DOL Fiduciary: Fin Services Fights Customer-First

Just in time for National Retirement Planning Week, the Department of Labor released its final rule about the fiduciary standard for professionals who service retirement savers. The rule change is likely to accelerate the current disruption to the industry, as fintech companies may become the beneficiaries of a mature industry’s reluctance to embrace a customer-focused approach to doing business. Let’s take a step back: “Fiduciary” is a fancy way of saying that a financial professional must put your needs first and must pledge to disclose and manage any conflicts of interest that exist. For example, if an investment consultant, broker or insurance salesman recommends that you roll over your old retirement account into a new one, where you will pay higher costs than your old plan, she must document why it is in your best interest to do so and must tell you if she receives any compensation for the proposed investments within the new portfolio. Prior to the pending rule, many investment professionals were held to a lesser standard, called “suitability,” which means what they sold you had to be appropriate, though not necessarily in your best interest.

Maybe you’re thinking, “Who would argue that putting my interests first is a bad thing?” Well, over the past year, big financial firms have fought back against the DOL fiduciary standard, arguing that the new rules would make it prohibitively expensive to service smaller accounts. In fact, they spent millions of dollars lobbying lawmakers on this very point and were partially successful – the new rule went easier on the industry than the original iteration.

The final version allows big firms to continue to sell proprietary products, as well as variable and fixed rate annuities, as long as they let investors know what commissions they're charging. Of course that means that the customer is responsible for parsing through the disclosure documents and understanding that the broker may or may not have hosed him with the recommendation. Score one for the industry.

Another concession was that the government pushed back the effective date. But instead of being effective by year-end, some provisions are effective as of April 2017, and the rest will be set in stone as of Jan. 1, 2018. Ostensibly, that gives firms the time to prepare new documents, but it also gives the industry time to challenge the whole thing in court or to lobby a new political party to trash the whole thing.

Why has the industry push back so much on a concept that would put customers first? Because there is a ton of money at stake: according to the Investment Company Institute, as of the end of 2015, IRAs totaled $7.3 trillion and defined contribution plan assets, which are ripe for future rollovers, totaled $6.7 trillion. Under the old rules, the industry made a fortune from these accounts. Joshua Brown of Ritholtz Wealth Management notes, the industry has had “a long and profitable tradition of selling high-cost products of dubious quality to the investing public.”

Still, those companies that take the position that working in their clients’ best interest is not good business, may chose to push out smaller retirement account owners, but that’s good news for investors—if they don’t want to put you first, why work with them? Given the great strides in financial services technology, you may be better off with a financial service disrupter (aka “robo-advisor”) like Betterment, Wealthfront or Rebalance-IRA (all have embraced the fiduciary standard), than a conflicted salesman who is pushing a more expensive retirement product than you need.

One last note: when the industry whines about fiduciary, what they are really saying is that the new rules will hurt their profitability. As Vanguard founder Jack Bogle told the Financial Times, “if the wealth management industry loses $2.4 billion, investors are $2.4 billion better off. This is not complicated.”

MARKETS:

• DJIA: 17,577 down 1.2% on week, up 0.9% YTD
• S&P 500: 2047 down 1.2% on week, up 0.2% YTD
• NASDAQ: 4850 down 1.3% on week, down 3.1% YTD
• Russell 2000: 1097, down 1.8% on week, down 3.4% YTD
• 10-Year Treasury yield: 1.72% (from 1.88% a week ago)
• May Crude: $39.72, up 8% on week
• June Gold: $1,243.80, up 1.7% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.04 (from $2.06 wk ago, $2.40 a year ago)

THE WEEK AHEAD: First quarter earnings season begins and according to Fact Set, the estimated year over year earnings decline for the S&P 500 is -9.1%. If so, it would mark the first time that there would have been four consecutive quarters of earnings declines since Q4 2008 through Q3 2009.

Mon 4/11:

Alcoa, Bids due for Yahoo’s core Internet and Asian businesses

Tues 4/12:

6:00 NFIB Small Bus Optimism

8:30 Import/Export Prices

Weds 4/13:

8:30 PPI

8:30 Retail Sales

10:00 Business Inventories

2:00 Fed Beige Book

Thursday 4/14:

Bank of America, BlackRock, Delta Air Lines, PNC Financial Services Group, Wells Fargo

8:30 CPI

Friday 4/15:

Citigroup, Charles Schwab

8:30 Empire State Manufacturing Index

10:00 ISM Manufacturing Index

9:15 Industrial Production

10:00 Consumer Sentiment

#266 Kids and Money: How to Have the Talk

Kids and money can be a thorny topic for parents. Luckily, personal finance expert, author and architect of the great MoneyAsYouGrow web site, Beth Kobliner joins us to celebrate Financial Literacy Month. According to research, money habits start to form by age 7, so we need to start talking to kids between the ages of 3 and 5.

• Download the podcast on iTunes
• Download the podcast on feedburner
• Download this week's show (MP3)

Start by identifying coins and their value and discuss the difference between something that is free, like playing with a friend, and an item that costs money, like an ice cream cone. You should also introduce the concept of work and the idea that you may have to wait for something you want.

You can start paying your child an allowance as early as age 6. Most experts agree that an allowance should not be based on household chores, rather it’s better to choose an amount based on what you already spend on small discretionary items your child likes but doesn’t need — like a toy. Make it clear that the amount you’re giving replaces what you would have been spending on her. You should encourage kids to save 10 percent of their allowance by opening a savings account and explain the concept of earning interest. To reinforce the savings habit, consider a "matching plan" for your child's savings: You put in 25 cents for every dollar she saves.

When it comes to teenagers and young adults, you should have the first of many conversations about debt. Explain why it’s important to avoid using credit card cards to buy things you can't afford to pay for with cash. As kids get to high school, you can start talking about the cost of college and about whether or how much the family plans to contribute towards education.

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Mark is back in the US and makes another appearance on the show. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

#265 Navigating Financial Aid and Student Loans

As college acceptances roll in, how can families navigate the web of financial aid and student loans? Guest  Kelly Peeler, the Founder & CEO of NextGenVest.com joins the show to help you scoop up some of the $2.7 billion left on the table every year. She notes that families are befuddled by the complex and time consuming student loan application process, highlighted by the dreaded FAFSA form.

• Download the podcast on iTunes
• Download the podcast on feedburner
• Download this week's show (MP3)

NextGenVest can help by providing key financial aid deadline reminders, form annotations, and on-demand help over text message to get more financial aid in high school and beyond.

NextGenVest's "Money Mentor" will connect students and their families with someone who can coach them through the process. Just dial 646-798-1745 and text "I WANT HELP" and you will be connected. Kelly also discussed the student loan bubble, which could be the next financial crisis. Check out Kelly's TED talk "How to Change the World as a Millennial - Don't Be Stupid with Your Money"

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Mark is back in the US and makes another appearance on the show. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

DOL Fiduciary: Putting Retirement Investors First

Tensions are rising in the financial services industry, as the Department of Labor gets ready to release its final rule about the fiduciary standard for professionals who service retirement savers. The rule change is intended to crack down on “backdoor payments and hidden fees,” which cost retirement savers up to $17 billion a year in excess fees and adverse performance, according the President’s Council of Economic Advisers. “Fiduciary” is a fancy way of saying that a financial professional must put your needs first and must pledge to disclose and manage any conflicts of interest that exist. For example, if an investment consultant, broker or insurance salesman recommends that you roll over your old retirement account into a new one, where you will pay higher costs than your old plan, she must document why it is in your best interest to do so and must tell you if she receives any compensation for the investments within the new portfolio. Prior to the pending rule, many investment professionals were held to a lesser standard, called “suitability,” which means what they sold you had to be appropriate, though not necessarily in your best interest.

Maybe you’re thinking, “Who would argue that putting my interests first is a bad thing?” Well, over the past year, big financial firms have fought back against the DOL fiduciary standard, arguing that the new rules would make it prohibitively expensive to service smaller accounts. In fact, they have spent millions of dollars lobbying lawmakers on this very point and have been partially successful - that’s why Speaker of the House Paul Ryan came out against the rule.

Why are they pushing back so much? Because there is a ton of money at stake: according to the Investment Company Institute, as of the end of 2015, IRAs totaled $7.3 trillion and defined contribution plan assets, which are ripe for future rollovers, totaled $6.7 trillion. Under the old rules, the industry made a fortune from these accounts. Joshua Brown of Ritholtz Wealth Management notes, the industry has had “a long and profitable tradition of selling high-cost products of dubious quality to the investing public…Insurance companies, broker-dealers, mutual fund companies, and other backers of the status quo will not go down without a fight.”

And fight they have...the Securities Industry and Financial Markets Association, the lobbying arm of the financial world, said “This proposal would lead to a number of negative consequences for individual investors.” But Ray Ferrara, the CEO of ProVise Management and former chair of the CFP Board, said in his testimony before DOL, “the argument that this rule will diminish the availability of services to middle class Americans is simply not credible.” Adding to Ray’s argument: LPL Financial Holdings recently announced that it would lower, not raise fees for smaller accounts.

Still, those companies that take the position that working in their clients’ best interest is not good business, may chose to push out smaller retirement account owners, but that’s good news for investors—if they don’t want to put you first, why work with them? Given the great strides in financial services technology, you are probably better off with robo-advisors like Betterment, Wealthfront or Rebalance-IRA (all have embraced the fiduciary standard), than a conflicted salesman who is pushing a more expensive retirement product than you need.

When the industry whines about fiduciary, what they are really saying is that the new rules will hurt their profitability. As Vanguard founder Jack Bogle told the Financial Times, “if the wealth management industry loses $2.4 billion, investors are $2.4 billion better off. This is not complicated.”

Is the US Economy at Full Employment?

Full employment is often described as the level of employment at which virtually anyone who wants to work can find employment at the prevailing wage. Given that over the last half century, the unemployment rate in the United States has ranged from a low of nearly 2 percent to a high of nearly 11 percent, what is the specific rate at which the economy has reached the magical level? According to the Federal Reserve, full employment is subjective. It’s “largely determined by nonmonetary factors that affect the structure and dynamics of the job market. These factors may change over time and may not be directly measurable.” In other words, your guess is as good as anyone else’s. In the Fed's March 2016 Summary of Economic Projections, the Committee estimated that the longer-run normal rate had a median value of 4.8 percent, but even if we drop to 4.8 percent when the government releases the March Employment report, that may not cut it.

The Fed also closely watches wage growth and hoping that it picks up from the paltry 2 to 2.5 percent seen during the recovery. Part of the problem is that even though job creation has been robust over the past few years, many of the new positions added have been lower paid ones, which has dragged down the average. As 538 Blog points out, this is perhaps why many American workers without college degrees are so angry. They have gone from working in factories, earning “more than $25 an hour before overtime” to the service sector, where “the typical retail worker makes less than $18 an hour…More than 80 percent of all private jobs are now in the service sector.”

Still, with the pace of average monthly job gains remaining above 200,000 and the labor market tightening, analysts believe that wage growth should accelerate this year. Until it does, most consumers are happy to see low inflation, which allows them to keep more of their paychecks. Indeed, the upward revision of Q4 growth to a still-slow 1.4 percent was due almost entirely from consumers, not from businesses. Consumer spending increased at a 2.4 percent annual pace in the final three months of 2015, up from a prior 2 percent estimate.

On Monday, the government will release data on Personal Income and Spending for March, which could provide a preview of the jobs report. Although wages have been disappointing, the addition of other income, like rental income, non-farm proprietors' income and investment income, the numbers look a little better: Personal income increased 4.4 percent in 2015.

MARKETS: Stock indexes snapped a five-week winning streak and that was before the holiday release of Corporate Profits, which fell 3.2 percent last year, versus increases of 1.7, 1.9 and 9.1 percent in 2014, 2013 and 2012 respectively. It was the first negative reading since 2008, but with energy prices moderating and dollar appreciation slowing, analysts expect that profits should rise this year, which could help the labor market.

• DJIA: 17,516 down 0.5% on week, up 0.5% YTD
• S&P 500: 2036 down 0.7% on week, down 0.4% YTD
• NASDAQ: 4773 down 0.5% on week, down 4.7% YTD
• Russell 2000: 1101, down 1.3% on week, down 3% YTD
• 10-Year Treasury yield: 1.90% (from 1.88% a week ago)
• May Crude: $39.59, down 2.4% on week
• June Gold: $1,218.70, down 2.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.04 (from $1.98 wk ago, $2.42 a year ago)

THE WEEK AHEAD:

Mon 3/28:

8:30 Personal Income and Spending

10:00 Pending Home Sales

10:30 Dallas Fed Manufacturing Survey

Tues 3/29:

9:00 S&P Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 3/30:

8:15 ADP Private Jobs Report

Thursday 3/31:

9:45 Chicago PMI

Friday 4/1

Motor Vehicle Sales

8:30 March Employment Report

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Consumer Sentiment

#264 Fiduciary: The F-Bomb About to Hit Retirement Plans

As the Department of Labor prepares to roll out new rules, which would require investment companies, brokers and advisors to put the interest of retirement savers first, our guest Ray Ferrara, former Chair of the CFP Board, joins us to discuss the fiduciary standard and why the financial services industry should embrace, not fight it. Ray has been one of the key players involved in the national debate surrounding the rules that should govern financial advice and was one of the experts who testified before The Employee Benefits Security Administration, the DOL division responsible for spearheading the change. We began the conversation with an explanation of the proposal, which would require that retirement investment professionals not only be held to a higher standard of putting clients first, but they would also have to fully disclose and eliminate conflicts of interest that exist.

• Download the podcast on iTunes
• Download the podcast on feedburner
• Download this week's show (MP3)

The Financial Planning Coalition, a collaboration of the Certified Financial Planner Board of Standards (CFP Board), the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA), strongly supports the DOL’s proposed rule and notes:

"Retirement investors face a perfect storm in the financial services marketplace. With ever-increasing responsibility for their own retirements and the need to choose from an increasingly complex set of financial products and services, retirement investors more than ever need competent financial advice that is in their best interest. Yet the current regulatory framework allows advisers’ interests to be misaligned with the interests of retirement investors; it does not require advisers to clearly and openly disclose the standard of conduct under which they operate or their actual or potential conflicts of interest; and it permits market practices under which retirement investors are simply unable to distinguish advisers who provide fiduciary-level services from those who do not."

This rule could be a game-changer for the industry. No longer will companies be able to sell opaque, expensive products that once were deemed "suitable" but will not pass the fiduciary smell test. And if you hear complaints from the industry, saying that the rule will mean that they will no longer be able to serve the middle class, I say, THANK GOODNESS! That means that they can no longer peddle their expensive, clunky products, like variable annuities or non-traded real estate investment trusts. And if they choose to raise minimums or fees, consumers have plenty of choices, like services offered by Betterment or Rebalance-IRA, which offer ease and simplicity at a fraction of the cost that those big firms charge.

Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Free Trade: Good or Bad?

There has been a lot of trash talk about U.S. free trade policy this political season. Candidates Bernie Sanders and Donald Trump have led the rallying cries about how trade deals have killed U.S. jobs and upended the economy, which is a great way to incite disgruntled middle class voters, but as always, the facts are a bit murkier. It is important to start this analysis with a brutal truth: some U.S. industries and employees have been hammered by a trifecta of forces over the past three decades: (1) globalization/lowered trade barriers, (2) the technology revolution and (3) a reduction in the power of unions to protect workers’ wages. The effect of these long-term trends has amounted to a loss of jobs in some goods-producing sectors of the economy and wage stagnation for the middle class.

Bureau of Labor Statistics research has found that the total number of manufacturing jobs peaked in 1979, fifteen years before North American Free Trade Agreement (NAFTA) and more than twenty years before China became a member of the World Trade Organization, which opened that market more fully. So to blame a specific trade deal for the erosion of manufacturing sector employment omits the other factors at play and likely overstates the negative impact of trade deals on the labor market.

That’s why PolitiFact called into question a Bernie Sanders ad that refers to 850,000 jobs lost under NAFTA. Sanders cites that number from the Economic Policy Institute, which gets about a quarter of its funding from unions. PolitiFact found other nonpartisan analyses, which concluded that NAFTA’s influence was much less dramatic. A Congressional Research Service report said “it is difficult to tease out the effects of the trade deal by itself… A similar review published by the international Organization for Economic Cooperation and Development reached the same conclusion...Jobs in certain industries, such as cars and electronics, might have suffered, but overall, the job impact was nominal."

Of course that impact wasn’t nominal if it was your job that vanished. Technological advances, globalization and free trade have combined to create losers and winners across the globe. Blue-collar American workers have been among the losers, while highly skilled ones were able to succeed. U.S. consumers have been winners; as they have been able to enjoy lower prices on imports and so too have the hundreds of millions of workers in developing markets, who have been lifted out of poverty.

Economists and politicians may have overstated the benefits of trade deals and minimized the potential pitfalls, but one thing is clear: even the hint of ripping up existing agreements has raised warning flags globally. A report last week from the Economist Intelligence Unit listed a Donald Trump presidency as the sixth biggest risk to the global economy (tied with the rising threat of jihadi terrorism), primarily due to his “exceptionally hostile towards free trade, including notably NAFTA” and his repeated accusations about China being a “currency manipulator”.

Economists are almost universally concerned that a potential trade war would be devastating, because it would decimate U.S. exporters, raise prices for Americans and escalate geopolitical tensions. As proof, they cite the 1930 Smoot-Hawley legislation, which contributed to making the Great Depression even worse.

So what is the solution? Economists Ed Dolan says, “It would be far more reasonable to employ direct forms of aid. Retraining, adjustment assistance to workers or employers, income support, or wage subsidies are some of the possible remedies,” but those would require government spending, something that deficit hawks have fought tooth and nail.

MARKETS: It was just like old times…a dovish Fed sparked a rally in stocks. It was the sixth consecutive winning week, which pushed the Dow and S&P 500 into the black for the year. Crude oil climbed towards $40 for the first time since December.

• DJIA: 17,602 up 2.3% on week, up 1% YTD
• S&P 500: 2049 up 1.4% on week, up 0.3% YTD
• NASDAQ: 4795 up 1% on week, down 4.2% YTD
• Russell 2000: 1101, up 1.3% on week, down 3% YTD
• 10-Year Treasury yield: 1.88% (from 1.98% a week ago)
• Apr Crude: $39.44, up 2.4% on week, 5^th consecutive week of gains
• Apr Gold: $1,254.30, down 0.4% on week
• AAA Nat'l avg. for gallon of reg. gas: $1.98 (from $1.92 wk ago, $2.43 a year ago)

THE WEEK AHEAD:

Mon 3/21:

8:30 Chicago Fed Nat’l Activity

10:00 Existing Home Sales

Apple Event: Expected to unveil smaller-screen iPhone and an updated iPad

Tues 3/22:

9:00 FHFA Home Price Index

Weds 3/23:

10:00 New Home Sales

Thursday 3/24:

8:30 Durable Goods Orders

Friday 3/25: Good Friday Stock Markets Closed, Banks Open

8:30 Q4 GDP final, slight upward revision likely from previous 1%

8:30 Corporate Profits

#263 Robo Advisors are Cheaper and Maybe Better than Humans!

ReBalance-IRA.com CEO Mitch Tuchman, who pioneered America’s first online investment advisory service, joins the show to discuss how the advent of robo advisors is helping to force down fees in the financial services industry and why an algorithm may be a better investment option than a conflicted salesperson. Mitch conceived of and built a service for do-it-yourself investors to manage their own retirement portfolios with MarketRiders and then enhanced the service for those who wanted a human touch with ReBalance-IRA. Robo advisors are poised to be the beneficiaries of the Department of Labor's soon-to-be-released rule on fiduciary, which Mitch believes will be a turning point for the industry.

• Download the podcast on iTunes
• Download the podcast on feedburner
• Download this week's show (MP3)

Thanks to everyone who participated this week, especially Mark, the Best Producer in the World and the worst LinkedIn User. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Spring Cleaning for Your Money 2016

Attention neat freaks and those who want to take more control of their financial lives: the Vernal Equinox, when the sun shines directly on the equator and the length of night and day are nearly equal, kicks off one of my favorite times of the year: spring cleaning for your money! Now that you have waded through a myriad of documents for tax season, it is an ideal time to clean out your files. Here is what you need to know:

Bank statements: Generally speaking, you only need to keep bank statements for one year, BUT if you think that you may be applying for Medicaid, many states require that you show five year’s worth of bank statements. Also, hold onto records that are related to your taxes, business expenses, home improvements, mortgage payments and major purchases for as long as you need them.

Credit card bills: Unless you need to reference something for tax or business purposes, or for proof of purchase for a specific item, you can shred credit card statements after 45 days. Like the bank statements, hang on to those statements that you may need for your taxes, as proof of purchase or for insurance.

Tax returns/supporting documents: Despite being able to amend your tax returns going back three years, the IRS has seven years to audit your returns if the agency suspects you made a mistake and up to six years if you likely underreported your gross income by 25 percent or more. As a result, you need to hold on to your returns and all supporting documents for seven years. If you work with a tax preparer, ask for a copy of your return on CD—it will save some space in your file cabinets.

Medical Records:  Given how hard it is to deal with health insurance companies, you should keep medical records for at least a year, though some suggest keeping records for five years from the time treatment for the symptoms ended. Retain information about prescription information, specific medical histories, health insurance information and contact information for your physician.

Utility and phone bills:  Shred them after you have paid them, unless they contain tax-deductible expenses.

Taxes: If you received a tax refund of more than $1,000, your first task is to adjust your withholding. Remember, a refund is the return of a year long, interest-free loan that you extended to Uncle Sam, so let’s not do that again! If you need help determining the proper withholding amount, the IRS has a nifty calculator: http://apps.irs.gov/app/withholdingcalculator/.

Once you adjust, you will have more money in each paycheck. It is critical that you capture this extra amount and save it. The easiest way to do so is to boost your retirement contributions into your employer-sponsored plan or to establish an automatic monthly draft from your checking or savings accounts into a traditional or Roth IRA.

Home Maintenance: Make sure that your property/casualty insurance is up to date and make a list of maintenance items that you need to address, especially those that may have occurred as a result of winter conditions.

If you are ready to tackle some larger projects, prioritize them by choosing those that add the most value to your home. According to Remodeling Magazine’s 2016 Cost vs. Value Report, “many of the biggest percentage gains were for higher-dollar ‘upscale’ projects.” Don’t fret if you don’t have big bucks available, because the report also found that replacement jobs—such as door, window, and siding projects—generated a higher return than remodeling projects.

Central Bank Bingo with Mohamed El-Erian

The world’s largest central banks are once again dominating the chatter among traders and economists. Last week, the European Central Bank announced additional measures to simulate the moribund Eurozone; this week, the Bank of Japan will weigh potential action after its surprise decision to adopt negative interest rates in January; and the U.S. Federal Reserve will likely refrain from a rate hike at its two-day policy gab fest. The heightened central bank focus made last week a perfect time to interview Dr. Mohamed El-Erian, author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse. El-Erian is Chief Economic Advisor at Allianz, chair of President Obama’s Global Development Council and a LinkedIn Influencer. Between December 2007 and March 2014, he was chief executive and co-chief investment officer of global investment management firm PIMCO.

I sat down with El-Erian during a LinkedIn webcast to discuss how far the economy and markets had come since the bear market lows of March, 2009 (the S&P 500 has soared over 240 percent, including reinvested dividends), as well as the significant challenges that still lie ahead for investors and for the global financial system.

As markets bottomed seven years ago, El-Erian and his PIMCO colleagues coined the phrase “The New Normal” to describe what was likely to be a slow growth economic recovery. That prediction was spot-on: the U.S. is now in the seventh year of 2 to 2.25 percent GDP. El-Erian credits the actions of central banks for even that measly pace. When it became clear that government stimulus plans were not large enough, central banks were forced to adopt a “Whatever it takes” mentality. In doing so, they were able to avoid a multi-year depression.

Unfortunately, the unintended consequence of aggressive central bank actions was an environment where investors relied on monetary policy to do the heavy lifting to promote growth. That reliance encouraged excessive risk taking, which helped drive up asset prices beyond economic justification and turbo-charged income and wealth inequality. (Those who already owned assets were the biggest beneficiaries.)

It’s not as if the Fed, the ECB and the Bank of Japan don’t get it, but just when global central banks are looking to hand off the responsibility of promoting growth, there seem to be no takers.

So where do we stand right now, seven years after we bottomed out? We have come to what El-Erian calls a “T-Junction”. As we approach the end of this recovery road, there is an equal probability that we turn left and right. On one side of the T, we remain in a stable, but slow growth world, riddled with high unemployment, increasing income inequality and political extremism. On the other side, we have politicians who wake up and get serious about creating an inclusive economy; make pro-growth structural reforms, remove debt overhangs in problem areas like student loans and get the overall architecture right. The result would be higher growth, job creation, decreasing income inequality and a drop in financial instability.

Could the stakes be any higher this political season? That’s why El-Erian says that we desperately need candidates to acknowledge the anger that the “inequality of opportunity” can breed; and then to address that anger with policies that promote inclusive growth and restore faith in the system. In other words, we need an “Economic Sputnik” moment. Perhaps that seems like a distant possibility this moment, but El-Erian remains optimistic that one can occur.

MARKETS:

• DJIA: 17,213 up 1.2% on week, down 1.2% YTD
• S&P 500: 2022 up 1.1% on week, down 1.1% YTD
• NASDAQ: 4748 up 0.7% on week, down 5.2% YTD
• Russell 2000: 1087, up 0.5% on week, down 4.3% YTD
• 10-Year Treasury yield: 1.98% (from 1.88% a week ago)
• Apr Crude: $38.50, up 7.2% on week 7.2%, 4th straight weekly climb
• Apr Gold: $1,250.80, down 0.9% on week
• AAA Nat'l avg. for gallon of reg. gas: $1.92 (from $1.81 wk ago, $2.45 a year ago)

THE WEEK AHEAD:

Mon 3/14:

Tues 3/15:

Bank of Japan meets

FOMC Meeting Begins

8:30 PPI

8:30 Retail Sales

8:30 Empire State Mfg Survey

10:00 Business Inventories

10:00 Housing Market Index

Weds 3/16:

8:30 CPI

8:30 Housing Starts

9:15 Industrial Production

2:00 FOMC Decision

2:00 FOMC Economic Projections

2:30 Janet Yellen Press Conference

Thursday 3/17:

8:30 Philadelphia Fed Business Outlook Survey

10:00 JOLTS

Friday 3/18:

10:00 Consumer Sentiment