Wednesday, August 31, 2016

Fed is hoping everything magically turns around



They want to keep up the pretense that the economy is strong enough for a rate hike.


Peter Schiff is a smart investor and author of several best selling books. He correctly predicted the economic meltdown of 2008 - 2009

Thursday, August 25, 2016

High inflation in our future


Peter Schiff is a smart investor and author of several best selling books. He predicted the last big economic meltdown.

Tuesday, August 23, 2016

Obamacare is a failed healthcare experiment

Economics is far simpler than most in academics or government would have you believe. To make accurate predictions all you really need is an honest appreciation of the self-interest that is at the heart of free market transactions and an ability to understand how regulations that attempt to “correct” these realities don’t work. This is certainly the case with the completely predictable slow-motion train wrecks that are the signature U.S. domestic policy experiments of the last eight years: Obamacare and Federal Reserve stimulus. From the start, I issued countless commentaries on why both would fail spectacularly. The jury has started to come back on Obamacare, and the results are a disaster. And while the verdict on the Fed’s policies has yet to arrive in similarly stark terms, I believe that its failure is just as certain. 

As I explained in my July 30, 2012 commentary “Justice Roberts is Right: The Plan Won’t Work,” the central flaw (among many others) in Obamacare is that it incentivizes younger, healthier people to drop out of insurance coverage while encouraging older, sicker people to sign up. The result would be a pool of insurance participants that would guarantee losses for those providing coverage. That’s exactly what we are seeing.

After only four years of operation, there is now wholesale defection by insurance companies to abandon the Obamacare marketplace because they are hemorrhaging money faster than just about anyone predicted. To believe that any other outcome was possible would have been the equivalent of believing in the Tooth Fairy.

According to the Wall Street Journal, the four biggest U.S. health insurance companies, Anthem, Aetna, UnitedHealth and Humana are losing hundreds of millions of dollars on their Obamacare plans. And since these companies can’t be compelled to operate a business that loses money, all four have significantly scaled back their offerings. UnitedHealth has already exited 31 of the 34 states where it sells ACA policies. Humana is now offering coverage in just 156 counties of the 1,351 counties in which it was active a year ago. The latest shoe to drop came this week when Aetna said it would stop selling Obamacare plans in 11 of the 15 states where it is currently active.

It’s no secret why the companies are losing so much money. Enrollees into the new plans take out far more money in benefits than they pay in premiums, despite the fact that premiums have increased substantially. That’s because the pool of insures in the Obamacare plans differ sharply from those that exist in the private marketplace. Why this has happened should have been stunningly obvious to anyone. To quote from my 2012 commentary:

“…the ACA makes it illegal for insurance providers to deny coverage to anyone for any reason. This allows healthy people to drop insurance until they actually need it without incurring any risk. It's like allowing homeowners to buy fire insurance after their houses burn down.” Given the high cost of insurance, the law allowed millions to take a free ride.

I argued then that penalties that would hit those who remained uninsured were insufficient to compel them to make an uneconomic decision. This was the same rational that was used by Chief Justice Roberts when he ruled that the plan was constitutional. He argued that since the penalties were not high enough to compel behavior, they should be seen as constitutional “taxes,” not unconstitutional “penalties.”

Similarly, by guaranteeing that no one could be denied insurance for any reason, and that the sick would pay the same premiums as the healthy, the plans have sucked in lots of people guaranteed to take out more in benefits than they pay in premiums. Add these factors together and you get the recipe for guaranteed losses. In retrospect, it is simply incredible that supposedly smart people argued against this outcome while the law was being drafted and passed.

At this rate, there may essentially be no private companies offering insurance through the exchanges within a few years. This will mean that unless president Clinton (Trump has promised to repeal Obamacare) passes a new law requiring companies to lose money for the good of the country (not too outlandish a possibility), or if the Supreme Court allows massive increases in the penalties for not buying insurance (thereby creating the coercive force that Justice Roberts argued was absent in the original law), then the government itself will have to step in and absorb the losses that are currently hitting the private insurers. At that point, Obamacare will become just what its critics always thought it was: an enormous new unfunded and open-ended government entitlement. 

While the flaws of Obamacare were incredibly easy to see, so too are the flaws in the Federal Reserve’s stimulus policy. What’s amazing to me is that more people aren’t able to see through it as easily.

Although few realized it while it was occurring, everyone now sees that the dotcom mania of the late 1990’s was a bubble that had to end badly. Most also realize now, as they didn’t realize then, that the housing bubble of the early years of the 21st Century (which took us out of the 2001 Recession) was a bubble created by the Federal Reserve’s unprecedented low interest rates in those years.  

But while we have gotten better at recognizing bubbles after they have burst, we are still totally blind to the ones that are currently forming. Ever since the Recession of 2008, the Federal Reserve has held interest rates at zero and has injected trillions of dollars into the financial markets through its quantitative easing policies. These moves have clearly inflated prices in the bond, stock, and real estate markets, an outcome that was an expressed aim of the policies.There is also clear evidence that these asset prices will come under intense pressure if interest rates were allowed to rise.

Recent history confirms this. Back in January of this year, just a few weeks after the Federal Reserve delivered the first rate increase in nearly a decade, the stock market entered a free fall. We had the worst opening two weeks of the calendar year in stock market history. The bleeding stopped only when the Fed backed off significantly from its prior rate hike projections. Since then, the market action has been clear to see: stocks rally when they believe the Fed will keep rates low, and then fall when they think they will rise. And so the Fed has played a continuous game of footsy with the market…forever hinting that hikes are possible but never actually raising them.

But given how close the economy could be trending toward recession, can anyone seriously believe that the Fed will risk kicking a potential recession into high gear by actually delivering another rate increase? It should be clear that it won’t, but somehow the best and brightest on Wall Street appear convinced that it will. Perhaps this explains why hedge funds have so consistently underperformed the market thus far in 2016.

To me, the fate of the Fed's stimulus policy is as clear as that of President Obama's failed experiment in healthcare. It's a disaster hiding in plain sight. The stimulus itself has so crippled the U.S. economy that it can now barely survive without it. As it limps along the crutch must grow ever larger, as the support it provides weakens the economy to the point where it becomes too small to provide adequate support. But rather than acknowledging that the Fed's policies have failed (an admission that any honest proponent of Obamacare should make), the proponents of stimulus are doubling down.

Earlier this week, John Williams, the president of the San Francisco Fed and widely believed to be a close confidant of Chairwoman Janet Yellen, issued an economic letter on the FRBSF website that lays the foundation for much greater stimulus for years to come. The centerpiece of Williams’ suggestions is that he would like to see the Fed raise its inflation target past the current 2%, and that the government be prepared to run much larger deficits to combat persistent economic weakness. In other words, ramp up the dosage of the medicine we have been taking for years, even though that medicine hasn’t worked. This shows a stunning inability to recognize a failed policy when it is staring at them in the face.

Absent from his analysis is any understanding that the stimulus policies of the past two decades may have actually created the conditions that have locked our economy into a perpetually weakened state. By preventing needed contractions, debt reductions, investment re-allocations and rebalancing, perennial stimulus has frozen in place a listless economy dependent on monetary support just to tread water. Just as Federal tax policy and healthcare regulations raised the costs of healthcare to the point where another bold (and ultimately futile) regulatory framework was launched to solve the problem, new forms of stimulus are being conjured to fix problems created by prior stimulants. But since Williams does not realize the stimulus he and his fellow quacks at the Fed have prescribed actually acts as a sedative, he has misdiagnosed the resulting condition of slower economic and productivity growth and as being the new normal.

Proof of this circular logic is Williams expressed desire to use monetary policy to push up “nominal GDP,” which is simply the GDP figures that are not adjusted for inflation. What good will it do for the average citizen if we get a higher GDP number that results merely from rising prices rather than actual economic growth? While the stimulus crowd likes to suggest that rising prices are a required ingredient for real growth because they encourage people to go out and spend before prices rise further, their asinine theory is completely unfounded. The entire purpose of deflating nominal GDP is to separate actual growth from rising prices. Pretending the economy is growing by targeting nominal GDP will only stifle real economic growth that might actually solve the problems the Fed still has no idea it created.

It is somewhat heartening that there is a greater recognition now of the inherent flaws in Obamacare. Hopefully such realizations will soon be widely raised about our current stimulus experiments, and that these insights will arrive in time to change course. However, confidence should be extremely low on that front.

To me, the fate of the Fed's stimulus policy is as clear as that of President Obama's failed experiment in healthcare. It's a disaster hiding in plain sight.  The stimulus itself has so crippled the U.S. economy that it can now barely survive without it.   As it limps along the crutch must grow ever larger, as the support it provides weakens the economy to the point where it becomes too small to provide adequate support.  But rather than acknowledging that the Fed's policies have failed (an admission that any honest proponent of Obamacare should make), the proponents of stimulus are doubling down.

Wednesday, August 17, 2016

Dollar will crash instead of market crashing



Peter Schiff is a smart investor and author of several best selling books. He correctly predicted the economic meltdown of 2008 - 2009

Monday, August 15, 2016

The Paradox of our new economy

If the Economy were a car, productivity would be the engine. Heated seats, on-demand 4-wheel drive and light-sensitive tinted windshields, are all very nice. But they mean little if the engine doesn't turn and the car just sits in the driveway. The latest productivity data from the Commerce Department confirms that our economic engine is sputtering.

If you strip away all the bells and whistles of economic analysis, the simple truth is that the increased living standards that have taken us from the stone age to the digital age happened because we increased our productivity. Better plows, windmills, bulldozers, factories and, more recently, better software, technology and automation, have allowed economies to produce more output with less human effort. This means there are more goods and services for more people to share and workers can work less to acquire those goodies. When productivity stops increasing, no amount of financial gimmickry can compensate.

With this in mind the latest batch of productivity data should have significantly changed the conversation. But like other pieces of evidence that point to a weakening economy, the news made scarcely a ripple. The fact that few opinions about our economic health changed as a result, confirms just how big our blinders have become.

Most of the economic prognosticators were fairly confident about the Second Quarter numbers. After all, productivity had unexpectedly declined for the prior two quarters, and given the optimism that is ingrained on Wall Street and Washington, a big snap back was expected. The consensus was for an increase of .5%. Instead we got a .5% contraction. That's a huge miss. The contraction resulted in three consecutive declines, something that hasn't happened since the late 1970's, an era often referred to as the "Malaise Days" of the Carter presidency. That time, which spawned such concepts as "stagflation" and "the misery index," was widely regarded as one of the low points of U.S. economic history. Well, break out your roller disco skates, everything old is new again.

But it gets worse. Productivity declined by .4% from a year earlier, marking the first annual decline in three years. According to data from the Bureau of Labor Statistics, the total magnitude of the three quarter drop was the largest decline in productivity since 1993. The last three quarters mark a significant decline from the already abysmal productivity growth we have since the Financial Crisis of 2008. According to the Wall Street Journal, during the 8 years between 2007 and 2015 productivity growth averaged just 1.3% annually, which was less than half the pace that was seen in the seven year period between 2000 and 2007.

The talking heads on TV can't seem to offer any real reason why productivity has gone missing. Some feebly suggest that globalization is the problem, or that automation has moved so fast that the benefits usually offered by technological improvements have lost their power. But it would be hard to come up with a reason why trade, which has universally benefited local, regional, and international economies through comparative advantage and specialization, has suddenly become a problem. Similarly, when does greater efficiency become a problem rather than a solution? So they are stumped.

But these economists ignore the major change that has befallen the world over the last eight years, a change that has coincided neatly with the global collapse in productivity. The Financial Crisis of 2008 ushered in an age of central bank activism the likes of which we have never before seen. All the worlds' leading central banks, most notably the Federal Reserve in Washington, have unleashed ever bolder experiments in monetary stimulus designed to reflate financial markets, push up asset prices, stimulate demand, and create economic growth. And while there is little evidence that these policies have produced any of the promised benefits, there is every reason to believe that the scale of these experiments will just get larger if the global economy doesn't improve.

But very few brain cells have been expended about the unintended consequences that these policies may be creating. But let's be clear, there is nothing natural or logical about a set of policies that result in an "investor" paying a borrower for the privilege of lending them money. So in this strange new world, we should expect some collateral damage. Productivity is a primary casualty. Here's why.

Another set of statistics that has accompanied the decline in productivity is the severe multi-year drop in business investment and spending. Traditionally, businesses have set aside good chunks of their profits to invest in new plant and equipment, research and development, worker training, and other investments that could lead to the breakthroughs and better business practices. The investments can lead to greater productivity.

But the business investment numbers have been dismal. But it's not because corporate profits are down. They aren't. Companies have the cash, they just aren't using it to invest in the future. Instead they are following the money provided by the central banks.

Ultra low interest rates have encouraged businesses to borrow money to spend on share buybacks, debt refinancing, and dividends. They have also encouraged financial speculation in the stock market, the bond market, and in real estate. Investors may believe that central bankers will not allow any of those markets to fall as such declines could tip the already teetering global economies into recession. The Fed, the Bank of England, the Bank of Japan, and the European Central Bank have already telegraphed that they will be the lenders and buyers of last resort. These commitments have turned many investments into "no lose" propositions. Why take a chance on R&D when you can buy a risk free bond?

Higher interest rates are actually healthy for an economy. They encourage real savings, with lenders actually concerned about the safety of their loans. Without the backstop of central banks, speculators could not out bid legitimate borrowers who make capital investments that produce real returns. But with central banks conjuring cheap credit out of thin air, supplanting the normal market-based credit allocation process; the result is speculative asset bubbles, decreasing productivity, anemic growth, and falling real wages. Welcome to the new normal.

If the cost of money is high, people think carefully about where they want to put their money. They select only the best investments. This helps everyone. When money is cheap, they throw darts against a wall. This is not the best use of societies' scarce resources. Is it any wonder productivity is down?

Many economists are now saying that the Fed won't be able to raise rates until productivity improves. But productivity will never improve as long as rates stay this low. This is the paradox of the of the new economy.

When will central bankers conclude that it's their own medicine that is actually making the economy sick? They will not make that connection until they succeed in killing the patient...and even then they may continue to administer the same toxic medicine to a corpse. The political pressure is just too great to ever admit their mistakes, so they repeat them indefinitely.


Monday, August 8, 2016

Why the Central Banks want to create inflation

They want it to wipe out government debt; they want it to prop up asset bubbles… they want to lower wages through inflation because of asinine minimum wage laws or things that unions do to artificially drive up the cost of employment. 

So there’s all sorts of secret reasons why central bankers want to create inflation, but they don’t want to level with the public as to why they’re doing it so they make up this nonsense about how it’s a good thing and we need it for the economy.


Peter Schiff is a smart investor and author of several best selling books. He correctly predicted the economic meltdown of 2008 - 2009

Wednesday, August 3, 2016

Fed just took the prospect of near term rate hikes off

You go back and think of all the rate hikes that people thought were going to happen. I knew that the Fed couldn’t raise rates. The fact that they did one trivial quarter point rate hike and then backtracked and took them all off the table proves that I was right.

They said they couldn’t raise interest rates without crushing the markets. They raised interest rates. The markets got crushed. The only reason the markets rallied back was because they stopped raising interest rates, which is exactly what I said.

I still believe, and I said this in December of last year, that the next move by the Fed is going to be a cut in rates.

It’s the opposite of Teddy Roosevelt. He used to say ‘speak softly but carry a big stick,’ but when it comes to rate hikes the Fed has no stick. So, all they can do is speak loudly and hope nobody notices the absence of a stick. They want to keep talking about all the rate hikes and how they’re going to raise interest rates. But the last thing they want to do is actually do that because then the whole economy will implode and then the markets will realize the box that we’re in.

Instead, they keep positioning as if they’re about to raise rates, but then they keep coming up with one excuse after another why they’re not going to do it. Meantime they’ve been making up excuses for so long, the economy has basically relapsed back into recession. We’re either there or we’re on the doorstep of one. 

I think had the Fed already raised interest rates a few years ago, they would be cutting them right now based on how weak the economy is.




Monday, August 1, 2016

Fed does not want real estate to crash



Peter Schiff is an Investor, Stock Market analyst and author of several best selling books.

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