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Strong Dollar and Trade Tariffs Play Chicken

The Dow Jones Industrial Average got an awakening this last week when two consecutive days of losses wiped out the year's gains. Down by 1.8% for 2018, it marked the worst half-year performance for the index since 2010.

Ironically, the losses were due to the strong U.S. economy and dollar, and the sluggish performance of overseas markets. More than half of the 30 companies that make up the DJIA receive 50% of more of their revenue from outside the U.S. By comparison, only 30% of the 500 companies that make up the Standard & Poors Index receive significant overseas revenue. The S&P 500 is still positive for 2018.¹

Since March 2009, when the U.S. pulled out from the bottom of the Great Recession, the domestic market benefited from one of the strongest rallies in history. The strength of the dollar increased in tandem. In order to thwart rampant inflation, the Federal Reserve Bank steadily raised interest rates. Chairman Jerome Powell recently raised interest rates for the second time this year, and indicated his intention to raise them two more times before the end of the year. Consequently, the dollar's value is at its highest since June 2017, compared to other global currencies -- up 5.5% against the Euro, and up 4.2% against the Japanese yen.¹

The dollar gained even more steam when mega-corporations were granted a "tax holiday" on profits held overseas in the latest tax law. $175 billion in profits were repatriated in the first quarter of 2018. Economists estimate that eventually, $450 billion will return to the U.S.¹

Emerging market countries, like Brazil, India, and Russia have been hammered by the strong dollar because in past years, they borrowed heavily in dollars to service their debt. Now, they have to repay the debt with dollars that cost even more. The Brazilian real is down 14% in value, the Indian rupee is down 7%, and the Russian ruble is down 9%.²

The firm dollar may be one of the reasons that Trump has decided to spark a trade war. Because the U.S. is in a stronger position than its global rivals, it may be hurt less than China or Europe, and can afford to "play chicken." The administration is even drafting a bill to exit from the World Trade Organization so it can impose tariffs with a freer hand, and without the consent of Congress.³

The tariffs have crippled markets outside the U.S. The Shanghai composite is in a bear market, down more than 20% from its 52-week high. The German DAX index is down 9% since January. The European market is down 6%, and Europe-focused funds lost $25 billion in assets in just the second quarter of the year. By comparison, U.S.-focused equity funds gained $3.2 billion in inflows in Q2. Of global investment portfolios, U.S. stocks and bonds now have a 60% share, the highest allocation since early 2017.⁴

U.S. Treasury bonds have also benefited from the turmoil. In a "flight to safety," investors have been drawn to the security of government bonds. The higher interest rates have made them even more attractive.

What does this mean for your personal investments? The money pouring into the U.S. market seems like a vote of confidence for strong, future growth. Because stocks are currently a little cheaper, this may be a buying opportunity. Volatility (the ups and downs of the market) may increase in the short-term because of the upcoming mid-term elections, and the continued uncertainty over how the trade war will play itself out. However, if you are investing to support 25 to 30 years of retirement, short-term volatility may be inconsequential to you.

The bottom line is, don't panic. This level of volatility is normal for the market, and is one of the reasons why the market holds out the potential for returns that are better than stashing money in a bank account. A strategy of broad, global diversification can be an effective way to reduce volatility, by spreading your risk. That way, no matter which of the many global markets is doing the best, your investment can benefit from it.

 

¹ Wall Street Journal, 7/2/2018

² Reuters 6/29/2018

³ Marketwatch 7/2/2018

⁴ Institute of International Finance 7/2/2018

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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U.N. Study Exposes American Poverty

In his "campaign rallies," and in Twitter, Trump often credits his economic approach for creating "the greatest economy in the HISTORY of America." However, on June 21, U.N. investigator, Philip Alston, presented a report to the U.N. Human Rights Council that told a very different story --

* 40 million Americans live in poverty. 5.3 million Americans live in "Third World conditions of absolute poverty."

* Among Organization of Economic Cooperation and Development countries, the U.S. has the highest youth poverty rate, and the highest infant mortality rate.

* Four out of ten Americans cannot cover an emergency expense of $400 without borrowing money or selling possessions.

* The top 1% of the U.S. population owns 38.6% of the total wealth.

Alston's study, carried out last December, included Skid Row in Los Angeles, African American communities in Alabama, the hard-hit coal country in West Virginia, and hurricane-racked Puerto Rico. He described, "people who have lost all of their teeth because adult dental care is not covered in programs for the poor," and Puerto Ricans living next to mountains of toxic coal ash. In Alabama, he found cesspools of sewage that have led to a resurgence of hookworm, which thrives in conditions of poor sanitation. A recent study found that more than one-third of people surveyed in Alabama tested positive for hookworm.

Alston found that, "the U.S. already leads the developed world in income and wealth inequality, and is now moving full steam ahead to make itself even more unequal," citing the $1.5 trillion in tax cuts that Trump passed in December of 2017, which "overwhelmingly benefited the wealthy and worsened inequality." Simultaneously, Trump cut a third of the food stamp program, and proposed to triple the base rent for federally subsidized housing. Alston said, "It's a very deliberate attempt to remove basic protections from the poorest, punish the unemployed, and make even basic health care into a privilege to be earned rather than a right of citizenship." He concluded that the U.S. is "building a society where wealth and privilege will dominate everything. The persistence of extreme poverty is a political choice made by those in power, amounting to a violation of civil and political rights."

In an interview with the Los Angeles Times,¹ Alston elaborated -- "There's been a systematic effort by conservatives to promote the notion that anyone who is receiving money from the government is shameful and offensive. Yet the rich receive vastly more money from the government, and that's not considered shameful." He pointed out "caricatured narratives" that hold up the rich as drivers of economic progress, while slamming the poor as "wasters, losers and scammers."

The report takes special note that the inequalities "affect African Americans in particular, where they just come out worse on every possible indicator, and policies are clearly designed to hit them harder." On the flip side, it cautions that "the equality of opportunity, which is so prized in theory, is in practice a myth, especially for minorities and women, but also for many middle-class White workers." Nobel prize-winning economist, Joseph Stiglitz added, "Can you believe a country where the life expectancy is already in decline, particularly among those whose income is limited, giving tax breaks to billionaires and corporations while leaving millions of Americans without health insurance?" Stiglitz warned that Trump's assault, "bodes ill for society as a whole. The proposed slashing of social protection benefits will affect the middle class every bit as much as the poor."²

"The American dream is rapidly becoming the American illusion," is the scathing message that the report delivered to the U.N. Human Rights Council. That message was scorned and dismissed by the Trump administration. Republican Party leaders like House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell and the Republican committee chairs have declined to comment. Rather than addressing the contents of the report, Trump's U.N. Ambassador, Nikki Haley, chose instead to criticize the U.N. Human Rights Council.

¹ Los Angeles Times 6/6/2018

² The Guardian 6/1/2018

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Charitable Gifts and the New Tax Law

One of the unexpected consequences of the new tax law is that charitable organizations are going to be struggling. Under the new tax law, charitable contributions are expected to drop by about half.¹

This is because the Standard Deduction has nearly doubled, from $13,000 to $24,000. At first blush, this would appear to be good news, but this is how it pans out for some taxpayers --

Let's say we're back in 2017, when the Standard Deduction for a married couple was $13,000. Your mortgage is paid off, and your only itemized deduction is $10,000 for state and local taxes.

It would make sense to make a $10,000 charitable contribution, because your tax deductions would total $20,000, $7,000 greater than the Standard Deduction.

However, for 2018, you would probably want to take the Standard Deduction of $24,000, because it's higher. Consequently, you might not do a gift to charity because there would be no tax benefit to you. In the past, roughly 30% of taxpayers were itemizers. That number is expected to drop to 10% by the time we start filing this year's taxes.² It's a tough decision, because you may still want to support your favorite church, temple or charitable organization, and help preserve the community.

There is still a way to support the community, take advantage of the higher Standard Deduction, and also receive additional tax deductions -- it's a strategy called "bunching," and it uses the unique advantages of the Donor-Advised Fund.

A Donor-Advised Fund is a fund in your name created inside a public charity. You receive an immediate federal (and sometimes state) tax deduction for the full value of your donation. Then, you can decide which charities, how much, and when to make distributions from the account later on.

In "bunching," (continuing the example above), instead of gifting $10,000 each year, you do $20,000 every other year. That gets your Itemized Deductions above the level of the Standard Deduction, but you have full control over when to make grants from the fund.

Because the investments continue to grow inside the fund, you could give away only the earnings each year, and preserve the principal. Or you could give away some or all of the principal. You can even wait several years, letting the money in your account grow before making grants. The main restriction is that the charities must be IRS-approved.

It gets even better. Suppose you donate stock that you bought at $10 a share, and now it's worth $50 a share. If you sold it yourself, you would have to pay capital gains taxes on the $40 per share gain. However, when you donate the appreciated stock to a Donor-Advised Fund, you escape paying the capital gains taxes. Nevertheless, you still receive a tax deduction based on the full $50 a share, as long as you’ve held the stock for at least a year. In this example, because of the tax savings, it would only cost you about $9,000 to make a $20,000 gift to your favorite community organization. 

You don't need to be a millionaire to consider Donor-Advised Funds. Minimum initial donations are typically in the $5,000 to $10,000 range.  Subsequent contributions can be much smaller. Donor-Advised Funds can accept any one of a variety of assets as a charitable contribution --  cash, wire transfers, stocks, mutual fund shares and bonds all are acceptable. 

When choosing a Donor-Advised Fund, you should carefully examine management fees, donation restrictions and investment choices.  A Certified Financial PlannerTM or CPA who is involved in the community can provide advice on the local needs of your community as well as a feature comparison of Donor-Advised Funds.

¹  http://cct.org/2018/02/giving-after-the-tax-cuts-jobs-act-a-charitable-conversation-guide/

² https://www.aefonline.org/blog/new-tax-law-bundling-gifts-donor-advised-funds

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Graduation Gifts for a Successful Future

It’s incredible how fast the year goes by; it’s already June.  Kids all over the country are graduating and starting new chapters in their lives.  Traditional gifts like an envelope of money or a Hawaiian lei are the norm, but it wouldn’t hurt to consider a few non-conventional gifts that might be equally as meaningful.    

In America, Land of the Free, higher education is anything but free.  In fact, the U.S. actually leads in having the highest average annual tuition fees, worldwide[i].  However, with education being the pathway to future career opportunities, many are willing to take on debt they would not normally consider.  Today, 70%[ii] of college graduates are leaving school with debt.  That means roughly one in four American adults are paying education loans, which amounts to approximately $1.5 trillion in student debt.  Studies have shown that young adults have delayed buying homes, starting families and other major life decisions until they are more financially stable, due in part to the burden of debt. 

With that in mind, it may not hurt to consider the traditional graduation gifts in combination with a few practical ones as well.  Here are a few ideas:

Gift Card to Purchase Books

Text books and course materials can be shockingly expensive.  For high school grads heading to college, a little help with books could go a long way.  Many colleges still sell books in the campus bookstores, but often schools also use the services of education material suppliers. These suppliers provide students print and digital content that can be ordered online and picked up at school or downloaded.  If you know where the student is going to college, you can buy a campus bookstore gift card.  Other textbook gift card options could include Amazon or Follett.  

A Professional Suit

Whether graduating from high school or college, having a quality suit in your closet is essential.   

I remember being invited to a networking event with possible future employers by the Dean of the accounting school.  As a Sophomore in college, my wardrobe consisted mostly of jeans and hooded sweatshirts.  In need of a presentable suit, I went to a local department store and came home with an economical suit, to which my roommate commented, “I’ve never seen a suit made from this material before.”  

Economical suits may work out in the short term, but an affordable quality suit might be an ideal gift that keeps on giving.  

Introduction to a Financial Planner

Schedule your graduate’s first meeting with a financial planner.  While they might not know what questions to ask now, the more powerful tool is that they’ll know who to ask when they have a question – in addition to their sounding boards: mom and dad.  A financial planner can give them advice on how to receive financial assistance for education expenses in the most tax efficient manner or how to effectively put savings away when they get their first real job.  Once employed, a financial planner can help customize an investment allocation for their work sponsored retirement plan and advise on a budget for paying down student loans.  The earlier people start saving for retirement, the more financially sound they’ll be the rest of their adult lives.  An introductory meeting with a financial planner can run in the range of $300-$500, which can be prohibitive for a young adult on a budget.  Some financial planners will offer a complimentary introductory meeting if they’re already working with members of the family.

Roth IRA

Roth IRAs are one of the most powerful ways for a young person to invest.  That is because young adults have the power of time on their side.  If you look at the history of the stock market, including the Great Depression or the more recent Great Recession, there is no 10-year investment window where you would have lost money if you stayed invested the whole time.  In other words, as long as you implemented a buy-and-hold strategy for an investment period of 10 years or longer utilizing a globally-diversified portfolio, you would not have lost money[iii], even if that 10-year window included a dramatic market decrease like the Great Recession.  The stock market is resilient.  Some of the best market surges in history were immediately following a dramatic stock market downturn.  If you are invested in a Roth IRA, not only will you benefit from market growth, all the gains in your investment account are tax-free.  There are many rules about investing in Roth IRAs such maximum annual contributions, participation limits based on your total income, etc.  Consult your Financial Planner or CPA if you feel the Roth IRA might be the right savings vehicle for your graduate. 

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For advice on any of the above strategies, gifting appreciated assets, or investing in preparation for college through the use of a College Savings 529, reach out to your Certified Financial Planner™ or CPA.

Congratulations to your graduate and best wishes to their future! 



[i] http://www.oecd.org/education/education-at-a-glance-19991487.htm

[ii] https://www.cnbc.com/2018/02/15/heres-how-much-the-average-student-loan-borrower-owes-when-they-graduate.html

[iii] https://loringward.com/blog/its-about-time/

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Stock Buybacks and the American Dream

President Trump, trumpeting the new tax law that took effect this year, promised that the massive corporate tax cut from 35% down to 21%, on top of the "tax holiday" on approximately $2.1 trillion of corporate profits held tax-free overseas would result in increased investment in factories, workers and wages, and would invigorate the American economy.

The numbers are now in -- only 4% of workers are getting salary increases or bonuses. 80% of the tax windfall is going toward stock buybacks, in which corporations use the cash on hand to buy back their own stock.¹ Because this removes stock from the open market, it creates a scarcity value and drives up the share price.

This is good for the senior executives of these corporations, who tend to be big owners of their companies' stock. It also benefits the 10% wealthiest Americans who own 84% of all stocks.² However, the bottom 40% of Americans (125 million people) own nearly nothing in stocks, and continue to balance the rent, the grocery bill, and the rising cost of gas and electricity.

Until the early 1980s, stock buybacks were considered illegal because they were an artificial way to manipulate share prices.³ They were an easy way to create phantom profits, compared to hiring workers, spending on research and development, and building new plants.

Corporations tend to put share value first, ahead of customers, employees, the community or public interest, but wield control over the American economy and politics. In order to understand how corporations got this powerful, we have to go back to the end of the Civil War. The 14th Amendment was passed to protect fundamental human rights. It granted emancipated slaves full citizenship, and protection of life, liberty, property, and due process of law. However, using lies and a twisted interpretation of the Amendment, railroad barons pushed Congress to grant corporations the status of "persons." Corporations used the shelter of the 14th Amendment to overturn economic regulations, child-labor laws, zoning laws, and fair wage laws. 

150 years later, "corporate personhood" has snowballed into an overturn of the democratic system. In the last 4 years, the Supreme Court dramatically expanded corporate rights, and in 2010 ruled that corporations have full rights to spend money as they wish in candidate elections -- federal, state and local. It unleased a flood of campaign cash and corporate influence over elections, the budget and public policy. Corporations play it both ways -- they reap the benefits of "personhood," but unlike real people they can keep and grow their assets in perpetuity, and are not subject to the laws of inheritance.

Much of what Americans perceive to be wrong with America has roots in this ideology -- rising income and asset inequality, swings from boom to bust, unemployment, crumbling infrastructure, and unaffordable education.

Corporate stock buybacks are just one manifestation of this ethic. When corporations' primary role is to boost short-term shareholder value at the expense of everything else, what's lost is a long-term investment in the future. To get the largest "return on investment," corporations want the biggest return from the smallest investment. Costly new factories are a no-no. Investing in education for the surrounding community is irrelevant. Hiring expensive workers who receive health and retirement benefits is counter-intuitive. Corporations as "job creators" is a myth -- creating shareholder value and creating good jobs is incompatible. Stock buybacks, though, are a no-brainer -- they create profits out of thin air.

What does this mean for the American Dream? Wages are stuck. College degrees are out of reach. Medical costs are skyrocketing. A recent study by a team of the nation's leading economists at Stanford, Harvard and the University of California Berkeley reported that for the first time, it's extremely unlikely that this generation of American children will earn more than their parents, after adjusting for inflation. Much of the anger fueling last year's presidential election stemmed directly from the concerns of Americans who feel they are losing ground economically. Corporations pumped over $2 billion into the 2017 elections⁵, and found scapegoats to target -- immigrants, people of color, unions, international trade agreements, and workers in other countries.

One positive aspect to the current administration is that many Americans have received an education about the political system. They didn't receive the tax cuts that they expected. Jobs that were promised did not materialize. The vulnerability of the electoral process to social manipulation became exposed. The swamp overflowed. The coming mid-term elections may be an opportunity for an energized electorate to take back the democratic system, and roll back a fake prosperity that only benefits a few at the top.

 

¹ Americans for Tax Fairness, 4/9/2018

² CNN Money, 2/16/2018

³ New York Times, 2/26/2018

⁴ Washington Post, 12/8/2016

⁵ Fortune, 3/8/2017

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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EDUCATIONAL WORKSHOPS


 

2018 SCHEDULE 

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 14, 2018

10:30 a.m. - 12:30 p.m.

La Canada Flintirdge Library

4545 N. Oakwood Ave.

La Canada Flintridge, CA 91011

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 21, 2018

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

INVESTING AFTER AGE 70.5 AND RMDS

Saturday, September 8, 2018

9:00 a.m. - 11:00 a.m.

South Pasadena Library Community Room**

1115 El Centro Street

South Pasadena, CA  91030

**this activity not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

INVESTING AFTER AGE 70.5 AND RMDS

Saturday, September 22, 2018

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 


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Pasadena, California 91101
Phone: (626) 449-7783
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