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.
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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.
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@theMarket: NK Missile Dud on Wall Street
The North Korean boy who cried wolf is alive and well, but seems to have less and less impact on financial markets. Kim Jong Un's minions launched another missile over Japan on Thursday night and the markets simply yawned.
Geopolitics are always a risk for the financial markets. For one thing, they are by definition unpredictable. Rarely do the antagonists worry about the economic and financial ramifications of their moves. As such, markets react quickly, but usually the impact only lasts for a short period of time.
It seems that even our tweet-happy president is learning that, in this case, Kim Jong Un, the boy in the wolf's mask, has a bark that is far worse than his bite. Have you noticed that none of those missiles hit anything? That is not by accident. Unlike the majority of Americans, I do not think Kim is either a madmen or stupid. Far from it. I believe he is a calculating despot whose single-minded purpose is to attain a seat at the table among the world's nuclear power brokers.
His missile tests are intended to do just that. He needs to demonstrate to the world that not only does he have the capability to manufacture nuclear bombs, but also the ability to deliver them in a consistent manner. His scientists and military, aided and abetted by technology from other nations, will continue firing missiles into the sea and testing nuclear devices underground
until the world is convinced that he can do it. Only then, with a seat at the table as an equal, will Kim be willing to negotiate.
While North Korea and a bomb blast on the London subway occupy investors today, what moves markets in the medium and long-term are economics, tax reform (think cuts) and to a lesser extent, the recovery of weather-torn Texas and Florida. The good news is, now that the floods and rain have subsided, investors are trying to figure out what the aftermath of Irma and Harvey will have on the economy.
Clearly, $300 billion in damages will take a dent out of the economic growth rate over the coming months. However, the need to rebuild, with all that entails will provide a boost to GDP down the road. So, as analysts are busy crunching those numbers, a new atmosphere of bipartisanship is giving hope to investors that something — anything — might be done by our lawmakers before the end of the year.
Granted, Donald Trump, the self-professed deal maker par excellence, has been a bit slow on the uptake, he is finally realizing that there are two parties in Congress. Since he has not been able to make much headway with the various splinter groups that is called the Republican Party, he has turned to the Democrats to further his agenda.
And his present agenda is tax reform. Readers are aware that I personally do not hold out much hope for the long-promised, much-needed (but never enacted) reform of our byzantine tax system. A far easier proposition is to cut taxes. After all, our politicians have a long history of cutting taxes one year and raising them the next. Tax cuts won't convince corporations to invest or spend more. The economy won't take off because of them either, think of it as an election bribe, most likely enacted just before the mid-term elections next year.
As for the markets, the good news outweighs the bad, thus the minor new highs we are enjoying in September. I suspect we will inch up a little further in the short term but markets will continue to remain volatile for the remainder of the month. Keep invested.
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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.
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@theMarket: Markets Brace for the Weekend
Usually, the weekend is a time when traders try to relax, reduce stress, and prepare for the coming week's markets. This weekend will be an exception to that rule. Just about everyone is focused on the latest news of Hurricane Irma's landfall in southern Florida tomorrow and into Sunday.
Over in Southeast Asia, analysts are also expecting North Korea to fire off yet another missile. Exactly where and when is up in the air.
As if that were not enough, an earthquake and Hurricane Jose both hit Mexico simultaneously last night causing quite a lot of damage. Investors have no idea what economic impact these natural disasters will have on the North American economy. As for Kim Jong Un, there is always the possibility that an "accident" could happen, setting off World War III.
So it is not surprising that the stock market has gone nowhere this week. About the best you can say was that the averages were mixed. The only good news seemed to be that the debt limit was passed as part of a bill that provided the first flood relief money to beleaguered Houston. That surprised many, since the deal was forged by President Trump and the Democratic leadership.
Facing a protracted battle within his own party, Trump reached across the aisle for the first time in his presidency. The results were surprisingly quick and altogether positive. Of course, the rank and file within the Republican Party were at first surprised, and then angry, since they were gearing up for a protracted struggle within their own party. The various GOP splinter groups were planning on adding spending cuts, various pet pork-barrel projects, etc. to both the Harvey Relief aid, as well as the debt ceiling.
The markets took this sudden about-face by Trump positively. It helped support the markets in the face of all the other bad news. One could even hope that the president might resort to even more bipartisan help to further his agenda in the future. That could loosen the political logjam that has prevented any substantive legislation from passing Congress in the first eight
months of his term.
In a media atmosphere that wherever you look the first thing you see is the swirling visual of this "storm of the century" approaching American soil, it is understandable to be concerned, fearful, even panicked. Let's hope that like so many weather-related crises that the media hypes, this one won't be as damaging as they predict. If it turns out to be so, you could
even see stocks rally.
September is certainly providing the increase in volatility that it is known for. I guess the best that can be said for the markets so far is that in the face of overwhelming negatives, stocks have hung in there. That is a testimony to the underlying strength and conviction among investors that the future continues to look bright. It is why any pullback in the market, in my opinion, will be a single-digit decline at best and nothing that should concern you.
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