Posts by michelle

Welcome to 2020: Hindsight and Vision

Posted on Jan 1, 2020 in Community, Family, Investments, Planning, Retirement, Tax, Technology

This time of year we often look back over the past 12 months, and as we close out 2019, we also close out a decade. Time goes by in the blink of an eye, and the past ten years are only different in that there has been more change than ever before. That will only be exceeded by the rapid change in the next ten.

We’ll welcome some of this: systemic and technological changes to make life better. Other changes,  like those which require shifts in well-worn habits, or to combat climate change and rewrite our social contracts to reflect life today, will be more difficult, and require more attention.

LOOKING BACK: THE DECADE IN REVIEW

ECONOMICS
We all remember where we ended the last decade, surrounded by the tatters of financial life after the Great Recession (aka the Financial Crisis, August 2007-March 2009). We weren’t sure it was over, and while the recession had technically ended, the impact would still be felt by many for years to come. While we are spending lately like the Financial Crisis is forgotten, some have still not recovered, and the trauma of the event continues to affect almost all of us.

As the decade began, we were told the recovery was happening, then we were hit with a series of smaller crises in financial markets: 2010 Flash Crash (trillion dollars lost in the stock market in 36 minutes, started by automated trading programs); 2011 European Sovereign Debt Crisis (causing a write-down of Greek bonds); 2013 bailout of Cyprus by the European Union (to avert a banking crisis); 2015 Chinese stock market crash, followed by a commodity-driven US stock market drop, and finally a 2018 worldwide stock market downturn, ending last Christmas Eve, when the S&P fell nearly 20% in the preceding three months.

While the economy is NOT the stock market, the two are related. Here is what the largest U.S. companies did over the last decade, in terms of their stock prices:

It hasn’t been an entirely smooth ride; we have forgotten the hiccups that occurred because of the events noted above, and others.  But what does this tell us about the economy?  Is it reflective of fundamental strength of companies and demand, or of manipulation of interest rates, and tax laws that favored stock buy backs? Or a combination?

Despite very low unemployment, wages have barely budged for most, and some Americans have taken to working two (or more) jobs. A minimum wage of $15/hour works out to $30,000/year for a full-time job, which hardly meets rent in some urban areas. You enjoy the benefits of a rising stock market when you can invest, and for many, that’s still out of reach.

POLITICS
President Obama was two years into his first term as the decade began, and the push-back to the change he represented was evident. A Republican-led Congress blocked attempts at government spending on infrastructure programs to jump-start the economy and get Americans, particularly those in the trades, back to work in the wake of the Financial Crisis. The Tea Party, a movement within the Republican Party and a harbinger of where we would end the decade, gathered power, pushing for lower taxes, reduced government spending and a reduction in the national debt. By the decade’s end, they’d achieved 1 of 3.

Obama’s first term was devoted to health care reform, and Congress passed the Patient Protection and Affordable Care Act (“Obamacare”) in 2010. President Obama’s second term included another big change: in 2013 the U.S. Supreme Court decided the case that recognized same-sex marriage and overturned the Defense of Marriage Act (DOMA).  Reforming our health care system and expanding the definition of marriage were both HUGE shifts in the American landscape.  No question there would be a reaction to big social change.

Part of the reaction to the economic situation was political of another persuasion: the Occupy Wall Street protests began in July 2011 in New York City and spread to 82 countries by October. Bailouts for big banks led to an outcry against financial greed and corruption, starting a new discussion about economic inequality that continues today.

The BlackLivesMatter movement began in 2012 after the shooting death of teenager Trayvon Martin, and went national in 2014 after the deaths of Michael Brown in Ferguson, MO and Eric Garner in New York City at the hands of police. Social media aided both the spread of participation in the campaign against violence and systemic racism, and in the backlash, with the appearance of “All Lives Matter” and Blue Lives Matter, in support of the police.

The election of Donald Trump in 2016 was the capstone to years of work to bring America back to an earlier time, to re-entrench systems and institutions to support the economic and social structure we created after World War II.  The President’s Inauguration in 2017 kicked off worldwide Women’s Marches, with 420 reported marches in the U.S. and 168 in other countries, becoming the largest worldwide protest in recent history. In March 2018, Stoneham Douglas High School students led nationwide protests over gun violence, called the National School Walkout. By May the protest movement became the March for Our Lives, with demonstrations in 900 U.S. cities.

In December 2018 “Yellow Vest” (“gilets jaunes ”) protests in France that were initially motivated by rising fuel prices and a high cost of living shut down urban centers weekend after weekend; by December 2019, the movement broadened its focus to include opposition to President Emmanuel Macron’s austerity measures, which included pension reform that would postpone retirement until age 64 instead of 62. The protests spread across political, regional, social and generational divides angry at economic injustice, with polls indicating than 80 percent of French people supported the movement.

A series of strikes in 2019 for action on climate change drew millions of people worldwide. The third global strike in September, also known as the Global Week for the Future, was timed to occur around the UN Youth Climate Summit and UN Climate Action Summit. The September Climate Strike included over 1,000 strike events in all 50 states, Puerto Rico, and the District of Columbia.  The student-led protests had five demands directed at world leaders and elected officials centered around a “Green New Deal”: to transform the economy to 100% renewable energy by 2030, while creating jobs and ending leases and permits for fossil fuel projects; respect for indigenous land and peoples; investment in communities affected most by poverty and pollution; protecting biodiversity, restoring 50% of the world’s lands and oceans, and stopping all deforestation by 2030; and sustainable agriculture, including the end to subsidies for industrial agriculture. A bold “to-do” list.

We closed the decade with anti-extradition protests in Hong Kong against a bill that was viewed as eroding the “one country, two systems” balance between Hong Kong and mainland China. The protests morphed to reflect broader threats to Hong Kong’s autonomy, as well as underlying discontent in Hong Kong, from the dearth of affordable housing to the demand for universal suffrage for elections rather than use of an Election Committee, which is viewed as non-representative.

Worldwide, there were protests related to housing affordability, economic inequality in general, climate, safety, and the concentration of power in few rather than many hands.

DEMOGRAPHICS
We’ve all heard about our longer life expectancy, and that reality is rapidly coming head-to-head with social safety nets worldwide. Despite reports of a reversal of this trend, looking closely at the numbers, the decline in life expectancy in the U.S. tends to cluster around certain regions, in rural areas where the opioid epidemic, among other factors, is concentrated and driving down life expectancy.  In coastal areas in the U.S., life spans are tracking the rest of the developed world, and increasing.   The safety net failing here is general health care coverage (as well as regulation of pharmaceutical companies).

The other safety nets running into headwinds are those for our elders. In April 2018, Nicaragua announced reforms to its Social Security programs to decrease retirement benefits; 34 people were killed by police in the resulting protests. In France, the aforementioned Yellow Vest protests now include push-back on labor law changes and plans to overhaul the pension system. In the U.S., the Social Security Administration notes on every Social Security statement that as of 2035, only 76% of benefits can be paid; for disability insurance benefits offered through the program, those benefits become unsustainable in 2020.  Medicare is on an even less solid footing.

Meanwhile, and because we like acronyms, a legislative proposal, called the Time to Rescue United States’ Trusts, or TRUST, Act, would create congressional committees to evaluate how to bolster solvency or make other changes to improve the programs. That sounds like kicking the can further down the proverbial road, but further increasing the age when we are eligible for benefits should be part of the solution. The Social Security 2100 Act calls for increased benefits, and increases payroll taxes to pay for it. Also in the hopper are plans to cut both Medicare and Social Security in a second Trump term, based on growing federal deficits, the same deficits Republicans and the Tea Party wanted to avoid, but created by the most recent tax reform legislation.

We are living longer than ever before, and the math these demographics present is straightforward: we need to work longer, pay more in taxes, and start benefits later. We’ll be experiencing exponentially increasing change over these longer lives, and we’ll need to retrain/retool/refresh along the way. All of which argue for a restructuring of how we work, not a return to a post-WW2 ideal, and a reworking of how we enjoy leisure time, “retiring” the current concept of “retirement.”

DATA
Throughout the decade, leaks and breaches of big data caused turmoil large and small:
2013 – Edward Snowden exposes widespread government surveillance
2016 – Panama Papers are revealed, showing myriad ways the rich can stash cash offshore
2016 – WikiLeaks releases Hillary Clinton’s emails and Russia interferes with US elections
2017 – WannaCry Ransomware attack hits computers in 150 countries

Wikipedia lists 138 data breaches from 2010 to the present, from Reddit to Capital One, the U.S. Department of Homeland Security to Uber, Premera Blue Cross to Facebook (Facebook was hit five times; in July 2018, a drop in Facebook’s share price on the heels of its latest data leak wiped out $109 billion from its market value, the largest single day loss in corporate history).

By the end of 2018, the UN reported that more than half of the world’s population is now using the internet. Also in 2018, Europe enacts strict privacy controls for European citizens called GDPR (General Data Protection Regulation), and we can expect the U.S and others to follow.  (Expect California, non-conformist state that it is, to lead here.) We are all in cyberspace now, even if we got there kicking and screaming, and the last decade shows us how we must be vigilant about how we manage our activities and information online. Those of you with kids who want to opt out of learning new technologies, think again; you will need to know about whatever follows SnapChat and TikTok to keep your kids tech smart and safe.

TECH
Social media and gaming were not new when we started the decade, but mainstays that we use today were just emerging: Instagram launched in 2010, PlayStation 4 and Xbox One were released in 2013, Pokemon Go in 2016. More ways to stream/play/be entertained are on the horizon.

Other parts of the tech community were focused farther afield, and there was no shortage of space exploration over the last decade.  NASA’s New Horizons probe visited Pluto (2015), NASA found water on Mars (2015), SpaceX landed a Falcon 9, the first reusable rocket (2015); a new Mars rover is headed out into space next year, complete with an oxygenator (just like in The Martian) as part of the Mars 2020 project.  Recently, I overheard two middle school kids on the bus talking about the budgets of NASA and the Department of Defense, noting that the former is 1/20 the size of the latter, and if they switched budgets, we’d be living on Mars.  Out of the mouths of babes.

In between our personal screen and the Final Frontier, there are technological developments to herald and to watch carefully.  Automation, self-driving cars, drones, AI-driven “helpful tech” from Siri to Alexa are here to stay.

HEALTH
Major health crises – the Ebola virus in 2014 and 2018, the Zika virus in 2016, cholera in 2017 in Yemen, plus famine in Africa in 2017 – occurred alongside medical breakthroughs: a vaccine 70%-100% effective against Ebola was found by the end of 2016; 3D printing created a lab-grown ear (2013); China created monkey clones in 2018.

Like other new ideas, some need to come with a warning label. In late 2018, a Chinese scientist announced he had altered human DNA in twin girls to make them resistant to HIV, news that was widely criticized by scientists and medical ethicists. The technology that made this possible was “CRISPR” (pronounced “crisper” = Clustered Regularly Interspaced Short Palindromic Repeats), which forms the basis for genome editing technology. In June 2019, U.S. scientists used CRISPR to treat a 34-year old woman with sickle cell disease. Also in 2019, a second case of sustained remission of HIV after stem cell treatment aided by the CRISPR research was reported. Alas, most of the decade was spent in a patent dispute between the two scientists laying claim to the CRISPR research and the huge educational institutions with which each is affiliated.

A man-made health threat is that of gun violence, and the decade proved laden with examples: Aurora, CO (2012) — Sandy Hook Elementary School (2012) — San Bernadino, CA (2015) —
Orlando, FL (2016) — Charleston, VA (2017) — New York City (2017) — Sutherland Spring, TX (2017) — Parkland, FL high school — Tree of Life Synagogue (2018) — El Paso Walmart (2019) — Dayton , OH (2019) – White Settlement, T (2019). Active shooter drills become commonplace in schools.

Technology continues to make us safer, and seemingly simultaneously exposes us to more, and deadly, risk.

CLIMATE
We talked about the climate Crisis the whole decade, continuing the discussion organized through the Kyoto Protocol (a 1992 international treaty to reduce CO2 emissions, the first commitment period of which ended in 2012), followed each year by climate change conferences. In 2015, at the UN’s annual climate change conference (COP 21), almost the entire world came together to agreed to reduce carbon. The U.S. and China, responsible for 40% of the world’s carbon emissions, joined the Paris Accords in September 2016. As of October 2019, the hold-outs were Angola, Eritrea, Iran, Iraq, Kyrgyzstan, Lebanon, Libya, South Sudan, Turkey, and Yemen. In November 2019, the U.S. formally began its withdrawal from the agreement, announced earlier during the Trump Administration. The U.S. will be officially out in November 2020.

The face of climate change activism became Greta Thunberg’s, a 16-year old Swedish teen, proclaimed Time magazine’s Person of the Year for 2019. I’ll let her final tweet of 2019 outline where we need to go:

NEW IDEAS
The last decade may have been more about disruption than innovation. Tesla made its public debut in 2010, and last year’s IPOs alone brought Uber, Lyft, Pinterest and BeyondMeat into the public domain.

For 2020 and beyond, the unicorns (private companies valued at a minimum of $1 billion) in the pen include CrowdStrike, The RealReal, Cloudflare, Peloton, Progyny, Bill.com, AirBnB, SpaceX, DoorDash, Robinhood, Casper (bed-in-a-box) and Didi Chuxing (China’s Uber competitor, which recently spun-off its autonomous driving unit into a new company), Ant Financial, Droom, Gitlab, Hemptown, Instacart, Neptune Energy, Palantir Technologies, Saudi Aramco. Remember, the companies that go public are rarely start-ups, they’re often many years (and many rounds of financing) old. And while sometimes they do well, Renaissance’s fund-of-IPOs ETF (IPO), for example, was up by about 33% by the end of 2019…but the S&P 500 was up by 29% over the same period, and with a lot less risk.

LOOKING FORWARD: THE NEXT DECADE

Data — If you’re not paying for the product, you are the product. The “free” services we use so readily are gathering our personal data into privately-owned assets. You may not be concerned about your Instagram account, but you should be concerned about the silos of health care data that are owned not by you, but by a specific health care entity, and not shared. Look for agitation for a national health care database.

Demographics – Longevity, work and family structures are all changing, and our social safety net will need to change to reflect these shifts. There are ways to adapt our institutions to meet our future needs. Don’t get hung up on fear-mongering about costs and taxes; smart legislation on taxes, program eligibility, needs-testing, and even immigration can adjust programs that have proven to lift Americans out of poverty. As a leading First World nation, we owe it to ourselves to look to the future and blaze a trail.  There is a real opportunity here for elders and youth to unite, creating a “great trade” to reconfigure safety net programs like Social Security and Medicare in exchange for big structural changes like universal basic health care and climate action at corporate and governmental levels.  Both age groups have the numbers of people that could sway the vote, and coming together rather than working for their separate interests could benefit everyone.  Oh yeah, and we’ll still have a planet to live on, too.

Government matters – If the impeachment hearings have taught us anything, it’s that there is a whole slew of civil servants who make our lives work. They labor mostly invisibly, with much criticism and little praise, and even less in these last few years. Our trade, our travels, our place in the world owe TONS to these unsung Americans. Government and the people in it matter.

Power – There are two issues here: power politics and power generation. Leaders with dictatorial leanings are striving to consolidate power, and to change the rules so that they keep it. If you’re content as a serf, no need to worry. If not, you’re going to need to expend some energy here, to protest, to vote, to walk out. On the second front, it’s fine to talk about adapting to climate change when you live in a place with most of your energy coming from hydropower and nuclear power. Our economy is no longer dependent on horsepower, or manpower, but on electricity, and some places are going to have a harder time adapting than others. If you want them on board, you’re going to have to pay for it, so watch for ideas to pay for not using coal- or oil-fired plants. It’s like paying for guns to get them off the streets. If there’s a bailout that might be worth the dollars, this could be it.

Attention – When research tells us that being mindful and intentional makes us happiest, you might hesitate when offered the newest, greatest way to stream/play/get high. The age of distraction that’s coming is built of new forms of tv/streaming/video games along with legal cannabis in addition to booze and offers a challenge to us to stay in the game (life) even when we’d rather check-out.

Voting – The 19th Amendment, giving US women the vote, is 100 years old in 2020. This is one voting block that could decide the 2020 elections. The other is the Millennial generation (1981-1996), which is on the verge of surpassing Baby Boomers (1946-1964) as the nation’s largest living adult generation, according U.S Census projections.

The next time you’re inclined to say something snide about a Millennial, think twice.  They will hold an increasingly stronger hand over the next decade.  And besides, you will need them to teach you how to use that new app or how to control your household robot.

These past 10 years have been tough in many ways, and while I’m always glad to be able to make a fresh start, this New Year dawned with some serious dark clouds overhead.  We have big decisions to make; doing nothing IS a decision, just not one we want to make.  Thunberg said it above: This coming decade humanity will decide its future. Our future is really our kids. And the kids better vote.

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The Future You

Posted on Nov 3, 2019 in Community, Health, Investments, Planning, Women

Research shows that one of the reasons we have a hard time planning and saving for the future is that we lack a connection to our future selves. We can’t – or won’t – picture ourselves as older. Our youth-obsessed culture draws the picture of an elder you as wrinkled, frail and infirm, rather than strong, experienced and powerful. Women in particular struggle with this and are continually fed statistics about how they’ll live the last years of their lives unneeded, unwanted and alone.

Who wants to plan for that kind of future? Can’t there be an alternate future of experience, community and engagement?

A Picture of Your Future Self
One of the best solutions to connecting Current You to Future You involves digitally aging your own portrait. A few years back, a major bank released an app that takes a current photo of you and digitally ages it. The tool was based on a series of experiments a research team at Stanford conducted, which found that people who view age-progressed photos of themselves often consider allocating more money to retirement accounts.

Published in the Journal of Marketing Research, this research brought together a heavyweight team as disparate as Bill Sharpe (Economist, inventor of the CAP-M asset pricing model, and winner of the Nobel Prize) and Laura Cartensen (Professor in Public Policy and professor of Psychology at Stanford, founding director of the Stanford Center on Longevity, and the principal investigator for the Stanford Life-span Development Laboratory).

In one of their studies, 50 people were shown either an age-progressed picture of themselves or a current one, and then asked to allocate $1,000 among four choices: a checking account, a fun and extravagant event, a retirement account, or buying a gift for someone special. Those who viewed the photo of their future self allocated more than twice the amount to the retirement account than those who viewed a current photo.

There are loads of blog series on advice to your younger self. What if we had known certain things earlier? What if we had done things differently? The gift of planning for Future You is that there is still time. You ARE the younger you. How can we connect who you are now with Future You?

What The Terminator Can Show You About Your Future
By now you all know I love movies. In part I love the way we use them to express human experiences and offer opportunities for empathy, as well as to entertain. In the Terminator film series (Terminator, Terminator 2 (T2) and Terminator Dark Fate (DF), skipping over the forgettable 3rd-4th-5th films in the series) we see the past, present and future visit and revisit each other, trying to alternately teach and learn the lessons to ensure human survival.

In the original film, protagonist Sarah Connor (Linda Hamilton) meets the cyborg “Terminator” when she is a college student waiting tables in Los Angeles. She is shown two futures. If she does nothing, she sees the grim fate she and her fellow humans share in a war against the machines. By the end of the film, she evolves from a damsel-in-distress to a damn-it-I-have-to-save-myself heroine, resolved to chart a different path than the harsh future she has seen.

Fast forward 10 years to T2, when we meet Sarah again, at 30. She is a mother now, and has grown into a warrior, having spent the last decade developing her skills and training to protect her son and his future. (She has also developed an enviable set of arms, and if like me, you can barely hang from a pull-up bar much less do a pull-up, you are probably covetous of them, too.) Choosing the future she wanted, and the Future Sarah she needed to be, she worked to prepare for it. She became something she couldn’t have envisioned as a college coed – until she saw herself in the future.

T2 shows Sarah fixated about the future, plotting and planning obsessively (which is not what I’d recommend for you). She couldn’t stay the rosy-cheeked college girl; she had to envision her future self as capable, strong, tough. She needed to start planning today for that version of herself, and may have lost part of herself in the process, at least for a time. But her future – and that of others – is at stake.

Your future is at stake, too. You don’t need to have nightmares about nuclear annihilation or be chased by cyborgs to appreciate that you need to plan for the future you want.  By acting today, you are rewarded not only with the future benefits of that action, but with a better life now.  Those actions aren’t depriving Current You as much as they are protecting and preparing Future You for who and what you want to be.  That’s peace of mind.

Envisioning Future You
We know that getting to know Future You — embracing her, admiring her, working to protect her — can incent you to act now.

Author and fellow Yale woman, Tara Mohr, wrote Playing Big: Practical Wisdom for Women Who Want to Speak Up, Create, and Lead to encourage women to live bigger lives, taking chances and going for what they really want. She devotes a chapter to summoning your “inner mentor,” that older, wiser, more knowing person we become over time. It’s not a question of looking back, but of looking into the future. The guided visualization she outlines to connect with your Inner Mentor involves conjuring the Future You:

Close your eyes and picture yourself many years in the future. This is you after a lifetime of experience. Imagine Future You in all your glory: what you are wearing, where you are living, what you are doing.  Take your time and take in every detail. Then think of a thread, a stream of light, a band of color flowing back to you, today. What did Future You do, what did she experience, to get from where you are now, to where you are in that future? How did you become that person? What does Current You need to do to manifest this future?

Your inner mentor is Future You. She is knowing and caring and full of a life well-lived. Taking the time to fully imagine what we want our future self to be – and to see in our mind’s eyes the vivid, enjoyable, rich life that self can have — helps connect us with the steps we need to take to make it happen.

A part of this exercise involves offering your future self love and kindness. It’s true that picturing Future You comes with giving up part of who you are now, maybe trading that smooth skin for a few wrinkles, a dark mop of hair for a paler (and possibly sparser) coif. You aren’t going to be the same in your future. But that doesn’t mean you haven’t exchanged some of what you feel you lose with what you might want to have: honed talent, cultivated career, curated hobbies, a ride-or-die circle of friends. A rich history, and ideally, a financially free life. Look at Future You with an admiring eye.

An Older, Experienced, Badass You
By the time we meet Sarah Connor again, in Dark Fate, 30 years have passed and she’s now 60-something. Take a look at this Sarah, Future Sarah: Her plans have achieved some success; other things have not gone well. That happens to us all. But we’re still here, and she’s a badass. While the flak jacket-wearing warrior image might not be your vision of yourself as an older person, I’d sign up for a Future Me that is as fit and fierce and purposeful as DF’s Sarah Connor.

That’s all well and good, but you know what I’m going to say next. Future Me takes shape based on what I do between Now and Then.

I know I’ve got to start hitting the gym to get those arms.  I also need to see myself in the future as a woman I care about, someone I value, for whom I would make sacrifices today in exchange for moving closer to becoming Future Me. She might have a few more wrinkles, but she’ll beat you arm wrestling. I’m not afraid of the picture of Future Me; I want that future, and I know I need to act today in order to become her tomorrow.

The future doesn’t have to be a frightening one full of circumstances we just want to avoid. One of the best ways to dodge some of the outcomes we don’t want is to start taking care of Future You. Don’t turn away from what Future You looks like – silver hair (or bald head) and all. Take a bold look into your future and start planning for your older, badass self.   #Badass #Future You #DarkFate

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Breaking Down the 2020 Debates: Health Care

Posted on Sep 11, 2019 in Health, Planning, Retirement, Taxes

Whatever you might think about politics and politicians, decisions made in your state house, the White House and houses of Congress have an impact on you and your personal finances.

I’m writing this mini-series to break down the issues that come up during the Presidential debates in the months leading up to the 2020 elections. When candidates use buzzwords and scare tactics to win at the polls, we lose the real exchange about how we want our lives to look. You need to understand how a tax proposal, health care plan or student loan forgiveness could affect you.

Upfront I want to say that I offer this with no political agenda. My goal is to take the politics out of policy and try to outline what you need to consider in evaluating a proposal or a politician’s platform. What matters to me are the problems we all face, and solutions to them.

So with that in mind, let’s talk about health care. This a long post, so sit back, get a second cup of coffee (or something stronger), and let’s dive in.

WHAT IS HEALTH CARE?
Let’s start by separating the three components of this subject:
1. Health care insurance
2. Health care services
3. Health – your physical and mental well being

All three components have been touched on during the debates, but it’s the first part – insurance – that is the main focus at this point. Employer plans, the Affordable Care Act, “Obamacare” – this is what the “health care debate” has come to mean. That is: How do we pay for help to maintain, enhance and recover our health over the course of our lives?

We’ll start with an overview of the health care insurance system we have, a little history about how we got here, and the various proposals up for debate.

WHAT WE WANT
Here’s what I think most of us want when we think about health care:

• We want to live long, healthy lives.
• We want to prevent illness and understand that preventative care, check-ups and routine testing, can catch big health issues early and help us avoid them.
• We want quality medical care for accidental injury or the Big Issues we haven’t been able to avoid that treats us without bankrupting us.

WHAT WE HAVE
Our system is almost completely backward. Kristen Gillibrand, Tulsi Gabbard, and Marianne Williamson are all correct that we have a “sick care” system that emphasizes treating illness and not a health care system geared towards preventing it.  We see this in data like that from the OECD which shows that the U.S. has a much higher rate of hospital admissions for preventable diseases than in comparable countries.

In the U.S. we have FOUR health care systems:
• Government-paid / government-provided (the Veterans’ Administration (VA) system)
• Government paid / privately provided (Medicare)
• Privately paid / privately provided (Employer plans)
• Self-pay (the individual covers all costs)

Most countries incorporate everything into one system. Our patchwork arrangement was stitched together over time, during various presidential administrations and political regimes. The VA system was in place when Truman (1945-1953) introduced a proposal that 15 years later would become Medicare. When Eisenhower was president (1953-1961), only 9% of single elderly and 14% of elderly couples had insurance coverage for medical expenses.

Before Medicare, less than 15% of older Americans had insurance coverage for medical expenses

Eisenhower signed into law the bill that gave employers a tax exemption for workplace health insurance plans. The insurance industry does not want to deal with selling and administering plans to individuals, and the lobby behind keeping employer plans and their tax exemption is huge. Kennedy (1961-1963) introduced Medicare but it didn’t pass. It was under Johnson (1963-1969) in 1965 that Congress enacted Medicare under Title XVIII of the Social Security Act to provide health insurance to people age 65 and older, regardless of income or medical history.

Friend, colleague and adviser/physician Carolyn McClanahan notes that the concern at the time was coverage over cost; if the Congressional Budget Office (CBO) were to review the program today, it would not be found to be cost effective. Note also that there was no requirement that Medicare recipients pay into the system. The next time you cringe about “socialist” programs, consider that our wildly popular health insurance system for older Americans could be labeled this way. Put the labels aside and consider a program or proposal’s costs and benefits.

Sidebar: Interestingly, it was former President Truman and his wife former First Lady Bess Truman who were the first two recipients of Medicare

So here we are, 50 years after Medicare, and we are still battling two conflicted camps:
Coverage over cost (universal coverage) and Cost over coverage (lowest cost). The Democrats tend to fall into the first camp, Republicans into the second, and the emphasis in the second camp is not the total cost of the program, but the cost to the government.

What you should ask: When politicos are throwing around concerns
about the “cost” of care, ask “The cost to whom?” What we need to be concerned about is total cost to you in premiums, deductibles, out-of-pocket costs and taxes.

The first camp led us to the Affordable Care Act (the ACA, aka Obamacare) and the second is dismantling it in favor of a free market approach. So what does “Medicare For All” offer us?

WHAT IS “MEDICARE FOR ALL”?
If you are confused about what they’re talking about when they say “Medicare for All,” it’s with good reason. There are TEN VERSIONS of health care insurance reform that fall into four broad categories:

Single-Payer (“Medicare-for-All”):
1. Jayapal (D-WA) and
2. Sanders (D-VT) – Single-payer programs covering all US residents, plus long-term care coverage, replaces all private health insurance by extending Medicare.
Public Program with Opt-Out (“Medicare-for-All-Who-Want-It”):
3. DeLauro (D-CT) & Schakowky (D-IL) – Makes Medicare a private option; individuals are auto-enrolled in Medicare for America, a new national health insurance pro-gram, but can opt-out in a year when they have other qualified coverage; employers can continue to offer group plan coverage or pay 8% of payroll for employee cover-age in Medicare for America; Medicare Advantage plans are retained.
Public Plan Options:
4. Cardin (D-MD) – Extends ACA, giving individuals the option to buy a federal public plan (i.e. Medicare); private and public coverages are retained
5. Bennet (D-CO)/Kaine (D-VA)/Delgado (D-NY) – Similar to #4
6. Schakowsky/Whitehouse (D-RI) – Similar to #4
7. Merkley (D-OR)/Richmond (D-LA) – Similar to #4 with employers able to offer a federal public plan
Medicare Buy-In:
8. Stabenow (D-MI) – Individuals can buy into Medicare at age 55; Medicare Advantage plans retained
9. Higgins (R-LA) – Similar to #8
MedicAID Buy-In:
10. Schatz (D-HI) /Rep. Lujan (D-NM) – States can offer a public plan option based on Medicaid

The Kaiser Family Foundation has created a side-by-side comparison of the competing proposals (current as of May 2019) with a futher breakdown of the details: Get KFF’s Side-by-Side Comparison

From a personal finance perspective, you care most about (1) what is a plan going to cost you, and (2) what benefits do you get with it. From a public policy perspective, we have to think about program costs, and cost containment.

WHO PAYS?
The short answer is, we all do. Directly and indirectly. A lot of people stop listening to the debate out of fear that their health care costs will increase or they will lose benefits with any kind of change. You need to think comprehensively about all the ways you pay for health care coverage, and whether you might get better or more comprehensive coverage under a new proposal.

It’s likely you are paying more for the coverage you have today than you did even a year or two ago. According to the National Conference of State Legislatures, in 2018 the average annual premium for employer-based family coverage rose 5% to $19,616 for by 3% for single coverage, to $6,896. Single employees carried 18% of their premium cost and workers with family coverage carried 29% of their cost, on average.

And it costs all of us by skipping preventative care and developing chronic disease.

How it Works Now
Under our current crazy quilt of coverage, if you’re over 65 and covered by Medicare, you still have premiums to pay; if your income in retirement is above certain thresholds, you’re paying a Medicare surcharge on top of that.

If you’re working, you’ll pay 1.45% of your gross wages with no income limit to Medicare as part of your payroll taxes. (Wages include things like RSU vests – you’ll pay $1,450 to Medicare on a $100,000 vest.) If you make over $200,000 (or $250,000 as a married person), you’ll pay an additional tax of 0.9% on earned income over those thresholds to Medicare, and another 3.8% on net investment income over thresholds.

In addition to your 1.45%, your employer is kicking in another 1.45%. If you’re self-employed, you’re paying the full 2.9% (and possibly + 0.9% + 3.8% over the above-noted thresholds). In case that’s hard to follow, you can find more detail on how these taxes work here.

If you’re working, you may have health care coverage through your employer – though 40% of workers do not. Even with an employer plan, you’ll still pay a portion of the cost for that, and your share has been growing as the costs of health care grow. If you’re self-employed, you’re paying into Medicare and covering your own health care insurance costs at market rates.

On top of your premiums and expenses up to your deductible, a portion of your federal taxes beyond payroll taxes goes to Medicare, and you have out-of-pocket costs for things your plan doesn’t cover as well.

Other Costs
The other ways we pay are through choices we can’t make without losing health care coverage:
• if you want to retire early (before age 65), you’ll have to factor in how to cover health care insurance costs before Medicare kicks in;
• if you lose your job, you’ll be paying the full costs of your insurance coverage (COBRA allows you to continue coverage, but not at the rate your former employer subsidized – you’re paying the full cost);
• if you want to leave your job to start a business, you’ll be doing the same, covering the full cost of your insurance as well as the cash burn of your business;
• if you’ve been covered on a spouse’s plan and want to leave a marriage when you don’t have a job that provides health insurance, you’ll have to find a way to pay for your health insurance.

Or you go without coverage, and we are right back to the problem of avoiding preventative care and facing potentially bigger problems down the road, a burden we all bear. All of these costs stifle the free movement of people and business and innovation.

THE HURDLES OF REFORM
A lot of the discussion about these new proposals centers around cost. And it should: our current system is not only not effective, it’s not sustainable. All the costs you have that are noted above are still not covering the cost of care. Medicare premiums and payroll taxes only cover about half the cost of the program. The balance of what’s needed comes out of the federal budget, and each year the share of your taxes going to pay for Medicare increases. In 2018, Medicare cost $582 billion, accounting for 14% of the federal budget and making it the second largest federal program.  And Medicare does not cover vision, dental, or long-term care.

A major scare tactic in the health care debate is that the new plans will cost you more. During the second presidential debate in July, Elizabeth Warren got it exactly right when she refused to be pushed into saying taxes would rise under a Medicare-for-All plan just in order to get a sound bite for the nightly news. Whether you would pay more in taxes is a red herring. That’s not the only cost you have. What you care about is your total cost for health care coverage.

If I am paying $10,000/year for health insurance with a $6,500 deductible, and someone says I could reduce my premiums to $8,000/year and lower my deductible to $5,000 if I pay $1,500 more in tax, my total annual cost for health care falls by $2,000 (and by even more if my expenses exceed $5,000), for an additional $1,500 in taxes. That $500 net savings is real money to me. Sign me up.

What you should ask: When fear-mongers are raising the issue of higher taxes from insurance reform, ask “What is the TOTAL COST to me?” You pay premiums, deductibles, taxes and co-pays; you need to be concerned about the total cost to you.

Not taking into account total health care expenses is often a costly mistake in retirement planning. According to Fidelity’s Annual Retiree Health Care Cost Estimate, a 65-year old couple retiring in 2019 can expect to spend $285,000 in health care and medical expenses throughout retirement, compared with $280,000 in 2018. For single retirees, the health care cost estimate is $150,000 for women and $135,000 for men.

Some of the proposals would result in substantially greater federal tax revenue, but not from you. Plans that remove the burden of health care coverage from employers also remove the tax deduction Eisenhower gave them for that expense. What happens when you lose a tax deduction? You pay more in taxes. Without the cost of having to provide an employer plan, businesses will pay more in taxes. McClanahan calculated the additional tax revenue to be $250 billion per year.

There are also protectionist obstacles to changing our system. With plenty of profit being made by insurers and fee-for-service specialty care providers, those factions and their lobbyists will do their best to maintain the status quo.

Changes in insurance plans isn’t a complete solution, though. The way we deliver health care in the U.S. has to change, too. We spend $3.2 trillion annually on health care in the U.S and 25% to 30% of that is overhead, while overhead in other countries runs 5-15%. By McClanahan’s calculations, we could provide primary care to all just by reducing overhead to 15%.

What you should ask: When you hear that “we can’t afford” a particular proposal, ask “Since the cost of our existing health care system is unsustainable, what is your proposal to reduce overhead costs?”

REAL REFORM
We started this discussion with the two primary concerns of the cost of care and the benefits you can receive. So far we’ve discussed is insurance coverage for individuals and families; none of this addresses the cost of the health care system, meaning the medical professionals, clinics and hospitals that deliver care, and the range of benefits for which you may be eligible under different plans.

Fixing our health care system mean changes not only in insurance options, but in the administration and delivery of medical care. Watch for who mentions these as the debate continues:
• Moving from four systems to ONE (like Canada);
• Using a single billing system (like France);
• Removing primary care from insurance, providing it as a public service (through Community Health Centers (like Spain);
• Developing a nationalized electronic database for our individual medical information, removing it as an asset that belongs to a specific insurer or hospital network, and shifting its focus from billing to patient history (like the VA ”blue button” system here in the U.S.).

These are all big ideas, but they are not new ideas. Preventative care is not an insurable event, it is something each of us needs and makes more sense to be offered outside of an insurance program. A hybrid system that combines a public-provided “primary care for all” for preventative medicine with public and private options for everything else would give us a couple of things:

All Americans would have the preventative care needed to stay as healthy as possible
We preserve choice for health care beyond basic preventative medicine by offering both public and private options for specialists and care that requires hospitalization
Competition can drive down costs further by having a not-for-profit provider like a public option in the mix to force down costs of for-profit organizations.

It’s hard not to get swept up in the histrionics that make up political debate. Getting to the root of a proposal or plan, and understanding how it might affect you, is the only way to really protect your interests. When the candidates turn to health care, you’re now knowledgeable about the 10 flavors of “Medicare-for-All,” savvy enough to ask about whether they mean single payer, a public option, or a buy-in, and sharp enough to look past labels to the actual plans, to evaluate what they might mean for you.

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Labor Day and Investing in YOU

Posted on Sep 2, 2019 in Community, Investments, Planning, Retirement, Women, Worklife

We’re in an era of constant change. As soon as you buy one thing, there’s a newer version. In the old I Love Lucy television show, Lucy asks the question: “If everything now is new and improved, what was it before? Old and lousy?”

In the same way store shelves are continually restocked with the “new and improved,” we need to think of our skills and talents this way, too. You have no doubt spend time and money on knowing what you know, doing what you do, and becoming who you are. This human capital – you – needs on-going investment and care to stay in top form.

Keeping your tools sharp helps you jump on a new opportunity or take on a new role, and it’s important because sometimes the decision to make a change may not be yours. As the prospect of a recession looms, you need to be able to recover quickly if a downturn affects your job, or company or your industry.

A career transition expert tells me that while this is good advice, you’re not likely to move on it now, even if you’re in a bad job. Like being in a dead-end relationship or on the brink of needing to think seriously about a long-term care plan, no one likes to think about the possibility of future misfortune — job loss, break-up, or broken hip. And yet, now is the best time, when you don’t have to make a reactive plan, but can craft a proactive one.

If you think you can skip this step if you’re retired, you might want to think again. Whether it’s serving in a volunteer role, re-entering the workforce, or keeping up with the grandkids, you’re still going to benefit from learning something new. (Your brain will thank you too – more on that in another post!).

Think FaceBook, Instagram, Slack, Evernote, the newest shiniest iPhone…Continual learning is a habit all of us need to develop, not only to recession-proof your income-generating capacity, but also because the way we live will continue to change at an ever-increasing pace.

Bill Burnett and Dave Evans, co-founders of the Life Design Lab at Stanford and recovering techies themselves, argue that much unhappiness comes from an unsatisfying work life, and by designing your life you move into a mindset to constantly evolve who you are and what you can do.

There is no better time to start than right now.

Make it Personal
If it sounds daunting to tackle “how to keep up with an ever-changing world,” literally take it personally: think about what you’d like to do that you’re not doing now, and identify how you can add to your tools and talents in those areas.

You can use this exploration to think about career or industry changes, in addition to getting to the next career step. Yes, you need to pay your bills, and you’ll spend 2,000 hours this year working that 40-hour a week job to do it – you may work more. Life is short, but workdays are way too long to not like what you’re doing. Thinking about what you’d like to learn next could take you in a satisfying new direction.

What’s the next step? Do you want to move to the next rung on your career ladder? Pivot into a new function? Make a move to a new organization? Attract a new opportunity? This might mean thinking big, and sometimes that means making big changes. But this is your life, after all. What skill, experience or quality lights you up when you think about adding it to your toolbox?

When you do this, your values and personal strengths naturally enter into the mix. And when you align what you’re doing at work to what you value, you do better work, are more likely to be inspired and happy.

Shifting your thinking from “what skill do I have to have to keep my job?” to “what can I learn that will help me do my best in my career?” changes your focus from thinking about working in a job to thinking about working on YOU.

Make it Portable
It’s not only about what your organization needs next, it’s about what you can learn that you can take with you. In the work world today, you want and need to be able to jump into a new role, or to a new company, when you want to – and even when you don’t.

In her book, Radical Careering, Sally Hogshead explains portable equity this way:

Portable Equity is personal capital that boosts your long-term career opportunity and market value far beyond your current job: your experience, skills, network, reputation.

The portable part of this is important. Many covet the equity compensation that comes from working someplace that pays employees in some form of company stock. But that kind of equity can dissolve overnight based on the fickle nature of financial markets, and it can get left behind if you don’t stay long enough. Portable equity moves with you. It IS you. As Hogshead rightfully points out, “You can be fired from a job, but you can never be fired from your career.”

When you develop a mindset of continual improvement in yourself- in all the things you know and can do and can offer the world – you’ve made the leap to thinking about building your portable equity. It’s not a machine you leave on the shop floor, it’s not a proprietary software system your company built for internal use. It’s the skill you have to use that machine in any shop, the knowledge of a system that is like many other systems.

The Three Pieces of Portable Equity
Your human capital consists of skills and experience, your network, and your reputation. Start by choosing one thing to work on next, and write it down. Plans that you write down have a 42% better chance of being achieved:

“I will learn python.”
“I will understand tax reporting for Americans overseas.”
“I will learn canine CPR.”

One: Skills and Experience
Picked a skill or experience to target? Once you have your target, research resources to help you get it:
Places – Classrooms, on-line learning, local workshops, your organization. Where can you find the resources to learn what you need to know or do? EdX, Coursera, your library, YouTube – there are more ways to connect with your interests than ever before.
Funding – Check to see whether your company offers financial assistance for what you’re planning, or if your boss will approve funds to pay for it. The thing about investing in your human capital is that while you’re going to benefit your company as long as you’re there, it doesn’t mean you can’t take it with you when you leave. Barring a corporate budget for development, think about setting aside your own reserve for career investment.
People – Who already has this skill you’re after? Who is doing the job you want? And how did they get it? Perfect questions for your network.

Two: Network
Decided to expand or engage your network? Just like getting a loan from a bank, it’s easier to connect with your network when you don’t need anything from it. A network, a real one, is not just 500-plus connections on LinkedIn. It is a living thing, and you need to participate. You are connected to these people for a reason.

Find a cohort – another person or small group of people you know who might be interested in the same thing. Early in my career, I wanted to learn SAS and gathered two other colleagues to take a weekend course.
Find an accountability partner and schedule regular coffee or lunch or exercise class. Even if you’re working on different next steps, you can encourage each other.
Don’t overlook the social part of your network. You never know what you’ll find when you speak from the heart about what you want next. A recently laid off woman in my book group found a connection to her next step, a career pivot, just by letting us know what was going on with her. Most people want to be helpful.
Update your connections – all of them – Keeping your network up-to-date isn’t about just asking for something. Your posse knows about your successes already; let your broader circle know what’s new. It might be as simple as turning on alerts in LinkedIn. Or when your brunch buddies are checking in since your last get-together, give yourself some snaps: “Things are good; had a few forgettable dates, still enjoying my yoga class, and took a class to learn python/taxes/canine CPR.” You never know who or where opportunities to use your new skills might pop up.

You don’t have to do this alone. And you shouldn’t. Find friends, colleagues, family who can help you. You don’t need a lot of people, but you do need people. They listen to your Big Idea if you have a major transition to work towards, they offer feedback, they refer you to others who can help, they are a shoulder to cry on. Sometimes just getting the word out to that first person can get the ball rolling.

A SPECIFIC CHALLENGE FOR WOMEN: Women are usually more than willing to offer help someone else. When you help another woman, and that woman asks “if there’s ever anything I can do for you,” ask her to pay it forward: when she has an opportunity to help another woman, ask her to commit to doing it. Imagine what we could accomplish if you knew that every woman you helped would help another, and that when you needed it, that huge network would be there to help you.

Three: Reputation
Want to ensure that your best self is what recruiters find when they go online? It’s super to have learned a new programming language, added another certificate in your field, completed a project that stretched your skills and knowledge. Don’t keep it to yourself.

Clean sweep your social – Whether you love social media or hate it, it has become a necessary tool of work life. A recent CareerBuilder Study found that 57 percent of hiring managers are less likely to interview a candidate they can’t find online, and 70 percent of employers use social media to screen candidates. More than half of managers have decided not to hire a candidate based on their social media profiles. Think about online complaints about your job, or photos from a late night out. Check your online reputation through the channels you manage yourself; do a Google search to see what else turns up about you. The rest of the world is going to see that too.
Update your “Atta Girl” file – We live in a culture that requires both competitive engagement and for women, modesty. Ladies, let’s get over that last part. If you can’t get comfortable using your own words, use someone else’s. You will need to sing your praises. On your resume, at your next performance review, at the interview. You need a file or e-folder where you keep track of every compliment, each piece of positive feedback, or stat showing successful outcomes that you receive or contributed to. And when a crap day rolls around, you have a secret weapon to remind yourself what you can do.
Update (or create) your LinkedIn profile – More than half of employers won’t hire a candidate without an online presence, and employers are increasingly looking online to check up on current employees. If you’re planning a career change, be smart about whether you want to advertise that you’re “looking for new opportunities”. Think about whether your online profiles reflect where you are – and where you might want to go next. If you’re enrolled in a class, add it to your profile. Your online profile becomes another accountability partner, and you’ll have another update for your circle once you complete your new thing.

Make It Happen
Other than a haircut, change doesn’t happen overnight. But it can look swift and feel effortless if it’s aligned with what you love to do.

Reframe how you look at your talents not as what you need to do for someone else, but with an eye to what really floats your boat. Pick one step or all three, and get to work. Vocation or avocation, you’ll invest the majority of your time in it. Make sure it’s serving you and what you want out of life – and make sure you can take it with you.

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Inverted Yield Curves, the Next Recession, and You

Posted on Aug 20, 2019 in Investments, Planning, Taxes

I initially started this post two weeks ago, after we woke up to the news of Dayton and El Paso, which made it feel like the world was falling apart. That shock was followed by China’s devaluation of its currency, a different kind of shock, and the financial world seemed like it was falling apart, too.

By the time I’d finished a first draft that Monday morning and guessed that China would be labeled a currency manipulator, markets rebounded. And China was labeled a currency manipulator. Then came this last week, when we saw an inverted yield curve, and markets tanked again. By the end of the week, markets had recovered, and you were probably throwing your hands up or wishing there was a nice pile of sand into which to stick your head.

Let’s look at what happened to the stock market over the first two weeks of August when all this was going on, then we can talk about what was behind it. The S&P 500 tracks the largest US companies, and we’ll use that index here:

The first dip in the chart is China’s devaluation of its currency. The next, leading up to the plunge on Friday, August 9th, was related to squabbling over name-calling between the US and China, increasing tensions in Hong Kong when anti-government protests over a proposed extradition law turned violent,  and the beginnings of investor flight from stocks to bonds. The sharp uptick of markets opening the following week on August 13th was a reaction to the Trump’s Administration’s announcement of a delay in implementing new tariffs on China from September until mid-December. News of the inverted yield curve came on the 14th, and markets collapsed. On Friday, Walmart’s quarterly earnings beat estimates, and that news along with other strong earnings numbers led to a rise in non-tech stocks.

So, yeah, if you’re feeling like following the ups and downs of the market is like playing whack-a-mole, you’d be right.

The big issues of a trade war with China and an overall flight to safety in financial markets are the two main things to watch, and we’ll take each in turn.

China’s Currency Devaluation
At the beginning of the month, the People’s Bank of China (PBOC) devalued the yuan, citing “unilateral and protectionist measures as well as the expectation of additional future tariffs on Chinese goods.” President Trump had threatened China with an additional 10% tariff on Chinese goods to go into effect in September, despite reported progress on trade.

When I was in grad school, even after studying economics in college and working in finance, taking an international investments class was like trying to think in an extra dimension. Supply and demand charts I understood. But now throw in the impact of multiple currencies? Until we all move to bitcoin, global commerce will still require an extra step: If I want to buy something made by someone using a different currency, first I have to buy some of their currency, then buy their product using their currency.

And let’s be clear: US importers and their US customers (i.e. you) pay the cost of the tariffs.  China “pays” in that their exports are more expensive to offshore buyers.

When the US puts a tariff on Chinese goods, it costs more to buyers here to import their products. So your Chinese-made clothes and electronics become more expensive to the stores here. Those stores have to buy their products in the local currency (yuan). By lowering the exchange rate with the US dollar, the Chinese have made their products cheaper for US stores to buy. By devaluing the yuan, China essentially canceled out the effect of the US tariffs for its buyers.

This doesn’t sound so bad, right? I can buy a new iPhone or a new sweater for the same price to me (and profit to the US company) than I would have before our current trade kerfuffle began.

Yes…and no. That China devalued the yuan to immunize their exports from US tariffs also means they are taking a hard line with regard to trade talks.

Currency manipulation
My guess on what would happen next was that the US would label China a currency manipulator (which is true) and the President would double-down on an ineffective trade policy. I was three-quarters right. We’re experts at name-calling these days, and so China was called out for manipulating its currency. Financial markets reacted. The market wasn’t expecting the devaluation of the yuan or the uncertainties that come with it. Turmoil ensued.

You could make the case that the US manipulated the US dollar when we implemented Quantitative Easing (QE) during the financial crisis. At that time, we (the US government) bought our own Treasury securities, pumping millions of dollars into the economy. This flood of dollars drove interest rates down, and drove down the value of the dollar. Sound familiar?

The Federal Reserve, China and Leverage
The Fed’s main job is to manage inflation. To do this it serves as the gatekeeper for the flow of dollars in and out of the economy by changing interest rates (the Fed Funds rate specifically). The Fed decided to lower rates by 0.25% at the end of July. This cut was the first in a decade, and many in the financial world saw this move as politically motivated, anathema to the tradition of the central bank as an independent inflation watchdog, not the political pawn of an administration wanting to stay in power. Typically, interest rate cuts are used to stimulate the economy. But wait – we’re told the economy is “tremendous.” Why does it need stimulating?

One factor that seems to be left out of the trade mix is the heavy investment of China in the US. We have been financing our growing deficits by selling Treasury securities – and outside of the US, the largest owner of US Treasuries is China. The “nuclear option” in the trade war would be for China to start dumping US Treasuries. The dollar would collapse and interest rates would spike. Everyone says this would never happen, as it would hurt China too.  Yet we live in unusual times, and brinkmanship can send both parties tumbling over a cliff. Our President is used to doing deals based on other people’s money, and he eventually will walk away from the Oval Office. What remains to be seen is whether the aftermath here will be similar to the multiple bankruptcies from which he has also walked away, leaving the mess for someone else.

And yet, we managed to wade through all that, with markets having recovered by the end of the first week of August. Then some fool noticed the inverted yield curve.

The Inverted Yield Curve
You think about yield curves even if you don’t realize it. When you’re deciding on a mortgage, you know that a 15-year loan comes with a lower interest rate than a 30-year loan: with the longer term mortgage, there is more risk to the lender that something might interfere with your ability to repay, and the money they’ll get back will be worth less with each passing year, thanks to inflation. What the lender is expecting to receive – the interest payments over the loan term – is the yield.

Each type of debt has its own yield curve, and a basic one for US Treasuries normally looks like this:

Normally, the longer you are asked to loan money, the more you’re going to expect in return. The yield curve typically shows how you need to pay more in interest the longer the period over which you borrow money. If you loan a friend $100 overnight, you might be fine with just getting the $100 the next day. If you loan them $100 for a year, you might be a little worried that you might not get it back. In addition, the $100 you get back in a year might not cover the cost of that bauble you’re planning to buy with it a year from now. You can’t be sure that the price of baubles won’t go up. Possible price increases equal inflation risk. And you want to be compensated for that risk, too.

The term structure of interest rates (the finance-fancy name for the chart above) shows how when you loan money, you want to be compensated for the decline in purchasing power of your loaned dollars (inflation), and for the risk that something will happen to interfere with repayment of the loan (default risk). Normally we expect short-term loans to have low interest rates, intermediate term loans higher rates, and long-term loans higher rates still.

But last week, the inverted yield curve showed the reverse: some longer-term loans had a lower interest rate than short-term loans:

How does that make sense?

To make it extra confusing, there is more than one reason why the yield curve might invert. When investors think a downturn is looming, they might want to hold longer-term bonds, and this demand causes the inversion. Another theory is that lenders have a reduced incentive to lend for the long term – they can make as much or more money lending in the short-term.

Even though the news reported that “this was the first time the yield curve inverted since 2007” (prior to the Financial Crisis), that’s not precisely true. Different parts of the yield curve have been inverted since then; in March the 10-year Treasury bond yield fell below the 3-month yield. What got everyone’s panties in a bunch this past week was that it was the two-month bond yield that pivoted higher than the 10-year bond yield.

Not many paid too much attention to the March inversion because the 3-month yield isn’t used as a benchmark in the same way as the 2-month. Going back to the mortgage example, most of us might note a change in the interest rate on 15-year or 30-year mortgages – those are industry benchmarks – but not care too much if the rate changed on a 20-year mortgage.

Does This Mean We’re Going to Have a Recession?
A yield curve shifts for a variety of reasons, but here the curve showed something akin to a herd phenomenon: investors wanted to move out of stocks (risk) and into bonds (safety). The reason an inverted yield curve is considered a sign of recession is because it signals an unwillingness to take risk, it shows a flight to safety. The media enthusiastically reported that “the yield curve has inverted before every U.S. recession since 1955”. But it tells us nothing about the timing of this next recession.

An inverted yield curve doesn’t “predict” recessions or downturns. It’s an indicator, a sign, that market participants watch. It’s important because markets are made up of people (and computers, but they are programmed by people). When people lose confidence, they choose safety over risk.

But remember, the same folks who look at “signs” to predict downturns completely missed this back in 2007 – and some of the same people also look at skirt hemlines and who wins the Super Bowl to predict future market behavior. An inverted yield curve might occur months or YEARS before a recession.

Which brings us back to what most economic forecasts have been saying (and which I relayed in my last Market Report to clients): it’s more likely than not that the US will move into a recessionary period sometime in the next year or two. With the uptick in trade tensions, we might be more on the short end of that range now.

Trade Tensions
As mentioned, when I started this post, the stock market had tanked on the news of the devaluation of the yuan.

Circling back to where we started the month, last week after the market downturn, President Trump decided to delay his now completely ineffective new tariffs – which he says don’t cost Americans anything – until after Christmas to help holiday shoppers. Markets responded favorably. Thanks, Santa.

What It Means for You
Between now and the Presidential Election, there will be noteworthy economic statistics and there will be bellowing and bluster. You need to listen for the noise in the numbers:

• The US unemployment rate is at a historic low – but not everyone is in a good job, with many taking on second jobs or “gigs” to make ends meet.

• Tax cuts were supposed to lift wages and stimulate the economy, but after an initial round of meager bonuses from a few big corporations, more individual taxpayers were left with a reduced tax refund – or tax due – in 2018.

• With the tax benefits to individual taxpayers skewed to the early years of the tax plan, you’ll likely see higher taxes in coming years – unless even more tax gimmicks are passed to prop up consumer spending today at a higher cost tomorrow.  The latest chatter is a payroll tax cut.

• While there is a new school of Modern Money Theory (MMT) that says deficits don’t matter (Democrats like this theory to fund proposed social programs, the Republicans have applied it to pay for the big tax breaks to corporations and the ultra-wealthy), some of us think running deficits while you have a booming economy is woeful mismanagement.

When a recession does come, we won’t have the capacity to stimulate the economy with monetary policy through more rate cuts (because we will have lowered rates as low as they can go) or fiscal policy through spending on infrastructure projects, keeping people employed and getting improved assets in the bargain (because we will have maxed out our collective credit card, aka the national debt).

What you can do is tidy up your finances:

• If you’ve run down your cash reserves, make it a priority to build them back up.

• If you are still in the workforce, spend a weekend updating your resume and professional online presence; watch for opportunities to add to your portable career equity – those projects and skills that would be valuable to another employer, not just your current one.

• If you’re retired, review your “buckets,” the portions of your savings that are allocated for near-term and intermediate-term spending. Most clients will have 5-7 years of savings set aside in these buckets.

• Working or retired, if you’ve taken on debt – credit card balances, no-interest-until-sometime-later deals, draws on home equity and the like – look hard at repaying it as soon as you can, both reduce your monthly spending and to clear out borrowing capacity if you need it later.

Remember that the stock market is NOT the economy. With a cash reserve and “buckets” for near-term spending if you’re in retirement, you can ride out stock market fluctuations.

The stock market is also NOT your personal economy. Your personal economy is your household, and your ability to pull in enough income to cover your expenses. If you’ve diversified your investments, you won’t be beholden to the performance of one company or one sector to finance your life in the event a stock market decline hits some industries more than others. And if you’re working, you’re keeping your tools sharp and skills current in the event a downturn affects your company and your job.

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