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Does the Fed share the stock market's worry about the economy? · The Financial Exchange Show

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Speaker 1: This is the Financial Exchange with Chuck Zada and Paul Lane.
1:10
Speaker 2: Pretty big day here on the Financial Exchange. It's Chuck,
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Speaker 2: Tucker and Paul with you. I don't know why I
1:15
Speaker 2: put Tucker in front of Paul. I think I was
1:17
Speaker 2: just looking at him. But sorry, Paul, didn't mean to
1:20
Speaker 2: do that. My apologies.
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Speaker 3: Uh.
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Speaker 2: In any case, big day today. At seven am, the
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Speaker 2: Mortgage Bankers Association announced the average thirty year fixed rate
1:28
Speaker 2: mortgage for last week and it came in at six
1:31
Speaker 2: point seven two percent. So this is obviously our top
1:35
Speaker 2: story of the day.
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Speaker 4: I was like, what what is he killing with this?
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Speaker 2: Now? Really, We've got a FED meeting happening at two
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Speaker 2: pm today, and so all eyes were going to be
1:44
Speaker 2: on the FED and quite honestly, all eyes on the
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Speaker 2: FED for the first time probably in about I gotta say,
1:52
Speaker 2: at least four months or so. The last time I
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Speaker 2: think people were this focused on the FED was probably
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Speaker 2: the November meeting, just because it came after or September
2:00
Speaker 2: where you had that half percent cut in interest rates.
2:04
Speaker 2: The question was are they gonna go half percent or
2:06
Speaker 2: a quarter? They basically went quarter quarter the rest of
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Speaker 2: the way out during the November and December meetings, and
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Speaker 2: so you know, the December one was kind of a
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Speaker 2: foregone conclusion, and then January was happening. I don't remember
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Speaker 2: the exact date of the January meeting, but it was
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Speaker 2: right around the inauguration, so like, quite honestly, no one
2:24
Speaker 2: was really paying attention to the January FED meeting, and
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Speaker 2: this one, I think people are interested just to see,
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Speaker 2: not anything in terms of a policy shift, because quite honestly,
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Speaker 2: what you're gonna hear from j. Powell during his press
2:38
Speaker 2: conference over and over is we still have significant uncertainty
2:42
Speaker 2: about the direction of policy with the new administration. We're
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Speaker 2: gonna wait for more clarity before we make any definitive moves.
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Speaker 2: Like you'll hear sixteen different variations of that. But what
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Speaker 2: I am interested to see. What I am interested to
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Speaker 2: see is the dot from the Federal Reserve and effectively
3:05
Speaker 2: what the dot plot is, by the way, so this
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Speaker 2: is their summary of economic projections, the step as it's
3:11
Speaker 2: referred to, and what that tells you is basically where
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Speaker 2: they think growth, inflation, and the FED funds rate are
3:23
Speaker 2: going to be over various terms in the future. And
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Speaker 2: the last one that we got on this was on
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Speaker 2: the December eighteenth meeting, and here's what it showed for
3:31
Speaker 2: twenty twenty five. Because this is setting the stage for
3:33
Speaker 2: how they view the economy to be evolving. They thought
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Speaker 2: that this year twenty twenty five change in GDP would
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Speaker 2: be two point one percent. They thought the unemployment rate
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Speaker 2: would rise very, very slightly to four point three percent.
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Speaker 2: They thought PCE inflation would still be running a little
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Speaker 2: bit hot at two and a half percent, and core
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Speaker 2: PCEE inflation still running a little bit hot at two
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Speaker 2: and a half percent as well, with the Fed funds
4:00
Speaker 2: rate falling from about four and a half down to
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Speaker 2: four percent called three point nine is what they put there.
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Speaker 2: So that's what they thought would be happening this year.
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Speaker 2: Their longer run projections, quite honestly, don't really matter. The
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Speaker 2: only one that is kind of interesting is where they
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Speaker 2: think the long run Fed funds rate is going to be,
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Speaker 2: because from there you can build in the idea of okay,
4:23
Speaker 2: where do they think, like this neutral interest rate is?
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Speaker 2: But even that is just like you know, counting, you
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Speaker 2: know how many angels can dance on the head of
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Speaker 2: a pin. The answer is whatever you want it to
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Speaker 2: be ultimately, and no one really knows. So I think
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Speaker 2: that this year, Like, let's look at those big components,
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Speaker 2: because this is where the meat of this FED meeting
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Speaker 2: is going to be. Do we think the Fed is
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Speaker 2: going to say that the change in real GDP is
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Speaker 2: going to likely be greater or less than two point
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Speaker 2: one percent this year? I'm gonna take the under in
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Speaker 2: terms of where they guide, I don't know how much.
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Speaker 2: Maybe it comes in at like one to nine, maybe
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Speaker 2: it comes in at two one eight. They're not gonna
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Speaker 2: be like, hey, GDP growth is going to zero.
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Speaker 4: Like give two point four.
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Speaker 2: Like they don't just look at you know, the Atlanta
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Speaker 2: Fed and say, well it's gonna be that. No, they're
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Speaker 2: they're a little bit more measured in this stuff. So
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Speaker 2: I would take the under on that. Likewise, if you
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Speaker 2: think GDP growth is going to come in under, would
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Speaker 2: it also follow that they probably think the unemployment rate
5:20
Speaker 2: is going to go up?
5:22
Speaker 1: Yes.
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Speaker 2: Higher. Now again, higher doesn't mean five or six percent.
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Speaker 2: I'm not expecting because if if they start saying, look,
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Speaker 2: the unemployment rate's gonna be you know, five percent, then
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Speaker 2: they better have a projected FED funds rate of zero,
5:35
Speaker 2: because it's basically saying, hey, there's gonna be a recession. Coming,
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Speaker 2: and like, I don't think they're gonna say that. So
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Speaker 2: maybe they think the unemployment rate by year end is
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Speaker 2: four to four, four five, you know, something like that.
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Speaker 2: PCE inflation, given all of the different models of tariff
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Speaker 2: impacts and this and that, it's hard to imagine that
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Speaker 2: they're gonna come in and say anything other than hey,
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Speaker 2: PC inflation is gonna be again, probably higher, maybe two six,
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Speaker 2: two seven, two eight. You know that they're not gonna
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Speaker 2: say PC inflation is gonna be four Like, I don't
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Speaker 2: think they're going there. But yeah, most of the stuff
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Speaker 2: that I've seen is that the estimates from the tariffs
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Speaker 2: currently imposed probably adds somewhere around point two too point
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Speaker 2: four percent UH to annual inflation. And given that those
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Speaker 2: tariffs are now imposed, we'd say, okay, like the FED
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Speaker 2: might say, yeah, PC inflation's gonna come in at two
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Speaker 2: seven this year instead of two five. Core PCE maybe
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Speaker 2: doesn't move as much, maybe goes from like two five
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Speaker 2: to two six or something like that. I mean, that's
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Speaker 2: kind of the magnitude of changes that that I expect
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Speaker 2: to see. But overall, I think the expectation on this
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Speaker 2: and maybe I'm off base, but I don't know. I
6:42
Speaker 2: seem to, you know, think I have a decent handle
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Speaker 2: on how the Fed's gonna view these things. They're gonna
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Speaker 2: expect that because of things like tariffs, there's gonna be
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Speaker 2: some slower growth in the US and higher inflation. Is
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Speaker 2: that a fair read on what what we should expect
6:59
Speaker 2: to see from them.
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Speaker 4: Yeah, I'm trying not to get clouded by because every
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Speaker 4: piece you read now is hidden all of those check marks,
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Speaker 4: you know, And then so much and we've talked about
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Speaker 4: this in the show before. There's so much sentiment out
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Speaker 4: there that's negative, and if we play that against what
7:16
Speaker 4: type of hard data that we have in place that
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Speaker 4: would back the negative sentiment, you know, it almost clouds
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Speaker 4: my judgment a little bit where you're just so you're
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Speaker 4: just so absorbed in reading all these pieces about poor
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Speaker 4: sentiment that you almost think as if we're there and
7:29
Speaker 4: we've seen significant deterioration in the economy and we're not
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Speaker 4: in terms of a hard data perspective. But that is
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Speaker 4: really what the importance of this meeting comes down to
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Speaker 4: for me today is not anything with policy and the rates.
7:42
Speaker 4: We know that those are going to stay unchanged, and
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Speaker 4: it's likely that they'd probably stay unchanged at least for
7:46
Speaker 4: the moment through the next meeting at the beginning of May,
7:49
Speaker 4: at least looking at some of the CME futures. It
7:52
Speaker 4: really is this is time where so much of the
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Speaker 4: FED speak is just rightfully so I'm not, you know,
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Speaker 4: criticizing this for this at all, but it's just cliches
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Speaker 4: and hey, we'll wait and see. We got to see
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Speaker 4: what the data comes back in. But this, to your point,
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Speaker 4: they have to put numbers where you know, they got
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Speaker 4: to put their money where their mouth is to a sense,
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Speaker 4: just by putting out this doplet. So that's why there
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Speaker 4: will be interesting data pieces to parse from this. But
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Speaker 4: I would envision that they trend in the direction that
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Speaker 4: you just mentioned, cutting down economic growth, boosting up unemployment
8:23
Speaker 4: estmens a little bit, and adjusting inflation. And that's all
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Speaker 4: playing off of the tariffs that we've seen discuss but
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Speaker 4: no one really knows how long are they going to
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Speaker 4: be in place, for what type of impact that they'll
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Speaker 4: have from a pricing perspective. So that's what makes this
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Speaker 4: so challenging to parse out.
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Speaker 2: Yeah, so I think that again, some modest shifts in
8:43
Speaker 2: how they're projecting things like they're not going to be
8:48
Speaker 2: it's not going to be that whole sky is falling,
8:50
Speaker 2: you know. Thing that the last couple of weeks where
8:52
Speaker 2: you know, people were asking like, hey, are we already
8:54
Speaker 2: in recession and stuff like this, Like we've said on
8:57
Speaker 2: the show multiple times, let's pump the brakes. I mean,
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Speaker 2: it's it's it's pretty far to get from where we
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Speaker 2: are to recession. It can still happen quickly, but it's
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Speaker 2: it's not something that's that's even in the conversation right now.
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Speaker 2: Given the data we've been getting. And so again, maybe
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Speaker 2: the FED says, yeah, GDP growth is gonna be one
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Speaker 2: to nine this year instead of two to one. Unemployment
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Speaker 2: we thought it would be four to three. Maybe it's
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Speaker 2: gonna be four four four five pc inflation. Yeah, it's
9:22
Speaker 2: gonna come into the high twos instead of in the
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Speaker 2: mid twos. You know, that's kind of the magnitude that
9:27
Speaker 2: I think they're comfortable projecting right now.
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Speaker 4: Because why would you have no incentive to be more
9:31
Speaker 4: aggressive with it?
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Speaker 2: Why would you, Yeah, why.
9:33
Speaker 4: Why would you send that messaging when you and I
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Speaker 4: don't know and they don't really know how this is
9:37
Speaker 4: gonna trend So why would you be overly you know, emotional,
9:40
Speaker 4: not emotional, but you why would you be overly pessimistic
9:44
Speaker 4: about some of the projections, make some tweaks, but like
9:46
Speaker 4: you said, don't go crazy with it.
9:47
Speaker 2: So that's again gonna be the big thing that we're
9:50
Speaker 2: watching this afternoon. The FED meeting is gonna They're gonna
9:54
Speaker 2: release the interest rate decision at two pm, and then
9:57
Speaker 2: Powell is gonna be on from two thirty onwards. So
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Speaker 2: I know where I'll be at two thirty watching j Powell?
10:05
Speaker 4: Any uh?
10:06
Speaker 2: Anyone have uh any guesses as to tie color for Jay?
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Speaker 2: With purple? I don't watch that is it?
10:14
Speaker 4: I know you?
10:15
Speaker 2: Purple?
10:15
Speaker 4: It never changes, always purple, Jay, JB A little Carria.
10:21
Speaker 2: Purple is the color of royalty, and I think Jay,
10:25
Speaker 2: it's as close as we have to American royalty. Am
10:28
Speaker 2: I wrong? No tie? I am wrong? You could be wrong.
10:30
Speaker 2: I am wrong? No tie, Cash Powell. I like oka
10:34
Speaker 2: couple buttons Chester. If Powell wears Here's what I'll say
10:39
Speaker 2: to this, Tucker. If if Powell wears no tie today,
10:43
Speaker 2: I will eat a tie tomorrow. All Right, you heard
10:46
Speaker 2: it here first? Okay? If Power wears a purple tie.
10:50
Speaker 4: If any of our listeners have any connection to J. Powell,
10:53
Speaker 4: please get mustard on his tie.
10:56
Speaker 2: Can he text the Minutien see if he's got a
10:58
Speaker 2: line to Powell? Sure? See, Let's see what goes on there.
11:02
Speaker 2: Let's take a quick break here. When we come back,
11:05
Speaker 2: Oh good, we get to talk about the debt ceiling
11:07
Speaker 2: right after this.
11:09
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12:14
Speaker 2: All right, so let's talk about this piece here from
12:17
Speaker 2: the Wall Street Journal. As debt ceiling looms, the FED
12:20
Speaker 2: considers tweaking its portfolio runoffs. So a couple things. Yes,
12:24
Speaker 2: that is correct. We are, you know, getting back to
12:26
Speaker 2: having to discuss the debt ceiling because I don't know
12:31
Speaker 2: what if they've specified like the X date as to
12:34
Speaker 2: when they exactly expect to see this pop up, but
12:38
Speaker 2: I believe it's sometime this spring. I don't have the
12:41
Speaker 2: exact detail. I was poking around for it this morning.
12:44
Speaker 2: I couldn't find anything meaningful on it. But here's here's
12:48
Speaker 2: the thing. The FED. One of the things that they
12:50
Speaker 2: have been doing is reducing the size of their balance sheet,
12:55
Speaker 2: and effectively, what this means is that during times of crisis,
12:59
Speaker 2: the FED has bought up a whole bunch of different bonds,
13:02
Speaker 2: predominantly US treasuries, but also some mortgage backed securities and
13:05
Speaker 2: things like that, to the point where in the middle
13:08
Speaker 2: of twenty twenty two, it peaked around eight point nine
13:10
Speaker 2: trillion dollars of bonds that the FED held on its
13:13
Speaker 2: balance sheet. It's now down to around six point seven
13:17
Speaker 2: trillion dollars worth of bonds that it holds on its
13:20
Speaker 2: balance sheet, and they've been running them off at a
13:22
Speaker 2: pace of I think it's like one hundred and twenty
13:24
Speaker 2: billion dollars a month, somewhere in that range. And so
13:28
Speaker 2: the question is going to be, Hey, what what are
13:30
Speaker 2: you going to do with that? Because you know, there
13:33
Speaker 2: are some signs that are pointing to hey, you've kind
13:36
Speaker 2: of you know, gotten to the point where most excess
13:39
Speaker 2: reserves are probably exhausted from the system, and you don't
13:42
Speaker 2: necessarily need to, you know, be continuing to reduce the
13:46
Speaker 2: size of your balance sheet. Uh, And so effectively, the
13:53
Speaker 2: question is, Okay, when do they you know, make a
13:55
Speaker 2: change here? And the thought is pretty soon. And this
13:59
Speaker 2: comes back to something happened at the end of twenty
14:01
Speaker 2: nineteen into early twenty eight the end of twenty eighteen
14:04
Speaker 2: into early twenty nineteen, where J Powell famously at the
14:08
Speaker 2: end of twenty eighteen, the FED was in balance sheet
14:11
Speaker 2: runoff mode there as well, and said, yeah, the balance
14:13
Speaker 2: sheet is you know, on autopilot, and about oh gee,
14:18
Speaker 2: I don't know. Within like six weeks he had to
14:22
Speaker 2: pivot and be like, yeah, we're actually gonna halt balance
14:24
Speaker 2: sheet runoff because we started, you know, experiencing some dodginess
14:28
Speaker 2: in the financial system, and the FED never hiked interest
14:32
Speaker 2: rates again in that part of the cycle, and that
14:34
Speaker 2: was basically it. So I think that Powell, having gone
14:38
Speaker 2: through that, I think he was somewhat spooked by it,
14:40
Speaker 2: and I think this is something that informs his view
14:43
Speaker 2: on how he conducts monetary policy generally, and so as such,
14:47
Speaker 2: I think they're probably gonna take the approach of, hey,
14:49
Speaker 2: even though we could run the balance sheet off further,
14:52
Speaker 2: there's no real need to do so, and as such,
14:55
Speaker 2: maybe we can avoid you know, some volatility associated with
14:59
Speaker 2: bank reserves too low and call it a day here.
15:03
Speaker 4: Yeah, it seems like they just don't want any interference
15:05
Speaker 4: with that debt limit conversation and the runoff of the
15:09
Speaker 4: balance sheet. It can cause overnight lending issues in the
15:12
Speaker 4: market if you do durrain those money reserves from the
15:15
Speaker 4: banking system too quickly, and you know, that seems to
15:19
Speaker 4: be really the whole hold up the issue. You summarized
15:22
Speaker 4: it pretty well, like you kind of alluded to before
15:24
Speaker 4: the break on the debt ceiling front. There's only so
15:27
Speaker 4: much that can really be covered. But it seems like
15:29
Speaker 4: they should be able to navigate this reasonably well by
15:33
Speaker 4: perhaps pausing some of the bond runoff for the time being.
15:37
Speaker 2: Yeah, and the debt sealing stuff, it's not something like
15:39
Speaker 2: it's not going to be an urgent thing that we're discussing.
15:42
Speaker 2: Quite honestly, we should never discuss it because it shouldn't exist.
15:44
Speaker 2: But that's neither here nor there. This is something that
15:48
Speaker 2: is going to be coming up probably June, July, August.
15:51
Speaker 2: Like it'll it'll be a fun summer thing that we
15:53
Speaker 2: get to do alongside of barbecues.
15:55
Speaker 4: I thought, I thought, I read August. Yeah, as to
15:57
Speaker 4: when it might come up, Yeah.
15:59
Speaker 2: Burger's and debt sealing. It's a great way to spend
16:01
Speaker 2: a summer. If if you're asking me New York Times piece,
16:04
Speaker 2: does the FED share the stock markets worry about the economy. Well,
16:08
Speaker 2: let's let's define what the stock markets worry about the
16:11
Speaker 2: economy is before we talk about what the whether the
16:14
Speaker 2: FED shares or not. The S and P five hundred
16:17
Speaker 2: is still trading like nineteen point nine times forward earnings,
16:21
Speaker 2: which to me implies, Hey, we're not as exuberant as
16:25
Speaker 2: we were before, but we're still pretty exuberant, and so
16:28
Speaker 2: are worry At this point our being the markets can
16:32
Speaker 2: best be described as, hey, there are things that give
16:34
Speaker 2: us pauses to whether or not stock should have some
16:36
Speaker 2: of the highest valuations we've ever seen.
16:39
Speaker 4: Yeah, we've seen an eight point six percent sell off
16:42
Speaker 4: from the record high that we reached. We're down about
16:45
Speaker 4: four percent year to date on the S and P
16:47
Speaker 4: five hundred, so we've covered certainly has been a sell
16:50
Speaker 4: off over the course of the last month or so.
16:52
Speaker 4: I think it's important to keep those numbers in context
16:54
Speaker 4: that it is, you know, four percent year to date
16:57
Speaker 4: that we are down, and this comes off the heels
17:00
Speaker 4: of really good market years in twenty four in twenty three.
17:03
Speaker 4: In terms of the Fed, obviously the stock market is
17:06
Speaker 4: not something that is part of their core responsibilities. Now
17:10
Speaker 4: what they do can influence the stock market we've seen
17:13
Speaker 4: that over the course of the last couple of years.
17:15
Speaker 4: But really what this comes down to is the FED
17:19
Speaker 4: and their dot plot, which we alluded to in the
17:21
Speaker 4: first segment of the show. What are they going to
17:23
Speaker 4: see from a long term perspective, shorter term perspective for
17:28
Speaker 4: the economy and things like that. There certainly has been
17:31
Speaker 4: a lot of sentiment that's been negative. We've talked about
17:33
Speaker 4: there's been some retailers and airlines that have come out
17:36
Speaker 4: saying that consumption and sales have been weaker. So all
17:39
Speaker 4: this factors into the issues that the FED will try
17:42
Speaker 4: and sort out with its projections this afternoon.
17:46
Speaker 2: And here's one of a couple things. First, I don't
17:48
Speaker 2: think the Fed's likely to overreact, just because generally, if
17:52
Speaker 2: there's one thing you can say about the FED, they
17:53
Speaker 2: typically underreact to most things. You know, the times when
17:58
Speaker 2: they do overreact, I think, you know, get a little
18:01
Speaker 2: bit embarrassing for them. But when inflation was, you know,
18:04
Speaker 2: ratcheting up, did the FED overreact to inflation?
18:07
Speaker 4: Underreacted there? I would say you could say they overreacted
18:11
Speaker 4: to the amount of stimulus that was needed to be
18:14
Speaker 4: that was.
18:15
Speaker 2: You know, the FED didn't part is stimulus, right, that
18:17
Speaker 2: was Congress doing that. Yeah, And then you know, did
18:20
Speaker 2: they overreact.
18:21
Speaker 4: The bond buying the he's going for too long?
18:24
Speaker 2: Did the FED overreact when Silicon Valley Bank blew up? No,
18:28
Speaker 2: they weren't like, oh gee, this means recessional's cut rates.
18:31
Speaker 2: Like they did nothing. And so I think most of
18:33
Speaker 2: the time with the FED, the right answer is do less.
18:37
Speaker 2: And I think they're they're actually kind of good at that.
18:39
Speaker 2: And recently, you know, the last eighteen months, I think
18:41
Speaker 2: they've done a nice job of doing less. I think
18:43
Speaker 2: they've been good at doing less, which is good to see.
18:47
Speaker 2: I think that the other piece is, you know, for
18:51
Speaker 2: all of the chatter out there about you know, how
18:54
Speaker 2: worried people are in this and that, I don't think
18:56
Speaker 2: the stock market's overreacted either. No. You know, like a
19:00
Speaker 2: ten percent pullback is something that we see on a
19:02
Speaker 2: pretty regular basis. If the market has sold off like
19:06
Speaker 2: twenty five percent in the last three weeks, then he'd
19:09
Speaker 2: be like, Okay, like this is you know, even if
19:11
Speaker 2: you know recession is definitely coming, which I'm not saying
19:14
Speaker 2: it is, like this is probably too far given the
19:16
Speaker 2: totality of what We've seen like an eight to ten
19:18
Speaker 2: percent pullback.
19:19
Speaker 4: Based off a question more healthy, you know, based on
19:22
Speaker 4: a market that was heavy in speculation and pretty overvalued.
19:25
Speaker 2: Yeah, let's take a quick break here. When we come back,
19:27
Speaker 2: We're joined by Todd Lutsky for Ask Todd. We've also
19:30
Speaker 2: got Wall Street Watch coming up as well.
19:41
Speaker 1: Like us on Facebook and follow us on Twitter at
19:44
Speaker 1: TFE show. Breaking business news is always first right here
19:48
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:53
Speaker 1: Street Watch. A complete look at what's moving market so
19:56
Speaker 1: far today, right here on the Financial Exchange Network.
20:00
Speaker 5: With all eyes on the FED. Markets today are well
20:03
Speaker 5: into positive territory ahead of the conclusion of the Central
20:06
Speaker 5: Banks meeting at two o'clock this afternoon, where rates are
20:10
Speaker 5: expected to remain steady. Wall Street will be paying close
20:13
Speaker 5: attention to FED Chairman Jerome Powell's press conference soon after
20:16
Speaker 5: at two point thirty for any noteworthy remarks about the economy.
20:20
Speaker 2: At the moment, the.
20:20
Speaker 5: Dow up by two thirds of a percent, are two
20:23
Speaker 5: hundred and fifty nine points, SMP five hundred also up
20:26
Speaker 5: over two thirds of a percent, or thirty eight points,
20:29
Speaker 5: and the Nasdaq is up nearly one percent higher one
20:32
Speaker 5: hundred and sixty points, Russell two thousands up by about
20:35
Speaker 5: seven tenths of a percent or fourteen points. Ten year
20:38
Speaker 5: Treasure reeled up by two basis points at four point
20:41
Speaker 5: three zero percent, and crude oil edging higher, trading just
20:46
Speaker 5: below sixty seven dollars a barrel. General Mills reported earnings
20:50
Speaker 5: ahead of the open this morning, where its fiscal third
20:52
Speaker 5: quarter results were below internal expectations. The maker of Cheerios
20:57
Speaker 5: and Bisquick also lowered its full year guidance a mid
21:00
Speaker 5: consumer spending less on snacks. General Mills shares it down
21:04
Speaker 5: about two percent. Meanwhile, Tesla shares up over two and
21:08
Speaker 5: a half percent after the ev maker received approval from
21:11
Speaker 5: the California Public Utilities Commission for a passenger transportation permit,
21:16
Speaker 5: making it one step closer toward offering ride hailing services elsewhere,
21:21
Speaker 5: and video shares are up over one percent after the
21:23
Speaker 5: chip maker's CEO, Jensen Wang said at its flagship conferences
21:28
Speaker 5: that continued advances in a I would require at least
21:31
Speaker 5: one hundred times the computing needs believed even a year ago,
21:35
Speaker 5: and Health Equity shares sinking by over twenty percent after
21:39
Speaker 5: the health focused fintech company reported weaker than expected fourth
21:44
Speaker 5: quarter earnings on Tucker Silva and that's Wall Street Watch.
21:49
Speaker 1: This is Asked Todd on the Financial Exchange Radio network.
21:53
Speaker 1: If you have an existing estate plan or in the
21:55
Speaker 1: market for one, Tod Letskey is here to answer your
21:57
Speaker 1: questions and help you plan for later life. Ask Todd
22:00
Speaker 1: is presented by Cushing and Dolan, serving Massachusetts and New
22:04
Speaker 1: England for more than thirty five years, helping families with
22:07
Speaker 1: a state and tax planning, Medicaid planning, and probate law.
22:10
Speaker 1: Visit Cushingdolan dot com. Now here's Todd Lutsky.
22:15
Speaker 2: As promised, we are now joined by the one and
22:18
Speaker 2: only Todd Lutsky for Ask Todd. It's your chance to
22:21
Speaker 2: ask Todd your questions about your estate plan and we
22:25
Speaker 2: got the phone lines wide open for you to give
22:29
Speaker 2: him a call. Eight eight eight to zero five two
22:32
Speaker 2: two sixty three. That is the number to call to
22:34
Speaker 2: ask Todd your state planning questions live on air right now.
22:39
Speaker 2: Usually get through two maybe three calls, so get calling
22:42
Speaker 2: early and often in order to make sure your call
22:47
Speaker 2: is uh taken. Here again eight eight eight to zero
22:50
Speaker 2: five two two sixty three is the number. One more time.
22:54
Speaker 2: It is eight eight eight to zero five two two
22:59
Speaker 2: six three, Lotski. How are you doing today?
23:02
Speaker 6: I am never better?
23:03
Speaker 2: How are you good? Trying to plan some some summer
23:06
Speaker 2: trips and stuff like that. Oh yeah, wife and I
23:09
Speaker 2: are considering a trip to Mount Everest. She wants to
23:14
Speaker 2: color her hair at the top of it. Yeah, she's
23:17
Speaker 2: willing to die on that hill. Todd, I want to
23:21
Speaker 2: talk a little bit about life estates. Okay, Let's say
23:27
Speaker 2: that I am someone who has reserved a life estate
23:30
Speaker 2: in a property. Okay, and I end up going into
23:33
Speaker 2: a nursing home.
23:35
Speaker 6: All right, but not just a property on your home,
23:37
Speaker 6: my home, on my home.
23:39
Speaker 2: What happens to my home in that case, as far
23:43
Speaker 2: as leans against it, equity, you need to be used.
23:46
Speaker 2: How does how do things work from that perspective?
23:49
Speaker 6: So, as we've said before, there are two ways to
23:53
Speaker 6: sort of do a life estate. A right way and
23:55
Speaker 6: a wrong way, is what I like to say, but
23:57
Speaker 6: I should say one is less bad and one is bad.
24:00
Speaker 6: So the way to do it is, in your example,
24:05
Speaker 6: we're taking the house and we're putting it in the
24:07
Speaker 6: hands of the children, and we're reserving the right to
24:11
Speaker 6: live there, which is one way to do a life estate. Sure,
24:14
Speaker 6: so there are benefits. I don't want to make it
24:16
Speaker 6: sound like there's no benefits to doing a life estate.
24:19
Speaker 6: There certainly is and are benefits, one of which is
24:23
Speaker 6: what you said. Let's say you put this arrangement together
24:27
Speaker 6: and you make it that five years. Remember that that's
24:30
Speaker 6: that waiting period that you really there's only a very
24:33
Speaker 6: few ways to ever avoid that. But so for the
24:36
Speaker 6: most part, you're gonna have to wait five years in
24:39
Speaker 6: order for it to be protected from the nursing home.
24:41
Speaker 6: But if you set it up and get beyond that
24:44
Speaker 6: waiting period and in your example, then need to go
24:48
Speaker 6: to a long term care facility, the house will be
24:52
Speaker 6: protected one hundred percent from the nursing home.
24:54
Speaker 2: What about on the other side of that transaction, what
24:58
Speaker 2: happens if I've transferred the property to my kids, and
25:02
Speaker 2: let's say that one of them runs into some kind
25:04
Speaker 2: of legal situation where they have a creditor who's looking
25:09
Speaker 2: for money from them, or let's say that you know,
25:13
Speaker 2: they need liquidity because something went wrong in their business
25:16
Speaker 2: and they need to sell that property. How do things
25:18
Speaker 2: work if they run into financial trouble.
25:20
Speaker 6: Yeah, I think it's a great question, because you've got
25:22
Speaker 6: to look at a life estate from all angles, right
25:25
Speaker 6: from all sides of this equation, and the kids side
25:30
Speaker 6: of this equation is where some of the problems come in.
25:32
Speaker 6: While we just discussed a benefit, I think some of
25:35
Speaker 6: the problems would be, you know, it is going to
25:38
Speaker 6: technically be exposed to that kid's creditors right away. Why
25:43
Speaker 6: because they do own it. You made a completed gift
25:45
Speaker 6: of a future interest. Now, good news for the life tenant,
25:50
Speaker 6: the life tenant that they can't move against the life tenant,
25:54
Speaker 6: so they will have that confirmed right to live there.
25:56
Speaker 6: They won't lose the house to that creditor. However, that
26:00
Speaker 6: child will have to deal with that creditor. Let's say,
26:02
Speaker 6: for an example, it's a divorce. If it's a divorce,
26:06
Speaker 6: at that moment, that child going through the divorce might
26:11
Speaker 6: have to say to the soon to be ex spouse, Okay,
26:15
Speaker 6: I'll tell you what, here's the value of the home.
26:18
Speaker 6: I'm going to keep the home to protect my mom,
26:20
Speaker 6: and I'm going to pay you, you know the value,
26:24
Speaker 6: your half of the value of that home. Sure, just
26:26
Speaker 6: allocate asset so to me. It's still a problem for
26:29
Speaker 6: the creditor. So I don't love it for that reason.
26:32
Speaker 2: Talking with Todd Watski from the law firm of Cushing
26:35
Speaker 2: and Dolan. If you've got a question to ask Todd,
26:37
Speaker 2: this is your opportunity, live on air right now, still
26:41
Speaker 2: room on the phone lines at eight eight eight to
26:44
Speaker 2: zero five two two sixty three. That is the number
26:47
Speaker 2: to call to ask Todd your questions again. Eight eight
26:50
Speaker 2: eight to zero five two two sixty three. We're going
26:54
Speaker 2: to take a quick break here, but when we come back,
26:57
Speaker 2: it is right to your questions with Todd. That number
26:59
Speaker 2: one one more time is eight eight eight two zero
27:03
Speaker 2: five two two six three.
27:06
Speaker 1: Ask Todd with Todd Lutsky every Wednesday at ten thirty
27:10
Speaker 1: only here on the Financial Exchange Radio Network. Todd Letsky
27:16
Speaker 1: answers your questions about a state and elder life planning
27:18
Speaker 1: every Wednesday at ten thirty right here on the Financial
27:22
Speaker 1: Exchange Radio Network.
27:33
Speaker 2: All right, let's get to your calls with Todd Lutsky.
27:37
Speaker 2: First up, we've got Jimmy in Provincetown. Jimmy, what is
27:42
Speaker 2: your question for Todd?
27:46
Speaker 3: Hi? Todd? How you doing? Never have a question in
27:49
Speaker 3: regards to when we sell the property in the trust? Yeah,
27:54
Speaker 3: the taxation isf you on the capitol games? Would the
27:57
Speaker 3: trust pay it or do with the beneficiary pay it
28:00
Speaker 3: after the assets are distributed?
28:03
Speaker 6: So so Jimmy remind me, just because there's lots of
28:06
Speaker 6: Jimmy's are are you? Is this my trust that we
28:10
Speaker 6: did or is it another person's irrevocable trust?
28:14
Speaker 3: Well, we did one for my mother, and then when
28:17
Speaker 3: she passed away, we did a similar one for me
28:22
Speaker 3: and my brothers and sisters. So I'm the trustee and
28:25
Speaker 3: my brothers and sisters, uh beneficiary.
28:28
Speaker 6: And so okay, so what you're saying is you're my client. Yeah, okay,
28:33
Speaker 6: I just needed to know that so that I can
28:35
Speaker 6: you know, because then I know it's my trust. If
28:37
Speaker 6: it was someone else's trust that I didn't draft, it
28:40
Speaker 6: would be harder for me to answer the question. So
28:43
Speaker 6: now that I can tell you that it's our trust,
28:46
Speaker 6: and so your your portion of the property? Did you
28:51
Speaker 6: you said your brothers and sisters inherited this property?
28:56
Speaker 3: We all did, so, y'all?
28:58
Speaker 6: Yeah, what percent do you you own?
29:02
Speaker 3: I have a forty percent interest, and.
29:04
Speaker 6: Your forty percent interest we put into an irrevocable trust
29:07
Speaker 6: for you.
29:07
Speaker 2: Correct, I don't think so.
29:11
Speaker 3: I think it was just just just I don't know
29:14
Speaker 3: if it was irreplicable or not. Oh so, can really
29:17
Speaker 3: do a fleet trust like that?
29:19
Speaker 6: Oh so again, Jim, In order for me to answer
29:22
Speaker 6: the question, I kind of need to know what kind
29:25
Speaker 6: of trust we did for you. Just hard for me
29:28
Speaker 6: to remember, right, you know, off the top of my head.
29:29
Speaker 6: So I'm going to give you two answers. If we
29:33
Speaker 6: did an estate plan together, I can assure you that
29:35
Speaker 6: I would have transferred your interest in the property into
29:39
Speaker 6: a trust. Okay, And and the ownership your only your interest,
29:44
Speaker 6: though not not the other chill other siblings. I would
29:49
Speaker 6: have transferred your interest into a trust. That trust would
29:52
Speaker 6: have been either revocable or irrevocable, depending on what your
29:57
Speaker 6: wishes were. So when we met, was one of your
30:01
Speaker 6: wishes to protect assets from the nursing home in case
30:04
Speaker 6: you got sick in the future.
30:07
Speaker 3: I don't think we did a trust for me.
30:09
Speaker 6: Oh so, then you're we're probably not a client then,
30:12
Speaker 6: In other words, other than I did it for.
30:13
Speaker 3: Your mom, right, you did it for my mom? Yeah?
30:16
Speaker 6: Okay, so your mom passed and you got forty percent interest. Yeah,
30:21
Speaker 6: so I'm trying to understand your question. So now you're
30:24
Speaker 6: selling that property. Yeah, okay, so you you went, I'm sorry,
30:30
Speaker 6: would you say.
30:31
Speaker 3: We're in the process of selling the property here on the.
30:34
Speaker 6: Cave right, So you and your siblings are selling the
30:37
Speaker 6: property yep. And you and your siblings are signing any
30:41
Speaker 6: purchase in sale agreement in your own name, correct. Yeah, okay,
30:47
Speaker 6: So there's no trust involved here at all, because I
30:50
Speaker 6: thought in the beginning you said you were selling it
30:51
Speaker 6: from a trust and I might have misheard that. So
30:55
Speaker 6: you're actually just selling it from your own name, correct, Yeah? Okay.
31:00
Speaker 6: So the answer is on the date of your mom's passing.
31:05
Speaker 6: That property was fully included in her estate for estate
31:09
Speaker 6: tax purposes, So like, when did she pass.
31:12
Speaker 3: She passed in to sixteen, March fifteen to sixteen.
31:20
Speaker 6: So of twenty of, twenty twenty four, twenty twenty five.
31:27
Speaker 3: She passed in twenty sixteen.
31:29
Speaker 6: Oh, in twenty sixteen, okay, So if she passed in
31:32
Speaker 6: twenty sixteen, now that was quite a while ago, so
31:36
Speaker 6: I'm sure there's been some appreciation. But the basis, the
31:40
Speaker 6: cost basis for you and your siblings will be whatever
31:44
Speaker 6: the value of that property was on the date of
31:48
Speaker 6: her death in twenty sixteen, So you've got to go
31:50
Speaker 6: back and get a back dated appraisal for that, find
31:53
Speaker 6: out what it was worth. Then that's your basis. Then
31:58
Speaker 6: whatever it has grown to from that day, the difference
32:02
Speaker 6: between what you sell it for today and what it
32:06
Speaker 6: was worth in twenty sixteen, plus any capital improvements you
32:12
Speaker 6: might have made or your siblings have made to the
32:14
Speaker 6: property since twenty sixteen is your basis. So date of
32:20
Speaker 6: death value plus improvements is basis minus what you sell
32:25
Speaker 6: it for today capital gain. And if you don't live
32:29
Speaker 6: there as your primary residence, you're not going to get
32:31
Speaker 6: any capital gains exclusion. It'll just be the capital gains
32:35
Speaker 6: tax associated with that. So you know, good news in
32:38
Speaker 6: the sense that at least you got as much of
32:40
Speaker 6: a basis step up as you possibly could have by
32:43
Speaker 6: doing the planning, or that your mother did the planning.
32:46
Speaker 6: It's just now a function of paying the gain on
32:48
Speaker 6: the future growth. So hope that helps, and good luck
32:52
Speaker 6: with the sale. So folks, you know, that's a great
32:55
Speaker 6: question because capital gains come up all the time when
32:58
Speaker 6: we talk about life states, and so if you've got
33:02
Speaker 6: a life estate and you're wondering if you go to
33:04
Speaker 6: sell it, what the tax ramifications are. Really need to
33:07
Speaker 6: get the guide right, because this is one of those
33:09
Speaker 6: things where you're going to find out that there are
33:12
Speaker 6: sometimes negative capital gains tax consequences associated with selling a
33:18
Speaker 6: home in a life estate arrangement, especially when the remaindermen
33:22
Speaker 6: are the children. This guide not only talks about those issues,
33:26
Speaker 6: it talks about the two ways to create a life
33:29
Speaker 6: estate and other gift tax, income tax, estate tax, creditor
33:35
Speaker 6: issues associated with loss of control. Another question associated with
33:40
Speaker 6: these life life estates. So if you got one, or
33:44
Speaker 6: you're thinking about doing one, call and get the guide
33:46
Speaker 6: and learn what you're getting into. Eight six six eight
33:50
Speaker 6: four eight five six nine nine or Legal Exchange Show
33:54
Speaker 6: dot com again eight six six eight four eight five
33:58
Speaker 6: six nine nine or Legal Exchange Show dot com toud.
34:02
Speaker 2: Before the break, we were talking about potential downsides to
34:07
Speaker 2: you know, kind of what you might see in a
34:09
Speaker 2: life estate if things go wrong. We covered a couple
34:12
Speaker 2: examples there. Huh, what other potential issues are there with
34:16
Speaker 2: the use of life estates in a state plan is
34:20
Speaker 2: kind of like a core piece of one.
34:22
Speaker 6: Yeah, and I think maybe it's a great follow up
34:25
Speaker 6: question really to Jimmy, who just called because I think
34:28
Speaker 6: we probably should spend some time since he's selling a
34:31
Speaker 6: piece of property, and I can kind of compare what
34:33
Speaker 6: he did or what his mom did and what we
34:36
Speaker 6: did for them versus a life estate situation. So he's
34:40
Speaker 6: selling piece of property after mom passes, So that's a
34:43
Speaker 6: little different, full step up. No problem in the gain
34:46
Speaker 6: world except for the future growth. But if you're living right,
34:50
Speaker 6: people set this stuff up and they could be sixty five,
34:53
Speaker 6: you know, nine five years later they want to say,
34:56
Speaker 6: you know, now I'm seventy and I want to move
34:58
Speaker 6: to Florida. Oh well I want to sell my house.
35:00
Speaker 6: Sure they should be allowed to do that, But if
35:03
Speaker 6: you gave the house to the kids and reserved a
35:07
Speaker 6: life estate, here are some steps that you have to
35:09
Speaker 6: go through in order to sell it. First, you have
35:12
Speaker 6: to ask the kids okay, well I don't want to
35:15
Speaker 6: have to do that. That's problem number one. Number two.
35:19
Speaker 6: Let's assume that they're nice kids and they say, yeah,
35:21
Speaker 6: we're going to sell it. Now both people have to sign,
35:24
Speaker 6: the children and the life tenant. Then we have to
35:27
Speaker 6: go to an irs table based on the life tenant's
35:31
Speaker 6: age in the month in which the life tenant is selling,
35:35
Speaker 6: find the applicable federal interest rate in effect, so that
35:38
Speaker 6: we can determine what percentage value of the proceeds from
35:43
Speaker 6: the sale get allocated to the life tenant and what
35:47
Speaker 6: percentage proceeds from the sale get allocated to the children.
35:51
Speaker 6: I can assure you the older you get, the smaller
35:56
Speaker 6: the percentage proceeds of the sale will be to the
35:59
Speaker 6: life tenant. So if you're seventy five when you're selling this,
36:02
Speaker 6: you might only get twenty twenty five percent of the money.
36:06
Speaker 6: So if you sell the house and you only get
36:08
Speaker 6: twenty twenty five percent of the money, I suspect you
36:11
Speaker 6: don't have enough money to buy your new house in Florida.
36:16
Speaker 6: So now you need to ask the children to give
36:19
Speaker 6: you back money that they got. Well, that's not a
36:22
Speaker 6: good place to be. In addition, what about the income tax? Oh,
36:26
Speaker 6: I forget that for a minute. The kids might have
36:28
Speaker 6: a gift tax when they give back the money to
36:32
Speaker 6: mom and dad if they give it back, So that's
36:34
Speaker 6: a problem. But more importantly, what's the capital gains tax? Well,
36:39
Speaker 6: the life tenant would get to a capital gains exclusion
36:43
Speaker 6: two fifty if you're married. I'm sorry if you're single
36:46
Speaker 6: five hundred thousand if you're married, but the children don't
36:50
Speaker 6: if they don't live there, they don't get a remainder interest,
36:52
Speaker 6: or they don't get a capital gains exclusion. They're going
36:55
Speaker 6: to have to pay higher capital gains tax than you
36:58
Speaker 6: would if we got the whole capital gains exclusion for
37:01
Speaker 6: mom and dad, folks. That's just one example of a
37:05
Speaker 6: life estate issue.
37:06
Speaker 2: Mister Lutsky, thank you so much for joining us today.
37:09
Speaker 6: Always a pleasure.
37:11
Speaker 1: This has been Asked Odd on the Financial Exchange Radio network.
37:15
Speaker 1: Ask Todd with Todd. Lutsky has been presented by Cushing
37:17
Speaker 1: and Dolan, serving Massachusetts and New England for more than
37:20
Speaker 1: thirty years, helping families with the state and tax planning,
37:23
Speaker 1: Medicaid planning, and probate law. Call eight hundred and three
37:26
Speaker 1: nine three four thousand and one or visit Cushingdolan dot com.
37:29
Speaker 1: The views expressed in this segment are solely those of
37:31
Speaker 1: Cushing and Dolan Armstrong Advisory. He does not provide any
37:34
Speaker 1: legal or tax advice. Please consult with your legal or
37:36
Speaker 1: tax advisor on such matters. Cushing and Armstrong do not
37:38
Speaker 1: endorse each other and are not affiliated