The financial regulatory reform law, known as Dodd-Frank, was supposed to make things better for consumers. It was supposed to end the ways those greedy banks and other financial institutions sucked unfair fees and charges out of the pockets and bank accounts of Americans. It was supposed to put the banks in their place and be pro-consumer. One of the hallmarks of the law was to set a maximum price on debit card fees. Now, to anyone who understood the way things worked, this part of the debate wasn’t actually about helping consumers, especially the section known as the Durbin Amendment. The debit card fees weren’t paid directly by consumers. The banks or other card issuers and processors charged retailers every time a consumer used a debit card to make a purchase. These fees were higher than those imposed on credit card transactions. Retailers didn’t like this, because they can’t charge on price for debit cards and another for credit cards. So they got Congress to set a limit on debit card fees. Retailers argued that this would allow them to reduce prices for all consumers.
May be the retailers will reduce their prices, and may be they won’t. But the banks will increase other fees to make up for the lost debit card fee income. You can read the news in any of the media today. Bank of America is leading the way, announcing yesterday that it will impose a monthly fee on at least some debit cards that previously were free. Before that, a number of banks eliminated or modified the rewards programs that went with their debit cards. There are a host of other actions banks are taking to pay for all that consumer protection in the Dodd-Frank law. Branches are being closed. Other fees are being added or increased. Free checking is less and less available.
The people hurt by all this are those who can least afford it: The poor and those with modest incomes. Wealthy people avoid the fees by doing enough business with a bank. All they have to do is keep a minimum amount in a no-interest checking account or switch their mortgage to the bank where they have their checking account. Those with fewer assets have to leave the banking system or reduce other spending.
Citing the negative impact of the Durbin amendment and other regulations on customer profitability, Texas-based IBC bank recently announced its decision to close 55 supermarket-based branches, eliminating 500 jobs, rather than increasing banking fees. Other banks will inevitably follow suit.
Conceived of as a narrow special-interest giveaway to large retailers, the Durbin amendment will have long-term consequences for the consumer banking system. Wealthier consumers will be able to avoid the pinch of higher banking fees by increasing their use of credit cards. Many low-income consumers will not. Banking will become less innovative and consumer-friendly.
In past issues of Retirement Watch I advised people to consider alternatives to bank checking accounts, such as similar accounts offered by discount brokers and mutual funds. This is a good time to review those options.
Younger people were quick to latch on to the iPad, but many older readers are content to stay with what they know, whether it’s a traditional computer or no technology at all. Here’s a quick review of why the iPad offers a lot to the silver generation, plus one negative aspect of the iPad.
Gold investors had a tough time in the last week. But the tough times might not be over. According to Mark Hulbert, statistically October is the worst month for gold.
But consider October’s track record. Over the last three decades, the London PM Fixing Price in U.S. dollars terms has lost an average of 0.9% during October. That compares to a 0.6% gain in all other months. That difference of 1.5 percentage points is statistically significant.
(By the way, I didn’t go back further in the historical record because it was only in the mid 1970s that it became legal for U.S. citizens to own gold.)
I don’t put a lot of emphasis on these calendar trading theories. I won’t follow a strategy unless I see both data and theory to support it. An investing strategy needs a fundamental explanation of why it works, not simply that data show it’s worked in the past. I find that when only data supports a strategy, the strategy soon stops working. Hulbert offers a couple of theories to back the data but neither is fully satisfactory. The main theory is that gold’s cycle has something to do with a five-day festival in India. Together India and China account for about half of the jewelry demand for gold.
That’s the consensus of most economists and market analysts. Yet, the Greek government and most European policymakers don’t believe that. At least, they aren’t saying so publicly. Unfortunately, the longer the default and plans to deal with it are delayed, the worse the transition will be. The latest to weigh in on this issue is Martin Feldstein, economics professor at Harvard University. Feldstein has an interesting perspective. He believes the policymakers understand the problem and that they are deliberating delaying the eventual solution. The delay is not for the reasons many people suspect, but is a canny move to give European banks two years to build their capital bases so they can absorb the losses from default. Two years also gives investors confidence that a Greek default won’t be part of a cascade of defaults through Europe that includes larger countries and economies, such as Spain and Italy. But Feldstein isn’t convinced this is a good strategy:
But there is a greater and more immediate danger: Even if Spain and Italy are fundamentally sound, there may not be two years to find out. The level of Greek interest rates shows that markets believe that Greece will default very soon. And even before that default occurs, interest rates on Spanish or Italian debt could rise sharply, putting these countries on a financially impossible path. The eurozone’s politicians may learn the hard way that trying to fool markets is a dangerous strategy.
One thing usually happens in times of crisis. You can use this to identify a bad market from a period of serious system wide financial stress. In a crisis, investors sell off all risky assets and seek only safe havens. In investment geek terms, all correlations go to one. We’re seeing that now. The final step in this process was the steep decline in gold and silver on Friday. Before that, gold and other precious metals were acting as safe havens along with the dollar and treasury bonds. Now, only the dollar and treasury bills are left standing.
Barron’s has a good explication of this in today’s edition. (Subscription might be required.) It reports on ETF data from ConvergEx Group. The group found that correlations among usually diversified assets are rising and area close to one.
Tapping into the group’s database, Barron’s surveyed monthly correlation rates — which measure how closely funds move in tandem — between 19 different ETFs covering broad equities and fixed-income markets. The results were jarring: other than gold, via the SPDR Gold Trust (ticker: GLD), silver, through the iShares Silver Trust (SLV) and investment-grade corporate bonds via the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), everything else was moving in sync through Thursday.
As a group, the 10 major sectors of the Standard & Poor’s 500 are averaging correlations of nearly 96%, versus roughly 82% three months ago, and in the same neighborhood as the iShares MSCI EAFE Index Fund (EFA). Meanwhile, junk bonds in the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) are performing like blue-chip stocks 80% of the time.
Note that the data were as of Thursday, before gold joined the decline.
I’ve been reporting on the CLASS program that was inserted in the Affordable Health Care Act of 2010 (health care reform). The program is supposed to provide people with $50 per day to pay for almost any expenses they incur when they need long-term care. It’s elective. People would choose to join and pay premiums via employer withholding. A person would have to pay premiums for at least five years before being able to collect benefits. The program was required to be self-sustaining and affordable.
The Department of Health and Human Services is supposed to be working on the details of the program, such as determining what the premiums would be and the detailed rules. The program isn’t supposed to go forward unless it is financially viable.
The Wall Street Journal reports that the program might die before it starts. The actuary hired in January to head the team working on the program and develop the details was terminated. He was told his services no longer were needed, and he says the rest of his staff was reassigned to other positions. HHS didn’t announce the changes publicly, but in response to questions denied that the program is officially terminated.
In a statement, HHS denied that the office was officially closing but confirmed it’s not certain the program will go forward.
“While the staff of the CLASS office has been reduced, reports that the CLASS office is closing are not accurate,” the HHS statement said. “We are continuing our analysis of this program. As we have said in the past, it is an open question whether the program will be implemented. A CLASS program will only be implemented if it is fiscally solvent, self-sustaining, and consistent with the statute.
We’ve been conservative in our portfolios the last two years. I’ve taken some criticism from readers who told me I missed the greatest buying opportunity of the century and made similar comments. I stayed with balanced, diversified portfolios because none of the problems that caused the meltdown in 2008 were solved. Policymakers chose to paper over the problems, take short-term measures, and defer substantive changes. Those chickens are coming home to roost. The gamble was that the economy would heal itself if governments used stimulus and other measures to prop it up during the healing period. We lost he bet.
PIMCO’s Mohammed El-Erian gave global policymakers a lecture on this topic Thursday at the International Monetary Fund’s annual conference. El-Erian told the conference that we are on the eve of the next financial crisis and that a “circuit breaker” has not been put in place to prevent the European debt crisis from spreading the way the Lehman Brothers bankruptcy did in 2008, despite adequate warning and the expenditure of a lot of money.
I suspect one reason markets began declining after the Fed’s announcement of Operation Twist on Wednesday is the Fed’s statement and actions reveal how impotent it is at this point. The Fed has done all it can do. It’s up to federal policymakers to change fiscal policy, and there’s little likelihood that they will agree on an adequate plan.
Hedge fund honcho Barton Biggs also expressed pessimism on Thursday. Biggs has been bullish since the market bottom in 2009 and just a few months ago was forecasting 20% stock market returns for the year. He was 85% in stocks six months ago. Now, he said he’s only 20% in stock market bets and wishes he owned fewer stocks.
“I wish I was minus 20,” Biggs said during an interview today on Bloomberg Television’s “Street Smart” with Matt Miller and Carol Massar. “I wish I was zero. I don’t think any place is a place to invest.”
The benchmark gauge for American equities lost 3.2 percent to 1,129.56 today, extending its weekly drop to 7.1 percent, on concern policy makers are running out of tools to avoid another global recession. Biggs said Aug. 18 that the S&P 500 may be bottoming after an 18 percent drop between April 29 and Aug. 8.
Markets are telling policy makers that “they’ve got to change and act or we’re going to go into a double-dip recession, and we’re going to go down another 20 percent,” said Biggs, whose equity purchases prior to the March 2009 market bottom sent his Traxis hedge fund to a 39 percent gain that year.
A number of economic and market forecasters closely follow what happens at the major shipping companies: FEDEX, UPS, truckers, and freight rail. The theory is that these firms show what’s really happening in the economy in real time. When shipments are rising, the economy is growing. When shipments stagnate or fall, the economy is having problems. The results of shippers also can pinpoint where the economy is doing best. The last few years, for example, results for shippers confirmed that there was stronger growth outside the U.S., especially in Asia, than in the U.S.
That’s why today’s announcement from FEDEX merits attention. FEDEX has been optimistic in recent quarters despite forecasts that the economy was due to slow. FEDEX reduced its earnings growth for the rest of the year, reporting that shipments slowed dramatically in July and the slowdown continued. That’s clearly being reflected in stock prices already, and there could be more declines to come.
Weak demand from consumers in the U.S. and Europe for electronics manufactured in China has sapped strength from international air-freight volumes, a stark illustration of the slowdown in global trade.
FedEx Corp. posted improved earnings for its fiscal first quarter Thursday, but the world’s largest air-cargo carrier reduced its full-year profit guidance, echoing recent warnings that Asian shipments have been particularly weak.
“We were on track for [Asian volume] growth in June, and then in July we saw a sudden deceleration that continued all through August,” FedEx Chief Financial Officer Alan B. Graf Jr. said. “There’s been no real pickup” since then, he added.
Global markets gyrated quite a bit in recent weeks. There have been side issues, such as corporate earnings and a few speeches from Fed insiders. But for the most part your net worth fluctuated up and down (mostly down) with the latest turns in the European sovereign debt crisis. This is being recognized in commentary by prominent money managers and market strategists.
John Hussman, in his latest weekly commentary, says Greece must default on its debt. There’s no logical alternative, because the country can’t possibly repay what it owes. Its attempts so far to impose austerity and pay the debt are causing social unrest and making the economy worse. The Wall Street Journal reports today that the suicide rate in Greece doubled since the debt crisis began.
PIMCO’s Mohammed El-Erian said that the euro and European Economic Union must be saved, and the only way to do that is to have Greece and perhaps a few other countries leave the Union and the currency. That’s contrary to what the leaders announced last week. They said they plan to keep the Union intact. Letting Greece and other countries leave the Union is another way of letting Greece default by inflating its currency and taking other steps.
Nouriel Roubini also advised Greece to exit the euro. Roubini approached the issue for what’s best for Greece, while El-Erian was arguing that having Greece leave the euro is best for the rest of the global economy. Roubini also advised that Greece conduct an “orderly default” on its debt, because the debt is choking the economy. Leaving the euro and defaulting are the only ways to restore economic growth and prevent more social problems in the country.
So we have three leading strategists advise that a default by Greece is inevitable, and the sooner it occurs the better it will be for all parties. The default must be orderly and managed. The European governments will have to take steps to ensure innocent parties (such as bank depositors) are protected from the consequences and that banks are recapitalized or transferred to new owners.
Investment markets are moving downward because investors fear the consequences of a default. They’re worried about another global market freeze as occurred after the Lehman Brothers bankruptcy. There are other problems in the U.S., Europe, and developing economies. But these can’t begin their healing, and investment markets can’t return to responding to fundamentals, until the European debt situation is resolved.
Many silver Americans don’t select the best Medicare Advantage plan for them. These plans offer broader benefits at a lower cost to the patient than traditional Medicare, on average. A study recently found that less than 10% of those searching for a Medicare Advantage Plan and 7% of those searching for a Part D prescription drug plan selected the plan that resulted in the lowest costs for their out-of-pocket drug costs. The problems, concluded the researchers, are that older Americans generally have a cognitive decline, which makes decisionmaking less reliable, and the choices have increased. Another factor is most people don’t have experience selecting a medical insurance plan. Their employers also did that for them.
And the cost difference can be substantial. For example, people in one Georgia zip code who take 70 mg tablets of osteoporosis drug Fosamax once daily may have annual expenses ranging from $2,661 to $9,032 — depending on which Medicare Advantage plan they pick, according to a plan finder offered by PlanPrescriber, a broker that sells Advantage plans, and a wholly-owned subsidiary of eHealth Inc.
Having access to more Medicare Advantage plans led to poorer decision-making, and seniors with cognitive decline were even less likely to switch to more cost-effective plans, according to a Harvard Medical School study released in August. Read the study on Health Affairs.org.
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