forecasting financial markets - pitfalls ahead but encouraging signs are around
Over the last week here, there has been a considerable amount of financial work done on planning ahead and final estimated tax to be paid for a joint return and two individual ones.
As that was done it seemed logical to come up with a good estimate of what we spent in 2011 and whether we were making rational choices.
What seems like an easy task is not so easy, and not necessarily so heartening. Across bank accounts, brokerage accounts, and a few other investments that fall into K-1 territory, what happens to our assets is heavily influenced by cyclical, or secular as the proverbial CNBC pundit might add, changes in financial markets. What had the most impact in 2011 was the fall in equity markets from April, then a further fall from July to a plateauing in the last months of the year. It was all incremental as opposed to harsh collapses.
From this distance, most of that slow but meaningful downturn could, by some, be attributed to Washington politics. The budget negotiations over raising the national debt limit were water torture to the markets, if not waterboarding. Almost five months were spent on this posturing, with almost no other substantive progress on important legislative issues. When finally resolved it was a two month solution but it did start a modest relief rally in late November and December, one that has now been meaningfully extended into January.
The issue will get ugly again soon. Why will the soon to be revived issue of the debt limit not be just as painful, as new uncertainty is introduced. Could it be that the economy is really improving?, and could it be that the House of Representative does not want improvement? Dysfunctional is a word that has often been used over the last two years to describe our Congress. Destructive might be a much better word. Caution is required based on last year's experience, at least from this perspective.
To follow on with the improvement observation, the statistics on jobs are slowly improving. The corporate profit picture, while not by any means a bubble and that's good, is showing steady improvement. Dividends are being added or increased at many companies giving those on fixed incomes some way to cope with this insane Fed orchestrated no interest to anyone environment. More important here is that the optics are improving. In late 2008 a post on ENS described the lack of traffic in the four block downtown here, the open tables and empty counter at the long established diner in the center of town, the closing of some small businesses, the extending of hours at some others that decided more work was necessary, and the lack of a need for a reservation at any restaurant in the area.
Today driving through a neighboring town, there was no place to park in the immediate downtown area. That made it click, wake up John. There are not places to park much of the time in our little downtown either. The local diner mentioned over three years ago is packed every evening and the lunch counter is packed at 12:30. That's real, but more real than that is my daughter finding a real job with a growing company three months ago and my wife having acquired one at the beginning of 2011 after many years of purposefully staying home.
There is improvement.
Getting back to where this typically rambling comment started, our expenses have many variables. First, the most important factor in our aggregate financial position will continue to be the state of the economy and financial markets. With an existential view of these financial markets, it is not worth worrying about too much but there is not certainty beyond what one sees today. Diversification is a key, but is it really effective when in any downturn everything seems to be linked. That's just life I guess. Second, our spending is radically impacted by having college expenses. They are extreme as we have no option but to pay what's charged and subsidize the scholarships of the majority of students. We are lucky to be able to do that, but there is no deductibility of any consequence for that opportunity. Third, prices for all services, at least in this area, are through the roof but they must be paid. Fourth, we cook and eat healthy food and enjoyable food. Finally, replacing anything, a car, a bathroom faucet, a front door lock, a double kitchen window, etc. bears no resemblance to prices just 10 years ago. No inflation?, just try to buy something of quality to replace something that originally was but finally wore out.
Financial markets, college costs, eating well, and higher costs in general for goods and services that have quality and staying power are the issues. We could be more frugal, we could be less generous to some, we could cut back in some ways for sure, but it's unclear how easy that is until our young adults are fully launched in a few years. One thing for sure, my clothing costs are not driving up our budget.
Going through it all, I have no idea how it all netted out in 2011. What we spent on specific items is well known here. The ins and outs of a reconciliation would have been a gruesomely tedious exercise. Here's hoping the need for that does not come anytime soon and an acknowledgment that we are fortunate enough to not be pulling out the graph paper yet.
As that was done it seemed logical to come up with a good estimate of what we spent in 2011 and whether we were making rational choices.
What seems like an easy task is not so easy, and not necessarily so heartening. Across bank accounts, brokerage accounts, and a few other investments that fall into K-1 territory, what happens to our assets is heavily influenced by cyclical, or secular as the proverbial CNBC pundit might add, changes in financial markets. What had the most impact in 2011 was the fall in equity markets from April, then a further fall from July to a plateauing in the last months of the year. It was all incremental as opposed to harsh collapses.
From this distance, most of that slow but meaningful downturn could, by some, be attributed to Washington politics. The budget negotiations over raising the national debt limit were water torture to the markets, if not waterboarding. Almost five months were spent on this posturing, with almost no other substantive progress on important legislative issues. When finally resolved it was a two month solution but it did start a modest relief rally in late November and December, one that has now been meaningfully extended into January.
The issue will get ugly again soon. Why will the soon to be revived issue of the debt limit not be just as painful, as new uncertainty is introduced. Could it be that the economy is really improving?, and could it be that the House of Representative does not want improvement? Dysfunctional is a word that has often been used over the last two years to describe our Congress. Destructive might be a much better word. Caution is required based on last year's experience, at least from this perspective.
To follow on with the improvement observation, the statistics on jobs are slowly improving. The corporate profit picture, while not by any means a bubble and that's good, is showing steady improvement. Dividends are being added or increased at many companies giving those on fixed incomes some way to cope with this insane Fed orchestrated no interest to anyone environment. More important here is that the optics are improving. In late 2008 a post on ENS described the lack of traffic in the four block downtown here, the open tables and empty counter at the long established diner in the center of town, the closing of some small businesses, the extending of hours at some others that decided more work was necessary, and the lack of a need for a reservation at any restaurant in the area.
Today driving through a neighboring town, there was no place to park in the immediate downtown area. That made it click, wake up John. There are not places to park much of the time in our little downtown either. The local diner mentioned over three years ago is packed every evening and the lunch counter is packed at 12:30. That's real, but more real than that is my daughter finding a real job with a growing company three months ago and my wife having acquired one at the beginning of 2011 after many years of purposefully staying home.
There is improvement.
Getting back to where this typically rambling comment started, our expenses have many variables. First, the most important factor in our aggregate financial position will continue to be the state of the economy and financial markets. With an existential view of these financial markets, it is not worth worrying about too much but there is not certainty beyond what one sees today. Diversification is a key, but is it really effective when in any downturn everything seems to be linked. That's just life I guess. Second, our spending is radically impacted by having college expenses. They are extreme as we have no option but to pay what's charged and subsidize the scholarships of the majority of students. We are lucky to be able to do that, but there is no deductibility of any consequence for that opportunity. Third, prices for all services, at least in this area, are through the roof but they must be paid. Fourth, we cook and eat healthy food and enjoyable food. Finally, replacing anything, a car, a bathroom faucet, a front door lock, a double kitchen window, etc. bears no resemblance to prices just 10 years ago. No inflation?, just try to buy something of quality to replace something that originally was but finally wore out.
Financial markets, college costs, eating well, and higher costs in general for goods and services that have quality and staying power are the issues. We could be more frugal, we could be less generous to some, we could cut back in some ways for sure, but it's unclear how easy that is until our young adults are fully launched in a few years. One thing for sure, my clothing costs are not driving up our budget.
Going through it all, I have no idea how it all netted out in 2011. What we spent on specific items is well known here. The ins and outs of a reconciliation would have been a gruesomely tedious exercise. Here's hoping the need for that does not come anytime soon and an acknowledgment that we are fortunate enough to not be pulling out the graph paper yet.
posted by John Borden at 5:11 PM
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