May 8, 2014
- How one in every 25 U.S. households willingly surrendered good money to the IRS
- Introducing the Janet Yellen drinking game
- The shareholder revolt that folded like the proverbial lawn chair
- Jim Rogers on why he’s not buying gold… but he’s not selling either
- Reader musings: Why more businesses are dying than being born
- Obama as “Emperor of the World”? What’s happening July 1
The number is staggering: Americans forfeited $5.7 billion to the IRS in 2011.
The reason is even more staggering: Giving up the money was the only way they could make ends meet.
Or so we can divine from a Bloomberg article this week. “For decades, Americans’ homes were their piggy banks,” it says. “As values rose, they refinanced or took out second mortgages. Since the housing collapse of 2008, that’s often no longer an option.
“Taking money from a 401(k) — and worrying about the consequences later — became a more attractive alternative and a record number of Americans made early withdrawals in 2010.”
Fully 4% of U.S. households forked over the early-withdrawal penalty in 2011. The IRS’ total take was the aforementioned $5.7 billion. And that’s actually down a bit from 2010.
Uncle Sam’s take from early withdrawal penalties has grown 37% since 2003… and that’s after adjusting for inflation. Coincidentally, the total amount of home equity loans outstanding has shrunk 38% since peaking in 2007.
Personal finance gurus say it’s a lousy idea to borrow from your retirement plan in the first place. “You’re losing the growth that you could have earned on the money you withdraw,” says Terry Savage.
But then if you lose your job, you have 60 days to repay in full before you owe the early-withdrawal penalty. To say nothing of having the loan amount counted toward your taxable income that year. “They get hit with the penalty at exactly the time when they’re the most vulnerable,” says Reid Cramer of the New America Foundation. “So it’s a real double-whammy.”
[Ed. note: Presumably, if you’re reading The 5, you’re not in such dire straits. But you might still feel as though you don’t have enough squirreled away for retirement.
That’s why we developed an aggressive “catch-up” plan last year. Fair warning: It’s not for everyone. But it might help you achieve the retirement of your dreams sooner than you ever imagined. Decide for yourself by following this link.]
Major U.S. stock indexes are all in the green this morning. The Dow briefly touched an intraday record and as we write sits at 16,572.
But the shakeout in the “mo-mo” stocks is gathering speed. “More former highfliers had their wings clipped yesterday,” says Greg Guenthner of our trading desk. “Groupon shares tanked more than 20%. Aegerion Pharma fell 21%. FireEye, a popular cybersecurity play, fell as much as 25% after announcing terrible earnings.
“In short, it’s not looking good for growth stocks. In two short months, these momentum names have transformed from kingmakers to villains.”
There’s not much “news” for traders to react to this morning. First-time unemployment claims fell sharply last week, but the number is becoming so volatile week to week it’s nearly meaningless.
Fed chairwoman Janet Yellen is testifying to Congress for a second day, but it’s unlikely she’ll say anything more interesting than yesterday’s “The recent flattening in housing activity could prove more protracted than currently expected.” Shocking, we know…
“How a Popular Two-Letter Word Is Undermining Your Credibility,” reads a headline at Fast Company.
“Everyone… does it,” says the article — prefacing sentences with the word “so.” As in, someone you just met asks what you do and you say, “So I’m the global brand director for our portfolio of…”
Bad habit, writes Hunter Thurman: “Beginning your sentence with ‘so’ orients your message and subconsciously alerts your audience that what you’re about to say is different than what you’ve been talking about up until this point… ‘So’ demonstrates that you’re not 100% comfortable with what you’re saying.”
Which brings us back to Yellen’s testimony…
Economics blogger Robert Wenzel noticed something interesting six months ago during her confirmation hearings: “Whenever she faced a hostile question, she started her reply with ‘so.’ The ‘so’ makes no grammatical or logical sense. But she did put it at the start of every hostile question.”
It continued in March during her first news conference as chairwoman. Wenzel analyzed the 15 reporter questions. “With seven of those questions, she started the answer with the word ‘so,’ with the other eight she did not. Indeed, the most challenging questions did come from the reporters, where she replied starting with the word ‘so.'”
Heh… Wenzel hasn’t weighed in on her testimony this week. But your editor just scrolled to a random question from yesterday’s archived video on the C-SPAN website. It was a Republican senator asking about the challenges of small business facing uncertain fiscal and monetary policy from Washington. Sure enough, she prefaced her answer with “so.”
Yellen’s next news conference immediately follows the next Fed meeting on June 18. If you’re up for a drinking game at 2:30 in the afternoon (earlier if you’re not in the Eastern time zone), it could be amusing…
The shareholder revolt at Bank of America was over before it began.
As we mentioned yesterday, BAC’s shareholder meeting promised a bit of fireworks — coming only days after the firm came clean about a $4 billion accounting “error” dating back to the 2008 financial crisis.
The retirement plans for California state workers and teachers are major BAC shareholders. They announced beforehand they would vote to kick out a director who was on the audit committee at the time of the foul-up… and to dismiss PricewaterhouseCoopers as BAC’s outside auditor.
In the event, all 15 nominees to the board were elected. And PwC was retained. And the bank’s executive pay plan was approved with 93% of the votes in favor. Proof again the banks will do what the banks will do.
We got a considerable amount of reader interest yesterday in the “Executive Dividends” of the type Warren Buffett gets from Bank of America. And with good reason — they’re a way ordinary folks like you can actually make back some of the money you lost during the bailouts. To learn more about this low-risk way to make five times your money, check out this presentation.
Gold is stuck in the mud at $1,290.
“There is going to be chaos out there over the next decade,” says adventure capitalist Jim Rogers, making his best case for gold. “It could be a monetary disaster or even war. This turmoil could come from a gigantic debt problem, for instance, which could cause world economies to fall apart as well.
“Politicians,” Rogers says in an interview at the Sprott Global site, “don’t know what to do besides printing money — so that’s what they end up doing. We will see a wave of turmoil from all this that will surely take gold higher.
“I am on the record extensively since the fall of 2011, saying that gold would be going down for quite some time. Well, correcting, I should say. That is still happening; I am not rushing in to buy gold. I also have not sold any of my gold. A 50% correction from the top would put gold under $1,000. I am not predicting that will happen, but it is possible.”
“Really,” a reader writes after yesterday’s episode, “are you surprised that Americans are not starting businesses like they used to?”
[No, but please, go on…]
“With the attitudes of youth about business so well publicized, it is a wonder that any new businesses appear at all.
“If you look at those small firms that are being set up, most are service oriented, taking care of pesky problems with houses, gardens, cars, computers et al. by young people who went to work right out of high school. Just look at the Yellow Pages of the phone books, while they still publish.
“If banks were smart, not just servicing the oligarchs, they would be fanning the small business market, solving the unemployment problem in that time-honored way, but of course, they can’t. The government forces them to finance government.”
The 5: “Forces” them? Seriously?
If you could borrow money from the Fed at near-zero rates and plow it into Treasury debt yielding 2.6% — and leverage it up to amplify that return several times over — what would you do? Would you say, “No thanks, I’d rather lend it to someone who wants to open a hair salon”?
Didn’t think so…
“Is it any wonder?” another reader chimes in on the lack of startups. “With ever increasing government can’ts and musts, kids can’t even sell lemonade most places.
“Why would anyone want to begin a new business in the United Soviet States… or is Fascist States of America? Not much difference, anyway. In one, government owns all the business — in the other, business owns all the government. In both, government and business are the same thing.
“And as I understand it, beginning July 1, Mr. Obama, with his newly armed IRS, lays claim to be Emperor of the World. He might even get away with it.”
The 5: Not 100% sure what you’re alluding to… but July 1 is the date the most onerous provisions of the Foreign Account Tax Compliance Act (FATCA) will kick in. This is the “virtual Berlin wall” Addison Wiggin and I have been writing about in Apogee Advisory for nearly three years.
Starting July 1, foreign banks and brokerages must disclose the holdings of U.S. customers to the IRS. If the institution doesn’t wish to comply, U.S. account holders are then subject to a 30% withholding tax on income from American sources.
Rather than heel to the IRS, many foreign banks and brokerages have done the only sensible thing: They’ve told their U.S customers to take their business elsewhere.
FATCA was tucked into a “jobs bill” way back in 2010. It was sold as a crackdown on tax evasion by “the wealthy.” The congressional Joint Committee on Taxation figures FATCA will generate $8.7 billion over 10 years.
That’s an average $870 million in a single year, or 0.18% of this year’s federal budget deficit. [Come to think of it, it’s only 15% of the $5.7 billion that not-so-wealthy people fork over to the Treasury in early-withdrawal penalties from their 401(k)s.]
This ham-fisted grab for such a paltry amount of revenue is what’s driving record numbers of Americans living overseas — few of whom are “wealthy” — to surrender their U.S. citizenship.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Is FATCA a precursor to wider capital controls? You can’t rule out the possibility.
That’s why we’ve long recommended what we call “offshore gold storage programs” in Apogee Advisory. They’re the best way we know of to insulate a chunk of your hard-earned assets from a sinking U.S. dollar and shaky U.S. banks. We’ve put together a special report describing how to get into these programs; it’s available to every Apogee reader. If you’re not among them, you can remedy that at this link.