Eric Lai & John Wenzel | Archvest Wealth Advisors | Oct 22nd, 2017
Category: Archvest in the News
For the quarter, global markets continued to appreciate, US stocks, as measured by the S&P 500, were up 4.5%. The international markets did even better, the MSCI EAFE was up another 5.4% during the same period. Another quarter and another new high. We often ask ourselves, how high can stocks go? Obviously we do not have a crystal ball to tell us when to take our money and run, but we can analyze the data of the current economy and render a conclusion as to where we believe things could go.
We believe that equities are fairly valued and that it would be prudent to take some profits off the table from US stocks and reallocate the proceeds to areas that have underperformed in the last several years. This type of reallocation allows us to reevaluate the risk within the portfolios and potentially provide a buffer against losses when the equity markets turn. It will turn at some point, we just do not know when. As we meet to review your plan we will discuss in more detail the strategies we are looking to put in place.
The Fed’s Balance Sheet and Inflation
It’s official! The Fed announced its plan to reduce their $4.5 trillion balance sheet. Starting in October, the Fed will reduce the amount of currency in circulation at a rate of $10 billion per month by not reinvesting the proceeds from its maturing bonds. This will slowly over time ramp up to $50 billion per month.
Despite the actions of the Fed over the last ten years, inflation remains low. During her press conference, Janet Yellen admitted that the Fed doesn’t really understand why inflation has not returned to the target level of 2% per year. The current inflation rate is 1.7% on an annualized basis. The Fed is hoping that the reduction in the Fed’s balance sheet will lead to an increase in inflation. This seems counter intuitive because economists, Fisher and Friedman, have theorized that inflation can be defined in this formula: M*V=P*T. M is the money supply, V is the velocity of circulation, P is the average price level, and T is the volume of transactions of goods and services. The change in P over time is inflation. When the Fed is reducing $10 billion of currency in circulation per month, it decreases the M in the equation above. Thus it’s hard to imagine how a decrease in M would translate into an increase in P over time. We believe the issue at play over the last decade has been the velocity of circulation rather than the money supply. That’s why despite all of the actions by the Fed, lower interest rates and quantitative easing has failed to raise the inflation rate.
The low level of velocity is a fiscal issue with the economy, not a monetary issue. Fiscal issues are driven by policy and policy makers, our Congress and Presidency. That’s not very encouraging these days because of the political polarization currently at play. While our politicians are figuring things out, the Fed continues to “buy” time through its monetary policy. Judging by the results, the Fed has done a great job over the past 10 years though its policies have had many unintended consequences.
Safeguarding Your Identity
We have always encouraged clients to do what they can to protect their identity and private information. Unfortunately, in today’s connected world, it’s getting harder and harder. In early September, Equifax announced a major data breach which has affected more than 150 million individuals. If you are an adult with a Social Security number, you were affected. According to reports from Equifax, the following data was compromised: Social Security numbers, birth dates, addresses, driver’s license numbers and over 200,000 credit card numbers.
Now that you know your private information was compromised, what can you do to mitigate any further damage? You have two choices, credit monitoring and credit freezing.
Credit Monitoring Services
Credit monitoring is a proactive way to watch for any changes on your credit reports. This gives you the opportunity to confirm the accuracy of any changes made to your credit and as necessary, the ability to clean up any discrepancies before they get out of hand.
As a basic safeguard, we recommend you subscribe to a credit monitoring service. There are a couple of free services through providers like the following: https://www.credit.com/ or https://www.creditkarma.com/. Be wary of signing up for any services provided directly by Equifax. There are reports that under the terms of service agreement you will be waiving your rights to pursue Equifax directly. In addition, if you are an AAA member, there is a free monitoring service provided though Experian called ProtectMyID. To sign up for this service you can go to the following website: https://www.AAA.com/IDsafe. You might also find free monitoring services through a local bank or credit union.
Beyond basic monitoring, you can subscribe to a service like ID Shield or LifeLock: https://www.idshield.com/ or https://www.lifelock.com/. Both services provide credit monitoring, but if there is a breach, they will help you remediate and restore your credit. The costs run roughly $10/ month for individual plans to $20 - 30/ month for family plans.
Fraud Alert or Credit Freeze
If you think your identity has been compromised, but you have not seen any abnormal activity, it might be best to place a fraud alert with one of the three bureaus. Once the fraud alert has been placed with one bureau they will notify the other two. This initial fraud alert will last at least 90-days. Should abnormal activity ensue the next step would be to place a freeze on your credit as well as request for an extended fraud alert.
This extended alert can stay on your record up to 7 years. If you have become a victim of identity theft the three bureaus typically do not charge you a fee to freeze your credit. If you are not a victim and you’re looking to freeze your credit as a safeguard, the cost could run $3 to $20/ bureau, depending on where you live. Unlike the fraud alert, in most states a freeze will stay on your credit report until you request it’s removed but some states have a statutory limit of 7 years then the freeze will be automatically removed.
The caveat with freezing your credit is that it can become very inconvenient to open future accounts or lines of credit. To do so, you would need to pay a small fee to either unfreeze or temporarily unfreeze your credit. However, if you become a victim of identity theft, we highly recommend you freeze your credit.
We know this can seem overwhelming, so if you need assistance or if you have any questions please give us a call. We are happy to help make sure you are taking the right steps to properly secure your identity.
As always, we appreciate the confidence you have placed in us to work alongside you regarding your planning needs. Be sure to follow us on Facebook, LinkedIn and Twitter as well as our RSS feed to stay up to date on what we’re reading and thinking.