Weekly Reflection for April 14, 2023

The Week - An Update in Charts

Although the major stock indices fell today, it was overall a positive week. The market is still divining mixed signals on the economy and corporate profits. As we enter the busy period in which businesses publicly report their sales and earnings, many expect disappointment. Some of that has already been built into stock prices but investors are still on edge.

Stock prices for the Global Systemically Important Banks (G-SIBs) are recovering but it is unlikely all of the banking issues have been revealed thus far.

Rapid rate increases have been a huge boost to bank earnings. JP Morgan's net interest income (NII) rose 49% year-over-year. NII is essentially the spread between what a bank charges you to borrow and what they pay you on deposits.

The International Monetary Fund says that after inflation is stuffed back into its hole, interest rates will likely drop back down to zero or near zero. (Gasp.) We are just on a rates roundtrip that is more or less at the halfway point. Using data showing that rates had already been trending down for 40 years, the IMF points out that those underpinning factors are still key. As their report puts it, productivity and "demographic forces, such as changes in fertility and mortality rates or time spent in retirement, are major drivers of the decline in natural rates."

Housing prices around the world in major developed economies rose as much as 50% from the start of the pandemic. And now they are moving the other way.

In the U.S., prices could drop 4.5% or more in 2023, marking a 10% total drop since the Federal Reserve began raising rates last year. Canada's housing market may fall 12%. Britain, Germany, New Zealand and Australia are all experiencing the same shift. The declines will be mighty painful in Australia where household debt as a portion of after-tax income is over 200%.

The "Bank of Mom and Dad" probably does not charge much, if any, interest and may not even expect any loan repayment, which may be a mistake. Some 70% of parents say that they have put their kids financial needs, mind you, adult kids, ahead of their own. Parents call the help given "significant" and it has required mom and dad to drain their own emergency savings or take from their retirement.

The "bank" says it has paid for everything from day-to-day bills (cell phones, car payments and insurance) to big ticket items (rent or home downpayment and college loans).

While the Fed's rate tightening cycle is likely not over, declining inflation is very good news. There is a good chance in May that rates will increase by 0.25% from their current range of 4.75% - 5.00% but end after that. Europe is still dealing with sticky high inflation of 6.9% at the latest reading. The European Central Bank will continue to raise, per its members. Their key rate is 3.5% and more hiking is expected. The Bank of Canada recently paused additional rate hikes, holding steady their current rate of 4.5%. Easing inflation, down to 5.2%, has given Canadian consumers some breathing room.

Uncle Sam's Big Day

Taxes are both a personal reckoning – you are sizing up your 2022 progress and decisions made, and a government reckoning – coming to terms with how much you pay into a system versus how much you and your community receive in return. Taxes are a compromise, one between citizens and their elected officials to fund operations that support our collective well-being. And, as is said about compromises, if no one is happy, then perhaps it is a good compromise.

The government is both happy and unhappy. For the most part, those who are earning the most, pay the most. Those who make less than $50,000 pay nothing or get a check back. Regardless of party affiliation, our federal government has repeatedly chosen via tax credits to help the lowest earners. After that, the tax system becomes steep. (This chart only considered Federal, not State or Local taxes.)

But the Biden Administration would like to

make some amendments, expected to be very difficult in light of the current Congressional makeup, which is not seen as friendly or amenable to tax hikes. Among their proposals would be to raise income taxes on Americans earning more than $400,000, end the “step-up at death capital gains” tax for high value estates, and impose a minimum tax on held assets for the very wealthiest.

IRS agents are happy. Yes, you read that right. The long-term employees are very happy to see so many new agents joining the ranks and sharing the burden. Over 5.000 new staff have been added with another 5,000 slated to come on board. Shuttered clinics are reopening, backlogs are almost obliterated and the office equipment is getting repaired.

The Inflation Reduction Act gave the IRS billions to spend over the next 10 years. Gobs of this money is slated towards “expanded enforcement ontaxpayers.” Cue the unhappy, and nervous, taxpayers, the vast majority of whom endeavor to do the right thing but worry about getting in trouble anyway. However, the agency says that audit rates on families and

businesses making less than $400,000 will not increase.

Now these agents and auditors need to deliver on better service for taxpayers and on increased revenue our government promised as a return on investment.

Love and Marriage and Money

Any worthwhile relationship therapist will probably say that shared values is one of the most important success factors for couple. Those who have been studying money and love in our modern age have a different take - opposite money types attract. And it is how they behave together as the relationship matures is key to satisfaction and longevity.

Here is what we do know about money and how it damages romance:

* Couples who fight over money are usually in debt (the credit card type of debt, not mortgage)

* If couples have regular or even weekly fights over money, they are more likely to get a divorce

* The household CFO, who usually has more time for the tasks, often shuts out their partner over time, leading to less consensus and understanding.

* A lack of conversation, openness and regular review of finances can be deadly to a relationship.

Experts say that partnering up with someone who can challenge and demonstrate different money traits is ideal. Spendthrifts can be attracted to misers and misers can learn to have fun splurging every once in awhile. One's habits and perceptions must change, or merge, over the course of a relationship, making the partners look more similar.

Talking about what the couple wants to do together, instead of what just one partner wants to do, is healthy. Having regular financial reviews and planning sessions together should be non-negotiable. And finally, experts have long said that combining assets is a defining success factor. Whether married or not, couples that pool finances experience greater relationship satisfaction and may even stay together for longer than their separate-finances counterparts per the National Institutes of Health.