As Stocks, Bonds and Gold Fall, Where’s the Cash Going?

By Michael Santoli 

June is when spring turns to summer, but this year it’s felt like fall for investors in nearly every market.

Bonds have tumbled in value, from Treasuries to corporate debt to municipals, as the focus on a possible end to the Federal Reserve's asset-buying prompted heavy withdrawals from fixed-income funds. Gold is collapsing and is on its way to posting the metal’s worst quarter on record. Non-shiny commodities have also been weak. Emerging markets have led the declines, as China’s banking system heaves. Stocks are down from their highs of May, though they’ve bounced the past couple of days.

This recent across-the-waterfront swamping of most every investment market raises two key questions: Where is the money that is exiting these assets going? And what happened to the balanced interplay among markets that produced offsetting movements and flattered a diversified portfolio?

The question of where the money is going is far more complicated than it sounds. While it’s common to characterize money entering and exiting markets as “flows,” it’s not at all like a torrent of water heading in a single direction, producing increased pressure that automatically propels prices.

While it’s true that more cash allocated to a certain asset increases the identifiable demand for certain investments, the available supply is almost always far in excess of the amount traded. A $30 billion net inflow into stock mutual funds in a month now qualifies as a big equity grab, yet in a $16 trillion stock market there’s always plenty to go around.

Further, consider that when money “enters” the stock market, it’s used to buy stocks from sellers who already own them, thereby producing the equivalent amount of cash in their accounts. As detailed nicely on www.capital-flow-analysis.com, money is forever moving in both directions in every market, cash being swapped for securities in equal amounts. Price changes are simply a function of the relative motivation, or urgency, of buyers compared to that of sellers.

Temporary paralysis

With that in mind, clearly the past month has been about greater urgency among sellers of bonds,stocks and commodities to reduce exposure, without much motivation to immediately reallocate it elsewhere. Proceeds of security sales can be immediately recycled into the same kind of investment, or another market, or used to pay down debt -- or turned into a boat, a vacation or a diamond ring.

So the evident excess of urgency by sellers across most markets, without any asset obviously capturing an outsize percentage of their newly raised cash, implies a sort of broad, temporary paralysis. The default way-station for cash raised is bank and brokerage accounts. When the outlook is considered uncertain and conviction wanes, it sits there longer.

The U.S. dollar has been rebounding sharply, implying a greater willingness among investors to hold short-term dollar instruments such as Treasury bills, either to play the currency appreciation or just wait.

As the initial flight dynamic has matured, and the spasm of rising Treasury yields has settled down a bit, the markets are hinting, hesitantly, that U.S. equities could end up being a relative beneficiary of this turmoil, as investors try to make their peace with a “new” range of interest rates.

Calls for a great rotation from bonds into stocks have been loud all year. It’s hardly a sure thing that a flood of money will obediently pivot away from fixed-income into equities with great haste. Yet on the margin, plenty of the money being knocked loose from bonds will find its way into stocks.

Of course, stocks more than doubled since March 2009 with money being yanked from stock vehicles almost the entire time. So, conversely, greater inflows in themselves wouldn’t automatically drive prices higher.

Municipal bonds have recovered a bit after a panicky selloff in recent weeks. Plenty of collateral damage has been done, and it is an obvious place for bargain hunters to prowl. The iShares S&P National AMT-Free Muni Bond (MUB) fund fell a steep 4.1% from Memorial Day through Tuesday, lifting its federal-tax-exempt yield to near 3%, before the gaining more than 2% Wednesday as bond markets calmed down.

A compatibility question

For long-term investors, a fresh conundrum is the way familiar correlations among various asset classes have broken down for the moment, fouling many carefully constructed portfolios meant to capture their ebb and flow in relation to one another.
During most of the past six years, the markets have oscillated between periods of “risk-on,” when stocks, commodities and riskier currencies thrived, and “risk-off,” when Treasuries and the U.S. dollar were coveted.

Since early this year, when stocks soared as Treasuries stayed strong with their yields depressed, this interplay changed. And with the latest scare related to Fed-policy rhetoric, both stocks and bonds fell in value.

As a result, a new class of risk-parity mutual funds, which seek to mix various assets to play the familiar to-and-fro, have been hammered. AQR Risk Parity (AQRIX) fell more than 6% in the week through Thursday and 10% in the last month -- representative of this whole group of intricately engineered funds.

Billed as an improvement on typical 60%-stock/40%-bond asset allocation funds such as Vanguard Wellington (VWELX), these portfolios have squandered whatever advantage they had built up over the plain-vanilla approach. While not an outright indictment of the risk-parity approach, their slide suggests some kind of climate change occurring in markets.

In the ‘80s and ‘90s, of course, bond and stock values trended higher in tandem. The question now is whether, as Jim Paulsen of Wells Capital Management has argued, rising bond yields from such low absolute levels are perfectly compatible with a strong stock market, as both represent confidence in the economic outlook growing among investors.

If this happens, the adjustment won’t necessarily be instant or smooth. Too much of the stock market’s leadership this year came from dividend-centric stocks whose main appeal came from the lousy perceived income alternatives out there, given low and stagnant government-bond yields.

That picture has been disturbed, and greater confidence in growth-oriented investments will probably be needed to carry the market higher from here.

Exit Signs Blurry for Private Equity

By Mike Spector | The Wall Street Journal 

It all was going so well. For the first 5½ months of the year, private-equity firms took advantage of soaring markets and eager investors to raise about $35 billion by selling stakes in their companies, not to mention billions of dollars more through initial public offerings.

The rush for cash prompted some buyout executives and bankers to view 2013 as the year of the exit, a moment to reap what they sowed, including on some highly indebted, controversial deals just before the eruption of the financial crisis. Leon Black, Apollo Global Management LLC co-founder, in April called the market's receptiveness to such sell-downs "biblical."

Then the markets turned. Stock and bond prices fell amid fears of an end to the Federal Reserve's stimulus, and the resulting market turbulence this month threatens to disrupt the sales planned by private-equity firms and possibly put the brakes on a blistering pace of big paydays for their top executives and investors.

The public offering of HD Supply Holdings Inc., a construction-materials supplier, priced Wednesday at $18 a share, far below the range of $22 to $25 the company previously expected. Private-equity-owned information-technology company CDW Corp. on Wednesday priced its IPO at $17, also well below the company's previously expected range of $20 to $23. The private-equity owners have decided not to sell their stakes in either deal.

At the same time, Five Below Inc., a retailer owned by private-equity firm Advent International Corp. and others, moved ahead with a share sale this week after a delay last week that cited market conditions.

"The exits will be more difficult because the stock market is seemingly pretty volatile," saidChristina Padgett, a Moody's Investors Service analyst. Buyout firms "have the ability to be patient, although the limitation to that is that they've been holding on to these investments from a historical perspective longer than is typical. They may feel more pressure to return capital" to investors, she said.

Others say the markets aren't spooking private-equity firms. The exits are "still really zinging along," said Michael Ryan, a lawyer at Cleary Gottlieb Steen & Hamilton LLP who specializes inprivate equity. 

Such investment exits are crucial for private-equity firms because they create deal profits for the firms' executives and the pension funds, universities and wealthy individuals that give them money to invest. When buyout firms successfully cash-in on deals years later, it helps them raise a new round of money from investors—a virtuous cycle that can be damaged if selling down an investment doesn't deliver the desired profits.

Private-equity firms and some other investors so far this year have sold more than $35 billion of U.S.-listed shares in already-public companies they own, on pace to eclipse the record of roughly $37 billion sold last year, according to Dealogic, a data provider that has tracked the transactions since 1995.

Meanwhile, private-equity-owned companies have raised more than $10 billion in U.S.-listed deals going public so far this year, on track to exceed the roughly $13 billion in IPOs in 2012, though likely to be short of the record $27 billion in 2011.

Despite the recent market volatility, there is "the potential for a trifecta of open windows, and all three windows being open means you're going to see a lot of activity," said Jim Coulter, co-founder of private-equity firm TPG, referring to share sales, IPOs, and company sales. He also pointed to so-called dividend recapitalizations, where companies pay investors with borrowed money.

Many of the deals being sold off involve companies bought in so-called leveraged buyouts during the cheap-debt boom preceding the financial crisis. And they could make money for their owners even with a few bad apples.

Among 29 of the largest takeovers by private-equity firms completed between 2005 and 2008, theequity investments that buyout specialists made in the deals increased 21% to roughly $142 billion as of the end of 2012, according to an analysis for The Wall Street Journal by Hamilton Lane, a Philadelphia firm that manages and advises on more than $158 billion in private-equityinvestments. By comparison, the Standard & Poor's 500-stock index rose about 14% between the end of 2005 and 2012. 

The upshot is the buyout firms gained about $25 billion on their equity investments alone across all the deals, even when including the record buyout of Texas power giant TXU Corp. that is likely headed for bankruptcy court. Private-equity firms typically finance takeovers with a small amount of their own money and a larger slug of borrowed funds, which can amplify their returns. The Hamilton Lane analysis surveyed 29 buyouts worth more than $5 billion, including debt, and the gains reflect both paper and realized profits for the firms and their investors.

"During the global financial crisis and immediately afterward, there were predictions that this group of deals was going to be the end of the private-equity industry," said Hartley Rogers, Hamilton Lane's chairman. The gains were "not heroic, but far from being a major disaster."

Take Realogy Holdings Corp., a real-estate agent owner purchased by Apollo in 2007. The deal looked disastrous when the housing market crashed and the company's revenue plunged. But Realogy reworked debts, cut more than 4,000 jobs and is now eight months into trading on the New York Stock Exchange. Its shares are up around 79% since their October public debut, though they are down more than 11% since their peak May 21. 

Employees can suffer when buyout firms cut jobs and other expenses, and creditors sometimes take losses when debts get reworked, even when they agree to such moves. Bonds can decrease in value when a company struggles, forcing early investors to renegotiate terms or ride out the storm in the hopes prices return to their original full-value level.

"To the extent you were one of the [full-price] buyers on day one, you had quite a wild ride, which is not what you're supposed to have," said Gautam Khanna, a portfolio manager at Cutwater Asset Management, a firm that manages $29 billion and makes debt investments. But government stimulus made credit markets inviting, allowing companies to refinance debts, he said. "If that had not been the case, arguably many of these LBOs might have had bad outcomes."

Not all deals are successes. Apollo and other buyout specialists in 2006 purchased Linens 'n Things Inc. for $1.3 billion, using $260 million of cash and adding more than $1 billion of debt to the struggling retailer. Linens filed for bankruptcy protection in May 2008 and eventually liquidated, eliminating some 17,000 jobs. While Apollo lost all it had invested in the retailer, the money amounted to 2% of its most-recent buyout fund at the time, and the fund overall ended up delivering profits.

Others have thrived. Blackstone Group LP in April took SeaWorld Entertainment Inc. public, tripling its roughly $1 billion investment made in December 2009 when including money returned to investors and the value of the firm's remaining ownership stake. KKR & Co. in April sold shares ofDollar General Corp. for $812 million, 5.6 times its original investment of that stake in July 2007. 

 Matt Jarzemsky contributed to this article. 

 Write to Mike Spector at mike.spector@wsj.com and Telis Demos at telis.demos@wsj.com 

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The student loan market has increased significantly over the past several years

Todd Vermilyea, Senior Associate Director, Division of Banking Supervision and Regulation

Private student loans

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

June 25, 2013

Chairman Johnson, Ranking Member Crapo, and other members of the committee, thank you for the opportunity to testify at today's hearing. First, I will discuss recent student loan market trends and the portfolio performance of both government-guaranteed and private student loans. I will then address the Federal Reserve's approach to supervising financial institutions engaged in student lending and close by briefly discussing the implications of rising student debt levels and default rates on other forms of lending.

Background

The Federal Reserve has supervisory and regulatory authority for bank holding companies, state-chartered banks that are members of the Federal Reserve System (state member banks), savings and loan holding companies, and certain other financial institutions and activities. We work with other federal and state supervisory authorities to ensure the safety and soundness of the banking industry and foster the stability of the financial system.

Student Loan Market

The student loan market has increased significantly over the past several years, with outstanding student loan debt almost doubling since 2007, from about $550 billion to over $1 trillion today.Balances of student loan debt are now greater than any other consumer loan product with the exception of residential mortgages, and it is the only form of household debt that continued to rise during the financial crisis. Outstanding education loan debt is now greater than credit card debt, home equity lines of credit, or auto debt on consumers' balance sheets.

Since 2004, both the number of student loan borrowers, and the average balance per borrower, has steadily increased, according to data compiled by the Federal Reserve Bank of New York. In 2004, the share of 25-year-olds with student debt was just over 25 percent; today, that share has grown to more than 40 percent. At the end of 2012, the number of student loan borrowers totaled almost 40 million and the average balance per borrower was slightly less than $25,000. In 2004, the average balance was just over $15,000. In 2012, roughly 40 percent of all borrowers had balances of less than $10,000; almost 30 percent had balances between $10,000 and $25,000; and fewer than 4 percent had balances greater than $100,000.

This sharp increase in student loan borrowing likely reflects a number of factors. Demand for student loans has risen in line with the increasing cost of higher education; increasing enrollment in post-secondary education; a relative decline in household wealth brought about by the financial crisis and the ensuing recession; and more favorable terms on government-guaranteed loans.

The rising cost of higher education and the decline in wealth coincided with a difficult job market, which may have encouraged more people to enroll in higher education, or stay in school to pursue advanced degrees immediately after graduation. Notably, enrollment in degree-granting institutions increased at an annual rate of about 5 percent between 2007 and 2010, compared with a historical increase of 3 percent since 1970. It is also important to note that underwriting standards and terms of federal student loans have been favorable relative to other borrowing alternatives over the past few years. As a result, households likely substituted student loans for other sources of education financing, such as home equity loans, credit card debt, or savings. All of these factors have contributed to the rapid rise in student loan debt levels and seem likely to have been influenced by the financial crisis.

The student loan market is bifurcated into government-guaranteed loans and private student loans that are not guaranteed.¹ Government-guaranteed loans represent approximately 85 percent of total student debt outstanding, and private loans represent just 15 percent. While federal student loan originations have continued to increase each year, private loan originations peaked in 2008 at roughly $25 billion and have since dropped sharply to just over $8 billion. New government-guaranteed student loan originations topped $105 billion in 2012, comprising 93 percent of all new loans.

Terms and conditions of government-guaranteed loans are generally set by a federal formula established by the Congress. Although a credit check is not required for most types of government-guaranteed loans, borrowers may be turned down if they are delinquent on an existing student loan. Private loan standards are set by the lending institutions and generally require full underwriting, including a credit check. Private loans also increasingly require a guarantor. Most government-guaranteed and private student loans provide the borrower with a six-month grace period after leaving school before payments begin.

Performance of Student Loan Portfolios

In line with the rapid growth in student loans outstanding, the number of student loans--private and guaranteed--that are currently delinquent has risen sharply as well, standing at 11.7 percent of all outstanding student loans in 2012.² However, some 44 percent of student loan balances are not yet in their repayment periods, and if these loans are excluded from the data pool, the effective delinquency rate of loans in repayment roughly doubles to 21 percent. By comparison, in 2004, only 6.3 percent of student loans were in delinquency.

According to the Consumer Financial Protection Bureau (CFPB), of the $1 trillion in total outstanding student loan debt, $150 billion consists of private student loans. It is important to note that the private student loan market includes loans made not only by banks, but also loans made by credit unions, state agencies, and schools themselves. The rate of delinquency among these loans is roughly 5 percent, according to the CFPB, less than half of the delinquency rate for all outstanding loans.

There are likely a number of factors underlying the difference between the performance of the government-guaranteed and private student loan portfolios. For instance, underwriting standards in the private student loan market have tightened considerably since the financial crisis. Almost 90 percent of these loans now require a guarantor or cosigner, usually a parent or legal guardian.

Federal Reserve Supervision of Student Loan Market

The Federal Reserve has no direct role in setting the terms of, or supervising, the student loan programs. The Department of Education is responsible for administering the various federal student loan programs, which, as noted earlier, comprise about 85 percent of the student loan market. The Federal Reserve does, however, have a window into the student loan market through our supervisory role over some of the banking organizations that participate in the market. We share this role with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration.

Federal Reserve supervision of participants in the student loan market is similar to our supervision of other retail credit markets and products. Institutions subject to Federal Reserve supervision--including those with significant student loan portfolios--are subject to on-site examinations that evaluate the institution's risk-management practices, including the institution's adherence to sound underwriting standards, timely recognition of loan deterioration, and appropriate loan loss provisioning, as well as (to a limited degree) compliance with consumer protection standards.

In addition to our work at specific institutions, the Federal Reserve also takes a horizontal view of the student loan market across multiple firms during the Comprehensive Capital Analysis and Review (CCAR) exercise, an important supervisory tool that the Federal Reserve deploys, in part, to enhance financial stability by assessing all exposures on bank balance sheets. CCAR was established to ensure that each of the largest U.S. bank holding companies: (1) has rigorous, forward-looking capital planning processes that effectively account for the unique risks of the firm; and (2) maintains sufficient capital to continue operations throughout times of economic and financial stress. The CCAR exercise collects data on banks' student loan portfolios, delineated by loan type (federal or private), age, FICO Score, delinquency status, and loan purpose (graduate or undergraduate).

The banks submitting student loan data for CCAR held just over $63 billion in both government-guaranteed and private student loans at year-end 2012, of which $23.6 billion represented outstanding private student loans.³ At the end of 2012, CCAR banks reported that just over 4 percent of private student loan balances were in delinquency, but more than 21 percent of government-guaranteed student loan balances were delinquent. Nevertheless, the delinquency rate for government-guaranteed student loans has shown improvement over recent quarters, dropping from a high of more than 23 percent.  Likewise, the delinquency rate for private loans at CCAR firms trended upward through mid-2009 but has since moved down, which is comparable to the performance of the overall private student loan market.⁴ 

The Federal Reserve and the other federal banking agencies that are members of the Federal Financial Institutions Examination Council (FFIEC) have jointly developed guidance outlining loan modification procedures: the Uniform Retail Credit Classification and Account Management Policy (SR 00-08). This guidance discusses how banks should engage in extensions, deferrals, renewals, and rewrites of closed-end retail loans, which include private student loans. According to that guidance, any loan restructuring should be based on renewed willingness and ability to repay, and be consistent with an institution's sound internal policies.

In keeping with this guidance, the Federal Reserve encourages its regulated institutions to work constructively with borrowers who have a legitimate claim of hardship. The aim of such work should be the development of sustainable repayment plans while also preserving the safety and soundness of the lending institutions and maintaining compliance with supervisory guidance and accounting regulations. When conducted in a prudent manner, modifications of problem loans, including student loans, are generally in the best interest of both the institution and the borrower, and can lead to better loan performance, increased recoveries, and reduced credit risk. Moreover, Federal Reserve examiners will not criticize institutions that engage in prudent loan modifications, but rather will view such modifications as a positive action when they mitigate credit risk. As supervisors, our goal is to make sure that lenders work with borrowers having temporary difficulties in a way that does not contradict principles of sound bank risk management, including reflecting the true credit quality and delinquency status of the loan portfolios.

Implications for Other Forms of Lending

The benefits of higher education are widely recognized and have been supported by public policy initiatives for some time through a variety of state and federal programs. The fact that annual median earnings are significantly higher for those with higher levels of education is well documented.

However, post-secondary education is becoming increasingly expensive. With continued increases in student debt, and high levels of unemployment, recent graduates are finding it more difficult to repay their obligations, resulting in elevated delinquency and charge-off rates.

Younger borrowers with high student loan balances have reduced their other debt obligations, including credit card, auto, and mortgage debt. This reduction likely reflects in part a decline in demand due to the burden of servicing existing student loans as well as the possibility that access to credit might be curtailed due to high student debt. Borrowers who are delinquent on student debt may face difficulty obtaining other forms of credit. Further, student loan delinquency is also associated with higher delinquency rates on other types of debt. More than 15 percent of delinquent student loan borrowers also have delinquent auto loans, 35 percent have delinquent credit card debt, and just over 25 percent are delinquent on mortgage payments.

Conclusion

Higher education plays an important role in improving the skill level of American workers, especially in the face of rising gaps in income and employment across workers with varying education levels. Due to increasing enrollment and the rising cost of higher education, student loans play an important role in financing higher education. The rapidly increasing burden of student debt underscores the importance of the topic of today's hearing. This concludes my prepared remarks, and I would be happy to answer any questions you may have.

---

1. In July 2010, the federal government stopped guaranteeing student loans made through private lenders. Return to text

2. Delinquency status is defined as more than 90 days past due. Return to text

3. Of the 19 banks participating in CCAR, seven submitted student loan data. Sallie Mae, the largest holder of private student loan debt (with $37 billion), is not included in the CCAR data set. Return to text

4. For all private loans, the delinquency rate increased from 2005 to 2009, and started to decrease during 2010, according to data from Moody's. Return to text

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Some good news and some answers to your questions

Hi, all!

We wanted to share some really good news for consumers about health care costs so that you can also help to get out the word. 

First, health insurance premium rebates, which average nearly $100 per family, are on their way to 8.5 million Americans. That is because the Affordable Care Act now holds health insurance companies accountable to consumers and ensures that American families receive value for their premium dollars. If an insurance company spends less than 80 percent (85 percent in the large group market) of your premium on medical care and efforts to improve the quality of care and instead spends it on overhead and corporate salaries, they must rebate the portion of premium that exceeded this limit. Thanks to the law, millions of Americans will get savings from their insurers.

The law is protecting consumers from rate hikes that don’t go to care. It, along with other provision of the Affordable Care Act, has already helped consumers save a total of $3.9 billion in 2012, and $5 billion counting the 2011 rebates.

Second, Americans know health care prices for decades were skyrocketing, but the health law is changing that. This week, we learned that the official measure of health care prices, the medical price index, fell in May. The average for the last year was the lowest it has been in over four decades -- a sign that health care is getting more affordable.

And third, a new report demonstrates this good news will continue.  A new PriceWaterhouseCooper report projects that medical cost growth will be lower in 2014 than in 2013. As they say: “defying historical patterns.” The report points to how the ACA, though its policies to promote value, reduce unnecessary care, and cut waste from the system, is driving down the cost of health care for all of us.

Meanwhile, we received a number of questions in response to our last email. Here are a couple answers:

If the pre-existing limitations are no longer allowed can an insurance company still decline to cover an applicant? 

No. No new applicants may be denied coverage due to a pre-existing condition starting in 2014, and permanently thereafter. Insurance companies will also be prohibited from charging more or carving out health benefits due to a pre-existing. Charging women more will become a thing of the past. And you won’t pay more based on the type of work you do or your family’s health history.

How does the ACA help people on Medicare?

People with Medicare now have free checkups and preventive services – you don’t have to be sick to see your doctor to stay healthy. They have a new discount on their prescription medicine in the so-called “donut hole” that’s already saved over six million seniors more than $700 each. The increases in their monthly Medicare premiums, like those for private insurance, have slowed down – with the Medicare Trustees projecting that they may actually drop in 2014. And, the part of the law that prevents insurance companies from spending premium dollars on overhead not care will begin in the Medicare Advantage next year, thanks to the Affordable Care Act.

We’ll tackle more of your questions in future emails, so be sure to let us know what’s on your mind.

Thanks!

Tara

Tara McGuinness
Senior Communications Advisor
The White House 

China's credit crunch spooks markets

By Mark Thompson | CNNMoney.com

China is facing a tricky problem with its economy -- and that's making the rest of the world skittish.

In its bid to control surging real estate prices and a head off a credit bubble, the Chinese government could end up sparking a credit crunch and slow economic growth more than expected. 

And as seen this week, concerns about the world's second-biggest economy can rattle investors all over.

The People's Bank of China, which maintains tight control over the banking system, has been taking a tough line with Chinese lenders. It refused to inject cash into the financial system earlier this week despite rocketing short-term borrowing costs and evidence that the economy is slowing.

Growth in China slipped to 7.8% last year. The government's target for this year is 7.5%. But the risk of a disappointment is rising and with it the prospects of a weaker-than-expected recovery in the global economy.

HSBC, which cut its China forecast to 7.4% this week, said it believed Beijing would not act to stimulate the economy unless growth was heading to 7%.

"We believe markets will worry about the slowdown, but take time to get enthusiastic about the prospects for reform," noted HSBC strategists Garry Evans and Herald van der Linde, downgrading Chinese equities to neutral from overweight.

The Shanghai Composite and Hong Kong's Hang Seng both closed about 0.5% weaker Friday and have lost 8.6% and 10.6% respectively since the start of the year, compared with gains of about 11% on U.S. stocks.

With the Federal Reserve likely to start winding down its bond-buying program before the end of the year, analysts at Nomura believe China is taking a stand now to avoid delivering two shocks simultaneously.

Related: China cities move to cool red-hot housing market

The rate at which Chinese banks lend to each other overnight hit a record high above 13% this week before falling to 8.5% Friday. Another key measure of cash in the banking system -- the 7-day "repo rate" -- hit 25% on Thursday, before dropping sharply Friday.

There were some reports Friday that the central bank had taken steps to ease lending but rates remain way above normal levels.

Explanations for the cash crunch vary. But China watchers agree that the country's central bank's hard line reflects Beijing's desire to put reform before growth in the short term and moderate lending to its burgeoning "shadow banking" sector.

"We believe that recent action by the People's Bank of China reflects the government's determination to take aggressive action to contain financial risks," said Nomura economist Zhiwei Zhang.

The International Monetary Fund last month cut its growth forecast for China to 7.75%, raising concerns about a rapid expansion in credit and questioning the quality of borrowers and their ability to repay loans.

Related: China's debt: a crisis in the making?

Analysts worry that new lending is not translating into growth and is increasingly dominated by unregulated operators such as trust companies, securities dealers and underground operators that make up the shadow banking system.

The risk that the cash crunch will trigger a full-blown financial crisis is slim, given the vast resources of the Chinese government. But corporate earnings will suffer as financing costs rise, and some companies could default.

Fitch Ratings agency, which warned in April about excessive debt levels, said Friday it calculated that credit expansion would total 18 trillion yuan ($2.9 trillion) this year, a level similar to 2011 and 2012, if the authorities maintain their current stance.

But with 10 trillion yuan extended by the end of May, that implies a sharp drop in new credit in the second half.

"This credit deceleration will create a further drag on economic growth, which has been slowing down steadily since early 2010," Fitch said.

The central bank has not commented this week but the Chinese government said Wednesday it would maintain a prudent monetary policy to curb new credit for unauthorized construction projects in industries with over capacity.

View this article on CNNMoney

How to Properly Display the American Flag

Today is recognized as National Flag Day because on June 14, 1777, the Continental Congress approved the design of a national flag. There can be confusion and questions about how to properly wear and display the American flag, especially as July 4th approaches.

Here is what the law says about using the American flag properly (PDF):
The flag should never touch anything beneath it, such as the ground, the floor, water or merchandise.
The flag should never be used as wearing apparel, bedding or drapery. It should never be festooned, drawn back, nor up, in folds, but always allowed to fall free.
No part of the flag should ever be used as a costume or athletic uniform.
The flag should never be used as a receptacle for receiving, holding, carrying or delivering anything.
The flag should never be carried flat or horizontally, but always aloft and free.
The flag should not be draped over the hood, top, sides or back of a vehicle or of a railroad train or a boat.

Boomers… Let’s debunk some retirement planning myths.

Posted by Carl A. Barnowski on Jun 13, 2013

No matter how many years you are from calling it quits, it’s essential to have some kind of plan in mind for financing retirement.

The days of counting on Uncle Sam and a company pension to carry you through old age are long gone. We’re living increasingly in a “yoyo” economy—short for “you’re on your own.”

But it’s easy to get fooled by some of the many myths about retirement planning that exist on the Internet or in misguided advice passed along unwittingly by well-meaning family or friends. Heeding bad tips could cost you in the future when you can least afford it.

Here are some of the most common myths about retirement planning, and the truth behind them.

MYTH NO. 1:  It’s OK to postpone saving for retirement until other needs are taken care of.

Don’t fall into the trap of thinking it’ll be easier to save for retirement in just a few more years. There are competing, expensive needs no matter how old you are — from college loans, wedding expenses to home, kids and their college. Every year you delay means you’ll need to save more in order to get on track.

The best time to start saving for retirement is when you were 22 years old… The second-best time is NOW!

MYTH NO. 2: Medicare will take care of almost all your health-care needs.

Medicare covers about half of all health-care costs for those enrolled in the program. For the rest, yes, you’re on your own. That means you’ll be on the hook for out-of-pocket costs for uncovered services such as long-term healthcare as well as dental, hearing and eye care, along with supplemental insurance costs.

A 65-year-old couple retiring this year is estimated to need about $240,000 to cover medical expenses throughout retirement.  Much of that comes in the final years of retirement.

MYTH NO. 3: You’ll need far less income in retirement to maintain the same standard of living.

This may be true in some cases, but it could be a life-changing mistake to count on it.  Surveys of retirees have found that many spend as much or more in the early years of retirement than before they retired.

Because retirement spending habits vary so widely, many financial advisors frown on the traditional rule of thumb that you need 70 percent to 80 percent of your pre-retirement income to maintain your lifestyle.  If you reach retirement and find that was a bad guesstimate,  you may quickly find yourself looking for work.

You may not need 100 percent of your earlier income. But take some time to analyze what you expect to spend in retirement in order to lessen any anxiety… visiting with an Annuity Safe Zone® retirement income specialist and learning how to produce Guaranteed Income for Life will eliminate that anxiety all together!

MYTH NO. 4: You can claim Social Security early and still get full benefits later.

Applying for benefits as soon as eligibility begins at age 62 will entitle you to monthly checks immediately.  But when you claim early, your benefits will be 25 percent less than if you had waited until your full retirement age (age 66) and 75 percent to 80 percent less than if you’d been able hold off until 70.  That remains the biggest misunderstanding among people using the AARP’s Social Security Q&A tool.

This myth is not only so wrong but also dangerous.  When consumers claim theirSocial Security benefits, they lock in those benefits for life.

Claiming early may still be the right move for some people, such as those with serious medical issues or a family history that suggests they’re not likely to live to a ripe old age. But with people living longer and retirement sometimes lasting decades, it’s best to make deliberate calculations and see if you can wait longer in order to collect more.  While the rules of the Social Security Administration apply equally to every eligible worker, your professional and familial situation can greatly affect the amount of benefits that you actually receive.  The practice of making choices to improve that financial outcome is called Social Security optimization—something we specialize in here at all of our Premier Annuity Source, LLC  Annuity Safe Zone® locations.

MYTH NO. 5:  You should rely heavily on bonds rather than stocks as you get older.

That common advice made sense when retirements were shorter and inflation didn’t have as much time to erode savings.  Planning for a 30-year retirement, as you should do now, changes the thinking.  So does the fact that the outlook for Treasury bonds isn’t as bright, with the government loaded with debt and future inflation fears high.

Carl A. Barnowski Founder/ CEO Premier Annuity Source, LLC

Carl A. Barnowski, founder of Premier Annuity Source, LLC say his only “retirement rule of thumb” is that there are no retirement rules of thumb.  Every Boomer heading into retirement has varying circumstances, needs and has saved at varying degrees.  Throw on top of that different risk tolerances and “rules of thumb” go out the window.  Employing an advisor who is fluent in Social Security Optimization and retirement income planning would be the only advice I can give that would apply to everyone.

MYTH NO. 6:  Any retirement target-date fund will allow you to “set it and forget it.”

It’s true that target-date funds are an appealing option for 401(k) and other retirement plans. The funds automatically adjust to a more conservative asset mix approaching retirement and the fund’s target date. But they can give consumers a false sense of security and lull too many into ignoring their savings, at their peril.

They also vary widely.  A review by the Securities and Exchange Commission showed target-date funds from the same year had as little as 25 percent or as much as 65 percent exposure to stocks.

If you invest in one, understand the “glide path” (how the allocation changes over time), how much and when it turns the most conservative, and whether you’re paying more in fees than with similar target funds.

MYTH NO. 7:  You’ll be able to make up a savings shortfall by retiring later or working part-time in retirement.

That’s a hope or last resort, not a plan. It’s unwise to rely on future circumstances for your 60s or beyond. Forty percent of retirees in a recent study said they were forced to stop working earlier than they had planned, citing health reasons, having to care for a spouse or family member or a layoff.

Even a job loss well before retirement age can be tough to recover from.  People age 55 and over currently spend an average of more than 13 months on unemployment, according to the AARP Public Policy Institute—nearly five months longer than for younger job-seekers. So don’t take it for granted you’ll be able to make up for years of failing to save enough on the back end of your working life.

Common Mistakes Boomers Make…

1. Marching in and filing for Social Security Benefits at age 62 without getting expert guidance on timing and maximizing their benefit.
2. Basing their decisions based on advice from anyone who is not an expert on the subject. This includes children, friends, people they play golf with etc.
3. Basing their decisions based on what a friend or co-worker has done.
4. Employing an advisor who is not fluent in Social Security Optimization and retirement income planning.

Before you file for Social Security retirement benefits or make any retirement income decisions, contact one of Circle City Annuity Source’s Annuity Safe Zone® agents and at the very least request our Free Boomers Guide To Social Security to get you started on the right path.  Schedule a complimentary consultation to have a Social Security Optimization report prepared especially for you, which also qualifies you for our CollegeBound Rewards Program.  Call us today!  (317) 569.2278.

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