Below, find some of the most interesting things I read in the last week.
Lower Q1 earnings. Sixty-three S&P companies have lowered their forecasts for Q1 earnings, while 17 have raised them. This is the largest disparity since the firm began tracking the data in 2006.
When will QE end? St. Louis Fed President Bullard suggested that the Fed could reduce their monthly $85 billion of bond purchases by $15 billion for each .1% that our unemployment rate drops. (The unemployment rate was 7.9% in January.) Cleveland Fed President Pianalto also suggested that the benefit / risk tradeoff of quantitative easing leads her to conclude that we may need to slow the purchases (although she didn’t offer a specific plan like President Bullard).
The bullish argument for gold. Central banks bought 535 tons of gold in 2012. This is the most since 1964. Net purchases by central banks accounted for 12% of overall demand in 2012. ETFs purchased 279 tons. The bar and coin market was 1,259 tons. Until four years ago, central banks as a whole had been net sellers for 15 years. They had been selling 400 – 500 tons. Now, they’re buying 500 tons. This is a large swing in a 4,400 ton market.
The bearish argument against gold. George Soros cut his investment in the SPDR Gold Trust by 55%. Billionaire investor Louis Moore Bacon sold all of his investment in the same ETF.
Huge news if this trend continues. From 2009 to 2011, total health spending grew at the lowest annual pace since they started keeping these records (52 years ago). In fiscal year 2012, Medicare spending per beneficiary grew just .4%. Overall Medicare spending grew 3% (because there are more beneficiaries). The CBO projects spending on Medicare and Medicaid in 2020 will be $200 billion – a 15% drop from the CBO’s projections three years ago.
Compare the slowdown to historical growth. For the past 43 years, Medicare spending per beneficiary grew 2.7% faster than the overall economy. Medicare spending grew from $7.7 billion in 1970 (.7% of GDP) to $551 billion in 2012 (almost 4% of GDP). But, for the last three years, Medicare costs per person have grown 1.3% slower than GDP.
What explains this drop? Analysts think that the weak economy is only part of the reason for reduced growth in health spending. We’ve also been starting to see changes in the way insurance is compensating doctors. The slowdown in spending started even before the recession (so it’s not purely a recessionary issue). On the downside: (1) this doesn’t solve our problems; (2) we’ve had temporary slowdowns in spending before; and (3) this may reduce pressure on Congress to address our long-term problems.
The future isn’t pretty. Unfortunately, the number of Medicare beneficiaries is projected to grow 3% each year as the boomers retire. This is why Medicare spending is expected to be more than 4% of GDP in 2023 and 6.7% in 2037.
Income inequality is returning post-recession. According to Berkeley economist Emmanuel Saez, incomes rose 1.7% during the economic recovery. When you break that down, income rose 11% for the top 1% of earners while the other 99% saw a .4% decline. This is largely the result of increasing stock prices (helping shareholders) and high rates of unemployment (holding down the income of wage earners). The income gap had shrunk during the recession (which is what normally happens).
Top 10% are doing relatively well. Excluding earnings from investment gains, the top 10% of earners received 46.5% of all income in 2011. This is the highest proportion since 1917.
The median household isn’t doing great. Median household income was $50,054 in 2011 – 9% lower than it was in 1999, after accounting for inflation. Other studies show that middle-class incomes have grown at a higher rate if you include transfer programs and benefits.
So we’re done fixing the budget? A week ago, President Obama said, “Over the last few years, Democrats and Republicans have come together and cut our deficit [over the next decade] by more than $2.5 trillion through a balanced mix of spending cuts and higher tax rates for the wealthiest Americans. That’s more than halfway towards the $4 trillion in deficit reductions that economists and elected officials from both parties say we need to stabilize our debt.” The upcoming sequester could get us even closer to the $4 trillion goal. (This ignores the fact that we’re stabilizing the debt at a higher level and when the baby boomers are fully retired, our debt-to-GDP ratio will be destabilized.)
How’s this for an instruction manual? A Wall Street Journal piece said that the federal government issued 70,000 pages of guidance last year to help explain The Affordable Care Act.
Another example of the cost of education. A New York Times article said that a bachelor’s degree from Appalachian State can easily cost $80K for a state resident (including tuition, room, board and other expenses). Approximately 40 years ago, the cost was $550 / year. With inflation, that would equate to $4,000 / year today.
A large percentage of undergrads spend significant hours working jobs. As of 2010, 17% of full-time undergraduates (traditional age) worked 20 – 34 hours per week. Approximately 6% worked 35+ hours per week.
I knew I should have been part of Baywatch. A recent Wall Street Journal op-ed piece said that 30,000 retired California government employees receive pensions higher than $100,000. There are ten that will combine to receive $50 million. One retired San Diego librarian receives $234K. Orange County beach lifeguards are retiring at age 51 with $108,000 annual pension plus health-care benefits.
State and local employees need to prepare. The Florida Supreme Court ruled that public employees’ pension contracts can be adjusted. A 2011 state law requires state employees to contribute 3% of their salaries to the pension fund. It is expected that this case will ultimately be decided by the U.S. Supreme Court.
Take some time off! The NY Times published a piece about the fact that we would be more productive if we relaxed more. More than 1/3 of employees eat lunch at their desks. More than 50% of workers assume that they’ll work during their vacations. Sleep deprivation (defined as less than six hours of sleep per night) costs American companies $63.2 billion / year in lost productivity. Sleep deprivation is one of the best predictors of on-the-job burn out. (So, I guess this means that having children ultimately leads to job burn out?) Americans left an average of 9.2 vacation days unused in 2012.
Evidence that the world is crazy. Wrestling will be removed from the Olympics in 2020. So, let me get this right…wrestling is no longer an international sport, but rhythmic gymnastics, where girls (or worse, women) prance around with a ribbon is a sport. Maybe wrestling took three minutes away from the television coverage of beach volleyball (a well known sport from the original Olympics) and that’s why it needed to be canceled?
Political sausage-making is hard to watch. Here’s a link to a really interesting PBS Frontline documentary about our financial crisis. It’s called “Cliffhanger”. It aired on February 12th and is approximately 55 minutes long. You’ll have to watch for yourself, but my view was that it was not favorable to either President Obama or Representative Cantor. I thought it was somewhat favorable to Speaker Boehner. He seemed to be the most willing to compromise and find a middle ground (knowing that no one would be happy).
Have a great week.
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