Asset allocation changes

In 2018 I changed my asset classes in my portfolios in response to the high price to earnings ratio of US equities and as a response to the political uncertainty in the USA. I also changed my fixed income asset classes to reflect the likelihood of interest rate hikes. If you would like a copy of my client letter that details this change and my reasons for it, please request it via email.

The Industry Offenders Are Busy Eliminating Transparency

Dodd Frank is 7 today

This article by Senior Economist Eileen Applebaum at the Center for Economic and Policy Research ( published in the Huffington Post is very revealing and calls readers to action. She tells us that Pres. Donald Trump has appointed two private equity managers to important authoritative posts for the financial industry. They are Wilbur Ross, Secy of Commerce and Stephen Schwartzman, Co-founder of Blackstone Group who is now head of Trumps Economic Policy Forum. It seems rather obvious that these two have something to gain from de-regulation while industry groups composed of Private Equity managers overwhelmingly support regulation. They cite the value of consumer confidence that is instilled by the presence of regulations, regulators and monitoring. The article contains some serious charges to Private Equity prior to the 2007-2008 industry shock such as manipulation of the price of holdings; failure to share fees with investors; and “incorrectly” charging fee expenses.
The Trump Admin. seems to be pushing the Hensarling Ammendment that would exempt Private Equity managers from registration and reporting requirements by the securities industry. The Hensarling Ammendment is called the CHOICE Act.
President Trump leads the charge against consumer protection and Wall St. regulation by declaring Dodd-Frank to be “horrendous”. One has to wonder why Trump is plunging ahead to eliminate many reporting requirements and oversight of financial institutions still in the wake of the near financial meltdown just 10 years ago. How could the public be harmed by the required registration of PE managers who might have discretionary control over billions of dollars? A good deal of capital from public pension plans is held in private equity funds. Shouldn’t they enjoy the increased security of their investment brought by sound regulation? These are assets of good public servants, after all.

Market show us the magic hand!

This early critique of the Republican Obamacare replacement by Dean Baker at the Center for Economic and Policy research takes a dim view of the outcome. That is looking to return to more than 50 million unisured before the Affordable Care Act. As we know, currently “only” 28 million Americans are without health insurance. Baker did not go into depth about the macro economic implications of this situation but stuck to the healthcare implications. He points out, and later reports support him that with the increase in the limit on contributions to the Medical Savings Account, more affluent people will be buying low premium, high deductible health insurance plans that will provide only catastrophic benefits. The market for such a plan will likely be among younger, “professional” types. On the other hand, as was revealed in this article published in the LA Times March 8, older poorer Americans will be the biggest losers in the overhaul. The article I read in the Arizona Daily Star this morning pointed out that the vast majority of counties that supported Pres. Trump in the election will lose big under the new plan. I cannot find a link because the website is dreadfully loaded with pop ups in every click and a poor search engine.

Paul Ryan, in this interview on CBS laughed when he was asked how many people would lose the health insurance under the new GOP plan. “We don’t know”, he said. He wants the American people to be so relieved that people will not be insured under “some government mandate” that they won’t care if they are going without. He sees  the magic marketplace that will produce just the right plan for everybody and for some, none at all. Later in the same CBS Face the Nation segment, Sen. Bernie Sanders pointed out that the real thrust of this change is to relieve the very richest Americans of the taxes that were imposed upon them to fund the ACA in part. I am of the opinion that the enormous effort to drag Congress into a very mild private-insurance based, privately delivered healthcare plan was primarily due to the pressure brought to bear by this class of Americans upon the GOP in Congress.

The macro-economics of available healthcare is on display right here in Arizona. Mounting uncompensated care was causing great financial stress upon hospitals and clinics in Arizona; particularly rural Arizona. The GOP-led State Legislature did not heed the pleas and cries of the Arizona healthcare providers to help them recover some of that uncompensated care and accept the Medicaid expansion offered by the ACA. It was not until great pressure was brought to bear upon these Legislative “leaders” by the Gov. of Arizona, Jan Brewer. Brewer, a Republican was able to bring to the table a plan to fund the Arizona premium of the expansion through a levy worked out with the healthcare providers on patient-occupied beds. Brewer was able to gain media support for this plan, got it passed over GOP leadership dissention and that by 2015 had enrolled 1.6 million Arizonans, according to this Arizona Daily Star article.

“Somebody else’s baby” is how one GOP Congressman characterized his view of the people who are helped under the Affordable Care Act. This is not only inhumane and selfish but it betrays a fundamental mindset common among these GOP leaders, including Paul Ryan that people who struggle in our society; or any society for that matter should not be the burden of those who are more fortunate. This is anathema to civil, developed societies who understand that widespread disease and want among large numbers of their society weakens and makes vulnerable the entire society.

The magic hand of the marketplace was given its chance. It resulted in skyrocketing healthcare costs, millions dying needlessly, financial ruin for millions; bloated, topheavy insurance companies and a shrinking number of enrollees. It’s time to move on to universal coverage. And no, it will not come from the magic marketplace. It will have to be demanded.

The stated objectives and the consequences of a Fed increase

The Federal Reserve Board and members raised the Fed Funds rate by .25% recently prompting pushback by Dean Baker at the Center for Economic and Policy research. His article, “The Job Cremators” is a good argument for the Fed to dwell a little longer on its other mission; to keep the rate of unemployment as low as possible. Baker gives a good historical account of a 1994 meeting he had with (now) Chairwoman Janet Yellen and another Board member, Alan Blinder at a time when most economists believed that a 6% rate of unemployment was a good target for the Fed.

Baker recounts how the Fed did not heed his argument that lowering the unemployment rate target just one percentage point (to 5%) would have the greatest impact upon middle and lower income workers, that any inflation that resulted would be minimal, and that the Fed could always raise rates later in the event of an inflation spike. The Fed raised its rates from 4% all the way to 6% by the end of 1994. However, heedless of the financial industry’s concern about an “overly tight labor market”,  in 1995 then Chairman Alan Greenspan “pushed through lower interest rates” even though unemployment was still below the 6% target. Students of economic history know that an economic and market boom ensued. Baker tells of how this resulted in record low unemployment with the marginal workforce such as teenage black workers benefited greatly. Baker shows that by the year 2000, inflation was still less than 2% while unemployment rates were still averaging 4%. This experience served to lower the target unemployment rate by two full percentage points to 4%.

A casual observer might ask, if the cause and effect is so straightforward, and the public benefit so undeniable, why then, does the Fed worry so much about inflation? The answer lies in the very good description of the makeup of the Federal Reserve Board (seven members) and the Federal Reserve Bank’s 12 regional bank presidents, together making up the Federal Reserve Open Market Committee. Baker points out that “…The process by which the regional bank presidents are picked is complicated, but it is dominated by the banks in the region. Unsurprisingly, bank presidents tend to represent the interests of the financial industry.” Baker also points out that the interests of the industry are to keep the debt obligations to those banks as heavy as possible and that inflation reduces the buying power; hence the value of those debts owed to the banks.

So, the reader is faced with the conclusion that it is the dominance of the banks that, (excuse the pun) trumps the public good that comes with a “tighter labor market” the so-called harbinger of inflation. Is it possible to have a monetary reserve system that is not controlled by  banks that except on rare occasions ensures that banks are profitable and that millions of workers stand idle with want?