Category Archives: fed

PragCap: Fallacy of Composition – National Debt Edition

Long time readers of this blog know that Cullen Roche of the PragCap blog is my favorite economics blogger.  If you’re not reading him, you should. In a recent “Three Things I Think I Think” Cullen puts the US National Debt into proper prospective:

Continue reading PragCap: Fallacy of Composition – National Debt Edition

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Irrelevant Ups and Downs 

downloadThe U.S. stock market gained 2.05% recently, the biggest one-day gain for the S&P 500 index since early September.  Of course, this comes after the same index was down 1.1% (Wednesday) and 1.4% (Thursday).

What’s going on?

Of course, no person alive knows exactly what drives the psychology of millions of investors, despite the confident analyses you read in the papers and see on cable financial news channels.   Yes, on Wednesday and Thursday, some investors may have been disappointed that the European Central Bank provided only the stimulus to the European economies that it had promised—when everybody seemed to be expecting more.  Analysts said that the rally on Friday was due to the encouraging jobs report issued by the Labor Department, which told us that 211,000 net jobs had been created in November, rather than the 200,000 that had been forecast.

But does any of this make sense?  Stimulating the European economy means more potential buyers for American goods and potentially more euros to buy them with.  Shouldn’t that cause American stocks to be MORE valuable than they were before?  The jobs data, meanwhile, means there will be more competition for workers, which often leads to higher wages and correspondingly diminished corporate profits.  Above and beyond that, the reassuring employment picture means that the Federal Reserve Board is now nearly certain to allow short-term interest rates to rise on December 16.  Shouldn’t that cause stocks to be less valuable?

The truth is that none of these events causes stocks to change their real intrinsic value in the least, and you should be skeptical every time you hear journalists draw links between headlines and stock movements.  The magnitude of the shifts should be a clue; how can a company—let alone a basket of 500 companies—be worth 2% more one day than it was yesterday?  Did they all win the lottery?  Did they all get caught making significant accounting errors that understated their earnings?  How much more likely is it that investors have to make guesses—sometimes wild ones—as to the value of companies, getting it more or less right over time, but constantly over- and under-shooting in their daily guesses?  If you follow this line of reasoning, it is helpful to note that the value of U.S. stocks, despite all this back and forth action, was essentially unmoved for the week, and pretty much unmoved for the year.

The markets may go back down on Monday, or they might soar.  This year may or may not end with a net gain.  None of that matters to your portfolio, which is slowly increasing in value to the extent that the companies you own are building value in ways that have nothing to do with the headlines.  If the world comes to an end, that will have an impact on the markets that we can measure with some precision.  Short of that, short-term market movements, and particularly the explanations that writers and pundits attach to them, are entertainment—and not especially entertaining at that.

Our recommendation?  Go watch a movie instead.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Sources:

Indexes Erase Thursday Loss; Ulta, Alaska Lead IBD 50

Stocks rallied across much of the session Friday, as a strong November jobs report overpowered a sharp pullback in oil prices and many energy stocks. The Nasdaq and the S&P 500 both popped 2.1%. Preliminary data showed those moves carrying in weak trade.

AP News – ECB stimulus falls short of hype, causing market plunge

FRANKFURT, Germany (AP) – The European Central Bank on Thursday ramped up efforts to stimulate the sluggish eurozone economy, but the measures fell far short of what investors had expected and stocks took a painful tumble.

Jobless rate stays at 5% in November, clearing way for Fed

Bloomberg 12/4/2015 Victoria Stilwell Employers added more jobs than forecast in November, underscoring Federal Reserve Chair Janet Yellen’s confidence that the U.S. economy is strong enough to withstand higher borrowing costs. The 211,000 increase in payrolls followed a 298,000 gain in October that was bigger than previously estimated, a Labor Department report showed Friday.

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Medicare Fix-It

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Congressional leaders and the Obama Administration have fixed the potentially alarming increase in Medicare Part B premiums under the recently-passed government budget deal.

Medicare Part B covers most health care services outside of hospitals, and thus represents one of the biggest expense items in the government-run health system.  The program is voluntary, but 91% of all Medicare beneficiaries are enrolled in Part B.

The problem that had to be fixed arose because, under Social Security and Medicare rules, the government is required to collect 25% of all expected Part B costs from recipients each year—in the form of premiums.  The total Part B cost was anticipated to reach $171.2 billion 2016.

However, another provision says that in years where there is no increase in Social Security benefits—such as next year—Medicare premiums must be held steady for current Social Security recipients.  As a result, the entire increase would have had to be borne by enrollees who either don’t yet collect Social Security checks; enrollees with incomes above $85,000 (single) or $170,000 (married); or are dual Medicare-Medicaid beneficiaries.  In all, these three categories represent 30% of 2016 Medicare beneficiaries—roughly 7 million Americans.

The new budget deal creates a $12 billion loan from the U.S. Treasury to the Medicare trust fund to reduce the impact on those Medicare participants.  Instead of seeing their monthly premiums go up from $104.90 to $159.30, they will experience a more modest 14% premium increase, to $120 a month next year, plus a monthly surcharge of $3.  This will allow premiums to rise more gradually, and spread the cost over a longer period of time.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association

Sources:

Medicare Premium Increases: Not as Bad as Predicted

The Obama administration and congressional leaders have finally reached a tentative budget agreement that will prevent a 52 percent spike in Medicare premiums for millions of Americans. Without the bipartisan budget deal about 17 million Medicare recipients would see their Medicare Part B premiums soar from $104.90 to about $160, USA Today reports.

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https://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html

FY2016 Budget in Brief – CMS Medicare

Topics on this page: CMS Medicare Budget Overview | CMS Medicare Programs and Services | The Four Parts of Medicare | 2016 Legislative Proposals | Affordable Care Act Highlights Strengthening Medicare | Highlights of the Protecting Access to Medicare Act | Highlights of the Improving Medicare Post-Acute Care Transformation Act of 2014 | FY 2015 Medicare Legislative Proposals The Centers for Medicare & Medicaid Services ensures availability of effective, up-to-date health care coverage and promotes quality care for beneficiaries.

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The Deficit Shrinks Again

US-budget-deficit-shrinks-faster-than-expected

You might remember some years back when the U.S. budget deficit was one of the biggest political issues on the campaign trail.  Yet this year, after one Republican debate and a lot of jockeying for political position, the subject seems to have gone away.  Why?

The most probable reason is that the U.S. has retreated from an unsustainable budget mess much faster than anybody anticipated.  In 2009, when the U.S. government was stimulating the world out of the Great Recession, the government’s shortfall came to $1.4 trillion, dangerously close to a red line of 10% of the economy, as outlined in “This Time It’s Different,” an analysis of government deficits around the world since the Middle Ages.  Today, the projected deficit is lower by nearly $1 trillion: the fiscal year ending in September is expected to close out with a $425 billion deficit, more than $150 billion lower than economists expected at this time last year.

It might be harder for politicians to generate public outrage at a deficit coming in so far from the alleged tripwire: this year, the shortfall is projected at a much more manageable 2.4% of GDP.

The bad news in all this is that tax revenues for the first ten months of the fiscal year topped a record $2.7 trillion, almost 8% higher than the revenues collected over the first ten months of 2014—and most of it came out of the pockets of consumers like you.  Individuals paid $1.3 trillion of the total, about five times more than corporations paid ($266 billion). Estate and gift taxes brought in an additional $16 billion.

Where is the money going?  Roughly $738 billion was sent to Social Security recipients and $477 billion paid the medical costs for Medicare recipients. Another $496 billion went to defense spending and $398 billion is allocated to health spending. Roughly $209 billion went to net interest on our debt—Treasury bond and T-bill payments to investors and pension funds.

Sources:

http://www.calculatedriskblog.com/2015/08/the-shrinking-deficit.html

http://www.forbes.com/sites/kellyphillipserb/2015/08/13/tax-collections-hit-record-highs-with-no-dip-in-spending/2/

http://www.nytimes.com/2015/08/13/business/economy/us-budget-deficit-rose-in-july-but-8-year-low-is-expected-for-year.html

https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/49892-Outlook2015.pdf

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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Tumbling Interest Rates in Europe Leaves Some Banks Owing Money on Loans to Borrowers

I’m not sure even what to say except that I want one of these mortgages! Also, I don’t imagine this ends well.

Tumbling Interest Rates in Europe Leaves Some Banks Owing Money on Loans to Borrowers

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Is Good News Really Bad News

 

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You may have read last week that the U.S. stock market took a tumble based on what would seem like really good news: that the U.S. unemployment rate is falling faster than anybody expected. If you’re scratching your head, you’re not alone.

First, let’s focus on the good news and what it may mean. At the beginning of 2015, there were 3 million more Americans at work than the year before. The unemployment rate had fallen to 5.5%—a level that economists at the International Monetary Fund had projected that the U.S. wouldn’t achieve until 2018 at the earliest.

Then came the U.S. Bureau of Labor Statistics report for February, which showed a seasonally-adjusted increase of 295,000 jobs (nonfarm payroll employment), well ahead of projections. As you can see from the chart, America has not only pulled out of the long unemployment slump triggered by the Great Recession; it is now creating jobs faster than at any time since 2000, roughly equal to the go-go economy of the late 1990s. The government report noted that there are 1.7 million fewer unemployed persons today than there were at this time last year. More importantly, perhaps, there are 1.1 million fewer people in the “long-term unemployed” category, which is now down to 2.7 million overall.

CA - 2015-3-7 Jobs ChartHow can this be considered bad news for U.S. stocks? There are three possible explanations. First, the labor markets may be creeping toward that place where businesses have to compete for talent and pay their workers higher wages. When payrolls go up, it eats into corporate profits. There is little direct evidence this is happening yet—overall, wages are up just 2% in the past year, roughly even with inflation. But there are reports that small business employers have more unfilled job openings than at any time since April 2006. Meanwhile, the average workweek is inching up, which suggests that companies need people at their desks longer than they did before.

If the unemployment rate hits 5.4%—which could happen this Spring—then our economy will have reached what Federal Reserve economists consider to be “full employment.” This, of course, does not mean what those words actually say; it is a coded way of saying that the balance of negotiating power will have started to shift from employers to workers.

Reason number two is bond rates. While stocks were tumbling last week, bond yields were moving in the opposite direction in what was described as the biggest one-day selloff since November 2013. The yields on 10-year Treasuries rose from 2.11% to 2.239% in a single day. As bonds become more competitive with stocks, demand for stocks goes down—and so do stock prices. Interestingly, the stocks with the highest dividends tended to be the biggest losers in the selloff, suggesting that some investors who were temporarily relying on stocks for income are shifting back to bonds.

But perhaps the biggest reason for the market’s angst is concern about the next move by Federal Reserve Board. Fed chairperson Janet Yellen has made it clear that the health of the U.S. labor market will factor into her decision on when to finally allow short-term interest rates to rise. The good unemployment news could accelerate that schedule; at the worst, it probably confirms the current unofficial timetable of graduated rise beginning in June. For the impact that would have, go back to reason number two.

How credible are these three concerns? Should we be worried? It’s helpful to remember that higher employment means more money in the pockets of consumers, which can trigger a virtuous circle of more spending, more corporate revenues, a healthier economy. We’ve learned from past experience that the stock market is easily spooked by shadows and headlines, by good news as well as bad news. Bond rates are still pretty low compared with historical numbers, and the possible threat of higher payrolls is not exactly the same as seeing them show up in the actual workforce. (Remember those 2.7 million long-term unemployed workers still searching for any kind of a paycheck.)

Short-term traders, who measure their investment horizon on the second hand of their watch, can panic if they want to. Those of us who measure our investment horizon with a calendar should be celebrating another milestone in the U.S. economy’s long and fitful recovery.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years. Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Sources:

http://www.bls.gov/news.release/empsit.nr0.htm

http://www.reuters.com/article/2015/03/06/us-usa-economy-idUSKBN0M20E620150306

http://www.economist.com/blogs/freeexchange/2015/03/americas-jobs-report?fsrc=scn/tw/te/bl/thewinningstreakcontinues

http://www.bls.gov/news.release/empsit.nr0.htm

http://blogs.wsj.com/economics/2015/03/06/economists-react-to-the-february-jobs-report-full-employment/

http://www.nasdaq.com/article/stocks-tumble-as-dollar-bond-yields-soar-on-us-jobs-report-20150306-00624

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Do Interest Rates Have To Rise…Part II

In May of 2013 (and ever since) it has been a fait accompli that interest rates MUST rise. I wrote in “Do Interest Rates Have To Rise Soon” on May 6th, 2013 the following:

I’ve listened to the prognosticators predict higher rates now for almost four years…and rates instead went lower. Are interest rates going to turn around and go up anytime soon? I doubt it.

Turns out that rates did in fact rise soon after I penned this.

Yahoo Finance
Yahoo Finance

My statement wasn’t meant to be a prediction of where rates were going to go, simply an acknowledgment that there was nothing requiring higher rates and in fact there was precedent for lower rates for longer. The ten year sat at about 1.80% when I wrote that post and by then end of 2013 it had risen to just a tad over 3%, quite a big rise in a short period (though not unheard of). Since that time rates have steadily come back down and the ten year now sits about where was back in May 2013. While rates might rise again and the Fed may even raise short-term rates in the near future, there is nothing keeping rates from staying essentially flat or within a small trading range for the foreseeable future. I’m not saying they will or making bets that rates will stay the same or fall, simply repeating my statement from nearly two years ago that there is precedent for these low rates for a longer period then we might expect and saying that “rates must rise” is not supported by history.

Rates might rise, they also might fall – I certainly don’t know where they are going (nor evidently do economists who get paid to make such predictions), but I do know that basing my client’s investment strategy on the “fact” that rates must rise is ignoring the facts.

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