The Great Disconnect Revisited; ACA Impact on the
Economy and Equities
by Victor Sperandeo and The Curmudgeon
Introduction:
No one can any
longer deny a total disconnect between the slow growth economy and soaring
equity values (especially small caps) in the U.S. and in most of the world.
The U.S. stock
market is already way overpriced, margin debt makes new highs every month,
corporate profit growth continues to decline.
Yet we see new all-time highs for equities almost every day or
week. Reason: Fed continues QE with no taper in sight, so
"greater fools" prevail.
In France, the
CAC 40 stock index is at a new all-time high, yet the economic numbers (growth,
unemployment, corporate profits, etc.) are terrible. The avowed Socialist
President- François Hollande -has only a 15% approval
rating. That's much lower than President
Obama current 39%-42% approval. But their stock market keeps going up,
nonetheless.
ECB Bank
President Mario Draghi says he'll "do whatever it takes" for the Euro
based economy to survive and prosper. He
is effectively saying "buy stocks, because we're placing a floor on
downside risk" (i.e. that's equivalent to a "Draghi put").
Relevant
Historical Quotes:
This incredible
quote by Sir Josiah Stamp may be enlightening, especially when compared to
speeches by Central Bank heads Ben Bernanke, (future) Janet Yellen and Mario
Draghi:
"The
modern banking system manufactures money out of nothing. The process is perhaps
the most astounding piece of sleight of hand that was ever invented. Banking
was conceived in inequity and born in sin . . . . Bankers own the earth. Take
it away from them but leave them the power to create money, and, with a flick
of a pen, they will create enough money to buy it back again. . . . Take this
great power away from them and all great fortunes like mine will disappear, for
then this would be a better and happier world to live in. . . . But, if you
want to continue to be the slaves of bankers and pay the cost of your own
slavery, then let bankers continue to create money and control credit. [Web of Debt, p. 2]"
Note: Sir Josiah Stamp was a director of the
Bank of England, beginning in 1928, according to Wikipedia. Ellen Brown
attributes this statement to him. It is from a speech delivered in 1927.
The above
honest exposé, along with the Rothschild's view of controlling money as the end
all, seems to be quite relevant today.
Mayer Amschel Rothschild (1744-1812), founder
of the House of Rothschild, wrote: "Let me issue and control a nation's
money and I care not who writes the laws."
The words of
Woodrow Wilson are also applicable: "A great industrial nation is
controlled by its system of credit. Our system of credit is privately
concentrated. The growth of the nation, therefore, and all our activities are
in the hands of a few men ... We have come to be one of the worst ruled, one of
the most completely controlled and dominated, governments in the civilized
world—no longer a government by free opinion, no longer a government by conviction
and the vote of the majority, but a government by the opinion and the duress of
small groups of dominant men."
"Since I
entered politics, I have chiefly had men's views confided to me privately. Some
of the biggest men in the United States, in the field of commerce and
manufacture, are afraid of somebody, are afraid of something. They know that
there is a power somewhere so organized, so subtle, so watchful, so
interlocked, so complete, so pervasive, that they had better not speak above
their breath when they speak in condemnation of it."
All of the
above is from Woodrow Wilson's, The New Freedom: A Call for the Emancipation
of the Generous Energies of a People (New York and Garden City: Doubleday,
Page & Company, 1913). It's ironic
that former President Woodrow Wilson was the man who signed the Federal Reserve
Act of 1913 into law. A decade after he
signed the Fed into law, Wilson wrote:
"I am a
most unhappy man. I have unwittingly ruined my country. A great industrial
nation is controlled by its system of credit. Our system of credit is
concentrated. The growth of the nation, therefore, and all our activities are
in the hands of a few men. We have come to be one of the worst ruled, one of
the most completely controlled and dominated Governments in the civilized world
— no longer a Government by free opinion, no longer a Government by conviction
and the vote of the majority, but a Government by the opinion and duress of a
small group of dominant men."
Fed Monetary
Policy Impact on Corporate America:
The Fed's money
printing mentality has scared Corporate America into believing the current
economic outlook is so bad it justifies QE.
As a result, corporations have curtailed investment in new hires, plant
and equipment. Instead, they are taking
advantage of ultra-low interest rates to issue corporate bonds to fund
operations, rather than repatriate foreign profits -which would be taxed (Apple
has recently done this). They are also
holding a lot of cash. U.S. nonfinancial companies had $1.8 trillion
in cash on their books at the end of the second quarter, according to the Federal
Reserve’s quarterly “flow of funds” report.
In absolute terms, cash holdings are at an all-time high, even after
adjusting for inflation.
In addition,
Corporate America used to pay approximately 7% of U.S. GDP in taxes in the
1950's. Today it pays only about 1.75%
of GDP - at an average tax rate of 12.5%- not the 35% stated corporate tax rate
that many say is much too high. Lobbying
and political contributions have certainly paid off big time here!
For the most
part, the real economy is very dependent on fiscal policy, which has been on
hold for years, due to political struggles/gridlock between the Obama
administration and Congress. This is the
principal reason the U.S. economy is stagnating, with very low growth, high
unemployment and more discouraged workers dropping out of the labor force. Five years of monetary stimulus has produced
a stock market bubble (which many now are shouting about, e.g. Andrew Barry in
this week's Barron's cover story), but it has done very little -perhaps
nothing- to help the real economy and the man on the street.
But now, a
potential major change in the corporate world and the economy has entered the
mix. It's officially called the Patient
Protection and Affordable Care Act (ACA), which is more commonly known as
"ObamaCare." 18% of U.S. GDP is related to health care, which
will now be controlled by the federal government.
Background
on the ACA:
The ACA was
passed with 100% of Democratic votes in both the U.S. House of Representatives
and Senate. Congressional
representatives of several states were enticed or lured to vote it into
legislation. Coined slogans such as
"The Louisiana Purchase" and "The Cornhusker Kickback,"
(among others) were used to designate the
"buying" of the votes
to pass the ACA, which occurred on Christmas eve - 12/24/09 -while the public
was out celebrating that joyous holiday.
The ACA
Congressional voting chicanery was not forgotten by the Republican Party. It has resulted in many huge battles which
attempted to stop or repeal the ACA.
Once it's fully operational, the ACA will control approximately one
sixth (1/6) of U.S. GDP.
The latest
battle began when the problems of actually implementing the ACA became widely
apparent and many complaints were voiced.
But beyond the perpetual 45 day website "glitches" are the
planned cancelations of many private health insurance policies which must be
switched to ACA mandated health plans.
The latter are much more expensive, because they include many options
not needed by most people. For example,
does a 55 year old couple need "maternity" insurance?
The real
problem with ACA, which can't be fixed by any website IT department, is forcing
approximately 15%-20% of private health insurance customers to buy expensive and
mandated new policies. That's really
a tax on the middle class (e.g. those that make over $64 thousand). It causes people over 26 years old to overpay
their insurance premiums in order to defray costs for older and/or people with preexisting
conditions.
The ACA's
hidden agenda is to collect higher premiums (i.e. effectively a hidden tax) to
pay for the people who did not buy, or could not otherwise afford, health
insurance at a reasonable price. The ACA plan has been a disaster from
inception. It's been exacerbated by the
public's inability to shop for health insurance on the dysfunctional ACA web
site. [We wonder why that website https://www.healthcare.gov/ wasn't
stress tested before it went live.]. The
number of people adversely affected is way underestimated, in our opinion. This is all due to inept federal government
management of the ACA. We don't think
it's likely to improve anytime soon.
The "Obama
spin" on the number of people affected by the letters of insurance
cancellations for existing policies is "ONLY 5%" (of 315 million U.S.
population) or 15 million people. This seems to be yet
another statistical lie. In 2010, the
Obama administration estimated that 93 million Americans would be unable to
keep their prior health coverage under the narrow grandfathering provisions
issued by the administration in June 2010.
Chris Conover (who works at the Center for Health Policy and
Inequalities Research at Duke University) estimates
that the number is now 129 million.
President Obama
announced this week that his administration would unilaterally decline to
enforce the provisions of ObamaCare responsible for millions of insurance
policy cancellations around the country. “The bottom line is insurers can
extend current plans that would otherwise be canceled into 2014,” he said. The
real bottom line is: If you like your
plan, you
might be able to keep it for another year. But after the midterm elections
are over, non-ObamaCare-compliant plans will get canceled yet again. Because, if the delay continues past 2014, one ObamaCare architect
believes it “could be the beginning of a death spiral” for the law’s insurance
exchanges.
Americans buy
health insurance as a "family."
According to the 2010 census, there are 114.8 families in the US {now
estimated to be 122 million families}, with "2.6 people per
household." Therefore, if the
individual market is 15 million people then the insurance per household
cancellations should be 2.6 (for the average family) X's 15 million which
equals 39 million people or 13% of U.S. households!
When will the
ACA be understood for what it is and what it is going to be? It is possible that it will implode, but not
likely until the next Presidential election.
Will we see a repeat of the 2010 "little big horn" battle in
the Republican controlled House of Representatives? And if
enough Democrats turn sour on the ACA, in the Senate as well?
Impact of
the ACA on the Real Economy:
The ACA will
certainly have a negative impact on the real economy. Companies have already resorted to part-time
hiring to escape the burden of paying for ACA mandated health insurance for
full time employees. Many consumers will
hold back on buying non-essential items to offset the increases in ACA costs
they must now pay. This decrease in discretionary spending should translate
into a further slowdown in U.S. GDP which has been way below 3% trend growth
since the great recession ended in June 2009.
According
to the Heritage Foundation, new taxes on drug companies ($27
billion) and medical device makers ($20 billion), as well as new reporting
requirements and regulations imposed on physicians, will make access to health
care and services more costly and difficult for seniors under ObamaCare.
Richard
McGregor wrote in this weekend's Financial Times: "Barack Obama
faces a slow-motion dismemberment of his presidency and mass defection of
once-loyal Democrats ahead of next year’s elections unless the White House
fixes the troubled rollout of his new healthcare system. The news that only a fraction of the people
needed to make the system viable had managed to sign up for insurance in the
first weeks of the online exchange has started to panic many Democrats in
Congress. Without a solution to attract
more customers, the White House policy will be shredded by regular bulletins
about its shortcomings, with far-reaching implications for Mr. Obama’s second
term."
The editorial
in that same FT paper was even more critical:
"So far, Mr. Obama’s interventions have only made a bad situation
worse.......The danger is that ObamaCare’s woes could
jeopardize prospects for doing anything else.
Congress pays close attention to polls and the US public’s trust in
government – and its personal trust in Mr. Obama – is plummeting. Republicans
were responsible for last month’s government shutdown. But approval ratings for
Democrats have now fallen almost as low. This is a recipe for (U.S. government)
paralysis........ There are also concerns about whether Congress can reach a
deal to stop the next scheduled government shutdown in mid-January."
So the odds
favor continued sluggish economic growth and/or a further economic slowdown
early next year. The negative effects and uncertainty of the ACA will surely
keep a lid on job growth and result in continued high unemployment. It might even tip the weak U.S. economy into
a new recession by the second quarter of 2014.
Equity
Market Reaction to an Economic Slowdown:
In the recent
past, "bad news was good news" for the stock market. That's because bad economic numbers meant the
Fed would continue QE (and defer tapering).
If the economy continues to stagnate (or go into a recession due to
negative effects of Obama-care) what will be the Fed's response and the effect
on the market?
Recent history
and Congressional testimony dictate the likely response by the (then Yellen
led) Fed would be to add more liquidity, i.e. more QE (How about $150
billion a month of bond purchases?).
This reckless monetary policy has occurred for five years now, with
scant GDP growth and continued high unemployment. It’s ballooned
the Fed's balance sheet* close to $3.6 trillion, but has done very little for
Main Street. Yet Wall Street wins big and few complain. For example, President
Obama got re-elected on poor economic numbers and very bad job numbers.
* The Fed's
balance sheet refers to the net total of U.S. Treasury debt, agency debt, and
mortgage-backed securities held by the Fed.
It's currently=$3,537,748 as per the latest Fed release.
That's up from < $1 trillion prior to the last recession.
As former FOMC
member Wayne Angel said: "There has
never been a (post WW II) recession unless the Fed wanted one." And for sure, neither Bernanke nor Yellen
want one now.
But
recessions and bear markets have not been eliminated, contrary to what some
pundits have said now and in the past.
As a result, the success of any monetary policy (e.g. Fed QE and ZIRP)
can only be judged in terms of a FULL CYCLE for the economy and stock market.
End Game
will NOT be pretty:
The end won't
be a soft landing, as many bulls believe.
The current U.S. stock market is not built on solid fundamentals, but on
Fed supplied liquidity and the "greater fool theory." So the higher the market is manipulated up,
the more difficult it wiil be to avoid a huge crash
landing with disastrous losses for stock holders in the end.
How bad an
ending? That's difficult to
quantify. A mistake can be anything that
politicians desire greatly [like Democrats and the ACA], but don't understand
the consequences or effects.
We have seen
this in history many times
before...Herbert Hoover with the Smoot Hawley tariff Act and the tax increase of 1931-32, Fed Chair Marriner S Eccles tightening
credit in 1937, President Kennedy in 1962 on control of steel prices, President
Nixon's price controls in 1971, Secretary of Treasury James Baker with a threat
to devalue the dollar in October, 1987, Fed Chairman Ben Bernanke and U.S. Treasury head Hank Paulson
letting Lehman Brothers fail in September 2008, and many, many more.
..
The next
mistake will cause a grand financial crisis, as the pillars of freedom and
economic strength are now very weak.
There is simply no buffer or wiggle room to effectively combat the next
recession or a stock market panic sell-off that turns into a colossal wipe-out.
Till next
time........................
The Curmudgeon
ajwdct@sbumail.com
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo
is a historian, economist and financial innovator who has re-invented
himself and the companies he's owned (since 1979) to profit in the ever
changing and arcane world of markets, economies and government policies.
As President and CEO of Alpha Financial Technologies LLC, Sperandeo overseas
the firm's research and development platform, which is used to create
innovative solutions for different futures markets, risk parameters and other
factors.