On February 1st the next Fed Chairman was sworn in. Janet Yellen, who also happens to be the first female, for those of you who keep score on such things, is a high powered and extremely intelligent economist, who will be excellent in this position. Janet served as the Vice Chairman of the Fed Board from 2010 to 2014.
As I mentioned last year, while Janet was on the fringe of this position, my sense was that the Fed will begin to slow the process of buying bonds on a monthly basis (Quantitative Easing 3). In 2013, the mere hint of such an event sent the markets straight down. 2014 seems to be bringing some renewed confidence and stability. Nonetheless, the Fed is still flooding 75 Billion per month in to purchasing of said bonds, which results in keeping interest rates at all time lows and is also he underlying support for our “still” fragile economy.
Sometime around 9/1/2013, 10-year treasuries were generating close to 3%. There has been some significant volatility in that rate since then. In October 2013, rates dipped to 2.5% and then at the beginning of January 2014, they were again at 3%. Since then, there was a steady decline, until about a week ago, when we started to see it “tic” up again to about 2.75%. Now those figures do not seem very large. What you must consider is that from 3% to 2.5% is just shy of a 20% swing in the rate and that is significant.
There are many that believe the process of tapering the QE3 will have dramatic negative repercussions on the markets. I’m not a believer….Granted, the reduction of cash will certainly have some impact, but a catastrophe is certainly not in the cards. If managed correctly, and I suspect it will be, the reduction of QE3 will be done over a period of time, likely 6-12 months, and the impact on the economy will be monitored very closely. Factually speaking, Ms. Yellen will want to be assured and make sure that our still fragile economy will be able to stand on its own, without the Fed assistance. I suspect she will keep her left foot on the “break” and right foot on the “gas” to make sure the damage is minimal. Personally speaking, it’s my opinion that we are still on pretty shaky ground with regard to the economy. Unemployment is down, but that is mainly due to people “leaving” the workforce not the surge of unemployed ranks flocking to the job market. Many people are not better off than they were 5 years ago. If you look at some statistics, done by Steve Leimburg, of Leimburg Services, the average worker is making the same amount of money they were 10 years ago, if you adjust the wage for inflation. That statistic should tell you that average workers are financially not gaining any ground. In a thriving economy, those figures would show the average American to be better off financially, not the same from a decade ago. I started in 2011 stating this would be the “new normal”, meaning the economy was going to take a significantly long period of time to recover from the “Great Recession”. Here we are almost 3 years later.
Ah, and now we get to my favorite subject. Let’s start with some statistics. Currently, there are approximately 3.9m people enrolled in the ACA (aka, Obamacare). There are about 5 1/2 weeks left for enrollment and the system needs close to 7m enrollees. Of those 7m, 25% must be younger people, under the age of 32, or the lower “risk pool” that will support the “heavy users”. Additionally, and something that seems to consistently get lost in translation, is the fact that almost 2.2m of those enrollees are Medicaid. Why you ask? Well under the ACA, Medicaid has expanded considerably and that has resulted in the additional enrollees. Many people who where not either eligible or knowledgeable about obtaining health coverage through the Medicaid system now have the opportunity to obtain coverage. It’s my belief that this is a good thing, despite what you might hear. The problem I see is simple, publish the enrollment
figures accurately and logically and not for political gain. There are several items that “skew” the figures. For one, if you read last month’s newsletter, there are several large corporations that have eliminated health coverage for retirees and are simply providing a stipend to retirees, so they can purchase their own coverage. These are not “new users”, as they simply have been moved from place to pace for coverage, which has zero impact on the 35m people that do not have coverage. Add to that figure people who have lost coverage or had plans cancelled, which is estimated at another 4m, and you will come to the same conclusion I did, which is a minimal impact on non covered individuals. Currently, less than 1.5m, or about 5% of the previously non-covered market now has coverage. When put in terms of figures, one must logically ask if it was all worth the effort and cost.
With enrollment loosing steam on a daily basis, it is highly unlikely the program will reach critical mass, which is 7m people. The White House, as of this week, is already starting to “spin” the numbers in anticipation of falling well short of expectations, fearing that the impact on mid term elections is going to be severe. What is a good preemptive example of the mid term fears? I was watching the Olympics last night and Senator Kay Hagan, D-NC, was running an ad attacking Obamacare, stating “it does not work”. There were several things that came to mind at that moment, the most prevalent was that Hagan voted for the law. The same law that she did not read, along with every other Senator who did the same thing, which is frankly irresponsible and derelict in duty as an elected official. Over the next 6 months, you are going to see lots of this type activity and lots of Democrats distancing themselves from the President, for fear it will cost them their jobs, and it should.
Statistically, which is supported by numerous polling agencies, including the non-bias Gallup, most people would not support the ACA if it were to come up for a vote today. As most of you know, the execution of the program has been nothing short of mayhem, with better than 2 dozen changes, which have been done through Executive Order by the President. We continue to “charge forward” instead of taking a moment and realistically trying to fix the problem, which is too long and complicated to explain in my monthly communication. The mid term elections are going to be interesting indeed and though I do not like making predictions, (mainly because I hate making mistakes) I’ll go out on a limb here and say there will be a power change in November.
I was trying to determine what advisory items we could discuss this month. I’m always careful about that, because my monthly newsletter is normally not used as a tool to get clients. Nonetheless, people constantly ask me to put a small advice section in each month and so I’m going to start accommodating that request for 2014.
For those of you that have been riding this wave for the last 4.5 years, it may be time to think about safety. My granddad always used to tell me that “pigs get fat and hogs get slaughtered”. If you are in retirement or within 10 years of said event, then it makes sense to start looking for ways to preserve your assets. There are several asset classes that can still reflect market gains, while protecting the dollars you have. Additionally, and over the past year or two, several insurance products have come to the marketplace that are worth a look. If this process interests you, please email me and we can have a discussion.
That’s all for this month…
As always, my very best to you and your families.