Feb 20, 2012

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While most media outlets last week were focused on the death of Whitney Houston (to one of the greatest voices of our lifetime – RIP Whitney) the other major news piece (or not) of the week was the fact FIVE big banks finally reached a deal with government authorities over their dubious mortgage practices and foreclosure abuses during the past housing bubble.

After months of talks, Ally Financial, Bank of America, Citibank, JPMorgan Chase and Wells Fargo agreed to pay a total of $26 billion in cash to try to remedy this fiasco.

As with everything out of Washington, the devil is in the details.

Marty Robbins of the Huffington post states “If the ‘settlement’ involving mortgage foreclosure practices is supposed to be good news for the country, I must have missed something. To me this is economically detrimental, manifestly unfair to those who did not take on unaffordable mortgages, and a thinly disguised attempt to buy votes (with banks’ money) for incumbent politicians.

The unfairness seems quite evident. Those who were never subject to foreclosure because they never had a mortgage or met their obligations, get virtually nothing in return for their prudence.  Those who were improperly foreclosed on will only get a combined $1.5 billion. It has been estimated this nets out to less than $2,000 a person.

So if the people who did the right thing aren’t benefitting, who is?

  1. Virtually all of the benefits go to those who failed to meet their contractual loan obligations.
  2. States, which took the lead in negotiating the deal, got a tidy bundle. The settlement says the attorneys general may distribute the money to foreclosure relief and housing programs, such as counseling, legal assistance and mediation initiatives. But, like in the 1998 tobacco settlement that was supposed to fund health programs, states have some leeway in how they use the money. Some states are using the funds to plug big holes in their budgets
  3. The politicalwire states “We’re sure to hear a lot about this in coming years as these attorneys general run for higher offices. ‘I fought the big banks and got you a check’ will be a powerful message to voters, whether you’re conservative Virginia Attorney General Ken Cuccinelli, who’s running for governor, or California Attorney General Kamala Harris, a Democrat pegged for bigger things.”
  4. Worst of all the settlement eliminates all or almost all liability for the banks and, most importantly, all bank officers and employees in exchange for a loan forgiveness or modification program. Think about this: the banks engaged in years of what can only be described as fraudulent if not criminal conduct that would put anyone else in prison for years if not decades, yet banks get to buy their way out with some money to help just a few of the victims they created.  Additionally, there is no requirement in that I’m aware of that require the banks to come clean, publicly release all the relevant documents and provide sufficient information on their conduct so that anyone can evaluate whether the sell-out, I mean, pay-off, oops, I mean, “settlement” is anywhere near adequate.  This is just, a slap on the wrist where a severe taken to the woodshed beating (or conviction and jail time) is appropriate.

If you are like me, you should be angry as hell but make sure your anger is directed at the right people. The bank regulators in Washington should have been cracking down on banks that were routinely evicting people despite incomplete documentation. It’s the U.S. Justice Department and other federal agencies that should have gone after the banks when they were caught fabricating legal papers and routinely “robo-signing” thousands of affidavits at a sitting

Feb 13, 2012

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How long a person will live is one of the key assumptions impacting a retirement plan. As advances in medicine and healthier living have become part of the cultural consciousness, living to age 90 or beyond is becoming more probable. Consider these statistics: 1) there is a 50% chance that at least one spouse will live to age 90 if both retire at age 65; 2) The number of people age 90 and older almost tripled from 720,000 people in 1980 to 1.9 million in 2010, and the 90-plus population is expected to more than quadruple between 2010 and 2050.

So what will life look like for people who live beyond age 90 in the US? Here’s a look compiled by US News and World Report author Emily Brandon, based on a recent report released by the US Census Bureau:

More women. Between 2006 and 2008, about three-quarters (74 percent) of the 90-and-older population were women. In 2006, life expectancy at age 65 was 19.7 years for women and 17 years for men. Women also experienced more rapid improvements in life expectancy than men between 1929 and 2006. Over the past eight decades, older women have added almost seven years to their life expectancy, or a 54 percent extension, compared with 5.3 years for men, a 45 percent extension. Among the age 90-and-older population, there are just 35 men for every 100 women. After age 95, there is approximately one man for every four women.

Married men and single women. Most women who make it to age 90 (84 percent) are widows. Only 6.3 percent of women in this age group are married. On the other hand, 43 percent of 90-something men are married and about half are widowers.

Living alone. Just over a third (37 percent) of people in their 90s live alone. About the same number of people (37 percent) live in a household with family members or unrelated individuals. A quarter of older adults (26 percent) live in institutionalized quarters, such as skilled-nursing facilities. White senior citizens were almost twice as likely to live alone as Asians and Hispanics. And women (40 percent) are more likely than men (30 percent) to live alone, while men (53 percent) live with relatives more often than women (32 percent). Unsurprisingly, an older person’s likelihood of living in a nursing home increases sharply with age, growing from 20 percent at ages 90 to 94 to 38 percent at 100 or older.

Physical limitations. The vast majority (85 percent) of people age 90 and older report having one or more physical limitations, the Census Bureau found.

The most common limitations include difficulty handling errands alone, such as visiting a doctor’s office or shopping (68 percent), difficulty getting around by walking or climbing stairs (66 percent), and difficulty dressing or bathing (46 percent). Some seniors also report cognitive difficulties (40 percent), and difficulty hearing (43 percent) and seeing (26 percent).

Low incomes. The annual median personal income for people age 90 and older between 2006 and 2008 was $14,760 (in 2008 inflation-adjusted dollars). Men had significantly higher incomes than women, $20,133 versus $13,580. Some 15 percent of the age 90-and-older population lives in poverty.

Reliance on Social Security. Almost all people age 90 and up (92 percent) receive Social Security income. Social Security makes up almost half (48 percent) of all income for people in this age range. Some 18 percent of 90-somethings also receive traditional pension income.

Universal health coverage. Practically everyone age 90 and older (99 percent) is covered by health insurance provided by Medicare, and 28 percent also received Medicaid benefits in 2008. About 40 percent of the 90-and-older population purchased additional private health insurance coverage from an insurance company. A quarter of these retirees are covered by health insurance provided by a previous employer or union.

Redefining old age. Traditionally, the cutoff age for what is considered the ‘oldest old’ has been age 85. But researchers are considering moving this definition back to age 90. With a rapidly growing percentage of the older population projected to be 90 and above in 2050, this report provides data for the consideration of moving that yardstick up to 90. Because of increasing numbers of older people and increases in life expectancy at older ages, the oldest segments of the older population are growing the fastest.

Source: http://finance.yahoo.com/news/life-after-age-90.html

Feb 6, 2012

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Don’t think this can’t happen here in the good ole USA.   This week’s post is courtesy of Mish’s blog (http://globaleconomicanalysis.blogspot.com/) who identifies the headwinds facing Japan today … and what is likely ahead for the US

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Japan’s Prime Minister Seeks Doubling National Sales Tax; S&P Downgrade of Japan Likely; No Winning Play for Japan

In an effort to halt expansion of Japan’s massive public debt, Japan’s Prime Minister Seeks Doubling National Sales Tax.

Prime Minister Yoshihiko Noda said containing Japan’s public debt load, the world’s largest, is critical after Standard & Poor’s downgraded credit ratings on France, Austria and seven other European nations.

Europe’s fiscal situation “isn’t a house burning on the other side of the river,” Noda said on TV Tokyo Holdings Corp.’s program on Jan. 14. “We must have a great sense of crisis.”

Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda’s administration hadn’t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation’s sovereign grade.

Japan’s government, which has enjoyed borrowing costs that are around 1 percent, wouldn’t be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.

‘Worse and Worse’

Japan’s finances are “getting worse and worse every day, every second,” Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview on Nov. 24. Asked if this means he’s closer to lowering Japan’s credit rating, he said it “may be right in saying that we’re closer to a downgrade.”

S&P rates Japan AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a “comprehensive approach” to containing its debt burden, which the government has projected will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March’s record earthquake.

The International Monetary Fund has said a gradual increase of Japan’s sales tax to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.”

No Winning Play for Japan

If Japan hikes taxes and reduces spending, the Yen will strengthen, and Japanese exports sink.

Demographics and balance of trade issues suggest there will still be insufficient buyers of Japanese bonds that need to be rolled over. Raising taxes in a global recession is not a wise thing to do as it will inhibit growth.

On the other hand, if Japan turns to printing, which I believe it eventually will, Japan would likely go into an inflation spiral.

Massive Debt Rollover Problem

Country

2012 Bond, Bill   Redemptions ($)

Coupon Payments
Japan 3000   billion 117   billion
U.S. 2783   billion 212   billion
Italy 428   billion 72   billion
France 367   billion 54   billion
Germany 285   billion 45   billion
Canada 221   billion 14   billion
Brazil 169   billion 31   billion
U.K. 165   billion 67   billion
China 121   billion 41   billion
India 57   billion 39   billion
Russia 13   billion 9   billion

For a discussion of the global debt rollover problem, please see World’s Biggest Economies Face $7.6T Debt Led by Japan $3 trillion, U.S. $2.8 trillion; Rollover Problems in Japan and Europe

There are no winning plays for Japan, given a debt load set to hit 230 percent of gross domestic product. The US would be advised to pay attention.

Jan 30, 2012

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It’s been a while since I have checked in with Peter Schiff at EuroPacific, but as usual he is spot with poignant commentary after a Fed meeting and this week is no different.

Waist Deep in the Big Muddy

With its announcement this week that it will keep interest rates near zero until at least late 2014, the Federal Reserve has put another large crack into the foundations underlying the US dollar. In a misguided attempt to provide clarity and transparency, Ben Bernanke has instead laid out a simple road map for economists and investors to follow. The signposts are easily understood: the Fed will stop at nothing in pursuing its goals of creating phantom GDP growth, holding down unemployment, propping up stock and housing prices, and monetizing government debt. To do so, it will continue to pursue a policy of negative interest rates, while ignoring the collateral damage of unsustainable debt, virulent inflation, misallocated resources and credit, suffering yield-dependent retirees, and a devalued U.S. currency.

Not surprisingly, precious metals and foreign currencies rallied strongly on the news – with gold up more than 4.3% and the Dollar Index down nearly 1.6% in the days following the announcement. The Dollar Index is now down more than 3.5% from its highs in mid-January.

In coming to the momentous decision to extend the Fed’s prior low-rate promises by another 18 months, Bernanke and his cohorts relied on a somber view of the economy that is at odds with the sunnier view presented the night before by President Obama in his State of the Union address. To justify holding rates so low for so long, the Fed is choosing to ignore the fact that CPI inflation is currently running north of 3%. Instead, it has conveniently chosen to look at a hand-picked alternative measure, the chain-weighted core PCE, which comes in just a shade below the Fed’s arbitrary 2% target. How convenient.

After some changes in key membership at the Federal Reserve’s policy-setting Open Markets Committee, in which a few long-time hawks were put out to pasture, the Fed has now established itself at the extreme dovish end of the policy spectrum. Among other central banks around the world, it may now be outflanked only by some very profligate ones in South America and sub-Saharan Africa. Unfortunately, the FOMC has its hands on the wheel of the world’s reserve currency, and therefore its decisions may lead the planet into financial chaos as long as other nations are content to follow the Fed farther and farther into a swamp of liquidity. To paraphrase Pete Seeger’s protest of the escalation of the war in Vietnam, “we are waist deep in the Big Muddy and the damn fool yells ‘press on.’”

The only bright side of the announcement is that it provides precious-metal and foreign-equity investors a fairly good sense that they are on the right side of history. In order to keep rates low, especially at the long end of the yield curve where it matters most, the Fed must continually print money to buy U.S. Treasuries. This will likely push more investors into gold and away from dollar-denominated assets.

As a testament to their own faith in themselves to forecast economic conditions, 6 of the 17 voting FOMC members indicated that they would have preferred to keep rates close to zero at least through 2015. Some even had the audacity to prefer no change until 2016! This comes from the body that couldn’t predict the 2008 financial crisis, even while it stared at them from point-blank range. To look into a completely uncertain future and determine that negative interest rates can persist for another

four years without igniting inflation is to me the height of economic insanity. Sadly, the inmates have the keys to the institution.

The lunacy persists in the rest of the government as well, with Congress and the White House still failing to address our nation’s long-term debt issues. The Fed’s commitment gives these politicians a “Get Out of Jail Free” card to continue avoiding responsibility. The deficits will be monetized, so no real efforts need be made to cut spending or raise taxes on middle-class Americans. Central to these plans is the assumption that the rest of the world will happily park their savings in U.S. dollars forever. If the latest announcement does not disabuse the world of this notion, I don’t know what will.

As long as interest rates remain far below the rate of inflation, the U.S. economy will fail to equitably restructure itself for a lasting recovery. As a secondary effect, U.S. savers will likely continue to suffer from a lack of yield and a weakening currency. In the end, the collapse of the U.S. economy will be that much more spectacular due to the great lengths we have gone to postpone it

Jan 23, 2012

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Here we are with many stocks and commodities right back at 2007 levels – as if we haven’t skipped a beat.  Yet, the average US citizen and the economy have not rebounded as well.  Take a look at the charts below which this month’s Atlantic magazine provides a great insight into how the recession has changed us.  If you want to look at a much larger blowup of the charts, follow this link http://cdn.theatlantic.com/static/coma/images/issues/201101/numbers.jpg.

Jan. 16, 2012

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With so many Americans reliant on Social Security for their retirement I find it helpful to check in a couple of times a year and see what, if anything, has changed.  Bruce Krasting is one of the guys I lean on to weed through the sanitized information/data that is provided to the public and give an honest, accurate assessment of SS’s real condition. I have long been saying the day of reckoning for Social Security will be here much sooner than we are being told and as such those that listen and get prepared now will be impacted the least.  Based upon the data presented confirms that day is accelerating upon us much faster than what is being presented to the public. Here is his latest …

Social Security Is Running Out Of Money At Least 5 Years Ahead Of Schedule

Full calendar year 2011 numbers are now available to calculate the results for the Social Security Trust Fund. Here’s a look at the key numbers that will be reported to Congress:

Payroll Tax Revenue: $669B ($642B – 2010)
Benefit payments: $726B ($702B -  2010)
Primary Deficit: $57B ($60B -  2010)

Other cash components at SSA:
Tax on benefits:  $23B  (2010 – $24b)
Payments to R.R. Retirement: $4.6B ($4.4B – 2010)
Overhead: $7.0B  ($6.5B – 2010)

Net 2011 cash drain: $46B ($49B – 2010)

Non cash items
Interest: $116B ($117.5B – 2010)
Paper surplus: $70.0B  ($68.5B – 2010)

The reported numbers will show a very small improvement ($3B ) in the net cash drain. This may cause some to look at the 2011 results and say, “See! Things are stabilizing and even getting better!” Let me try to blunt any enthusiasm in advance.

SSA measures (A) actual monthly cash receipts and then (B) makes assumptions about what additional amounts are coming in based on a series of macro assumptions (GDP, employment/unemployment, etc.). The Treasury Department pays SSA the sum of A+B. Ultimately all of the money is accounted for and any adjustments (plus or minus) are reflected in the next year’s results.

This system works pretty well as the annual adjustments have been fairly modest and the adjustments have been both positive and negative. That was not the case in 2009. The models that SSA uses significantly overestimated tax revenues in that year. As a result, there were very significant downward revisions to the actual receipts that were reported in 2009. Following is a slide of SSA’s monthly 2010 revenues. Note that the revisions to FICA and SECA from the prior years totaled $28B. (2009 and 2011 also have significant prior year adjustments.)

Image: Bruce Krasting

To regularize the data for the big accounting changes it is necessary to add/subtract the adjustment from the prior year and then look forward to what overstatements/understatements were made in the then current year. When the ins and outs are made, the results for the regularized FICA/SECA revenue numbers are as follows:

2005….$521B
2006….$553B
2007….$585B
2008….$615B
2009….$676B
2010….$702B
2011….$726B

The following chart shows adjusted Payroll Tax revenues minus Benefit Payments:

Image: Bruce Krasting

Looking at the data on this basis, you’ll see the actual deterioration that took place in 2011. 2012 will be worse than 2011. Benefits are going to jump by $50B+ next year. 10,000 new people are signing up for checks every day of the week. Add the fact that every one of the 55mm beneficiaries will be getting 3.6% more in their checks (COLA adjustment). The revenue side is a wild card. What will GDP be? If it’s around the 2% that is currently anticipated, revenues at SSA will fall well below plan. A flat economy (+2%) would translate into a $100B 2012 primary deficit (payroll receipts minus benefits). A number like that is not on anyone’s radar today.

The following is a chart used by the House Finance Committee. It plots the expectations for net cash drains at SSA. While there is plenty of red ink in the chart, there is not nearly enough to describe what is going to happen. Note that the expectation is for some improvement in 2011 and relative stability until 2018 when the red ink explodes. On the chart, I think today we are really at the 2017 level. 2012 will bring us the results depicted in the chart for 2018.

Image: Bruce Krasting

The 2011 numbers for SSA indicate that we are at least five years ahead of existing thinking on the SSA deficits. When this realization sinks in, it will break the hearts of the SS defenders. If we are, as I contend, five to six years ahead of “schedule” with cash deficits at SSA, there is no alternative besides cutting scheduled benefits. Raising taxes to fill a hole this big is not an option. Nor is it an option to maintain the status quo and allow for a very rapid rundown of the SS Trust Fund.

If we are going to experience what I believe we will, then the cumulative SS cash shortfall over the next decade will add ANOTHER $1.5 trillion onto Public Sector Borrowing (“PSB”). This increase in PSB more than offsets the $1.2 T of cuts that the congressional super committee failure has just mandated.

The consequences of SS (and similarly the other government retirement funds) on PSB over the coming years is not now being considered by those looking at America’s debt profile. It will be soon enough. The current thinking is that SS is a problem that can be worried about in another ten years or so. That’s simply not true.