Obamacare - What's Up With That

So I read this recent article on how Obamacare is costing boat loads of money and premiums are up across the board:

http://www.zerohedge.com/news/2016-03-25/thanks-obamacare-what-americans-spent-most-money-2015

Now I agree that health care is undoubtedly a big driver of what little inflation the government has reported.  But the question that I do not think can be answered yet is why and will this continue.  The reason I say this is largely due to anecdotal evidence but I think it is enough to raise the question.

I primarily raise the question based on a comment from a doctor.  He told me that doctors and hospitals are incredibly busy following implementation of Obamacare as there is this massive population of patients who simply did not seek medical attention before because they did not have insurance and could not afford it.  They only went to get help when they had no choice and then it was commonly to the emergency room on Medicare or Medicaid's dime.  Now that many of them have the coverage they are getting physicals and checkups and, guess what, problems are being discovered that need to be dealt with.  And these problems are leading to more payouts by insurers than perhaps they anticipated because I suspect the insurers did not factor this into their initial premiums,  either because they did not anticipate the increase or intentionally ignored it to keep initial premiums low to get things started.  Either way, they are having to increase premiums to pay for all these people who have old, festering, unattended to problems that are now being addressed.

So again the question I pose is whether this initial significant increase will continue or level off in time, and I suspect only time will tell.

Meanwhile the good news might be that the 4th Quarter GDP estimate was just increased to 1.4% with the "bulk" of the increase coming from "services," which is in no small part healthcare. 

http://www.shopfloor.org/2016/03/fourth-quarter-2015-real-gdp-revised-higher-at-1-4-percent-growth/

So Obamacare may be achieving what the Fed so desperately has tried to do.  QE and ZIRP may not get folks to spend but require them to get health insurance and by God they will use it!

http://www.zerohedge.com/news/2016-03-26/healthcare-about-surpass-housing-biggest-source-american-growth

Then again things are not going so honky dory lately over at the Atlanta Fed with its GDPNow forecast.  Its forecast for the 1st quarter 2016 went from a sweet 2.3% two weeks ago on March 11 to a somewhat more sour 1.4% March 24.  Hopefully that direction will not continue.  We shall see.

We Used to Invest

Long ago you could look at data, either on macro level or on a micro level, and hopefully make some informed decisions on where to put your money.  You could do silly things like look at the employment numbers to gauge the health of the economy or at the financial statements of a company to determine its value and risk.  You could roughly ballpark timing of economic cycles and when a reversion to mean was in the cards.  You could do your homework and truly find a good value place to "invest" your money.  Those days sadly are gone.

Moves by the governments and Central Banks of the world, along with games played by many corporations with no fear of punishment, have ended those days.  It used to be if a corporation cooked its books it failed and went bankrupt but now it can rely on the government to bail it out.  Economic cycles are now totally distorted by Fed action so recessions are delayed in their onset but more severe when they occur.  Data from the government includes countless adjustments, seasonal and otherwise, until it is virtually meaningless.  Financial information from companies cannot be taken at face value with more and more companies cooking their numbers with non-GAAP numbers, stock buybacks and the like.  The market is also based on computers and algorithms where its direction can simply be due to a quirk or fat finger.  It is truly a world for speculators, not investors.  Yet folks looking to retire some day are increasingly either needing to save enough to retire without and expected return or to take risks they should not take because conservative investments provide next to no return.

So even the most savvy of investors are stumped.  If you watched The Big Short you saw some very smart fellows who figured out the housing bust in advance who nearly went broke because the true impact of what was happening was hidden for an extended period through fraud that went unpunished.  As pointed out in this link by Lance Roberts, economic cycles are increasingly distorted and hard to anticipate, especially now that major economies around the world are all following suit in kicking the can.

http://seekingalpha.com/article/3959755-yellen-just-cage-bears?ifp=0&app=1

Yet as he explains this simply delays the inevitable and makes it worse when it arrives.  This is why I have been wanting Yellen to increase rates.  Not because it will aid the economy in the short term but because it will allow the long overdue recession to wash out the crap.  The longer we kick the can on this the worse it will be and more people will suffer needlessly.  Yet now the Central Banks of the whole world seem to be coordinating a final stand against the onset of a natural correction cycle.  They will fail in avoiding it and only succeed in making it worse.  And in the process they will make any assessment of when this economic cycle should come virtually impossible to determine, despite how many charts and stats you study.

So be careful out there.

Define "Win"

The terrorists cannot hope to defeat the U.S. in a military battle.  They can do bombings, mass shootings and, as shown by WTC, take out thousands in a massive terrorist plot.  While each of these things is terrible in its own right and we do need to take steps to prevent these attacks from happening, we need to also consider what the terrorists are seeking to achieve.  Obviously terror is one of things they seek and we should not give it to them.  Should you fear a terror attack?  Sure, within reason. But you have a greater chance of being hit by lightening or dying from a gun in a non-terrorist attack.  Indeed, the odds of dying from a gun go up exponentially when one is in the house - well beyond the odds of dying at the hands of a terrorist - yet we as Americans guard and revere the right to posses a gun.  It is our Constitutional right!

Well privacy is a Constitutional right as well.  If terrorists attacks cause us to lessen our Constitutional rights, be it by more restrictions on gun ownership or less privacy in a world where privacy is increasingly scarce, then perhaps they are achieving exactly what they set out to achieve. In my mind we cannot let terrorists win this emotional battle.  We cannot let them dampen the very thing that makes us the great nation that we are.  Freedom is paramount and it includes having some freedom from our own government.  We have allowed countless soldiers to lose their lives protecting our freedom only now to let terrorists threaten it from afar with occasional attacks.  Freedom is not free and if we give up our freedom to fight terrorists then they have already won.

Stupid Is As Stupid Does

Well, looks like the EU is going full tilt.  The only benefit to be gained is that hopefully when this fails abysmally folks will finally figure out that this crap does not work

http://www.bloomberg.com/news/articles/2016-03-10/ecb-cuts-all-rates-as-qe-boosted-to-80-billion-euros-a-month

3.12.16 Update - And do not take my word for it, Bill Gross says so as well:

http://seekingalpha.com/article/3951216-bill-gross-sunshine-lollipops?li_source=LI&li_medium=liftigniter-widget

His linked piece does a nice job of explaining some of the problems with negative rates and the like - at least up until he gives a sales pitch at the end.  I guess a fellas gotta make a buck somehow.

Why is ZIRP so bad?

I read an interesting piece at Mish Shedlock's new blog location with the new name Mish Talk where a reader asked him why ZIRP is so bad. 

http://mishtalk.com/2016/02/27/reader-asks-why-are-zero-interest-rates-bad-what-should-the-interest-rate-be/

Mish endeavored to give the reader the answer in layman's terms, but with all due respect, I did not view the answer as very laymanesque, so let me take a shot since in these matters I am very much the layman.

Let me start by noting not all aspects of ZIRP are bad in my view.  I, for one, refinanced my mortgage to a 15 year mortgage at 3% and am quite happy with the savings - not to mention paying the place off years sooner.  Low interest rates used sensibly are a good thing and have undoubtedly been good for many individuals and businesses.

The problem comes in when you focus on the "sensibly" word in my last statement.  Many individuals and businesses use the low interest rates to incur debt they simply would not have incurred before, which is precisely what our friends at the Fed want them to do.  But as mama always told me, debt is to be avoided as much as possible because heavy debt burdens bring with them lots of downside.

But why would folks run up more debt foolishly?  Pause for a moment and think about that question and you will realize that the only thing foolish is asking the question.  People do stupid things if you let them and they can.  Now there are two important parts of the equation - that you let them and that they can.  Let's start with the "that they can" side of it.

Lowering the interest rate brings the price of entry to a point where more people can take out the loan and make the payments (or at least think they can).  Certainly back in the 80's with double digit interest rates a lot fewer people were buying homes and cars.  Now with all sorts of low interest rate deals a lot more people can afford to do this.  For those that really need a car to get a job and commute, this is a good thing.  For those who really do not need the car but want it just for fun and freedom, tying up income in debt payments is perhaps not so good.  Overall an increase in the debt level of society is not a good thing, especially since it not brought with it the golden ring the Fed promised in the form of a booming economy that creates a lot of high paying jobs that let people pay off that debt.  Had the plan worked out that way it may have made sense, but it has not.  So now we have mountains of debt and a shaky economy that is not going to support the job growth needed to pay down that debt.

And aside from the individuals taking out loans they do not need, the low rates also lead to companies taking risks they would not take - or be allowed to take - at higher rates.  This speculation sometimes pays off and sometimes does not.  Just ask all the oil frackers sitting on mountains of debt on which they can no longer even pay the low interest.  Speculation can be a good thing and in some ways is at the heart of capitalism, but when too many are speculating with too much debt on the same bet, excesses are created that lead to bad outcomes.  Presently, HSBC posits that there is $1 trillion out there in distressed corporate debt within the $3 trillion in speculative grade debt outstanding.  To give perspective, subprime loans during the housing bubble in 2007 peaked around $1.3 trillion.

http://www.zerohedge.com/news/2016-02-28/about-1-trillion-distressed-junk-bonds-ubs-responds-wall-streets-shock

Since many companies roll-over their debt by issuing more debt to pay off the old, the increase in rates now being demanded will make this roll-over cost prohibitive, i.e. they are up the creek without a paddle or with one that HSBC thinks will cost them 20-25% a year.

And then there is the other fun thing companies have been doing with their debt.  They have been taking loans to do stock buybacks and pay dividends, not for CAPEX.  This has the double whammy of building debt on the company books while artificially pumping up stock prices.  It also serves to undermine the Fed purpose of building businesses and the economy. 

Now let's visit the other side of the equation - that lenders let individuals and businesses take out the loans.  Indeed, let me rephrase that - that lenders push them and make it way too easy for them to take out the loans.  This happened in the housing bubble, which ended oh so well, and is happening again today.  Not so much in housing - though we recently went back to Fannie Mae supporting 3% down loans - but more so in areas like auto finance and business loans.  Subprime is booming in all these areas and banks and other lending institutions are (or were until recently) pushing folks to take on as much debt as they can.  Even if you credit is so bad you cannot get the low rates, they will now give you the car loan over seven years to make the payments affordable.  How many car ads have you heard asking for folks with bad credit to come on in as it is no problem.  I heard one the other day saying X dollars of income a month qualified you for Y dollars in loan to buy a car.  When I did the math, the buyer would be spending roughly a third of their take home pay on one car payment.  Seriously!?  Well, that is the problem and a big one.  It is peaking now in energy related loans that banks are having to write-off and in the subprime auto area where delinquencies are surging:

http://davidstockmanscontracorner.com/chart-of-the-day-subprime-auto-delinquencies-surging-higher/

Too much debt burden is just a powder keg waiting for a match and we are starting to feel the warmth of that match right now.

So you may be wondering why the Fed's grand plan did not work out as expected, with increased lending leading to increased spending and resulting demand leading to booming business and more hiring with more wages leading to more demand and more profits and so forth.  Lot's of theories on this and probably lots of contributing causes.  Let me point out one; low interest rates are great if you are borrowing money but suck big time if you are trying to save for retirement, and with roughly a quarter of the US population qualifying as baby boomers, you have a lot of folks looking to save and avoid debt.   Unfortunately low rates mean any conservative investment like Treasuries is paying squat, so you have two choices.  Door number one is to save more as you anticipate having to save enough to pay for retirement without any decent investment gains.  Door number two is invest in riskier investments in the hopes of making the returns you need, which works well until, well, it doesn't, and then you might end up back at door number one.  Same goes for all those soon to be bankrupt vastly underfunded pension funds out there that are banking on 8% returns a year just to have any hope of being close to targets.  And as pointed out in this link below from Zero Hedge, Bank of America believes a lot of retirees are choosing door number one, i.e. saving more and spending less, which is the opposite of what the Fed wants. 

Let me add a couple other factors to chew on.  First, we went to ZIRP after the stock market collapse in 2007-2008, right when a lot of baby boomers were retiring or looking to do so soon.   For many their retirements were wiped out.  And given that losses instill a much stronger emotional response in people than gains, you can bet a lot of retirees or soon to be retirees took their money out of the market then and never went back, so they missed out on the gains since then.  Second, add to this the double-whammy that many of the jobs the BLS is reporting were taken by older people who would have normally left the market and you have a number of wage earners who are saving everything they can, not spending it, so the Fed's plan is shooting itself in the foot.

http://dollarcollapse.com/welcome-to-the-third-world/welcome-to-the-third-world-part-17-was-middle-class-retirement-just-a-credit-bubble-fantasy/

Just think what will happen when we go to NIRP.  There are already reports of cash hoarding in Japan where Kuroda just went to NIRP and last I check hoarding is the opposite of spending.

http://www.zerohedge.com/news/2015-10-29/bank-america-looks-europes-record-%E2%82%AC26-trillion-negative-yielding-debt-stunned-what-I

Also see:

https://mises.org/blog/negative-interest-rates-and-fear-mean-well-save-more-not-less

So ZIRP has not had the hoped for response.  It looked good on paper but did not play out as expected.  That, my friends, is the problem with theory based on what economists think people will do versus what in real life they in fact do.  And NIRP I strongly suspect will bring much of the same merely making matters worse for the ultimate collapse..

And by the way, while I have your attention, let me note that if you think January was bad for the markets, wait until you see what happens next, which I believe will be in March.  Madness will only begin to describe it.  If that happens, it will not be just baby boomers saving as much as they can of their hard earned income.

I Stand Corrected

Well, if I am going to be wrong, I might as well be the first to point it out.  Let me begin by admitting defeat.  I predicted in April that the Fed would not raise interest rates this year and I was wrong.  Missed it by two weeks.  Oh well.

Might I add that I said then and all along that them raising rates is a good thing.  I wanted them to do so.  Indeed they should have never even gone to ZIRP in the first place, but once they went there the sooner they ended it the better.  Now I did not think they would raise rates this year given the state of affairs and their self-made mandate of the economy having a never-ending expansion.  But they did indeed raise them last week, though the reason I thought they should raise rates is not the reason they gave.  Lance Roberts here http://seekingalpha.com/article/3767106-fed-rate-hike-starts-the-clock?ifp=0&app=1 quotes our dear Ms. Yellen on the reason for the rate increase being okay and timely:

When asked about why the Fed decided to raise rates now, Ms. Yellen responded by suggesting that the "odds were good" the economy would have ended up overshooting the Fed's employment, growth and inflation goals had rates remained at low levels. She then went on to state that it was a "myth" that economic growth cycles die of "old age."

He then goes on to write the following sentence:

While such an optimistic outlook for economic growth was certainly welcomed by the markets, both of her statements expose the challenges that lie ahead for the Fed. 

Instead, I believe he should have worded the sentence thusly:

While such an optimistic outlook for economic growth was certainly welcomed by the markets, both of her statements expose the challenges of believing the lies from the head of the Fed.

Point being that the reasons Janet gave are most certainly not the real reason they did it, which I suspect was largely an attempt by them to maintain some small semblance of credibility as they have been telegraphing a rate increase for a very, very long time.  The also know perfectly well the prolonged ZIRP is brewing disastrous consequences and is leading to increased criticism of them not raising previously, so they likely want to silence the critics (albeit while lining up a whole new cadre of critics because they raised rates).  Just no winning for poor old misunderstood Janet.  It is also quite possible they want/need some wiggle room for when the recession/depression/end  of the world (take your pick) hits and are hoping like hell they can get in a few increases in the rate before that happens - AND HOPEFULLY WITHOUT CAUSING IT TO HAPPEN.

Oh, and there is one other possibility, which is just evil enough in its covert continuing support of financial institutions that I have to believe it may indeed be a significant part of Janet's plot.  You see, there are a couple of different ways the Fed can effectively raise rates.  The easiest and least suspect would be to simply reduce its balance sheet by say $1.4 trillion.  There is a lot of detail not needed here on how this works, so if you are interested see Dr. Hussman's nice piece explaining it here:

http://www.hussman.net/wmc/wmc151221.htm

But nooo, the Fed chose not to take this logical and easy route, which would also achieve a long overdue reduction in its balance sheet.  Nope, it has chosen instead to increase the rate it pays banks on excess reserves and reverse repurchases, thereby subsidizing both U.S. and foreign banks to the tune of billions more (as in more than the billions they have already been giving them each year).  And yes, a lot of this goes to foreign banks, as in U.S. taxpayers subsidizing those banks when their own governments won't do so.  Oh joy.  For more of an explanation on how this works, go here.

http://www.zerohedge.com/news/2015-12-21/real-reason-behind-yellens-rate-hike-11-billion-handout-foreign-banks-fed

So are you at all surprised that Yellen did not give the real reason for their moves or how the moves will be achieved?

Still, whatever the real reasons are for the Fed doing it, an increase in rates is a good thing either way (though doing it by reducing their balance sheet would have been a lot wiser).

Now I am not a fool (unless you talk to my wife), and I have no burning desire for a recession or the inevitable pain and financial misery it will bring to many people, both here in the U.S. and around the world, and I know the rate increase will likely hasten the pending recession's approach.  I just know it is inevitable and the longer the Fed falsely pumps up markets and the economy with false rates, the worst the next bubble bursting will be.  And it will already be a doozy. 

You see the falsely low, artificially manipulated rates lead to falsely high, artificially manipulated markets and business models.  It leads to virtually free money being used to speculate through financial gamesmanship and on poorly conceived business models.

I note in an article at the Mises Institute site this week, that there is a debate among economists on whether businesses actually take more risks with money when rates are low.  You can find it here:

https://mises.org/library/why-capitalists-are-repeatedly-fooled-business-cycles

Now the Austrian business cycle theory ("ABCT") concludes that low rates lead to a misallocation of resources because free money leads businesses to do stupid things.  The counter thought is that business people know better than to be stupid.  (I may be simplifying these arguments a tad, but this is the gist.)  As quoted in the Mises article, a critic of this ABCT theory is Gordon Tullock, and Gordy believes they are all wet:

One would think that business people might be misled in the first couple of runs of the Rothbard cycle and not anticipate that the low interest rate will later be raised. That they would continue to be unable to figure this out, however, seems unlikely. Normally, Rothbard and other Austrians argue that entrepreneurs are well informed and make correct judgments. At the very least, one would assume that a well-informed businessperson interested in important matters concerned with the business would read Mises and Rothbard and, hence, anticipate the government action.

So Gordy concludes business people have learned from past mistakes on what not to do with low rates and undoubtedly behaved properly during the just ended 84 months of ZIRP.  RIGHT . . .

I certainly agree with Gordy that perhaps SOME business people are smart enough to know better, but unfortunately these business people have to compete with stupid business people who are only looking to boost profits for the coming months or year.  Unfortunately many CEOs are more focused on next year's stock price and the impact it has on their compensation and a good bit less focused on appreciating the teachings of Mises and Rothbard.  So they do foolish things like borrowing tons of money at low rates and using it to buy back stock or give dividends, which has been occurring at a record pace the past couple of years.  Or they take the free money and invest it in poorly conceived business models and acquisitions.

And the fine folks giving the loans to these poorly conceived businesses really do not give a damn as they are just getting their commissions or fees and packaging the loans for "investors" starved for any investment gain they can get because the damn interest rates are so low and they cannot make gains on more conservative investments.  Thus, one gets all these high yield bond funds provided by our good friends at BlackRock, Third Avenue and the like that make it possible for the average retail investor to play in the junk bond market, which as we speak is in the process of imploding.

But hey, Gordy tells us this is not really happening as all these smart business people are familiar with the teachings of Mises and Rothbard and know the dangers associated with the improper use of low interest rate funds, so they are only using said funds prudently, just as those lending the funds are being so prudent in who they lend to.

But wait a second, as pointed out in the Mises article linked above, this whole Fed ZIRP thingy was supposedly to get consumers to borrow money they did not have or spend savings which were earning them nothing and indeed losing money to inflation.  Someone has to meet this artificially created demand and what better way to do it than to borrow money at cheap rates.  This was happening on a global basis and China became the 800 pound gorilla of artificial demand, building unneeded infrastructure and ghost cities.  When China cooled, so did all the artificial demand for commodities and all those foolishly highly-leveraged businesses that were created to meet this demand are now sucking wind.  So everyone is slashing prices and both the good and the bad businesses are struggling.

Let's look at another example of this prudence, which we can find in the retail auto market.  Auto loans are at records on virtually every stat, including amount financed, the length of the loan, the percentage of sub-prime and deep sub-prime borrowers, etc.

http://www.zerohedge.com/news/2015-12-03/auto-loan-madness-continues-us-car-buyers-take-record-debt-lunatic-financing-terms

But hey, prudent business people running used car lots who spend their free time studying Rothbard and Mises know better than to tie their business model to cheap credit.  They would not sleep at night if they thought those buying the cars were getting in over their heads.  And they would not have a business model that throws caution to the wind and allows - perhaps promotes - people borrowing more than they can afford to buy a car now instead of waiting until they can afford one or perhaps buying a more expensive one now than they otherwise would.  No way Jose.  Nope, I most certainly did not hear any auto ads promoting "Bad credit, no credit - no problem."  My imagination is again getting the best of me.

Car dealers always think for the long term and promote sound buying choices.  Why they would be foolish to frontload sales during low interest rate times only then to suffer the consequences when demand evaporates with higher rates.  Surely they would not want to suffer the consequences of every Tom, Dick and Gordy defaulting on sub-prime loans and lots filling with repossessed vehicles.  Why that would be foolish of them to risk.  Moreover, they know that the companies financing these loans have the exact same interests of fostering sound buying decisions and affordable loans.  So these loan companies have their backs and the backs of the consumers as well - not to mention the backs of the investors in the HY bond funds.

And so economists like Gordy are undoubtedly correct to assume business people are wise and prudent in their use of low interest rates.  Again, I stand corrected.  My thoughts on all this were clearly wrong.  I really need to stop making so many mistakes on this blog.

All Is Well!

We can officially stop sounding the alarms and relax.  The near demise of the world economy is over.  All is well my friends.

The DOW was up a whopping 320 points, Draghi is telegraphing more QE and lower rates in December in the EU and - drumroll please - after hours shares of Amazon, Google, AT&T and Microsoft are all up on better than expected earnings!!  Oh, happy days are here again!

Heck, Amazon has now even shown a profit for a whole two quarters in a row!  A whopping $79 million this past quarter for a company with a mere 677 million shares outstanding.  Why if they can repeat this feat quarterly, they could show in the future profits of $320 million a year, which is over 50 cents a share!!  More than enough to justify a stock price of  over $600 after hours making Mr. Bezos the third richest man in the U.S. and fifth richest in the world!!

http://www.bloomberg.com/news/articles/2015-10-22/bezos-leaps-to-third-richest-in-u-s-as-amazon-sales-beat-target

He is now worth a nice $55B.  And at its current pace, his company will only take a little over 171 years to make that much profit.  Indeed, through the wonders of math, we can determine that at a pace of $79 million a quarter in profit, if every single penny of profit were to be distributed to shareholders they would receive an amount equal to the stock price in a mere 1200 years, give or take a decade or two.  Wow, that is most impressive!  Makes me reminisce about the good ole days.  You know, 2000.  Ah, now those were P/Es back then.  Mostly negative but outstanding to say the least.

Yes, put away those silly worries of a downturn and break out the champagne! 

10.23.15 update:  With the S&P up again today, you savvy investors once again have bragging rights.  Yes, at this point year-to-date you have not lost any money on average in the S&P!  Yeah team, we're breaking even!