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Monday 08.22.2016

Obamacare Has Gone From The President's Greatest Achievement To A 'Slow-Motion Death Spiral'

It has not been a good week for the Affordable Care Act (ACA), better known as Obamacare. A slew of news, from insurers dropping out to possible fraud among healthcare providers, has all accumulated in a deluge of negative headlines for one of President Obama's signature laws.

In fact, it's gotten so bad that it appears that the whole program itself may be in doubt. While there are issues, and this past week highlighted many of them, it does appear that there is a long road ahead before we have a definitive understanding of Obamacare's survival, and there's a good chance that it makes it.

On Monday night, Aetna announced that it would be dropping around 80% of their policies offered through the ACA's public-health exchanges after sustaining large losses on the Obamacare business.

This makes Aetna the third of the "big five" insurance firms (which includes Humana, United Health Care, Cigna, and Anthem) to announce a serious cut to their Obamacare business. Whether Aetna did this due to business losses, as the company claims, or because of the Department of Justice's lawsuit blocked their merger with Humana is still up for debate, but regardless, the firm will be out of nearly all of the exchanges by 2017.

Fed Close Yo Hitting Job And Inflation Targets: Fischer

The Federal Reserve is close to hitting its targets for full employment and 2 percent inflation, the Fed’s No. 2 policymaker said on Sunday in comments that did not address when the U.S. central bank should next raise interest rates.

The Fed has been suggesting it could raise rates in 2016 since it tightened policy in December for the first time in nearly a decade, but investors have doubts the central bank will follow through on that guidance. Fed Vice Chairman Stanley Fischer gave a generally upbeat assessment of the economy’s current strength, saying the job market was close to full strength and still improving.

“We are close to our targets,” Fischer said in prepared remarks for a conference in Aspen, Colorado. Fischer’s comments come ahead of a speech scheduled on Friday by Fed Chair Janet Yellen who is expected to give guidance on interest rate policy. New York Fed President William Dudley said last week a rate hike would be possible at the Fed’s next policy meeting in September.

The Fed in June pointed to two rate increases in what remains of 2016 but investors see almost no chance of an increases at its September or November meetings. Prices for interest rate future contracts show investors see roughly 50/50 odds of an increase at the Fed’s last meeting of the year in December. Fischer, who has argued in the past that the Fed needed to be wary of being too slow in raising interest rates, made no such argument on Sunday.


If one could put a price tag on pain, look no further than the lack of economic progress for most American families since 1989.

In that year, Ronald Reagan left the White House after two terms of his “trickle-down” economics, and a new era of democratization was heralded as the Berlin Wall fell. Since then, U.S. GDP has more than tripled, while the S&P 500 has surged more than sixfold.

Yet most Americans haven’t reaped the benefits from those expansions, as the middle class treads water and the poorest get more deeply mired in debt, according to a new report from the Congressional Budget Office that was prepared for Senator Bernie Sanders (I-Vermont). The report puts real dollars behind the economic pain currently reflected in the discontent many Americans are voicing as the November presidential election nears.

But while so many are losing out, the rich have grown only richer, the report finds. “The reality, as this report makes clear, is that since the 1980s there has been an enormous transfer of wealth from the middle class and the poor to the wealthiest people in this country,” Sanders said in a statement. “There is something profoundly wrong when the rich keep getting richer and virtually everyone else gets poorer. That is unacceptable, and that has got to change.”

Carl Icahn telling it like it is

Morgan Stanley mismanaged employee retirement funds: suit

Morgan Stanley was hit with a lawsuit on Friday accusing it of mismanaging its employees’ retirement money to maximize its own profits.

The suit, filed in Manhattan federal court, claims the Wall Street firm steered more than 60,000 employees into its own poorly performing funds with excessive fees.

For example, the bank’s small-cap fund performed worse than 99 percent of similar funds in 2014 and showed little improvement the next year, when it did worse than 95 percent, according to the complaint.

The fees on Morgan Stanley’s funds were also higher than those of peers, the suit claims. An investor with $1 million in one of Morgan Stanley’s small-cap funds would have made $335,485 more over five years if he had invested in a similar, cheaper fund run by Wellington.

Goldman "Explains" Why Yellen Lost Credibility: "In Our View, The Fed Has Been Unlucky"

While historically the Kansas Fed's Jackson Hole symposium has not lead to dramatic market moves (with the exception of 2010 when Ben Bernanke unveiled QE2), it has traditionally served as a springboard for the Fed to prepare the market for any major shifts in policy, such as the 2013 tapering of QE. So having skipped the 2015 central banker conclave, all eyes will be on Janet Yellen this Friday, where as Bloomberg's Daniel Kruger predicts it will be all about "coming to grips with the idea that our economic future is currently staring back at us in the mirror" as a result of numerous recent admissions by current and former (most notably Ben Bernanke) central banks, who have been increasingly focused on r*star (or the natural interest rate) as an indication that the US economy can no longer grow at its historical pace absent a major fiscal stimulus.

The topic of the meeting ("Designing Resilient Monetary Policy Frameworks for the Future") belies the notion that some hard truths are going to be served up. Among them should be acknowledgments that the Fed’s terminal rate is lower than officials have forecast and that central banks, once seen as omnipotent, have thrown their best punches and will be operating from positions of weakness for the foreseeable future. In other words, as Kruger puts it, this is the new normal, and it could get worse.

The WSJ's Jon Hilsenrath confirms as much, saying that "for much of the post-financial-crisis era, U.S. Federal Reserve officials have held to a belief that they could get back to their old way of doing things. Growth would resume at a modest pace, annual inflation would climb to 2% and interest rates would gradually rise from near zero to a normal level near 4% or higher."

However "as they prepare to gather at their annual retreat in Jackson Hole, Wyo., officials are grimly coming to a view that it isn't going to happen that way." Hilsenrath admits that the Fed, in turn, "is starting to see that rates aren't going to return to normal and the way it conducts monetary policy and deals with recessions is going to have to change."

Why Gold Is Going Higher

Asset prices are at all-time highs around the world. Since 2008, assets under management have increased by a whopping 43%. The reason? Institutional investors have been taking advantage, gobbling up all they can get.

But while institutions have been on a buying spree, there is one asset they have neglected.

This asset is considered the best investment of 2016. It’s outperformed the S&P 500 and USD by 19% and 29%, respectively. It is also the only financial asset that is not simultaneously someone else’s liability. That asset is gold. Up 26% year to date. However, as a percentage of global financial assets, it is near all-time lows.

Gold made up 5% of global financial assets in 1960. Today it is a meagre 0.58%. If that figure returned to its 1980 figure of 2.74%, that would translate into an additional $2.5 trillion flowing into gold and gold stocks. That’s eight times the current market cap of the entire gold industry, which now stands at $324.4 billion.

Are Middle Class Jobs Coming Back?

Is the middle class still shrinking? Maybe, but a new federal report will certainly disrupt that narrative. Middle income jobs have rebounded, according to new analysis by the Federal Reserve Bank of New York. The finding suggests that previous job growth trends, which showed significant improvement only in low-wage and high-wage job creation, have inverted in recent years.

“Our economists will show that the tide has begun to turn,” said William Dudley, president of New York Fed, in a statement. “For the first time in quite a while, gains in middle-wage jobs actually outnumber gains in higher- and lower-wage jobs nationwide.”

The economy gained over 2 million middle-wage jobs – positions paying between $30,000 and $60,000 per year – between 2013 and 2015, the new study finds. By comparison, only about 1.5 million low-wage jobs and 1.5 million high-wage jobs were added in that three-year period. In previous periods, these numbers were more or less reversed.

The middle class, compressed by wage stagnation, has been slow to recover in post-recession years. Even as unemployment receded and consumer spending resumed, many middle-wage jobs simply didn’t return. Between 2010 and 2013, only about 20 percent of new jobs were in middle-income fields such as education, construction, and social services. But according to Dudley and colleagues, that is slowly changing. Now, middle-wage positions make up over 40 percent of new jobs.

Gold Will Explode In Value

While Jim Rickards explains many reasons why it is important to own gold, he leaves out the most important factor. Jim has become one of the more prominent names in the precious metals community due to his strong opinion on owning gold even though he worked on Wall Street (the anti-gold financial establishment) for 35 years.

Jim Rickards has written several best-selling books such as, Currency Wars, The Death Of Money and more recently, The New Case For Gold. Rickards is a big believer in owning gold to protect against the collapse of the highly leveraged derivatives based financial industry.

Rickards has gone on record in stating that his technical target for the price of gold posted in the article, Gold “Chart of the Decade” – Math Suggests $10,000 Per Ounce Says Rickards:

“I have a technical level for gold, it is $10,000 U.S. per ounce. That amount gets bigger over time because it’s a ratio of physical gold to printed money. The amount of physical gold doesn’t go up very much, but printed money goes up a lot, so the dollar target goes up more over time because of all the money printing. $10,000 U.S. per ounce is the implied non-deflationary price for gold. If you have to go back to a gold standard, or anything like it to restore confidence, that is the number you must have to avoid deflation. So $10,000 per ounce is mathematically derived and is not a guess.”

“Saving Social Security” May End in Dollar Devaluation

As the US presidential election nears, we are doing a series of reports on the differences and agreements of major parties on various economic and financial topics. Last week, we noted one area where the major-party candidates are in agreement: trade. In different ways, the candidates have challenged the free-trade status quo. US multinationals will face an environment in which established free-trade treaties are renegotiated, and treaties that are currently in the works (such as the Trans-Pacific Partnership) are scrapped or drastically revamped, potentially disrupting long-settled plans.

Where the candidates agree, we have some sense of what waits for us after the election. In many areas, though, their visions of the way forward for the US differ substantially. This is certainly true for the approach each would take to retirement and tax issues.

Both candidates agree that Social Security must be “saved”—that is, something must be done to ensure the solvency of the system, which will exhaust its “trust funds” by 2034. If nothing is changed, at that point Social Security would be financing payments purely with the contributions of those currently paying into the system, and by current estimates would be able to pay only 79% of its obligations. The situation would continue to get worse as the population aged, so politicians on both sides of the aisle are eager to come up with a solution that will keep the system intact and solvent.

Bi-partisan deals made changes in the past—such as the one made in 1983 under Republican President Ronald Reagan and Democratic Speaker of the House Tip O’Neill. Such bi-partisan agreements have been tougher to come by a more polarized environment that has prevailed recently.

The Biggest American Layoff Queens in 2016 “So Far”

The most recent company to announce four-digit layoffs was Cisco on Wednesday with 5,500 people on its list. It followed numerous other announcements of mass layoffs this year – particularly in oil-and-gas, brick-and-mortar retail, and tech.

Since the oil bust began, there have been 195,000 job cuts in the US alone, according to Challenger, Gray & Christmas. Of those, about 95,000 occurred in 2016. They were concentrated in just a few states, particularly Texas. And it’s not over: there was a “resurgence” of 17,725 job cuts in July.

Tech announced about 55,000 layoffs so far this year, including Cisco. The sector is getting clobbered by a sea change in technology, the shift to mobile, and the downward spiral of the entire PC ecosystem. And retail announced nearly 44,000, not including Macy’s still unspecified job cuts associated with shuttering 100 Macy’s stores.

So 24/7 Wall St. interviewed John Challenger, CEO of Challenger, Gray. And digging into additional data, it came up with its list of the biggest layoff announcements in 2016 so far – “so far” because the year isn’t over yet. Layoff announcements can cover the global workforce, as in Cisco’s case. So not all of Cisco’s 5,500 layoffs are likely to happen in the US. And they may not necessarily happen this year. These things can drag out. For example, retailers generally want to keep their stores open and fully staffed through the holiday selling season and not shut them down just before.

3 Economic Developments to Watch in Europe This Week

Japan Inc unenthused over Abe's stimulus, BOJ easing: Reuters poll

Japanese companies overwhelmingly say the government's latest stimulus will do little to boost the economy and the Bank of Japan should not ease further, a Reuters poll showed, a setback for policymakers' efforts to overcome deflation and stagnation.

Prime Minister Shinzo Abe this month unveiled a 13.5 trillion yen (US$135 billion) fiscal package of public works projects and other measures, vowing a united front with the BOJ to revive the economy and raising speculation of a surge in government spending essentially financed by the central bank.

But less than 5 percent of companies believe the steps will boost the economy near-term or raise its growth potential, according to the Reuters Corporate Survey, conducted August 1-16.

"It's disappointing that the stimulus focuses on public works, and it lacks attention to promoting industry and technology that would lead to future growth," said a manager at a precision-machinery maker. Abe took office 3 1/2 years ago, pledging to reboot the economy with aggressive monetary stimulus, fiscal spending and reform plans. After an early spurt of growth and surging corporate profits, helped by a sharp fall in the yen, the economy is again sputtering and prices are slipping, underscoring the challenge for Japan to beat nearly two decades of deflation and anemic growth.

Even Your Boss Doesn’t Think You’re Saving Enough

Even your boss knows you could do a better job of saving for retirement. Employees have been asking their employers to help them stash more money in their 401(k) savings plans, seeking more automated savings features.

Companies are responding by boosting the amount employees can defer when they are automatically signed up for a 401(k), according to a report from T. Rowe Price. The asset manager studied 662 retirement plans with more than 1.6 million participants.

Twenty-nine percent of the employers were automatically enrolling workers into the retirement plan at a savings rate of 6% of salary as of the end of 2015, according to the report. That's up from about 17% of 401(k) plans in 2011.

Thirty-eight percent of employers automatically enrolled workers at a rate of 3% of salary in 2015, down from nearly 50% of employers in 2011, according to T. Rowe Price. There are two factors behind employers' decision to boost the default contribution to 6%, said Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services. "Coming from the data we've seen over the last several years, 3% isn't enough," she said.

Multi-Unit Operator Pulls Plug On ‘Living Wage’ surcharge

Restaurants Unlimited Inc. this week discontinued a 1 percent “living wage” surcharge it had added to checks at restaurants in Portland, Ore.

Seattle, Wash.-based Restaurants Unlimited, which has 45 casual-dining restaurants in 10 states under such names as Henry’s Tavern, Kincaid’s, Palomino and Stanford’s, had added the one percent surcharge with the notation “LWageSC” on checks.

On July 1, Oregon took the first tier of a minimum wage increase, raising it to $9.75 an hour from $9.25 in mixed urban-rural areas like Portland. The federal minimum wage is $7.25 an hour. The Restaurants Unlimited units discontinued its short-lived surcharge this week.

"We truly appreciate all of the feedback from our loyal guests regarding the one percent living wage surcharge policy," said Jim Eschweiler, CEO at Restaurants Unlimited, in statement to The Oregonian. "After further consideration we have decided to discontinue this policy,” Eschweiler said.

Craig Hemke-All Markets Are Broken

America Has a Worrisome Cash Problem, but It's Probably Not What You Think

If I told you America has a cash problem, you probably wouldn't even think twice about it, because it's a well-accepted fact that Americans are poor savers relative with other developed countries. But here's the kicker: A lack of cash isn't the issue.

According to three recently released reports, the bigger concern might be that Americans are holding more cash than ever.

A survey conducted by Bank of AmericaMerrill Lynch in July found that cash levels were at 5.8% of portfolios, representing the highest reading since November 2001. Furthermore, Wealth-X's Billionaire Census observed that the world's 2,473 billionaires are keeping 22.2% of their total net worth in cash. This works out to more than $1.7 trillion being held in cash by billionaires, representing the highest amount ever recorded since the survey began in 2010. Lastly, UBS noted in a survey of its own that wealthy Americans are keeping approximately 20% of their portfolios in cash, which UBS points out is in line with the post-2008 average.

Why are we witnessing such a rush to stuff money under the mattress? It probably boils down to three factors. First, global yields in developed markets are more or less anemic. As an example, U.S. Treasury bonds, which are among the safest assets you can buy in the world, are yielding just 1.14% on the five-year, 1.55% on the 10-year, and 2.27% on the 30-year. Although these rates do result in nominal investment gains, chances are that they won't outpace the rate of inflation over the long run. Long story short, buying fixed-income assets for the time being often means losing real money. With few perceived "safe" places to park money, Americans appear to be parking it on the sidelines as cash instead.

Household debt back to housing 2008 boom levels

Although household debt is up close to the 2008 peak, other factors come together to show that it may not be as risky to households as it was before. Some of the main differences today include improved credit conditions, as banks tightened their standards on some consumer loans, a recent report from Capital Economics states.

Delinquency rates for most categories of household debt are low and stable, also giving little cause for concern, the report continues. Overall, the credit default rate increased one basis point monthly to 0.83% in July, however it is still down from last year’s 0.92%, according to the Consumer Credit Default Indices released by S&P Dow Jones Indices and Experian. The first mortgage default rate also increased one basis point from last month to 0.66%, and now but remains down from last year’s 0.8%.

“The latest data show that household debt is now close to its 2008 peak in dollar terms,” Capital Economics Chief Economist Paul Ashworth said.

“However, the gains in income over the past eight years and the decline in interest rates mean that households are now in a far stronger position to pay down that debt that they were prior to the financial crisis,” Ashworth said.

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