Download Recession Rebound Reaches Six-Year

Volume 9, July 2015
We Interrupt Our Usual Digest Article to Deliver A Special Consumer Message:
Coping with the IRS (or Any Entity) Data Breach
Data thieves; they have hit us where we shop, how we receive
health care benefits, and now, they have found their way into
our tax returns. The recent breach reported by the Internal
Revenue Service is unnerving when you consider how much
personal data is included on the return of not only the tax
filer, but other family members as well. Various government
agencies have published information to help you guard against
identity theft, as well as aid you if you fall victim to this growing
crime. Direct links to these websites and comprehensive PDF
documents will be available at Legacy’s web site, www.lptrust.
com. This article will summarize recommendations from
creditable authorities and websites on what to do (or not to do)
right now if you receive a letter from the IRS (or other entity)
that your data appears to have been stolen.
FIRST CRITICAL FACT: The IRS (or your bank or credit card
company) will not contact you by email to report a fraud alert.
This data breach has already spun off additional fraud attempts
of people posing as the IRS by both email and telephone. If the
IRS believes your data has been compromised, they will send you
a letter in the mail. Never provide information over the phone
to someone who has called you no matter how professional they
sound, especially if they ask you to provide confirmation of your
identity. Emails suggesting you have a problem with an account
are even more likely to be fraudulent—never click on a link
that is imbedded in these emails. If the email worries you, find
different ways to contact that company to investigate the issue.
PLACE A FRAUD ALERT: Call one of the nationwide credit
reporting companies, (Equifax 1‑800‑525‑6285, Experian
1‑888‑397‑3742, TransUnion 1‑800‑680‑7289) and ask for a
fraud alert to be placed on your credit report. The company you
call must contact the other two so they can all put fraud alerts on
your files. An initial fraud alert is good for 90 days and does not
prevent lenders or other third parties from accessing your credit
files; but it does require them to take additional steps to verify
that you have authorized the activity on your account. If they
perform this extra due diligence and believe it to be credible,
they still have the ability to open new lines of credit.
REVIEW YOUR CREDIT REPORT: As dictated by law, everyone
is entitled to review your credit report annually. Since there are
three credit bureaus, you can review your report once every
four months by using a different one each time. If you want
to see all of them at once, go to www.annualcreditreport.com
or call 1-877-322-8228. Later, there may be a small fee to do
an additional review within the same year, but in cases where
fraud or identity theft is a concern, fee discounts and waivers
may be offered. Monitoring your credit reports may be helpful if
someone tries to open new lines of credit using your information,
but it doesn’t necessarily stop them from succeeding.
CONSIDER PLACING A CREDIT (AKA SECURITY) FREEZE: A
security freeze prohibits, with certain specific exceptions, the
credit reporting agency from releasing your credit report or any
information from it without your expressed authorization. Since
most businesses won’t extend credit without reviewing credit
history, this should stop credit from being issued to anyone
but you. Once a “freeze” is in place, if you need to pursue
legitimate applications for credit you can “thaw” your credit
report by using a personal identification number or PIN (issued
by the credit reporting agencies). Freezing your credit files has
no impact whatsoever on your existing lines of credit, such as
your current credit cards; you can continue to use them as you
regularly would even when your credit is frozen.
Freezes are free to victims of identity theft who have filed their
case with a law enforcement agency, but non-victims are subject
to fees when freezing and thawing their credit files. In Wisconsin,
each action of placing, removing, or temporarily lifting the freeze
will cost $10. It is imperative that you freeze your credit with
all three bureaus in writing. You can download a PDF from our
website with instructions on how to freeze your credit.
IF YOU ARE A VICTIM: If you do find fraudulent activity, you
need to create an Identity Theft Report. An Identity Theft
Report is comprised of two documents; a filed complaint with
the Federal Trade Commission (FTC) and a police report
from your local police department. First, complete a fraud
complaint with the FTC by going to www.ftc.gov/complaint
or calling 1-877-438-4338. Following your complaint filing
you will be provided with an FTC Affidavit, which you need
to give to the local police in order to file a police report.
Combining your FTC Affidavit and your local police report
gives you an Identity Theft Report.
Unfortunately, identity theft cases continue to increase as
thieves find new ways to steal information that can be used
in a variety of fraud schemes. Even in death we don’t appear
to be protected; families have discovered multiple lines of
credit being opened using their loved ones’ identity following
a published obituary and death notice because too much
personal information, such as the exact birth date, was
included. In order to keep you more informed, we have posted
additional information regarding how to protect yourself from
identity theft on our website, www.lptrust.com. n
For ideas and steps you can take to protect your identity from data
thieves, please go to the back page of the Digest.
Economic and Financial Digest
Recession Rebound Reaches Six-Year Anniversary
The U.S. economy reached a milestone of sorts in June when
the recovery from the Great Recession hit the six-year mark.
There’s been more than the usual share of bumps along the
way, but the upturn always regained its footing. The last
pothole was traversed in the first quarter when the terrible
winter plus a West Coast port strike briefly knocked the
recovery off the rails. True to form, growth resumed in the
second quarter, although the rebound has been more subdued
than policy makers would have liked. Even with a decent
growth rate for the period of about 3 percent, which many
expect, growth for the entire first half of the year would fall
short of the 2.2 percent average pace over the six years since
the recovery began, which itself is about half the normal
growth rate seen in previous postwar upturns.
Yet, the Federal Reserve is expected to raise interest rates
before the year’s end, a prospect that has barely raised any
alarms. True, some critics feel the central bank should wait
a while longer, believing that the economy is still not strong
enough to withstand higher rates. But this view is held by the
minority of forecasters, both within and outside the Fed. At
its latest policy meeting on June 17-18, the majority of Fed
officials expected at least one rate increase this year, which
would be the first hike in nearly a decade. The liftoff date
remains up in the air depending on how the economy performs
over the summer months.
The Fed, of course, has wanted to start normalizing policy for
some time, but its efforts have repeatedly been thwarted by the
economy’s failure to live up to expectations. It’s possible that
the central bank is once again being overly optimistic about the
economy’s prospects, prompting another delay in rate hikes.
Legacy Core Equity Portfolio
The core equity portfolio is designed to ensure broad participation
in the equity market, with less than average market volatility, while
effectively producing a meaningful performance edge for our clients.
We use an active valuation strategy that employs quantitative and
fundamental analysis, focusing on individual stock selection in
conjunction with economic sector discipline. Securities are selected
through a process incorporating quantitative and fundamental
analysis with the qualitative judgment of our senior investment
professionals. This rigorous investment process strives to look
beyond mainstream consensus opinion to construct portfolios
designed to achieve your investment goals and weather varying
market conditions.
The chart to the right shows the sector weightings in the Core
Portfolio as of June 30, 2015.
Odds are, however, the economy will perform as advertised this
time, allowing the long-awaited liftoff to take place later this
year. Having lived with near zero interest rates for almost seven
years, there’s understandably some trepidation about how the
financial markets, much less the economy itself, will respond.
There’s at least one group—savers—who believe that higher
rates are long overdue.
Getting Long in the Tooth
With six years in the books, the current upturn ranks among the
longest of the postwar period. On average, the eleven recoveries
since World War II expired 58 months after they started. This
one is entering its 74th month and still counting. To be sure,
it has a ways to go before catching up to the record 1991-2001
expansion, which spanned 120 months, or the one in the
1980s that lasted 92 months. It is also well short of the 1961-69
upturn, which was fueled in its later stage by military spending
related to the Vietnam War. Measured against peacetime
recoveries, the current recovery is tied for third longest, just
matching the 2001-2007 cycle, which it is poised to exceed.
But what it boasts in length, it lacks in vigor. As noted earlier,
the current recovery has progressed at a much slower pace
than previous recoveries, something that sets it apart for
another reason. Most previous upturns were mirror images
of the recessions from which they emerged: the deeper the
downturn, the stronger were the subsequent recoveries. This
one, however, followed a different script, as the recession
that preceded it was the deepest since the 1930s. Instead of
exploding out of the starting gate, it staggered to its feet and
has wobbled for most of its existence.
Core Equity Portfolio Composition
Consumer Descretionary – 12%
Consumer Staples – 8%
Materials – 4%
Health Care – 16%
Information
Technology – 12%
Utilities – 4%
Industrials – 12%
Energy – 4%
Financials – 28%
Past performance does not predict future results. Current and future results may be lower or
higher than those referenced in this newsletter. Investments are not FDIC-insured, nor are they
deposits of or guaranteed by a bank or any other entity. Investment return and principal value
will fluctuate and investments may lose value.
Length of Postwar Expansions
Months
140
120
120
106
100
92
80
73
60
40
37
45
39
73
58
58
36
24
20
12
0
45 49 54 58 61 70 75 80 82 91 01 Avg
Current
Starting Date
There’s no shortage of explanations as to why the current
recovery departed from past cyclical patterns. Rather than
debating their relative merits, it would be more useful to look
at the implications this departure might have for the future. On
this score, there is both good and bad news. The good news is
that the very lackluster pace of the upturn increases the odds it
will last longer because the usual inflationary forces that build
up as a recovery matures, leading to a growth-stifling tightening
of monetary policy, are being held at bay. The bad news is that
the inability to break out of a slow-growth trajectory makes
the recovery more vulnerable to external shocks, such as an
oil price surge, the Greek debt crisis and the unfolding stock
market turmoil in China.
Walking a Tightrope
Clearly, the Fed is coping with a delicate balancing act. It
must weigh the risks of waiting too long before raising interest
rates, allowing inflationary forces and other imbalances to gain
traction, against the risk of acting prematurely, which could
choke off the vulnerable recovery. The central bank has dealt
with these risks many times in the past, both successfully and
unsuccessfully. More often than not, it has waited too long and
was forced to react by harshly clamping down on the monetary
brakes, bringing on a recession. As a previous Fed chairman,
William McChesney Martin, famously noted some 60 years ago,
the most challenging task of the Federal Reserve is to know
when to take away the punch bowl before the party heats up.
Of course, the current party is far from overheating and
the Fed has no intention of taking away the punch bowl,
only lowering the fill level a bit. As Fed Chairwomen Yellen
reiterated at her press conference following the latest policy
meeting, the step back from easy money will be gradual,
whenever it begins, and rates will remain low for some time to
come. This cautious approach is in deference to the erratic and
subpar performance of the economy throughout the recovery
as well as its modest growth prospects over the next several
years. As much as the Fed wants to avoid overstaying the
course, it also needs to keep the growth engine humming and
feel reasonably confident that inflation will move up towards
its long-elusive 2 percent target.
There are compelling reasons to increase interest rates as soon
as the economy can tolerate it. For one, the Fed needs to be
forward looking when making decisions, as policy changes
affect the economy with a lag. Hence, any policy move has to
take into account where the economy will be in six or nine
months. A small step now may prevent larger more disruptive
actions later on. For another, it’s important to build up a
cushion of higher rates as soon as possible to give the Fed some
leeway to cut rates if and when the economy stumbles again.
With short-term rates at nearly zero, the Fed has no room to cut
further should a recession suddenly appear.
Double-Edged Sword
It’s also important to remember that interest rates cut both ways,
as they are a cost to borrowers as well as a reward for savers.
There is no question that borrowers have benefited immensely
from the low cost of funds. Not only have businesses and, to a
lesser extent, households been able to borrow cheaply to finance
operations and sustain consumption, they have also reduced debt
burdens by refinancing copious amounts of bonds and mortgages
at lower rates. The resulting balance sheet improvement,
reinforced by appreciating asset values, has partially compensated
for weak income gains and, hence, supported stronger consumer
spending than would otherwise be the case.
But seven years of low rates have also taken a toll on households
who traditionally rely on interest income to sustain living
standards. It’s unclear how much of an effect this has had
on overall consumption, but the removal of this source of
purchasing power has been dramatic. Just prior to the recession,
slightly more than 11 percent
of personal income came from
It’s important to
interest receipts. That share has
fallen to just over 8 percent in
remember that
recent months. Not since 1964
interest rates cut
has interest receipts constituted
such a small proportion of
both ways; they are
income; back then, Regulation
a cost to borrowers
Q ceilings imposed strict
as well as a reward
limits on the interest rate
financial institutions could
for savers.
pay on savings accounts. Not
surprisingly, there is a vocal
constituency that believes low interest rates penalize savers,
particularly retirees. Keep in mind that this group used to have
a stronger safety net to rely on to complement interest income,
as most families received a steady income stream from defined
benefit plans. That’s no longer the case. According to the
Department of Labor, the share of households with such plans
has dropped precipitously, accounting for only 30.5 percent of
all retirement plan participants. That compares to a 75 percent
share in 1975. A far larger share of households today has their
retirement funds in defined-contribution plans, 401ks and IRAs,
which generate a much more uncertain income stream.
Continued next page
Recession Rebound Reaches Six-Year Anniversary
Continued from page three
Tough Time For Savers
Percent
19.0
Bubble Risk
17.0
Indeed, the prolonged period of ultra-low interest rates has
raised another concern that’s on the Fed’s radar screen. To
compensate for low yields, savers and investors in general have
taken on more risks to generate income, channeling funds into
speculative assets such as equities and high-yield bonds. Many
feel that the unprecedented bull market in stocks over the past
six years is largely a response to the Fed’s easy money policies.
According to these critics, the longer rates are kept at rockbottom levels, the greater the odds that a stock market bubble
will inflate—and eventually burst with dire consequences when
the punch bowl is taken away.
The Fed, of course, is not dissatisfied with rising stock prices,
as the wealth boost from improved portfolios has contributed to
the recovery, even as most of the gains have accrued to wealthier
investors. However, Fed chair Yellen has expressed concern that
some investors may be taking on too much risk, and worries
about the possible financial turbulence that may occur when
rates start to move up. For that reason, the Fed has gone to great
lengths to prepare the markets for an eventual policy move,
hoping that ongoing forward guidance of its intentions will lead
to a smooth transition to higher rates. Only time will tell whether
the events occurring in Greece and China will be enough to
convince the Fed to postpone its plan to increase rates.
15.0
13.0
11.0
9.0
7.0
Interest Income as a % of Personal Income
5.0
3.0
89 91
93
95
97
99
01
03
05
07
09
11
13
15
Simply put, the prospect of higher interest rates should
not be a cause for alarm. The financial markets might or
might not overreact to the initial move, but the Fed has to
do what’s best for the economy. Given the numerous false
starts since the recovery got underway six years ago, there’s
understandably much skepticism as to whether the modest
rebound in activity following the winter slowdown will usher
in a period of sustained growth that can withstand higher
interest rates. But the economy has clearly broken out of the
crisis environment that warranted a zero interest rate policy
and it’s doubtful that a nudge up will choke off the recovery
shortly after its sixth anniversary. Besides, it might give savers
something to celebrate. n
Avoiding Identity Theft:
Ideas to Protect and Monitor Your Identity Security
• Never respond to email alerts warning you of a breach; contact the
entity by a phone number you research yourself if you are worried;
• Monitor credit bureau reports and consider a credit freeze if you
don’t need to open new lines frequently;
• Shred all personal documents;
• Consider credit freezes on minor children, high school graduates or
college students, and recently deceased loved ones;
• Never provide information over the phone unless you initiated the
call and feel secure about who you are talking to;
• Social security cards should be kept in a secure location and never
in a purse or wallet;
• Know at all times what is in your wallet by making a photo copy of
your credit cards, health insurance cards and other personal items;
• Checks should never include your social security number and
do not write the account number of the bill payer on your checks
submitted for payment;
• The personal representative of an estate should notify all three credit
bureaus of a death both by telephone and in writing.
Additional information including printable PDF brochures is available
at www.lptrust.com.
Sites with helpful information:
www.ftc.gov/idtheft
www.identitytheft.gov
• Remove labels from prescription medicine bottles before disposing;
www.consumer.ftc.gov/topics/privacy-identity
• Review all account statements from banks, investment companies,
credit cards and health insurance monthly;
www.consumer.ftc.gov/articles/0272-how-keep-your-personalinformation-secure
• Take steps to make sure your computer, all files and passwords are
safe from intruders or hackers;
www.privacy.wi.gov
To learn more about Legacy and our services, visit www.lptrust.com or call 920.967.5020.
Two Neenah Center | Suite 501 | Neenah, WI 54956 | 920-967-5020 | www.lptrust.com
© 2015 Legacy Private Trust Company. All rights reserved.