This is a publication by Scott Anderson Financial. Scott K. Anderson, CPA, CFP®, EA is a Registered Investment Advisor in Newport Beach, California.
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Scott Anderson Financial

In This Issue

Monthly Riddle

How do banks “create” money?​

Click here for the answer.


"My reading of history convinces me that most bad government results from too much government." - Thomas Jefferson

November – Two Weeks to Plan for 2017

The middle of November – the two weeks between Election Day and Thanksgiving Day – is probably the last chance to plan for 2017. 

The frenzied national election is today, November the 8th.  I live in California which has a very active vote-by-mail program.  In a nod to the weirdness of this election cycle, I mailed my ballot on October 31st. While I have a clear candidate preference (the candidate who will hurt me the least, lower taxes, and pay attention to both the national debt and the Supreme Court), either candidate is going to produce four years of chaos and confrontation.  I do not expect either side will go quietly into the night thinking it has been a well fought but fair election.  The US Government acts as the “sugar daddy” in so many ways that it is inevitable it will attract swarms of flies and other distasteful insects which will get mad when their particular largess is threatened. 

While the pundits are already talking about what might be the economic and stock market effects of each presidential candidate, the reality is the market will always win out.  I plan to continue taking investment positions for my clients that follow the market indexes.  No one can consistently beat the market – I just plan to track the market as closely as possible. After I buy, I will hold – the Warren Buffet strategy: “My favorite holding period is forever.”  

For equities (stocks), that means Exchange Traded Funds (ETF).  A mutual fund is a basket of stocks which follows the fund manager’s stated goals. The price of a mutual fund is set at the end of the day when the market closes.  An ETF is a close cousin of a mutual fund.  An ETF is a similar basket of stocks and follows a stated market index but trades during all market hours. Since an ETF simply follows a stated market index, there is very little managerial discretion, so internal management expenses of the ETF are very low which increases returns to the ETF holder.

For fixed income (bonds), that means bond mutual funds.  Bonds, unlike equities, are not traded on organized exchanges.  The bond market is more like Craig’s List.  Buyers make inquiries through their brokers (“Ask”) and sellers (usually other brokers) respond (“Bid”).  Spreads (the difference between Ask and Bid) widen or tighten depending on broker inventories and the number of buyers and sellers at any given time. Individuals buying small lots of bonds are at a distinct advantage against bond fund managers who buy and sell large numbers of bonds on a regular basis. Bond fund managers know both what they are doing in the market and who they are dealing with.

There are bond ETFs, but mutual funds are still the preferred vehicle in the bond market.   Since bonds are not traded on organized exchanges, coming up with an index for bonds, which could be mimicked in an ETF, is much more difficult. More importantly, since bonds are not traded on organized exchanges, it is possible for the price of the ETF to be out of sync with the actual price of the underlying bonds in the ETF. Bond mutual funds settle up at the end of the trading day when all trading information is available.  I plan to stay with bond fund managers who keep fund expenses low and have a good track record following one of the few indexes in this market.

At the other end of November is Thanksgiving Day (November 24th) and the start of the frenzy known as the “Christmas” season or the “holiday” season, depending on the point of view of the candidate winning on November 8th.

So in the quiet time following the November 8th election date and before the gastronomic climax of Thanksgiving that initiates the year-end activities, you might get out the old pad of paper and write down some goals, financial and otherwise, for 2017: make extra payments on debt, retire a credit card, save upfront for a vacation, increase a 401k/403b/IRA contribution, start building a reserve fund, do a spending review (chapter 1 of my book), update the personal balance sheet to refocus on building net worth (also chapter 1 of my book). These are all great places to start.

I asked Riley, our Golden Retriever with whom I share my office, what she was planning to do between Election Day on November 8th and Thanksgiving Day on November 24th.  That was a mistake.  When I started the question, she lifted and tilted her head with that quizzical look that only dogs can give you when they do not understand your confusing instructions.  When I got to the word “Thanksgiving”, she smiled (yes, dogs can smile) and put her head back down.  I don’t think Riley will be doing much planning with Thanksgiving just around the corner.  I don’t know if dogs dream, but I got the distinctive impression that drumsticks were marching before her eyes. 
All the best,
Scott K Anderson Jr., CPA, CFP®, EA
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By The Numbers

Click Here For The Monthly Economic Update
By The Numbers: Q3

Yield Curve: Interest Rate on US Treasury Securities versus Time to Maturity

Thick Line – October 28, 2016; Thin Dark Line – One Month Ago; Light Line – One Year Ago;
The Yield Curve is a graph of the interest rate on US Government securities based on maturity. All interest rates use the US Government yield curve as the reference as the US Government rates are considered riskless which means there is no chance of bankruptcy – the US Government  can simply print money to meet its obligations.


Not much change from last month. This is a “normal” yield curve – upward sloping – longer maturities command higher rates than shorter maturities reflecting (among other things) the higher risk of inflation in the meantime. 

Shorter term rates (two years or less) continue to be higher than a year ago due to Fed’s efforts to lever the entire yield curve up (increase interest rates) by moving up the left end of the curve. 

Longer term rates continue lower than a year ago reflecting (among other things) the tremendous number of investors (particularly foreigners) seeking to own US Government securities because US Government securities are considered the safest investment in the world. 

Nonetheless, there appears that the slight upward movement in the longer maturities is holding. 

As noted in previous newsletters the dilemma for the Fed is that if they try to push up the yields on the shortest maturities to try to lever the whole yield curve up, the demand for longer-term securities as a safe haven may have the effect of keeping longer-term rates lower and the whole yield curve could accidently flatten out.  A flat yield curve offers investors (and businesses) no incentive to invest for the long term which will definitely slow down the economy.

Like many other things at the moment, the market’s attention is on the presidential election. Regarding economic policy, the two candidates are worlds apart. The outcome on November 8th will be a signal for what US Government policies might be coming. If it were only that simple.
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Trivia Answer:
Our banking system is called a “fractional reserve” banking system.  When you deposit money in a bank, the bank can lend that money out at interest. Assume you deposit $10,000 in a bank and the bank must keep 10% of its deposits on reserve for depositors to withdraw at any time.  Look what happens to the 90%:

All total, when carried out to the end, that $10,000 creates about $90,000 in money that grows the economy through the exchange of goods and services. 

By changing the reserve requirement at banks, the Fed can increase or decrease how much money is created and thus make money cheaper (lower reserve, more money to circulate, lower interest rates) or more expensive (higher reserve, less money to circulate, higher interest rates).

Of course, the more government taxes, the less there is to put in the bank which slows down the availability of money which slows down the economy.
IRS Circular 230 Disclosure: if this newsletter contains any type of tax advice, please be advised that, based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to the matter.
Copyright © 2016 Scott Anderson Financial, All rights reserved.​

P.O. Box 7463 | Newport Beach, CA 92658 ​| (949) 200-7111

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