Monthly Archives: August 2015

Fed Minutes Show Inflation is Holding Back a Rate Hike

Federal_ReserveOn Wednesday afternoon, the Federal Reserve released minutes from their July 28-29 Federal Open Market Committee meeting. Investors were looking forward to the minutes to discern if the Fed might start hiking rates this September, as previously expected. The minutes were somewhat muddled as they showed members continue to debate whether it is appropriate to start raising rates. But in the end, the minutes appeared to show a bias toward keeping rates low, largely due to inflation not being near the Fed’s target figure.

Conventional theory says the Fed, in trying to fulfill its dual mandate of stable prices and full employment, must try to interpret economic data to see which way the economy is tilting; is there slack in employment and therefore low rates are needed, or is inflation becoming a risk and therefore higher rates are needed? While this teeter-totter of prevailing conditions sounds good in theory, what we often find is the Fed is faced with contradictory data on economic conditions.

The recent release of July’s minutes is an example of this confusion. The Fed noted the labor markets have been improving with unemployment at 5.3%, the lowest rate so far since the recession. But historically, this isn’t that low; unemployment reached lows of 4.4% and 3.8% before the last two recessions in 2008 and the early 2000’s, respectively. Furthermore, the Fed itself admitted the labor force participation rate and the employment-to-population ratios both declined. Translation: the unemployment rate continues to decline, as less people look for work.

GDP remains tepid. Recall that growth estimates for GDP were well above 3% not too long ago, which is why many expected a rate hike as the Fed wouldn’t have as much trouble hiking rates going into a stronger economy. Meanwhile, the Fed continues to brush off the weak first half of the year as being ‘transitory.’

Inflation continues to sit below the Fed’s 2% target. The meeting minutes also labeled this as transitory, as the low inflation was attributed to lower energy prices and the decline in import prices due to past dollar appreciation.

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Feature Story: Sean Manning, CPA, Contributing Author of Six Steps To Small Business Success

Sean Manning, CPA and Managing Partner of Manning and Company, is one of the sharpest blades I know when it comes to building a profitable business. He is also a collaborative author of a re-released book Six Steps To Small Business Success: How To Start, Manage and Sell Your Business. In my humble opinion, it’s a must-read for anyone running a business, whether large or small.

Recently, I had the opportunity to glean some great insights from Sean on how to launch, manage and create a legacy business amid today’s tax and regulatory complexities. So read on, and then share your thoughts and comments on this piece.

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Sean, why did you and your collaborators decide to write this book?

Michael, this book represents a culmination of nearly 100 years of experience among us, and it reflects the questions we get asked the most by our clients. By imparting the knowledge we’ve acquired from having worked with literally thousands of business owners, our goal was to summarize the key components and details that surface during the life cycle of a business. In a sense, it’s a “how-to” reference guide that’s applicable irrespective of where you are in your business.

So what sorts of issues are you hearing about most frequently from business owners these days?

There are three that I can discern for sure. First, there are the regulations and the expanded requirements that government is demanding of small businesses. That’s been a major concern, not only for emerging businesses but also for those that have existed for a number of years. This increased regulation has brought on quite a lot of angst.

Second, staffing and people-management issues are big. Again, much of this can be tied to increased regulation coupled with efforts on the part of business leaders to determine how to best leverage talent.

Finally, business development is a significant concern. This area has probably gone through one of the biggest transformations in the past 5 years because global economic factors,

Currency War Rages on as China Devalues Yuan

PBOCChina’s central bank has caught the markets off-guard by unexpectedly devaluing the yuan by nearly 2 percent against the U.S. dollar, roiling stocks as a result, especially those that sell to China. The central bank of China has tried to brush aside the magnitude of the move, calling it a ‘one-off depreciation’ and saying the change in policy will help drive the currency toward more market-driven movements. However, this is just another chapter in the worldwide currency war we are experiencing, and it should not come as a surprise at all.

First, it is helpful to examine more closely what China actually changed. The yuan has been pegged to the dollar for many years now, with Chinese officials allowing the yuan to trade 2% above or below a midpoint they set called the daily fixing. Officials can look at the daily trading when setting the midpoint, or they can arbitrarily set it higher or lower as they please.

The central bank has now changed its policy, saying it will base the midpoint off of the previous day’s closing price as well as market-makers’ quotes. As a result, it set the midpoint 2% lower than the previous day’s. This was the biggest devaluation of the yuan since 1994 when they let it fall by one-third as part of a breaking away from Communist state planning.

Because the rules are now more ‘market based’, it will be interesting to see if this really will be a one-off devaluation or if China will let the currency slide further. They could also continue to influence rates by entering the foreign exchange markets themselves with their reserves.

In the end, the mechanism or specifics are minor details compared to the real reason for the devaluation; participation in the global currency war. Almost nobody doubts that China is now fully engaged in the same game that developed countries have been playing for years now. Each one is devaluing their national currency as a last-ditch effort to stimulate more growth.

The Biggest Advantage You Have Over Wall Street

DollarNews stories of high-frequency trading, market rigging and interest rate manipulations make the average individual investor feel like they have no chance of making any money in the markets. It seems like the guys on the inside track, such as the hedge funds, private equity funds and other “accredited investors,” only have access to all of the great deals. But there is a huge advantage you, as an individual investor, have over Wall Street and the entire investment management industry – independence.

What I mean by this is you as an investor of your own money only have to answer to yourself. Almost every hedge fund or investment manager in the industry is managing money for someone else and therefore have to answer to to their clients every month or quarter and report on their performance. This is of course a good thing in itself, but it can be a hindrance to the manager and something you can use to your advantage.

For example, hedge fund manager David Einhorn has recently been under fire for his bet on gold. His publicly traded reinsurer, Greenlight Capital Re, is down 18% year-to-date partly due to the fund’s gold position as well as other positions that have not been working out.

Myths of Inflation (and Deflation) with Christopher Casey [Interview]

Top highlights from the interview. Five of the ways that inflation is misunderstood in today’s world:

1. “Demand pull” inflation (Keynesian concept) a.k.a. an “overheated economy”

2. “Cost push” inflation (Keynesian concept) e.g., increase in the price of oil can spark inflation.

3. Velocity can exacerbate or mitigate inflation (when it reality it does not exist and is a poor proxy for monetary demand).

4. Demographics directly impacts the price level (e.g., an aging population is “deflationary” per people like Harry Dent), the impact is really indirect and only results from the nature of fractional reserve banking

5. The Federal Reserve can not successfully control inflation, it can only contribute to the price increases with its ability to print money at its leisure.

Thanks, WindRock Wealth.

Major Tax Reform: A Good Idea or Fuel For Cataclysmic Upheaval?

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Tax expert and author of Tax-Free Wealth Tom Wheelwright has never been one to mince words about tax reform. And he certainly didn’t disappoint in a recent radio interview about a spate of ideas being bantered about by some of the 2016 Presidental candidates. So does Tom think that major tax reform, which would involve slicing and dicing through the 74,000 pages of tax code regulations that currently exists, is a good idea? Listen to this five minute video to find out more.