The Appeal of Bonds

July 24th, 2017

“We must all suffer one of two things: the pain of discipline or the pain of regret or disappointment.”

                   Jim Rhon, entrepreneur/motivational speaker

As fixed-income investments, bonds are all about income. Cash flow will be consistent, based on the bond’s coupon, until the bond matures. Each day that passes, the bondholder is accruing income and shortening the bond’s maturity, even though those changes aren’t reflected in the value of their account.

The risk in bonds is in their price, which fluctuates. Bond prices are affected by many factors, including interest rates and inflation. When interest rates increase, yields increase, too, and bond prices generally move in the opposite direction.

With interest rates rising, many investors are concerned about the impact that will have on the price of their bonds, but the Federal Reserve Board has already said that rates will remain below normal levels for years to come. It’s doubtful, for example, that the yield for a 10-year Treasury will exceed 3% anytime soon.

In addition, inflation will likely remain low for some time. The U.S. inflation rate has dropped from 2.7% in February to just 1.6% in June.

And while changes in price matter, most of a bond’s return comes from its coupon. Recognize that it’s all about cash flow and you’ll understand why bonds are a safer investment than stocks. Read the rest of this entry »

Socialism’s Promise: Medicaid for All

July 17th, 2017

For an example of how government entitlements always expand and never contract, consider what’s been happening to Medicaid.

Designed to provide health coverage for low-income and disabled Americans, Medicaid was signed into law in 1965 during the Johnson Administration.

Today, Medicaid ranks second only to public school education as the largest budget item in most states. Nationally, Medicaid spending now exceeds a half trillion dollars a year ($574.2 billion in FY 2016).

The true cost is higher, though. Both Medicaid and Medicare pay providers significantly less than what they receive from private payers – and Medicaid pays about two thirds of what Medicare pays. That means less access to healthcare, since one in three physicians refuses to see Medicaid patients. It also means non-Medicaid healthcare costs need to be higher to subsidize Medicaid.

Initially, Medicaid covered 4 million Americans. This year, it’s projected to cover 73.5 million Americans. In spite of the more than $20 trillion spent on the War on Poverty over that period, Medicaid enrollment from year to year has almost always increased, regardless of the overall health of the economy. It has also increased even though the poverty level has remained about the same – about 15% of the population.

But the worst is yet to come. Read the rest of this entry »

Unfunded Pension Liabilities Reach $7 Trillion

July 10th, 2017

The mean average amount saved for retirement by all working-age families in the U.S. is just $95,776, according to a new report from the Economic Policy Institute. The median average – that is, the average for those in the 50th percentile – is just $5,000.

That’s tragic, as it means that many Americans will be unable to afford to retire. At the same time, they are on the hook to pay unfunded liabilities for government employees as they retire.

Most private-sector employees have “defined contribution” plans, such as 401(k) plans, which are self-directed. Employers typically provide matching funds, but if you don’t contribute, you get nothing. Which is why many have saved little or nothing.

In contrast, employees in the public sector often have “defined benefit” plans, which are traditional pension plans. Defined benefit plans, as the name implies, guarantee a set amount throughout a person’s retirement years. Read the rest of this entry »

The Peter Pan Economy

July 3rd, 2017

Lowering interest rates is not necessarily a bad thing. It can make borrowing cheaper, which – at least in theory – will stimulate business investment. It can weaken the dollar, making American goods cheaper abroad. It can lower payments on the federal debt.

The problem with lowering interest rates is that eventually they have to be raised again. If rates were to remain at zero indefinitely, the Federal Reserve Board could not lower them to stimulate the economy during a recession, unless it created negative interest rates, which cause a whole new set of economic problems.

And history says a recession is likely to come sometime soon. The current recovery, which has frequently been described as anemic, celebrated its eighth anniversary in June. Now in its 97th month, it is the third longest recovery on record. The average recovery since the end of World War II has been 58 to 61 months.

While the length of the recovery may not determine how long a recovery will last, when unemployment drops low enough to spur inflation, the probability of a recession climbs. And unemployment is allegedly at a 16-year low of 4.3%.

“Expansions, like Peter Pan, endure but never seem to grow old,” according to Fed economist Glenn Rudebusch.

But the current expansion has much more in common with Peter Pan. It’s a fairy tale. And the Fed has run out of fairy dust.

The Fed’s Conundrum

The conundrum the Fed faces is that as it raises interest rates so that it will be able to drop them in case of a recession, it may actually cause one. Read the rest of this entry »

The Fed’s Abnormalization Plan

June 26th, 2017

The Federal Reserve Board has issued an addendum to its “Policy Normalization Principles and Plans” for reducing its bulked up $4.5 trillion portfolio, but there’s nothing normal about unloading $4.5 trillion in bonds.

That’s a lot of bonds.

The Fed’s policy, which virtually no one has read since it was issued in November 2014, is an update of its 2011 normalization policy, which no one read. It crams quite a few words into a single page, which we would summarize by saying that the Fed hopes to unload as much of its bond holdings as it can without causing the bond market to collapse.

Fed Will “Cease or Commence”

In case you don’t believe me, here’s a sample paragraph: “The (Federal Open Market Committee) expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.”

Note the “cease or commence.” In other words, the Fed will either stop buying bonds to keep its portfolio close to $4.5 trillion or it won’t. Talk about commitment issues! Read the rest of this entry »

U.S. the Leader in Addressing Climate Change

June 19th, 2017

With 195 countries signing on, the Paris agreement has been touted as a “global action plan” designed to save the world from climate change.

So the recent decision by President Trump not to sign on was, according to former Secretary of State John Kerry, “walking backwards from science and backwards from leadership on behalf of polluters and fringe ideologues.” He added that it “may be the most self-defeating action in American history.”

Oh really? For perspective, it’s worth taking a look at energy usage, both globally and in the U.S.

U.S. vs. Germany

Environmentalists, politicians, journalists and assorted do-gooders typically point to Germany as a model of environmental consciousness, given its heavy reliance on renewables, such as solar and wind power. The U.S., meanwhile, is the bad guy, achieving success with a highly industrialized economy at the expense of the environment.

So it’s worth comparing Germany’s carbon dioxide emissions with those of the U.S. Which country has done more to reduce carbon dioxide emissions in recent years?

The United States has. According to the U.S. Energy Information Administration, carbon dioxide emissions (CO2) fell 12% in just 10 years, from 2005 through 2015. Emissions fell by another 1.7% in 2016, according to the EIA.

Meanwhile, in Germany, CO2 emissions increased by 0.9% in 2016, according to energy research firm AG Energiebilanzen e.V., as growth in energy consumption outstripped the country’s reduction in coal use and increase in renewable energy sources. AGEB even blames the extra day created by leap year as one of the reasons for the increasing emissions (it didn’t stop the U.S. from decreasing emissions, though). Read the rest of this entry »

24 Million Losing Health Insurance? Not Really.

June 12th, 2017

The Affordable Care Act (ACA), as The Washington Times noted, is “a public policy flop of epic proportions.”

It is costing much more and insuring far fewer Americans than projected, while adding a huge government bureaucracy to the healthcare system, which was heavily regulated even before the ACA. Even though every American must either purchase health insurance or pay a penalty, many are choosing to pay the penalty instead. In spite of heavy subsidies, the number of Americans insured under the ACA is millions short of the number projected.

The Congressional Budget Office (CBO) forecasted In February 2013 that 26 million Americans would be insured through the ACA by 2017. Instead, only 10 million Americans are insured through the ACA – in spite of government subsidies and penalties requiring enrollment.

Meanwhile, new research from the Health and Human Services Department shows that, on average, premiums in the individual market have more than doubled since 2013 in the 39 states where Obamacare exchanges are federally run.

In spite of sharply rising premiums, insurers are bailing on the ACA (aka Obamacare), because they are losing money on it. Blue CrossBlue Shield of Kansas City, for example, has just withdrawn its Obamacare plans for Kansas and Missouri, citing losses of $100 million. In many markets, Americans who use the federal exchanges to purchase insurance have only one insurer from which to purchase insurance. In some cases, insurers have withdrawn completely. Read the rest of this entry »

Even France Rejects Socialism

June 5th, 2017

Many American voters lamented that our election choices came down to two highly unlikeable candidates – Hillary Clinton and Donald Trump.

But France’s recent election wasn’t much better. The two leading candidates were Emmanuel Macron and Marine Le Pen. Macron is a “centrist,” which, by French standards could be someone to the left of Fidel Castro. Le Pen is described by media as “far right,” the term used for anyone with views that are not widely accepted by the media, such as not endorsing socialism.

Le Pen might also be described as a crazy racist anti-American, but wouldn’t someone who chooses Russia over the U.S. be far left, not far right?

Center-right Republican François Fillon might have been the new president if he hadn’t been “formally charged in a widening embezzlement investigation” due to allegations that he paid his wife and children “hundreds of thousands of euros from the public payroll for little or no work.” Even in often-forgiving France, nepotism is unpopular.

Macron France’s Youngest Leader

Macron, who was decisively elected president, is France’s youngest leader ever, having been elected at age 39. He is “an outspoken EU supporter who wants to establish a command center for the Continent’s defense, create a border police force, loosen France’s rigid labor rules, cut payroll taxes and reduce French public-sector employment by 120,000,” according to The Wall Street Journal. Read the rest of this entry »

Freeing the Internet

May 30th, 2017

For nearly two decades, the Internet has been capitalism’s engine, driving the creation of the country’s largest and most successful companies.

Amazon, Google, Uber, Airbnb, Facebook, Twitter, Pinterest, LinkedIn and thousands of other companies wouldn’t exist without it. In fact, pretty much all of the 176 companies on Fortune’s unicorn list of startups valued at $1 billion or more wouldn’t exist without the Internet.

The Internet has improved our quality of life, providing us with entertainment, online shopping, directions when we’re lost and the ability to communicate with anyone, anywhere at any time. It’s beginning to improve healthcare and should save lives and lower costs – if we let it.

Libertarians would point to the Internet as the most compelling example in history of how businesses can grow, create jobs, contribute to the economy and produce tax revenue when left practically untouched by government regulation.

Net Neutrality

But lovers of government regulation are protesting at the home of Ajit Pai, chair of the Federal Communication Commission, because he’s attempting to “destroy net neutrality” by overturning rules adopted by the FCC in 2015 under his predecessor, Tom Wheeler.

Net neutrality supporters have also crashed the FCC website with negative comments, and created organizations with noble-sounding names like Fight for the Future and Save the Internet. Read the rest of this entry »

Ben Bernanke Invents Supply Side Keynesian Economics

May 22nd, 2017

Ben Bernanke is back, having been interviewed during the past month by The New York Times, NPR, CNNMoney, The Hill, Bloomberg, CNBC and other media. That his book, The Courage to Act: A Memoir of a Crisis and Its Aftermath, is out in paperback could have something to do with it.

When the hardcover version was released, Bernanke, former chair of the Federal Reserve Board, wrote a piece for The Wall Street Journal titled, “How the Fed Saved the Economy.” Having taken credit for saving the economy after the financial crisis, he’s now giving advice about how to continue saving it. His comments, in which he poses as a supply sider while advocating for still more Keynesian stimulus are almost as unintentionally humorous as his Journal op-ed.

In an interview with The Hill, he said, “What we want to do is try to improve the supply side of the economy, make it grow faster, have greater potential. And I think that probably that to do that, I would think that on the fiscal side, that infrastructure spending that improves our roads, our bridges, our schools, and tax reform, not necessarily tax cuts, but reform that makes the system simpler, more efficient, those would probably be the highest-return fiscal actions in terms of getting higher growth.”

We’re not sure how you can reform the massive federal tax code without cutting taxes for someone, but supply side stimulus spending is an oxymoron. Supply siders would deregulate and cut taxes to encourage business investment. Read the rest of this entry »