Bob’s Journal for 1/12/22

Negative Yields Are Almost Gone

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Debt with negative yields has disappeared, or is very close to disappearing, around the globe.

Once thought very unlikely in the modern world, negative interest rates became common after the global financial crisis. Investors earned less than 0% on bonds issued primarily in Europe and Japan, essentially paying debtors to lend them money (to borrow their money).

As recently as two years ago, bonds and other debts with a total principal value of about $18.4 trillion carried negative yields, according to Bloomberg.

After the financial crisis, central banks kept interest rates at 0% or below to try to maintain economic growth in the wake of the bursting global debt bubble.

But as inflation rose in 2021 and 2022, central banks gradually increased interest rates they controlled. Investors also demanded higher market interest rates.

Until the end of December 2022, Japan was the last country with negative interest rates on a significant amount of debt. Japan finally increased the target rate on its 10-year government debt in the last week of 2022.

Unlike other central banks, the Bank of Japan didn’t identify its latest move as a tightening of monetary policy. But the Federal Reserve, European Central Bank and other central banks have been openly tightening monetary policy to fight inflation.

The negative yields had caused investors to pour money into riskier investments, especially in 2020 and 2021. But the markets punished those investments in 2022 as the central banks increased their target interest rates.

Though interest rates no longer are negative and are well above their low of recent years, this isn’t an especially safe time to buy long-term bonds. Rates in the United States and many developed countries remain below their long-term averages, and inflation remains above central bank targets.

The interest rates of recent years weren’t the norm. Investors shouldn’t anticipate rates returning to those levels. There’s plenty of room for interest rates to rise unless inflation collapses in the coming months.

Fiduciaries Have to Do Better Than Owners

Family members who agree to be executors or trustees often are surprised by the responsibilities and obligations. The misunderstanding can be costly to them, as a recent Michigan case demonstrates.

Tracy Wallace was married to Daniel and operated several businesses with him through limited liability companies of which Daniel was the sole owner.

Daniel passed away, and his estate planning documents made Tracy sole executor of his estate, successor trustee of his living trust and recipient of all the property in his estate. The couple had two adult children.

Tracy continued to operate the businesses and the estate the same way Daniel had. The problem is, Daniel had been a sloppy operator.

Tracy didn’t fully account for all the estate’s assets in probate court filings. She commingled business and personal assets, often paying personal expenses from business accounts. Tracy also failed to pay bills from the business’ creditors, didn’t account for all revenue and expenses, and didn’t pay taxes or file tax returns on time.

Tracy thought none of this mattered, because she was the sole primary beneficiary of the estate and trust. The estate was insolvent when Daniel died. The couple’s children said they had no expectation of receiving anything from the estate and didn’t object to how Tracy managed things.

But creditors of the businesses had objections. They had the probate court replace Tracy and had the new executor perform an in-depth review of the estate.

After the review, the executor asked the court to find that Tracy didn’t fulfill her fiduciary duties and owed damages to the estate.

The court agreed with the executor. Though Tracy was the sole beneficiary of the estate and trust, as executor and trustee she owed fiduciary duties to the estate and trusts as separate entities and to other people, especially creditors of the businesses owned by the estate and trust. Tracy owed the creditors a duty to manage the estate properly to maximize the amount that could be paid on their claims.

Tracy failed to fulfill her fiduciary duties when she used money from the LLCs to pay her personal expenses and those of her children. She also failed in her duties by not filing and paying taxes on time.

The court ruled she was personally responsible to the estate and trust for the amount of the personal expenses paid from business assets, as well as penalties and interest charged by tax authorities.

Even when someone is both the fiduciary and sole beneficiary of a trust or estate, there could be other parties with interests. Those parties can ask a court to hold the fiduciary personally responsible for actions that are inconsistent with those of an independent fiduciary.

Apply for Long-Term Care Insurance Early, if You Want It

Most people don’t think about long-term care insurance (LTCI) until they’re close to needing it, and that can be a big mistake.

LTCI doesn’t pay benefits until long-term care (LTC) is needed. For most people, that doesn’t happen until their late 70s or later in life. But the best time to buy LTCI usually is between ages 55 and 65.

Insurance companies are more selective today about accepting applicants for LTCI than they were years ago.

Now, almost half of applicants older than 70 are denied LTCI, according to the American Association of Long-Term Care Insurers (AALTCI) and the 2022 Milliman LTC Survey. Sometimes coverage is denied because the applicants have health histories that concern the insurer. Other times it’s because the insurer won’t issue policies to people above a certain age.

Even between ages 65 and 69, about one-third of applicants are denied coverage.

Unlike Medicare, you have to qualify for LTCI. The longer you wait to obtain LTCI, the more likely you are to be denied coverage or have to pay more for it.

People don’t want to buy LTCI too early in life. They want to avoid paying premiums for decades before they receive benefits. They also don’t want to buy a policy that becomes obsolete in a few years, because newer policies might have different terms.

It is important to balance these factors and establish a plan to pay for any LTC before it’s needed. If some type of LTCI is part of your plan, apply for the coverage before age and health history make it difficult or impossible.

The Data

The service sector began contracting in December, according to the ISM Non-Manufacturing Index. The index fell to 49.6 from 56.5 in November.

Any reading below 50 indicates the sector is contracting. This is the first reading below 50 since May 2020.

Likewise, the PMI Services index said the services sector had its largest contraction in four months and the second-fastest since May 2020. The index declined to 45.0 at the end of December, which was an improvement from the 44.6 estimate at mid-month but down from 46.4 at the end of November.

Overall economic activity also declined in December, according to the PMI Composite Index. The index was 45.0 at the end of December, compared to 44.6 in mid-December and 46.4 at the end of November.

The Small Business Optimism Index from the National Federation of Independent Business (NFIB) was 89.8 in December. That’s a six-month low and the 12th consecutive month the index has been below the 49-year average of 98.

In the survey by NFIB, inflation again topped the list of the most important business problems faced by small business owners. Most factors in the index were worse in December than November.

Consumer credit outstanding increased at an annual rate of 7.1% in November. Revolving credit (mostly credit cards) increased at a 16.9% annual rate, while nonrevolving credit (mostly vehicle and student loans) increased at a 3.9% annual rate.

Factory orders declined by 1.8% in November, following three consecutive months of increases.

Excluding the volatile transportation sector, orders declined 0.8% in November, the most significant dip for that measure in four months.

The labor market was a little less robust in December, according to last week’s Employment Situation reports.

There were 223,000 new jobs created in December. That’s the lowest monthly number since December 2020. But it’s a strong number compared to historic averages and higher than economists were expecting.

Average hourly earnings increased only 0.3% in December, down from 0.4% in November. Over 12 months, earnings increased 4.6%, the lowest rate of annual average hourly earnings growth since August 2021.

There were 235,000 new private sector jobs created in December, according to the ADP Employment Report. In addition, November’s number was revised higher to 182,000.

Job creation was uneven across the economy in December, according to ADP. There continued to be gains in the service sector, with leisure and hospitality leading the way followed by business and professional services. But there were job losses in trade, transportation and utilities, as well as natural resources, mining and other sectors.

Initial unemployment claims declined by 19,000 to 204,000 in the latest week. That’s the lowest number since September.

Continuing unemployment claims decreased to 1.694 million from 1.718 million.

Both numbers indicate that while there have been headline-making layoffs, especially in the technology sector, laid off workers apparently are able to find new jobs.

The Markets

The S&P 500 jumped 2.56% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.81%. The Russell 2000 rose 4.10%. The All-Country World Index (excluding U.S. stocks) gained 4.45%. Emerging market equities soared 6.38%.

Long-term treasuries gained 2.49% for the week. Investment-grade bonds increased 2.35%. Treasury Inflation-Protected Securities (TIPS) added 0.83%. High-yield bonds gained 2.63%.

On the currency front, the U.S. dollar declined 1.28%.

Energy-based commodities fell 1.80%. Broader-based commodities lost 1.76%. Gold rose 2.12%.

Bob’s News & Updates

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I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.