applying military force. The U.S. actions this week threaten that stance and could invite some kind of retaliation from the mainland. Certainly China does not separate trade relations from geo-political concerns. To them, it is all one and the same. Therefore their response could be in the economic sphere or in the political realm (less pressure on North Korea).
On the trade front, many global trade economists believe that 2018 will be the year when Trump takes the gloves off when it comes to China. In December, Trump unveiled his national security plan and identified Russia and China as rivals that are attempting to erode American security and prosperity. He specifically accused Beijing of unfair trade practices.
There are plenty of areas ranging from steel to intellectual property where America has expressed their trade grievances. Politicians like to use the trade imbalance with China as justification (now about $309 billion in their favor) for additional tariffs on Chinese goods, but that line of discussion is too simple and ignores the vast and tangled economic relationships we have with that country.
Our withdrawal from the TPP Southeast Asian trade agreement has also left us with less clout when negotiating with China. In many ways, we are now on our own, as opposed to being the lead player in a multi-country, Asian trading bloc, when dealing with the Chinese. In fact, China is trying to replace the U.S. in that particular trade group, which could strengthen their position and cause us even more difficulties.
As of today, we have yet to feel any real fallout from our MAGA moves, but they are coming. Just this week, the markets tumbled worldwide when an unnamed Chinese official intimated that China might slow down, or stop purchasing altogether, our U.S. Treasury bonds. The concern was understandable, since China is the largest foreign purchaser of our debt. Other officials quickly denied the statement, but it reveals how dependent global financial markets are on maintaining the status quo in world trade.
And it is not only China that we need to contend with. This week, according to some Canadian trade officials, the North American Free Trade Agreement (NAFTA) is reported to be on the rocks. If that is true, the implications would be huge. No one can predict what would happen as a result of the dissolution of NAFTA, but suffice it to say that it would not be good for the stock markets of Mexico, Canada or the U.S. The three currencies involved have already seen some wild gyrations. When long-standing trade deals change, dislocations should be expected. There will be winners and losers, some obvious but others may take years to discover.
An enormous number of companies on both sides of our borders would be impacted. Hundreds of thousands of jobs would also be affected in ways that analysts are only just beginning to study. The same downside (and upside) exists in our relationship with China and every other country where our MAGA policies will impact trade agreements.
Financial markets hate uncertainty. Financial markets at historical highs dislike uncertainty even more. Aside from backing out of the TPP and bowing out of the world's climate change initiative, nothing substantial has come out of the president's first year in regard to trade. That doesn't mean it won't. As 2018 gets going, be aware that there are trade risks out there that we are only beginning to comprehend. Let's hope the president gets it right.
The Independent Investor: Beware the Tax Hit From Mutual Funds
Plenty of investors will be faced with an unpleasant surprise. Any day now, one or more of the mutual funds that you own will be sending out their capital gain distributions for the year.
The tax hit could be quite large this year.
Many investors are not aware that mutual fund companies are required to distribute at least 95 percent of their capital gains to investors each year. Given the double-digit gains in the stock market last year, those gains could be an unwelcome liability when tax time rolls around.
At this late date, there is little one can do about it, other than pay the piper, but this year you can take steps to minimize 2018's potential tax liability. Since the tax reform act did not change capital gains taxes, you can expect that short-term capital gains (less than 12 months) will be taxed at the same rate as your income tax bracket. Long-term capital gains, however, will continue to be taxed at 15 percent.
The job of most mutual fund managers is to buy low and sell high. That's what creates track records, which, in turn, attracts investors to their funds. But mutual funds are just like individuals when it comes to capital gains. Anytime a mutual fund sells a security, no matter what the asset, that gain is taxable. And since mutual funds are considered pass-through entities, they are required to pass along to you any of these taxable gains.
In the grand scheme of things, capital gains distributions could be considered a luxury problem since we want the mutual fund we are invested in to turn a profit for us. So producing capital gains (as opposed to capital losses) is a good thing. But some caveats do apply.
Distributions reduce the fund's net asset value, regardless of whether they are long-term, or short-term capital gains, qualified dividends, or a return of capital. The problem might be in the timing of your purchase. If, for example, you purchased such a fund after all the gains were made, but before the distribution, you will be sent the capital gain (plus the taxes you will owe) while the mutual fund you purchased would decline by the amount of the distribution. You would be left with an after-tax loss on that mutual fund investment.
So the morale of this tale is if you are going to stay invested in mutual funds in a non-retirement account you better start tracking the upcoming capital gains distributions on the funds you own or are considering purchasing. In general, most mutual funds pay one or two capital gain distributions each year, normally sometime during the summer, and the last one toward the end of the year (late November or December). Try to avoid buying mutual funds at those times.
The mutual fund industry is aware of how these sudden taxable events impact shareholders. Most managers try to avoid dumping huge gains on investors, especially short-term gains, which are taxed at a higher rate. However, at certain times, they are forced to do just that.
During market declines, for example, when they are faced with unusually large redemption requests, then fund managers may be forced to liquidate positions that they would have preferred to hold, but can't.
Today a shareholder of mutual funds can easily find out when and what upcoming distributions will be made by simply accessing each mutual fund's website. There, you will find a wealth of information concerning distributions. Many fund websites will give you distribution guidance several months before the event. That makes it easier for you to make informed investment decisions.
The Independent Investor: Confusion Reigns as Taxes Change
At the best of times taxes are confusing, so much so that most people hire an accountant to prepare them. This coming year should be a real doozy for the accountancy industry.
Given the massive changes to the tax code that will go into effect next year, taxpayers are rightly concerned (and confused) on exactly what the rules will be and how they will impact their families.
"Most (although not all) taxpayers would owe less under the new rules, according to analyses by various independent think tanks, including the Tax Foundation and the Tax Policy Center," according to Charles Schwab and Co.
In high tax states, lines are already forming at the local assessor's offices. New York Gov. Cuomo just signed an emergency executive order that urges counties in the state to send 2018 property tax bills now before the end of the year. That way, residents can pay next year's taxes before the end of the year thereby still taking a tax deduction against their federal tax bill.
Money management firms across the country are also being besieged by clients who want to pay next year's fees in advance in an effort to take advantage of that tax deduction before those too expire in 2018 under the new legislation. Phone lines to most accountancy firms ring busy and even office voice mails are full.
Let's start with your tax brackets. There are still seven tax brackets but the new legislation generally lowers rates across income levels. For a couple filing jointly, the new brackets will be 10 percent for taxable income up to $19,050, 12 percent on $19,050 up to $77,400; 22 percent on income up to $165,000; 24 percent up to $315,000; 32 percent to $400,000; 35 percent to $600,000; and 37 percent on income above $600,000.
In addition, since most Americans do not itemize their tax deductions, the standard deduction available to those taxpayers has doubled from $12,000 for individuals and $24,000 for couples. However, what the government giveth, the government can also taketh away. The personal exemptions for individuals were also removed, which comes out to $4,050 per person.
However, overall, if you're a low- or middle-income household, an increased standard deduction combined with an increased child tax credit should lower your tax bill.
The new tax law has placed a cap on itemized state and local tax deductions that have been up to this point fully tax deductible against your federal taxes. The cap on combined state and local taxes amounts will be no more than $10,000. People with heavy tax burdens in high-tax states such as New York, New Jersey, California and Massachusetts will be hurt the most.
And in order to close as many loopholes as possible, the Republican lawmakers barred these taxpayers from prepaying in 2017 any state or local taxes that will be due next year.
Those who have been choosing to itemize deductions may now have to reconsider which is better: a reduced level of itemized deductions versus the standard deduction. Some families may now fare better taking the simpler standard deduction.
The Internal Revenue Service has also warned high-property state taxpayers not to prepay property taxes before the end of the year unless your local government has already assessed your property for 2018. For example, my town has already billed me for next year's taxes, while across the border in New York State, the local authorities bill in the year taxes are due.
Mortgage interest amounts will also be limited to the first $750,000 of a loan for a newly purchased first or second home. Although it is early days, many analysts believe this tax change will have a devastating effect on areas that rely on second homes and their owners for their livelihood. People who might have considered buying a second home will find the new rules will be a disincentive to purchase. It could also make it harder for home owners in those markets to sell their homes. The net effect would be a dampening of economic activity in those areas.
This would impact many lower income families who depend on second home owners for their livelihood. Those who provide landscaping, lawn care, house maintenance and repairs, snow plowing and a myriad of additional services supplied by mostly blue collar workers would feel it the most.
There are countless other areas from healthcare to pass-through income that has been affected by the new rules. In future columns, I will examine many of these changes. But for now, rest assured that as 2018 unfolds, there will be countless variations to this legislation that will continue to impact the economy and all of us in unexpected ways.
The Independent Investor: To Roll, or Not to Roll Your 401(k)
Rolling your 401(k) or 403(b) into an IRA can be a good idea for some savers but not for others. Here are some things to think about before you make a decision.
In my last column, I outlined some of the more obvious reasons for rolling over your retirement accounts: cost savings, larger selections of investment choices, more flexibility. I also discussed some of the cons against rolling it over: the ability to borrow against your 401(k), a lower age for beginning distributions from your 401(k) (55, versus 59 ½ for an IRA), the ability to delay minimum required distributions after 70 1/2, if you are still working.
This week, I want to focus on one of the greatest weaknesses of just about all employee tax-deferred retirement accounts. When the public and private sector came up with the concept of tax-deferred retirement accounts to replace pension funds, they forgot one extremely important detail. Pension funds for a company's employees were managed by full-time professionals.
That makes sense because managing retirement savings is a full-time job. Unfortunately, the government ignored that fact when they gave the responsibility of managing tax-deferred retirement savings to the worker. Few workers are qualified to do that. They are totally focused on the full-time job of making a living, getting ahead and providing for one's family, as they should be.
Even if they had the education, knowledge and skill to manage money, (which most don't), they have few resources to do that job successfully. And as years of contributions have accumulated, many retirees now have hundreds of thousands of dollars (if not millions) invested in these employee-sponsored plans.
At the same time, the financial markets have changed enormously. It is a world of derivatives, leveraged investments and the commoditization of everything from individual stocks to Bitcoin, the individual investor is increasingly outgunned.
As a result, most 401(k) contributions are funneled into funds that automatically change your exposure to bonds and stocks based on the date you plan to retire. These target date retirement funds tend to be expensive and have a number of unintended consequences. One of which is that the closer you get to retiring, the more bonds are added to your portfolio (since bonds are considered a safer investment). In an environment where interest rates are rising and bond prices are falling, however these "safe" investments are fraught with risk.
In today's constantly-changing, global financial markets, the set-it- and-forget-it approach to investments does not work very well, just witness the debacle in losses back in 2008-2009 to most savers' 401(k) assets.
By rolling over your 401(k) to an IRA, the option of professional money management becomes available. It is one of the reasons that brokers, annuity salesmen and investment advisers are so focused on the area. This "gold rush" by the financial community to manage these assets has led to a myriad of abuses. Unscrupulous brokers, financial planners and advisers have stuffed these rollover accounts with high-priced investments with sub-par returns that have generated big commissions and fees for their firms while stiffing the poor retirees.
Worst of all, countless elderly retirees have been sold annuity products that are not federally-insured or regulated. These restrictive investments are inappropriate for the vast majority of savors. They command some of the highest fees of almost any investment product (as much as 15-20 percent of the entire investment over the lifetime of the annuity contract). What's
worse, if you try to sell them (as many do) they are saddled with huge penalties for years.
Money management, on its own, is no panacea; there are good advisers and bad ones, so you still need to do your due diligence. Make sure that whoever you select is registered, is a fiduciary and, if possible, offers more than just money management. In planning for retirement there are a number of other areas besides money management that are important, everything from financial and estate planning to Medicare, Social Security and elder care issues.