You will get Less FAFSA student aid than you Deserve

 While the FAFSA student aid application has been made easier to use, shorter, and the Pell Grant and Max Award should increase, the calculator in the on-line form has an error which will provide a Student Aid Income figure which will be higher than it should be and qualify the student for less aid than they should receive.

This error, that the different percentages of protected income should be inflation adjusted annually was not included in the current calculation table, was noted repeatedly in the comments period.  The Department of Education said it did not have the time for 2024-25 year and would correct it for the 2025-26 period.  The Law specified the period of April 2020 to April 2023, which was a period of high inflation, should be used in implementation.

Student aid from an educational institution takes many forms.  Be sure to not depend on the gross aid amount and look at the different components of the aid offered to see what is really covered.  Here is a simple list of categories.  You may find there are conditions or exclusions of some expenses.

 

Print Page

Is the Federal Reserve wrong on unemployment/inflation?

The stock market is down today on a a relatively strong jobs report, because New Keynesian economics and the Phillips Curve say unemployment must rise to lower inflation.

The Bank of International Settlements in its 2022 Annual Report questioned the reliability of the Phillips Curve in the current economic environment of post Pandemic supply chain disruption aggravated by the Ukraine -Russia War with its food and natural gas/oil supply disruptions.

 The wage and price-setting mechanisms and interactions at the very heat of the inflation process are glossed over in the Phillips Curve process hiding the play between worker's bargaining power and capital and resulting in a flattening of the Phillip's Curve.  Studies have shown that in an open economy with a fiat currency, it is possible to have a dramatic increase in employment and a flat Phillips Curve whereas in  a flexible exchange economy a trade-off between inflation and unemployment is unavoidable.

The American Rescue Plan provided a necessary stimulus to the post pandemic lock down and

Economic Growth Towards Normalcy is not Hot Inflation

The current U.S. stock market is suffering the unfamiliarity of people born in 1970 and later who have had no experience with real inflation.  Both CPI and PPI show increases which reflect year-on-year the effect of growth to recovery from the pandemic lows of 2020.  The comparison of month-over-month and year -over-year show the differences in how inflation can be viewed.  While April 2021 PPI is being "reported" as the highest increase since 2009, April 2020 PPI, reported exactly one year ago today, was the biggest drop since 2009.  For more perspective, this is what PPI looks like over the last 25 years.

 Federal Reserve Chairman Powell, Fed regional Presidents, and Treasury Secretary Yellen have repeatedly, for a few months now, cautioned that there will be transitory inflation as the economy recovers towards normalcy.

Part of this transitory inflation will include increases in normally volatile commodities, such as food and gasoline and increases in commodities in substantially more demand as growth and demand increases until supply and.or production catch up.

The shortage of microchips is an example as it has caused new car and truck production to slow or halt, while the price of used vehicles goes up. The demand for lumber is another example.

Economic recovery from the pandemic recession will require significant continuing governmental fiscal spending to boost economic growth and employment by supporting families and their ability to find safe jobs at a pay level which does not keep them in poverty and allows them to afford child care, transportation, housing, food, medical care, and education expenses.  It is not surprising that women have consequently suffered significant job loss.  Until the long term unemployment rate goes down by millions of people, of which 24% have been unemployed for more than a year, more, the Fed will not be looking seriously at tapering.

Print Page

Watching U.S. Repo, Liquidity, and the Fed

As I detailed at length in my last post, U.S. Repo, the Fed, Coronavirus, and Global Demand/Supply Shocks, overnight repo submissions have continued to increase to $123.625 billion on 3/10 and $132,375 billion on 3/11.  As a result the Fed on 3/11/2020 has increased the overnight repo daily funding cap to $175 billion through April 13 to provide the liquidity to ease pressures on funding markets and adequate reserves in the banking system.  Besides offering 14 day repo on Tuesday and Thursday of each week capped at $45 billion each offering,  the Fed will also offer three one month offerings capped at $50 billion each starting Thursday 3/12.

With the continued daily increases in repo submissions and the evolving risks in the global economy, this increase in repo operations was to be expected and shows the commitment of the Fed.

Meanwhile, Italy has shuttered all shops except suppermarkets, food stores, and pharmacies in its nationwide lockdown, India has suspended all tourist visas, and, in a Presidential Oval Office meesage to the nation, President Trump announced he would seek to provide aid to affected workers and small businesses, deferred taxes for certain affected individuals and businesses, restrict travel form Europe for thirty days while not offering any additional stimulus and support for health care during this coronavirus pandemic.  The Oval Office message has not been well received as Asian and European markets have significantly tanked and the U. S. Dow futures show tthe Dow is set to fall 1195 points on opening as I write this.

With reduced global travel, businesses telling workers to work at home, universities sending students home, states, cities, and athletic leagues (NBA suspended its season) limiting public gatherings in the United States (which was 4-6 weeks too slow in preparing and responding to the coronavirus infection), the U.S. and global economy is shutting down.  Consequently, as I detailed in my last post, the recessionary pressures on the U.S. economy is obviously increasing.

Print Page

U.S. Repo, the Fed, Coronavirus, and Global Demand/Supply Shocks

On March 2nd, I discussed the growing impact of the coronavirus infection's on the stock market and the Federal Reserve monetary policy counseling waiting for more data or a modest 25 basis points cut at the March 17-18 FOMC meeting, only to be immediately frustrated with the quickness of changing information when, on March 3rd, the Fed, after an emergency FOMC telephone conference, cut the Federal Funds Rate 50 basis points.

As I pointed out on March 3, the market noise of March 2nd when the Dow went down 5.09% on significantly lower volume was not the cause (the stock market is noise and not of data interest to the Fed) and I pointed to the repo spike on the morning of March 3rd of the one day U.S. Repo to $108.608 billion which was $8.608 billion more than the $100 billion Fed cap on one day repo.  On 2/28 U.S. Repo was only $26.240 billion and on 3/2 it doubled to $53.140.  On 3/4 the submitted amount was $111.478 leaving $11.478 billion not accepted over the $100 billion Fed cap.  3/5 went down to $87.357 billion; 3/6 was $89.607 billion; and 3/9 was $112.932 billion, all of which was accepted because the Fed raised their cap to $150 billion through 3/12.  In comparison the significant 2019 repo market stress, which was very disruptive, began on September 17, 2019 at $53.150 billion and never went over $90 billion on any one day through November, 2019.

The 14 day repo has been capped at $20 billion and on 3/3 $50.950 billion was not accepted and on 3/5 $52.550 billion was not accepted, but on 3/9 the Fed raised the cap to only $45 billion through 3/12.

You can find recent repo operations here and you can do an historical search here.

The Fed announcement and news conference was fairly uninformative stressing only evolving risks and the Fed's intention to act as necessary.  Tim Duy, who had correctly called the 50 basis points cut, correctly notes the market will not be satisfied, but believes early action by the Fed will help short circuit recessionary dynamics and allow the Fed to squeeze through without returning to the zero bound.  However, Stephen Williamson expressed concern, as I did on March 4, that the potential gains of the Fed cut were too small and the potential costs too large and the Fed should have waited for more data or cut less aggressively. Both economists indicate that fiscal stimulus from the Federal government is needed as the Fed cannot do it alone though monetary policy.

Williamson is also not supportive of the Fed continuing to buy $60 billion in treasuries each month if the market is seeking safe assets and the Fed could sell treasuries exchanging treasuries for cash in its assets and reserves. However, the Federal Reserve has a model of a supply of ample reserves in the implementation of monetary policy.

The Peterson Institute has published two papers recently on Central Banks ability to fight recession and a program for the Fed to fight the next recession which indicates " Traditionally, the Fed has responded to economic downturns by cutting the federal funds rate. But if it continues in the traditional manner, without making any decisive changes to the way it conducts monetary policy, it will have less scope than it should have to counter the effects of the next recession"  The Peterson program is concerned about Effective Lower Bound problems and emphasizes monetary policy at lower Federal Funds Rate necessitating QE.

The Federal Reserve is analyzing the 2019 repo market stress has focused on the confluence of several technical factors and transactions leasing to a decrease in the reserves of the Federal Reserve.
On the other hand, the BIS not only acknowledges the confluence of factors and transactions but notes the four largest U.S. banks, which are heavily involved in overnight repo operations, had bulked up on U. S. Treasuries leaving smaller reserves for lending while money markets have increased risky lending to hedge funds which use repurchase (repo) agreement to fund arbitrage trades.  When the stock market is volatile, hedge funds have more need for repo.

When you consider the continuing global economic demand shock impact from the Trade War and the continuing volatility in equity, bond, and treasury markets there is a lot of pressure for an economic downturn.  The Saudi-Russia oil dispute and plummeting oil prices, the decline in the U.S. ten year treasury to .318% in 3/8-9 overnight trading but ending at .54% on 3/9, and the stock market volatility continuing with the Dow down 7.82% on 3/9 and 3/10 Dow futures up over 1000 points, as I write, all contribute to a growing possibility of not only a demand shock but also a supply shock.  Supply shocks demand governmental fiscal stimulus, but will the government respond strongly and quickly enough?

Without the fiscal stimulus, recession becomes more probable.  According to a recent MIT study which devised an historically back tested new model for predicting the likelihood of recessions, the was a 70% chance for a recession in the six months following November 2019 and 86% for the 12 moths after November 2019.  The six month period would be May/June 2020.

The MIT paper has yet to be proven in reliable in evolving current data, but the equity, bond, and treasury markets continuing volatility and evolving demand and possible supply shocks, means we should be on recession watch  (a recession requires two quarters of negative growth and 1st Quarter 2020 looks like +.7% but March could change that).

Keep your eye on the daily U.S. repo operations.  If it keeps moving up, much less continuing at the high submissions seen this March, you will probably see another Federal Funds Rate cut at the March 17-18 meeting --- maybe sooner.  The Fed needs to maintain liquidity and has demonstrated with the 50 basis points cut it is ready to act strongly.  The market wants a 75 basis points cut, but the market is noise (not data driven but reactive to data) and, like a two year old child, is never satisfied (want want want).  Some economists want a 1% cut or cut to zero, but such a preemptive strike is, in my opinion, very risky;  I want to the Fed waiting for the data and saving ammunition to deploy if a recession appears more likely as the risks evolve in the current demand and possible supply shocks.


Print Page

Market and Fed March 3, 2020

Volatility moves fast.  The 5.09% Dow increase yesterday was on 25.46% lower volume than last Friday and the Nasdaq volume was also significantly down at 19.34% yesterday.  The G7 made no fiscal stimulus commitments offering only words of appropriate policy action.

The Fed Repo Operations significantly spiked today with $108.608 billion 1 day term submitted and $100 billion accepted while $70.950 billion 14 day term was submitted with only $20 billion accepted.

The market started down a little over 200 points and started easing back basically on the G7 lack of fiscal stimulus action.  The European market were all up.

The the Fed makes an emergency rate cut of 50 basis points, which is what the market wanted and the market is still down and has gone down over 100 points as I write this at 9:19 AM Central time.

In my opinion the repo spike was the new driving data, but the Fed may find the 50 basis points too preemptive (and consequently less effective) and too much spent ammunition (25 basis points would not have satisfied the market but the that is not the Fed's job) to counter what could be a recessionary downturn as the global economic impact of the coronavirus infection multiplies and the infection grows in the United States.

Officially a recession takes two quarters of negative growth, which should be increasing apparent by the end of May going into June.  The first quarter is pretty obvious.  The Federal government needs to provide fiscal stimulus with direct effect on health care, employment, and support of economic sectors most heavily impacted by the coronavirus economic impact.  Additionally, the Federal government needs to start working with the international community to control and treat the coronavirus infection.  The United States is not in this alone.  If the U.S. does not start effectively cooperating and coordinating international response, including fiscal support, then the economic impact globally will be worse.

It begins.

Print Page

Coronavirus, Market Expectations, and the Fed

In the last half of 2018 (with a economic model driven Fed funds rate hike in December in which the Fed message was interpreted as rates will continue to rise) and the data driven Fed holding pattern through 2019 until August, September, and October Fed funds rate cuts of 25 basis points each month from 2.5% to 1.75% in order to tame and prevent inflation as the result of the Trade War economic disruption, the market expectations and self-serving political pressure were never completely satisfied, economic data realistic, or rationally predictive.  The market is irrational and reactive to human behavior much like an infant's terrible twos.

By Friday, February 28, 2020, we had seven consecutive down market days and the market had fallen into correction territory with an approximately cumulative 11.5% drop as the global economic impact of the coronavirus infection starting to sink in and the fears of a potential global pandemic.  As of Wednesday morning, the 26th, economists could see no data reason for the Fed to act.  By the morning of Thursday the 27th, economists were acknowledging the short run economic impact of the coronavirus infection but stating the obvious reality that the data was not present to indicate how long or how deep.  On Thursday the Dow fell 1190.95 points, after a Presidential televised message/presentation the night before raised many doubts as the competence of governmental leadership.  The need for the Fed to make a statement was necessary and Chairman Powell appropriately did so indicating the Fed stood ready to act in response to the evolving risks when appropriate.  By Friday morning, this had caused the economist Tim Duy to change his assessment from an appropriate wait for economic data to the need for a 25 to 50 basis point cut in the Fed funds rate and Goldman Sachs seeing stagnant earnings growth for U.S. companies through 2020 and three 25 basis points rate cuts from March to June of a total 75 basis points and Wall Street expecting at least 50 basis points in March. 

By the morning of Monday, March 2, Goldman Sachs aggressively stated there needed to be a 50 basis points cur in March and at least 100 basis points this year.  Marc Chandler, a forex and macro analyst, was accurately reporting the negative economic data and commenting that central banks words of assurance have a short life.  Tim Duy was concluding the Fed would need to cut 25 basis points in March with a tilt towards 50 basis points and sooner, although the Fed's initial response might be to expand repo operations.  In this same Monday morning, another economist was commenting that central banks are already doing enough for now and that the emphasis in combating a potential pandemic is appropriately directed fiscal spending by government to support the public health system and provide direct (not tax cuts which would come to late and often to the "special" people who do not need them) stimulus to economy as the global impact on the United States becomes more obvious.  As of this Monday the CDC has yet to deliver accurate testing kits to state, county, and local public health agencies and hospitals to provide timely testing.  By this Monday afternoon, general doubts were beginning to be raised that, while the market expects rate cuts, cuts will not work and that the Fed is more likely to cut rates due to a demand shock leading to inflation rather than a recession.  However, a demand shock can also be a supply shock and lead to recession.

By market end this Monday, March 2nd, the Dow finished up 1293.96 or 5.09%, despite European markets being up then turning down (except for UK) on coronavirus concerns.  Hope springs eternal in the market however fleeting the moment may be.

At this moment, I expect the Fed will hold the Fed funds rate in March, unless data between now and the meeting March 17-18 significantly changes.  The growth of the coronavirus infection will get much worse before it gets better.  Expect the Fed to look at the repo rates and repo operation (and the effect of hedge funds on the repo market) as well as bank liquidity throughout the system, particularly the largest banks which handle most repo facilities.  If the data does become more negative, there might be a 25 basis points cut.  This a wait a see how bad and how serious the public health problems impact the economy, prices, and employment --- and for what length of time.  The Federal government needs to listen to Congress and spend money to stimulate the public health response and directly stimulate the economy with spending which has more immediacy of impact than possible future impact.

If the economic impact grows more negative over the next two to three months, we may see the data showing that a recession could start in May-June.  Notice the use of the word "may" and not "will".


Print Page

2020 Important Tax Facts and Dates

Morningstar has compiled a succinct informational listing of important tax facts for individuals, investors, and important tax dates throughout the year.  I see no reason to write my own list as it does not require any professional originality.  You can find the information here.

This link will enumerate the twelve tax deductions and credits you need to evaluate for tax planning and their effective use to you.

Lastly, there are eleven tax deductions you can still take if you use the standard deduction.

Print Page

Required Minimum Distributions and The Secure Act

There is continuing confusion on how RMDs are treated since The Secure Act became law.

If you turned 70 1/2 years old in 2019, you are still subject to the old law and required to begin RMDs.  If you turn 70 1/2 in 2020, you do not need to take RMDs until you turn 72 years old.  If you have been doing RMDs, you need to continue.  Always use the IRS worksheet.  If you receive an RMD notice from your broker/dealer or retirement account custodian or trustee and you did not turn 70 1/2 years old in 2019 or have not been taking RMDs but you will be 70 1/2 in 2020, you should probably ignore it.  The IRS has issued Guidance here.  You should never just accept  an RMD notice with a calculated amount from a retirement custodian or trustee or broker/dealer; you should always

Is High Corporate Credit An Inceasing Risk to the Economy?

 Last year, the Fed commented on the historical level of corporate credit with rapid growth concentrated in the riskiest firms.  One risk is a market dislocation which causes an increase in credit spreads and a contraction of credit market liquidity.  In January 2020, Moody's Analytics questioned if overvalued equities increase the risk of high corporate debt, because the debt could impact profits and/or cash flow and this might promote a equity market downturn and increase pressure on companies with high debt.  At the present time, the market overvaluation is not at the level of 1999-2000.  Moody's Analytics has published a second commentary entitled, "How Corporate Credit Might Burst An Equity Bubble".  The article continues the discussion of a market downturn amplifying corporate leverage and the two feeding on each other.  The one data set you should watch