The Market Ripple Effect of Sovereign Wealth Funds

Sovereign wealth funds have grown significantly in size and number fueled by rising oil prices, a desire to increase economic growth and invest abroad. According to the Sovereign Wealth Fund Institute, the world’s sovereign-wealth funds have combined assets of $7.2 trillion. That is twice their size in 2007, and more than is managed by all the world’s hedge funds and private equity firms combined. Furthermore, nearly 60% of those assets are in funds dependent on energy exports. The precipitous decline in oil prices has caused some funds to shrink while others are being tapped by governments as their oil revenues decline. That is forcing them to sell or borrow investments, potentially pressuring markets at a time when investors are becoming more risk averse. Saudi Arabia’s central bank, which operates in some ways like a sovereign wealth fund, has sold billions in investments this year while Norway’s fund, the world’s largest, plans to tap its fund for the first time in 2016. What’s also problematic is that many of these funds don’t disclose their size, holdings or investment strategies which make it challenging to measure the risk they pose to the global financial system. The Financial Stability Board (FSB) said that global financial regulators are investigating “potential vulnerabilities” of these funds that could affect world markets.1  As we wait to hear the results of FSB’s analysis, we will be watching to see if oil continues to decline in 2016. This situation would likely force more selling by sovereign wealth funds against a backdrop of liquidity concerns which could result in larger price movements and market turbulence.


We Have Liftoff

On Wednesday, the U.S. Federal Reserve, exactly seven years to the day after cutting its benchmark rate nearly to zero, announced they will raise short-term interest rates by 0.25%. This increase, as outlined by Federal Reserve Chairwoman Janet Yellen, is rooted in the progress made by the U.S. in restoring jobs, improving wage growth, and easing the financial hardships numerous Americans faced in the seven years since the financial crisis. However, if past history is any indication of where interest rates are headed, every other developed country that has raised rates since the end of the financial crisis has been forced to reverse course, i.e. lower rates, as growth became stagnant. The next few quarters, as well as key economic data, will determine whether the Federal Reserve moved too soon or at just the right time.



Wealth and Tax Planning


Individuals and families, just like businesses, are being forced into approaching planning more rigorously and strategically than ever before. Due to increasing stock market volatility and worldwide economic dysfunction as evidenced by a simultaneous rising of U.S. interest rates and an overall decline of global interest rates including for the first time negative interest rates in some global markets, planning is now not optional.

Individuals, especially those who are retired, must have a complete understanding of their personal financial situation today. They must also possess a vision of their future needs and resources in order to cope and respond to the anemic market returns being experienced and the potential of deflation in some markets with concurrent inflation in other markets. This, when combined with increasing geopolitical and security risks makes for a very difficult and scary world and one that requires a disciplined approach, a degree of risk management, and intelligent professional guidance. In short, planning for your future is like being a skier, one’s eyes need to be looking down the hill and not at one’s feet.

With 2015 closing behind us, it is time to reflect on what can be done differently. Tax efficient thinking and planning can provide better returns than market returns in many situations. Some general ideas to consider include:

  • Retirement plans—Do you or will you have self-employment income? If so, it is possible to still put certain retirement plans in place before April 15th and obtain a 2015 tax deduction. Are you maximizing your retirement plans for 2016 and when was the plan design last reviewed?
  • Based on a review of a multi-year tax and financial plan it may be beneficial to make 401(k) plan contributions to a Roth account versus a traditional pretax account depending on current and future marginal tax rates. In addition, some 401(k) plans allow employees to make additional after tax contributions to their 401(k) plan. If so, it may be possible (depending on your company plan and your age) to effectively create a back door Roth IRA that you otherwise could not do. If your plan allows additional after tax contributions, you should discuss with your tax professional. Have them review IRS Notice 2014-54 to determine if you should consider the feasibility of the following ideas:
    • Consider contributing after-tax dollars to a 401(k) plan and then roll over those dollars to a Roth IRA, thus supplementing pre-tax or Roth 401(k) plan contributions along with any eligible direct Roth IRA contributions. Note that you cannot roll over after-tax contributions without also rolling over the tax-deferred earnings on those contributions between the time the contributions were made and the time they are rolled over.
    • If your plan does not have a designated Roth 401(k) option consider contributing 100% of your contributions on an after-tax basis and eventually rolling over these funds to a Roth IRA. This way you can approximate being able to fund a designated Roth 401(k) without actually having this option available. This approach is especially worth considering if you expect your marginal income tax bracket to be higher over time.
    • If you have access to a non-qualified deferred compensation plan (NQDC), consider funding after-tax dollars to a 401(k) plan ahead of the NQDC plan. NQDC dollars ultimately will be taxed, while after-tax 401(k) plan contributions rolled over to a Roth IRA will not be taxed.
  • Philanthropy is a fundamental part of many wealth plans and just like everything else it must be approached strategically and efficiently:
    • Is your philanthropy goal based or dollar based? If you are trying to achieve certain goals, ensure that your giving is concentrated and strategic so as to be most effective.
    • Charitable giving is a tax advantaged activity. Be tax aware and conscious on how you give. Consider donating appreciated long term capital gain property. Consider your current and future year’s income and try to maximize the tax benefits based on income tax savings and highest tax rate year utilization.
    • Consider using charitable structures such as charitable remainder trusts to achieve both income tax savings and charitable goals when selling highly appreciated assets while retaining an income stream from the sale.
  • Wealth transfer is a critical element of multi generation wealth maximization:
    • Maximize the use of the annual gift exclusion of $14,000 per person. Over time a significant amount of wealth can be transferred tax free and income tax savings can also potentially be achieved.
    • Consider the use of the unlimited gift tax exemption associated with the direct payment of tuition and medical expenses of others.
    • Consider using trusts to achieve not only wealth transfers but also multi-generational creditor and spousal protection.
    • With interest rates still low, revisit intra-family low interest loans and even GRATs as a way to shift growth out of your generation.

The earlier in the year one starts planning, the more effective and tax efficient the results can be. At Telemus, we act as the quarterback to coordinate your entire financial life and your other advisors (be it CPA or attorney) to achieve greater results for you.

We suggest meeting with your Telemus trusted advisor as soon as possible to update your wealth based Financial Life Plan and to ensure you are on the best path to achieve your goals.



PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client’s specific financial needs, goals and objectives, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.

Fed Decision Fallout

Money managers and hedge fund managers are backing up the proverbial truck by betting a record amount of money, roughly $26.6 billion as of December 1st, that the prices of five-year U.S. Treasury notes will fall. Bond yields rise when prices fall. This figure, according to the U.S. Commodity Futures Trading Commission, is the largest since 1993, when the data began being tracked. As of Monday, and coinciding with the amount of money placed in federal-funds futures, investors believe there is a 79% likelihood of a rate increase from the Federal Reserve at its December meeting before the end of this year, according to data from CME Group. This likelihood has increased roughly 100% from two months earlier following the Fed’s October meeting. Next week’s Fed meeting may prove to be highly lucrative depending on the outcome.


ADP Report Points to Steady Job Growth

According to Automatic Data Processing (ADP), private payrolls in the U.S. increased by 217,000 in November which beat estimates and was the most in five months. Additionally, the October number was revised upward to 196,000 from 182,000 further making the case that job growth remains strong and steady. November’s increase was primarily due to the service sector which accounts for most of the economy’s jobs and helped to offset a weak manufacturing sector although manufacturing did snap a two month streak of job cuts. Small businesses added the most employees although medium and large businesses did see meaningful hiring. The ADP report comes ahead of the Bureau of Labor Statistics’ (BLS) employment report due out Friday. 1 Pay close attention to this report as it may provide the last data point the Fed needs to initiate rate liftoff.

1 Wall Street Journal; Private Payrolls Rose by 217,000 in November

Atlantic Divergence

As we head into the close of 2015, the world’s two largest central banks, the U.S. Federal Reserve and the European Central Bank, may be heading in opposite directions, at least as it relates to their monetary policies.  Given the strengthening US economy, coupled with an anticipated better-than-expected jobs report to be released on Friday, December 4, the Federal Reserve may look to lift interest rates when they meet later in December.  However, across the Atlantic, the Eurozone economy is still sputtering, trying to gain traction after the initial stimulus earlier this year.  As such, in order to decrease the likelihood of a further slowdown, the ECB is expected to increase stimulus measures on Thursday, December 3.  These simultaneous actions would create a large divergence in monetary policies between the world’s foremost central banks and create an interesting shift in foreign exchange, financial, and geopolitical events.

‘Too Big To Fail’ Is Still A Concern

Federal Reserve Bank of New York President William Dudley stated that large banks and regulators have made important progress toward ending the “too big to fail” perception, but that more work is required to make sure that any failure could be done in an orderly manner without taxpayer assistance. Mr. Dudley went on to mention a recently proposed Fed rule which would require banks to add more loss absorbing debt to their balance sheet to lessen the likelihood of financial system contagion. Mr. Dudley also said firms need to simplify complex legal structures and be able to prove that they can obtain funding to remain open during a bankruptcy, while regulators should adopt rules regarding banks’ derivative contracts with nonbank counterparties which would make it more difficult for non-banks to immediately close out contracts in times of stress.1 Although we are seven years removed from the financial crisis, the perception of “too big to fail” is still very much alive and many believe continues to pose a significant risk to our financial system. It will be interesting to see if banks and regulators can finally agree on a framework that removes the risk of future taxpayer-funded bailouts.

Wall Street Journal – Fed’s Dudley: Work Remains on ‘Too Big To Fail’

Negative Inventories?

As of October 28, 2015, according to the Federal Reserve Bank of New York, large U.S. banks reported holding negative $1.4 billion of investment-grade corporate bonds maturing in at least 13 months. Since the New York Fed began accumulating and reporting this data since the spring of 2013, this is the first time that inventories have turned negative. Prior to new capital and leverage rules, banks used to hold a lot more bonds in order to fill orders from clients; however, these new rules have made it more costly for firms to hold those corporate bonds, thus forcing some firms to completely exit the market. Is this a sign to come regarding the liquidity of corporate bond markets or just a byproduct of the artificially low interest rate environment?

Social Security Update

The recent passage of the “Bipartisan Budget Act of 2015” which was signed into law by President Obama on November 2, 2015, changed some very popular Social Security planning strategies that now need to be re-examined.  For many, this will require that action steps be taken to protect the ability to maximize future Social Security planning.

Prior to this law change, a popular strategy for maximizing Social Security benefits was to utilize the “file-and-suspend” rules, which permitted an individual – upon reaching full retirement age – to file for benefits but then suspend them immediately, allowing delayed retirement credits to be earned while simultaneously still allowing a spouse to begin to receive spousal benefits including family benefits for minor children.  A typical additional strategy was to then have one’s spouse, upon reaching their full retirement age, to file a “restricted” application which would allow their benefits (based on their work record) to continue to grow by allowing delayed retirements credits to compound and yet commence their spousal benefit – based on their spouse’s full retirement age benefit. This “cake and eat it too” strategy is what forced Congress, at the urging of the President, to change the rules. The “file-and-suspend” strategy was very straight forward but did have some downsides including:

  • Suspending resulted in a suspension of all benefits (which limits couples from crisscrossing spousal benefits by having each file and suspend);
  • Suspending triggered the onset of Medicare Part A benefits, which can render someone who chooses to file and suspend to be ineligible to make any more contributions to a Health Savings Account (HSA).

The new law changes the above rules and strategies essentially denying any benefits being paid to a spouse or other person based on a worker’s earning record if the worker’s benefit is suspended. Furthermore the new law will allow a spouse to file a restrictive application for benefits only if they are age 62 by the end of 2015. These two changes severely limit the ability to obtain any social security benefits while still earning delayed retirements benefits. These changes and the law’s effective date may require that a protective “file and suspend” application be filed within a short six month window. Some highlights that need to be considered include:

  • Beginning 6 months after the passage of the bill, no one will be able to implement a “file and suspend” strategy. Benefits based on a worker’s earnings record will no longer be paid to any spouse or other dependent if the worker’s benefit is suspended.
  • If a client has already claimed benefits using a “file and suspend” strategy, they will be “grandfathered” and may continue receiving benefits as they are now. Any benefits being paid on the earnings of a worker who has suspended benefits will continue in this circumstance.
  • If a client implements a “file and suspend” strategy within 6 months of the passage of the budget bill, they will be allowed to continue with the benefit claiming strategy, and benefits that begin being paid to a spouse from the suspended benefits of a worker will continue.
  • If a client will have already reached age 62 before the beginning of 2016, he or she will still have the option of filing a “restricted application” at full retirement age. This will allow the claiming of a spousal benefit while their own benefit will accrue delayed retirement credits. It will be possible for the client to switch to his or her own higher benefit at a later date.

Based on this and subject to future regulations it may be important that one consider the following action steps based on one’s personal situation and considering the aforementioned downsides:

  1. If you are currently over full retirement age (66) and have not started receiving your social security benefits you may want to file a protective  application to “file and suspend”  before May 1, 2016.
  2. If you will turn age 66 before May 1, 2016 you may want to file a protective application to “file and suspend” immediately upon turning age 66.

This is a very new law and regulations have not been drafted so please consult your wealth or tax advisor to maximize planning opportunities.

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client’s specific financial needs, goals and objectives, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.

Fed’s Yellen Suggesting Live Possibility for December Liftoff

Federal Reserve Chairwoman Janet Yellen stated that the Fed may raise short term rates at its December meeting, but stressed that no final decision has been made. She also added that they expect the U.S. economy to grow enough to realize further improvements in the labor market and a return to 2% target inflation over the medium term. The Fed has also emphasized that any move will be done at a gradual and measured pace. Overall, the Fed’s more hawkish tone as of late has resulted in a 52% probability of a December rate increase as measured by fed-funds futures.1 Place close attention to the next two employment reports that will be released prior to the December Fed meeting as they will certainly influence policy decision as to whether we have rate liftoff in 2015.

Wall Street Journal – Fed’s Yellen: December is ‘Live Possibility’ for First Rate Increase