Winter 2013
Thinking Beyond the Fiscal Cliff
By Michael G. Sparks, CFP®
One of the things I enjoy this time of year is watching high school basketball. While the weather is getting
cold we often take in a game of hoops to watch the hustle of the players, the excitement of the fans and the
spirit of the game. We all know that as the players get older the skill level grows and so does the interest in
the games – at least measured by how many fans show up to watch a 7 th grade game vs. the varsity team.
This led me to think about the upcoming “games” in Washington
among our national leaders.
By the time this newsletter hits your mailbox, time will have passed
and while the Fiscal Cliff will not be forgotten, the details will most
likely have changed dramatically from the time I’m writing this article.
While I have some opinions today about the possible outcome, I have
little comfort or confidence in what will truly happen. Getting me to
put them on paper at this point seems a bit fruitless. So let’s skip
what I’m calling the “warm-ups” and look to the opening tip-off and
the first half.
Beyond the Fiscal Cliff, what is the next issue to stare us in the face? We all know that federal spending is
high and tax revenues are low, thus creating a budget deficit in the range of about 1 trillion dollars. I know
some will argue that taxes are high enough. I can hear some people screaming already. There are three
things we can do to fix the problem; cut spending, raise revenues, or a combination of the two. I will defer to
you and others to argue what we should do. I just think it is too simplistic to think this problem can be fixed
by doing only spending cuts OR tax hikes. I think it will take both.
I’m well aware that we can all extend financing and debt to indulge personal overspending – at least temporarily. This comes in the form of credit cards, car loans, student loans and home mortgages. But we all
Continued Page 2
Fiscal Cliff (continued)
know this train doesn’t go forever. That’s true of our Federal budget as well so that’s why we need to turn
our attention to the second half. You see, the warm-ups and the first half were interesting, but we now
move to crunch time and how the final score will look.
So what will the second half be about? And how does it impact me? It’s going to focus on a little thing called
“Entitlement Spending”. Yes, the all-important two lines in the federal budget for Social Security and Medicare/Medicaid. Together they represent over 40% of our federal spending. Even worse is the trend-line
which shows this percentage growing significantly. While I’m certain most of you reading this have heard
enough fiscal cliff noise to make you go crazy, just wait until the debate begins in earnest over entitlements.
But to think we resolve the budget imbalance without dealing with this is naïve.
Now back to where I get myself into trouble. While I think fundamental changes must occur in these programs I think most changes will impact younger, pre-retirees – not nearly so much as for current retirees.
But, that’s not to say hearing the roar of the crowd will be pleasant. This is one game that isn’t on the schedule yet but must be played. Once announced, get your tickets early. It’s sure to be a barn burner!
Interesting Factoids
Is It Worth It?
It would take $24,000 invested in a taxable money market earning +4.18% (the national average yield 5 years
ago, 12/1/07) to generate $1,000 of taxable income over the course of a year. It would take $5 million invested in a taxable money market earning +0.02% (the national average today) to generate $1,000 of taxable
income over the course of a year (source: BTN Research).
Crazy Numbers
A child born in 2012 that begins kindergarten in the fall of 2017 would attend college between the years of
2030 and 2034. If that child attended an average private 4-year college and if the annual price increases for
private colleges experienced over the last 30 years (+5.9% per year) continued into the future, the aggregate
4-year cost of the child’s college education (including tuition, fees, room and board) would total $482,288 or
$120,572 per year (source: College Board).
Homes
The average value of a single family home in the US as of 9/30/12 is essentially unchanged (actually down
1.6%) from the average value nationwide as of 9/30/04, i.e., flat over the last 8 years (source FHFA).
Cost Of Health Care
From 12/31/04 to 9/30/12, the cost of medical care in the US increased by 33%, half again as large as the
+22% increase in the CPI (Consumer Price Index or measure of inflation) over the same period. Americans
over the age of 65 spent 12.2% of their income on health care in 2011 (source: Labor Department).
Hopeful Signs of a Manufacturing Comeback
By Chanley M. Christman, CFP®
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We all know that over the last 35 years the manuweakness of the US Dollar (a weak home currency
facturing base in the US has continued to shrink.
causes import prices to be higher and export prices
Whether it is a result of automation/technology or
to be lower, more competitive) and the higher shipMichael
thought
his
two
mile
commute
to
the
outsourcing to Japan in the 70’s-80’s and China in
pingoffice
costs took
which too
are much
directly time.
related to higher oil.
If
we
kept
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name,
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owe
Mark
a
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payment
of
the 2000’s, the number of manufacturing jobs has
Both of these factors on their own would be
$5,000,000.
diminished. However, over the last 12-18 months
deemed negative, but in relation to manufacturing
We like the attention it all brings.
the US has experienced jobs being added to the
in the US they are positive. Companies that are
We are unstable people who like chaos and
disorder.
manufacturing
base.
It
appears
that
we
may
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looking
the globe
forbank
the best
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Nancy wants more exercise and complained thataround
her walk
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was
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reached
a tipping point for various reasons, causing
a new plant are beginning to decide that the US
close.
many
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the worldlotand
may
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certainly is
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to be the best place to open a new
more competitive now than previously.
(Insert
manufacturing
We are just
facilitrying to do our part to prop up the local economy.
Another
our phones
in- factor helpty. IfApple
would bego out, we can run across the street and request a repair
ing US manufacturtheperson.
most recent exright now is the
We’ve always wanted the convenience of having a gas station next ing
door.
ample.
Chan is dying to shovel more snow this winter.
auto industry. With
There are multiple
very low auto invenfactors
for
the
tories as a result of
attractiveness of the
significant
under
US now versus the
production
from
last 20 plus years.
2008 to 2011 during
These factors inthe recession, we
clude China’s rapidly rising labor costs; the inare left with the demand for used or new cars and
creased value of China’s Yuan versus the US Dollar
not nearly enough supply. Over the last 20 years
(or the weakness in the US Dollar in general); the
the number of new vehicles produced in the US has
higher cost of shipping as a result of rising oil prices;
averaged 15.1 million. However, the production
the significantly higher productivity of US workers;
run rate bottomed out in 2009 at 9 million new vethe quality control concerns that continue to haunt
hicles, with years 2010 (11 million) and 2011 (12.7
many manufacturers that have offshore production;
million). This underproduction implies that we are
and the challenge of managing long-distance supply
going to drive our cars for 20 plus years, or we will
chains.
have a major replacement era where the number of
new vehicles produced exceeds the average. ReIn my opinion, the factors here that have changed
cently in November, the production run rate for
tremendously over the last 5 years and are most
new autos recovered back to 15 million units. Add
important in the scale tipping back to the US are the
in the OEM suppliers (original equipment manufacContinued Page 4
Manufacturing (continued)
turers) that supply parts for the production of
new automobiles and one can see the beginning
of positive momentum for the manufacturing
base (source HBR).
The Harvard Business Review predicts that “the
US manufacturing renaissance doesn’t mean Chinese factories will shut down or even slow down.
With high growth in China, more plants will be
needed. Many will see the benefit in building
new plants in the US to serve the US and western
export markets, while retooling plants in China to make goods for the Chinese and Asian markets”.
Average 15.1
Many believe that the lower cost products like apparel, footwear and textiles will continue to be grounded in
China or South America as they still enjoy a large labor cost advantage. The biggest impact will be felt by sectors in which wages account for only a moderate portion of total production costs – and in which shipping
costs, distances and time are often critical. There are many hopeful signs of a comeback in manufacturing,
which would be a significant benefit for the overall US labor market and economy.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in
this material. The information has been obtained from sources considered to be reliable but we do not guarantee that the foregoing material is
accurate or complete. Any opinions are those of Michael Sparks and Chanley Christman and not necessarily those of RJFS or Raymond James. You
should discuss any tax or legal matters with the appropriate professional. The S&P 500 is an unmanaged index of 500 widely help stocks that’s
generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.
On A Personal Note
Nancy Roop is a proud grandma for the second time as of September 3. Jase Scot has been a fun addition to
their family. His brother, Layton, is happy most of the time that he has someone to share the attention with.
Should be an exciting Christmas at the Roop household.
We want to Thank You for coming to the Christmas Party we had at our office. We are thankful for great
weather that allowed many of you to join us. Thank you for stopping by. We hope you had a very Merry
Christmas and we are looking forward to a successful 2013.