The privatization of any social program always brings a hot debate between conservatives, liberals and, well, anyone in the middle. Many free market minded individuals think Social Security should be privatized while liberals say no way. Who is right and is it even possible to privatize such a huge chunk of the Federal pie?
First, let’s answer whether or not Social Security could be privatized. The answer is simple, it cannot be and privatization will never, ever happen. Why? Anyone who has been alive for more than 15 years knows that the federal government takes a nice chunk of your paycheck for FICA, basically Social Security and Medicare/Medicaid, but what they do not know, usually, is that the Social Security portion does not go where you might think. There is no actual account for your Social Security benefits instead you build up credits and your payout is determined by what age you retire. The size of your check will vary some depending how long you have worked and who much you put into the system. This is a very 30,000 foot view.
You receive credits into your Social Security account and not a “cash balance” report because there is no cash actually in your account. Believe it or not the government borrows against Social Security assets all the time and gives you an I.O.U. instead – the Social Security Administration is now cashing in some of those I.O.U.’s because they are now broke. You should know this because it means that if the cash flow into Social Security was ever stopped the whole house of cards would come crashing down. In effect, your entitlement program is the largest Ponzi Scheme in the history of scams. It is for that very reason Social Security will never be privatized because all of the lies would be exposed. But, what if we could privatize it?
Is it a good idea to privatize Social Security? That is a complex question and I am inclined to say yes, but with severe limitations. I do not think it is a great idea to put it into an account with only equities because people do dumb things when equities are involved. In my opinion I believe that using a deferred income annuity product would be the best option or some other type of account that has guarantees attached to it. An income Annuity would give the investor much higher lifetime income than you might think. I am also inclined to believe that insurance companies would create a product that would create a greater stream of lifetime income than what Social Security could ever provide.
However, I think some products should never be considered as an investment option. On my list I believe products that involve higher fees should be excluded such as equity index annuities and variable annuities. I am a believer in Variable annuities, but I feel that the current product fees are too prohibitive to make them a suitable option, a new one would have to be created. I am not a believer in equity index annuities, call me crazy but monthly or daily averaging which intentionally lower the rate of return is not a good idea and then throw on caps, yields or spreads and you have a product that is just not good. I am sure someone will disagree with me about indexed annuities, but that is their opinion and I have not seen a product I actually like. Plus when you exclude the dividends for these products it will drastically underperform the market rate of return. In short, these types of insurance products, which I am sure are valuable, are just too complex for a self directed Social Security account and I do not have faith in the government to choose the best products if they were allowed.
I think a hybrid product with a living benefit, which would payout 5% for as long as the owner lives regardless of account value, might be a decent option. They have a lower cost compared to a variable annuity, but provide similar lifetime income guarantees. These accounts also would mandate an asset allocation model that would have to be adhered to or all guarantees are off. Contrary to belief, asset allocation did work throughout the market crisis. Yes, you took a loss even in a diversified portfolio, but a balanced fund only lost 19% and has a standard deviation of 12.7, not bad.
If this were to happen, privatization of Social Security, it would lead to bad products being created since the government has no sense of what is and what is not a good investment for people. It would also lead to great confusion by investors since many have no idea how any type of guaranteed products work or their drawbacks. There is also the possibility that if/when we have another meltdown in the markets the losses incurred by investors would bankrupt insurance companies or whoever is offering guarantees. It is clear that traditional pension funds have not worked, the taxpayer is already making good on those guarantees, which leads me to believe that any type of equity investment options are simply a bad idea.
The only feasible option for privatizing Social Security would be using a traditional income annuity. The risk is manageable and the returns are predictable as well. However, this is all a moot point because it will never, ever, happen simply because if the government did not receive that income from your paycheck they would fold. While I think some investors would benefit from this the larger population would not and the only real winner would be Wall Street, as usual.
I was excited to see The Hartford had turned the corner to profitability, until I realized that they only had positive earnings if you excluded the losses. I am sorry, but that is accounting profits, not actual profits. Without the losses the firm posted a whopping $1.56 per share, but including the losses the firm lost $.79 per share. Of course, no one is going to look under the hood at the balance sheet in the media, so come with me for a ride at looking at an insurance company’s balance sheet.
First, let’s take a look at this statement about these quarters’ results:
“Impairments were $536 million, pre-tax, in the third quarter of 2009. The majority of impairments were related to potential future credit losses on certain structured securities.
Net unrealized losses on investments were $5.8 billion, pre-tax, as of September 30, 2009, compared with $13.2 billion as of December 31, 2008. The improvement was driven by significant spread tightening across virtually all fixed maturity asset classes in the second and third quarter of 2009, partially offset by the implementation of new impairment accounting guidance.“
So, there is still $5.8B in losses on the books, that will have to be realized because everything is catching a bid nowadays. However, what caught my eye was new impairment accounting guidance. That is the fabled market-to-fantasy land issue that we have all been talking about. What would happen if we did not have that rule in place? I am sure you know that that $5.8B would go way up, but that must be good news, somehow.
The firm did not enjoy prosperous growth across its business lines, its P&C business was down pretty much across the board. Its variable annuity business had significant net outflows, its fixed annuities had less than $1B in net inflows. The mutual fund arm of the firm did have strong inflows of about $2.7B, but it is a low profit margin product. Its group benefits did OK with $4.4B and its individual life has margins of about 4%. Overall, it is not that strong of a report in my view as its core business were way down.
If you actually look at the balance sheet there is simply nothing to really like. Every division, except for the P&C division lost money, but had a credit from previous losses which offset the loss and made it a gain. This is a paper gain, not an actual gain at all. For example, The Hartford had a loss of ($323M) in its core life business, but Less: Net realized capital losses of $822M and what do you know, you have a profit of $499M. I know, I am being picky, why argue with a profit, right? Sorry, but a profit is something you earn, not carry forward credits or offset losses. I am not saying that The Hartford’s earnings are not legitimate, but I am saying it is just accounting.
This type of accounting realized losses were on every line of the earnings statement, which makes me think that the $.79 loss is the only number to go with here. I know we are all looking for good numbers and good news, but accounting profits are just that and not real. What happens when you have no more losses to offset anything or the rules get changed, I hope, back to mark-to-market? The Hartford is a good firm and I know they will be fine, but I do not like this quarter’s earnings at all. I do not own any long or short positions in The Hartford and I encourage you to look for yourself at the earnings report and judge it for yourself.
OK, there are lot’s of things we could say about Mr. Cramer, but you know what I kind of like what he does. Before you get the wrong impression I do think he is dangerous and makes some bad calls, i.e. the housing bottom, but he does get people interested in stocks which is a good thing.
Let’s get this straight, employers cut 467,000 increases for June and the unemployment rate jumps .1%? Now, last month we saw 347K, or so, jobs lost in June and the unemployment rate jumped 4 times what it did today.
I find that odd. How can you have radically different numbers with such a different rate of unemployment? We know the deal, the number is whatever the government wants it to be. Regardless, is this another green shoot or are we going to continue with the “employment is a lagging indicator” BS line?
As stated many times before, and what some people just don’t get, is this is a credit problem, not a liquidity problem. Lehman, Bear they went under because no one would lend them money, not because it wasn’t available. Well, wait it wasn’t available to them because of their credit ratings.
You mix the employment numbers with the piss poor economic data that trickles out and you have weeds, not green shoots. Until unemployment is taken care of then this problem will persist.
On another note, we read Zero Hedge and like them. However, no idea why others are throwing them in the middle of this and am upset that they did not even give us any props for trying to go on the show.
Who are we? One guy has 17 years experience in the investment world as an advisor, as a executive at well known firms and as a person who conducts research. Another is a former investment banker at a well known firm. In other words we are not exactly dummies and some say, never heard of you, no shit sherlock you are day trading options we cover broader economic topics and market conditions and annuities. We stay anonymous because we have other obligations and do NOT care about publicity, we just want out message to get out. Plus, if you look hard enough you will see that Mike is a real person. So whatever.
Why is it that people trust the media so much? While I admit that I am an avid CNBC watcher I simply do not understand why everyone trusts what they have to say. They initially came out blasting Obama, but then all of a sudden they embrace his policies, no matter how destructive they are. I was never a believer in media bias until after the election and the bailouts, which GE Capital subsidiary of GE the parent of CNBC received part of, where handed out.
Political bias aside, the real damage the network does is through its pitch men, Jim Cramer, Larry Kudlow and super dip shit Dennis Kneale. Frankly, they are totally clueless about everything that is going on. Cramer calls the bottom of the housing market, a few days before an announcement of further declines and horrible housing data, he used new permit data and saw what he wanted. Kudlow has continually called a rebound in the economy in the face of continuing horrible data. Finally Kneale called the end of the recession as of Thursday based on two data points.
The truth of the matter is that none of these people understood the real problem which was a credit problem, not a liquidity problem. Credit has not really improved and the consumer is in worse shape than ever. Unemployment is not a lagging indicator for this problem, it is a leading indicator and is going to get much worse. The higher the unemployment rate climbs the greater the credit card, foreclosures and auto loan defaults there will be. That is where the problem lies, not with liquidity.
The Fed is not helping matters by not allowing institutions to fail. While no one wants banks to go under and people to lose their jobs it is imperative for the markets, not government to sort things out. Now we have zombie banks that are still under capitalized and not lending money to consumers. Not to mention, which I find embarrassing, is that 45 banks have failed this year, 45 with a trillion in bailouts! Seriously, how can that happen?
We cannot have a consumer based economy that is massively in debt, both consumers and the government, and expect to be the powerhouse we once were. We need manufacturing to succeed which is exactly why China is such a powerhouse, they produce things while we do not. It is a matter of time, as recent news stories have indicated, before the world will seek a new reserve currency. I am not saying the dollar will be dumped overnight, it could happen, but it won’t, rather we will see foreign banks buy short end treasuries and just let them mature, which is what is happening now.
The massive, inflationary, stimulus package has done nothing to create jobs and will fail to put a dent in the unemployment problem. The Fed’s own whisper number is 11-14% for unemployment by next year and the real irony is that the Obama budget was based off of BS numbers of 3.8% GDP growth and unemployment of 9% or so which means much more deficit spending to come.
The Fed is in a pickle, they need long-term rates lower, but they are at zero now and have spent a ton of money buying government debt in the market already. In other words, the only way that long-term rates can decline is through quantitative easing which is monetizing our debt and devaluing the dollar. They know not what they are doing, but Cramer and Co. embrace Bernanke as a hero, seriously? He got us here and did not see the writing on the walls then, but now he’s a hero?
Regardless, the media has been spinning a recovery for months now, why? Clearly no one wants this thing to get worse, however the markets have gone up which means we are all set and things are fine. That is what Cramer and Co. all say at least. What we are seeing here is not a recovery, but a factor of two things.
1. The market had to go up because it was massively oversold, in the short-term.
2. The dollar weakened significantly which is really, really bad, but a boost to equity prices.
This is merely a dead cat bounce, period and to deny it will prove devastating to your portfolio, in our opinion. It is important for you to realize that we are bullish on the US, but we are disciples of the Mises Austrian School of Economics. Based on the teachings that we embrace we see more trouble with the debt being issued, dollar weakness and governments policies. We do believe that the free markets, which don’t really exist anymore, can correct itself, but cannot be left all on their own and needs regulations.
Now, all of the Cramer and Co. will preach a bull market to make us feel better and deny all that has gone wrong and misdirect you into believing what is false. They parade all bulls and few bears on the air to cheerlead, and that is what they are doing, stocks. They pat themselves on the back for writing books that are after the fact and late to the punch. They chastised Peter Schiff and Roubini on the air before the crisis happened, and they predicted it, and now only give them limited air time because they are telling you the truth – things are not good.
Harry Dent is even predicting another leg down, to 5,500 on the Dow, but he is not given any air time. Now, I can understand why as Dow 30,000 never happened, but in his recent book which was written in March of 2008 he predicted exactly what we have seen. Based on what he said and what we know the Dow and markets will sell off starting in July. We say that you should move into protectionist mode again and dump equities and dollar cost average into the market.
Buy ETF’s and annuities. ETF’s give you liquidity to dump the holdings in the middle of the day or whenever, versus mutual funds which make you hold losses through the day. Annuities give you guarantees which you will find useful in the long-term. Hedge dollars with either foreign currency or precious metals, physical metals are always better than buying tracking ETF’s.
Bottom line, this thing is just getting started so get ready for a hell of a ride. We acknowledge we may be wrong, but we have not been so far.
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