Micro Lending

Micro Lending is the extension of very small loans, called micro loans, to impoverished borrowers who typically lack any form of collateral, steady full-time employment and a verifiable credit history.  It is designed not only to support entrepreneurship and alleviate poverty, but also in many cases to empower women and uplift entire communities. In many communities worldwide, in developed and developing nations alike, women lack the highly stable employment histories that traditional lenders tend to require. This reality might result from factors such as leaving the paid workforce to care for children and elderly relatives. As of 2010 an estimated 75 million men and women held micro loans that totalled US $38 billion.  Grameen Bank, who first founded micro loans, reports that repayment success rates are between 95 and 98%. As of 2012, micro lending is widely used in developing countries and is presented as having "enormous potential as a tool for poverty alleviation."

The principles of micro lending have also been applied in attempting to address several non-poverty related issues. Among these, multiple Internet-based organizations have developed platforms that facilitate a modified form of peer-to-peer lending where a loan is not made in the form of a single, direct loan, but as the aggregation of a number of smaller loans, often at a reduced or negligible interest rate.

New platforms that connect lenders to micro-entrepreneurs are emerging on the Web, for example Kiva, Zidisha, and World Vision Micro all provide aggregate loans to micro-entrepreneurs.  In 2010, US based non-profit Zidisha became the first peer-to-peer micro lending platform to link lenders and borrowers directly across international borders with any intermediaries.  One of the great features of the program is that lenders can track the progress of the recipient of their loan.

If you are looking to a philanthropic alternative to direct giving of cash to a charity, web-based micro lending sites may be a viable option to consider.

Obamacare Taxes in 2014

At the end of 2012, we discussed the implementation of the Affordable Care Act also known as Obamacare.  The article discussing the taxes which began in January of this year can be found here:  Obamacare 2013.  The taxes which began in January are the first phase of the Act with the second phase coming in January of 2014.  While we are still roughly 8 months away, we thought we would mention that health care insurance premiums could dramatically increase as insurance providers pass on the new taxes to consumers (see Tax on Health Insurers below). Anyone who is paying for health insurance should expect an increase in premiums.

Below is a summary of the taxes that will take effect in 2014.

Individual Mandate Excise Tax (Jan 2014): Starting in 2014, anyone not buying “qualifying” health insurance must pay an income surtax according to the higher of the following:

	1 Adult	2 Adults	3+ Adults
2014	1% AGI/$95	1% AGI/$190	1% AGI/$285
2015	2% AGI/$325	2% AGI/$650	2% AGI/$975
2016 +	2.5% AGI/$695	2.5% AGI/$1390	2.5% AGI/$2085

Exemptions for religious objectors, undocumented immigrants, prisoners, those earning less than the poverty line, members of Indian tribes, and hardship cases.

 

Employer Mandate Tax (Jan 2014): If an employer does not offer health coverage, and at least one employee qualifies for a health tax credit, the employer must pay an additional non-deductible tax of $2000 for all full-time employees.  Applies to all employers with 50 or more employees. If any employee actually receives coverage through the exchange, the penalty on the employer for that employee rises to $3000.  If the employer requires a waiting period to enroll in coverage of 30-60 days, there is a $400 tax per employee ($600 if the period is 60 days or longer).

Tax on Health Insurers (Jan 2014): Annual tax on the industry imposed relative to health insurance premiums collected that year. Phases in gradually until 2018. Fully-imposed on firms with $50 million+ in profits.

With the economy still struggling to grow at full capacity, we expect these additonal taxes could weigh heaviliy on consumer spending in 2014.

Dow Jones Average At All-time High

This past week saw the Dow Jones Industrial Average reach an all-time high.  The S&P 500 index isn’t far behind, just a few percent from its all-time high established in October 2007.  It has been a long 13 years for most investors.  This dreary market has conditioned most investors to fear the worst from capital markets.

However, unlike the backdrop to the market peaks of 2000 and 2007, both economic conditions and monetary policy remain favorable to the equity markets going forward. In March 2000, the Fed had been raising rates for a full year.  There was one more rate hike in May 2000 that essentially ended the bull market.  It wasn’t until the following year the Fed would lower rates for the first time.  Unfortunately, business models by US corporations were predicated on unrealistic expectations and the slowdown in the economy was quite severe.

In 2007 the Fed had just started to wake up to the severity of the subprime crisis when the market peaked. Indeed the decision to reduce the discount rate in August and the Fed funds rate in September provided the final spurt that took the S&P 500 to its new high on October 12, 2007.  We don’t need to remind readers what happened in over the next year and one half.

The situation today is much different.  The Fed remains in permanent liquidity mode and continues to buy bonds at a furious pace, with no end in sight.  While we worry about the long term implications of Fed policies to the economy and the dollar, it has definitely worked wonders for the equity markets.  Monetary policy is a very important determinate to investing in equity markets, and remains a positive influence.

In addition, economic growth over the past two years has been positive, albeit modestly so.  Corporations and consumers continue to deleverage which is another plus. 

None of this guarantees it will be smooth sailing and we would expect the next downturn in the markets to be very volatile, especially if the market keeps climbing at the current pace.  If the market continues to increase at this rate it will almost double by this time next year.  We don’t think that is very likely.