How the Government Dealt With Past Recessions

via nytimes.com

 

North Dakota Oil Production, proudly posted by Wade Dokken

This is a post that has nothing to do with annuities, fixed annuities, index annuities or WealthVest Marketing.  It only has to do with my home state of North Dakota and their amazing good fortune in oil.  Since 2008, oil production has doubled.  They are expected to pass all states except Alaska in total production.   The proven reserves are 200 billion barrels, dwarfing most known reserve pools in the world.  

ND's Record-Setting Oil Production Fuels Economic Boom with Record Employment, 3.6% Jobless Rate

 

 

Following an ongoing pattern that I have reported previously, North Dakota set more new records in July for monthly oil production (see top chart above, data here) and employment (see bottom chart above, data here).

There was a new record high of 321,042 barrels per day produced in July, which was a 1.83% increase from the previous record in June, and a 41% increase from July 2009.  From 156,420 barrels per day level in May 2008, daily oil production in North Dakota has now doubled to more than 321,000 barrels. 

As a direct result of the ongoing North Dakota oil boom, the state's economy is booming as well, with the lowest state jobless rate in the country of 3.6% in July, and recent jobs gains that completely offset all of the jobs lost during the recession, bringing North Dakota's employment to a record high in July of 373,500 (see bottom chart above).  July marks the fifth straight month of job growth in North Dakota, which totals to a cumulative gain of 7,700 jobs since February.     

 

via mjperry.blogspot.com

 

Life Inc. - Finally, the housing meltdown makes sense

Sorry for the length but really need a common sense approach to the problem.

There are multiple causes for the collapse of housing. The bottom line is that people who had mortgages did not have enough money to pay the bank or mortgage holder. Many people think that the Arms, MBSs, and alike were the ultimate cause.

An example: When a person has chest pain and shortness of breath, we think the patient is having a heart attack. These same symptoms can be caused by hyperventilation. You have to look at the root cause of the problem. Sometimes, a true heart attack can cause anxiety and thus lead to hyperventilation thus compounding the diagnosis. The root of the problem has to be determined whether it is a heart problem or a pulmonary/nervous problem.

Many people bought houses beyond their means not taking into account a change in interest rates, i.e. Arms, balloon payments, etc. I am by no means defending the buyers or mortgage backers that pushed these products on home buyers. Almost no one ever reads the fine print of mortgage papers, if one did before signing, you would be at the title company for a day or more.

In the 1990s, the Clinton Administration wanted to extend home ownership and passed laws to assist the lower income people to obtain mortgages for a home. ACORN was a sponsor for many of these people and would encourage banks to lend to lower income people. The country had just come out of a recent recession in the early 1990s and interest rates were low considering the rates of the early 1980s when mortgage rates were 18% or thereabouts. The high interest rates of the late 70s and early 80s were the work of Paul Volker, then the Federal Reserve Chairman, who is now Pres. Obama's chairman of his economic council.

The recession of 2001 was preceeded by the attacks of 9/11. People were scared and the economy slowed. Mr. Greenspan lowered the Funds rate to 1% to encourage people to spend and keep the recession brief. This drop in interest rates while well intended allowed more lower income people to purchase homes. This also allowed move up buyers to buy larger more expensive homes.

When a bank reviews your income and tries to determine your ability to repay your loan, they consider many things and it generally accepted that your mortgage payment should never exceed 40% of your income. Why is that? Does it take 60% of your income to survive your daily living expenses such as food, clothing, schools, raising children and leisure activities? Probably a little more than 60% depending on your criteria.

We all know that food prices vary, sometimes by seasons. Clothing can vary due to the trends that people migrate too. Colleges are constantly raising tuition and books also never seem to take a price break. Most of these are also linked in some way to Energy Costs. Food for example, oranges may double in price if there is a heavy frost in Florida during the growing season. Energy however is often controlled not only by supply and demand but also the weather and speculators. Recently the SEC fined a firm for pushing the price of oil over $100.00 prematurely in the mid 2000s.

What were you paying for a gallon of gas after the 9/11 attacks? How about $1.05-$1.15 depending on your state's tax on gas. Oil never went above $40 a barrel until 2004, the same time that we invaded Iraq. The world became jittery. Speculators jumped in. Oil continued to $147 a barrel which translated into $4.00 a gallon for gas. You had now a 400% increase in energy costs. Even oranges don't get that bad. There is nothing that we consume that does not require energy. Energy is a necessity.

When you have a explosive rise in energy costs, the daily living expenses can often not be adjusted accordingly. Hopefully the CPI would encourage your employers to provide a COLA. I forgot. During the Clinton Administration, the CPI was changed as his administration believed that the CPI calculations over stated the true cost of living. Saved them money on Soc Sec Colas.

When people have less money, they buy less discretionary items. Thus companies produce less and lay off workers. Mortgage companies make less loans and lay off workers. Real Estate agents can't sell houses and find other part time work. Local companies decide to move their facilities to areas less costly to produce their products. Layoffs increase and more mortgages go unpaid.

The mortgage payment is the largest payment each month. The best and easist one to extend with the hope of catching up someday. However the banks and Wall Street decided that they could increase their revenue through the use of MBSs, CDOs etc. Smart move to increase the bottom line and their stock price. However they did not realize that daily living expenses would cause such a problem. Then to really top things off, Wall Street sold these "A" rated investments to Countries, Cities, etc overseas and thus we had the making of a world wide crisis.

If you wish to look at the crisis graphically, go to economagic.com and plot the Prime Rate and the price of West Texas Intermediate oil from 1940 to present using a GIF Chart. Add the recessions in and the grids. You will see that even a small rise in oil back in the 50s would cause a recession as the prices continued to rise.

Last note, Mr. Volker in the 70s and 80s often rose interest rates to combat inflation, often due to energy prices and why now does he speak a different tune when the same things occur?

via lifeinc.msnbc.msn.com

 

Retirement crisis: From bad to worse - MSN Money

By Jim Jubak

Baby boomers and the post-boomer generations are facing a retirement crisis. And it now goes way beyond the worries about a collapse of Social Security that so preoccupied us before housing prices headed south.

The crisis I'm talking about is a result of economic and monetary policies that have turned a pattern of boom-bust-boom-bust into business as usual in the U.S. economy. The 2007-and-counting collapse of the housing, mortgage and debt markets isn't an isolated disaster but part of a decade-long shift away from saving and investing toward speculation and gambling with our future.

We don't have a whole lot of time to fix this crisis. The boomers born in 1946 will turn 65 in 2011. For many of us in the baby-boom generation, financing a relatively comfortable retirement, which never looked easy, looks increasingly impossible.

For those of you in the post-boomer generations, I'm sure it seems even more likely that we boomers will try to pick your pockets to finance our retirements. And I'm not sure that you're wrong to believe that. This crisis wouldn't be so bad -- and might not even exist -- if we hadn't dug ourselves such a deep hole to begin with and then kept on shoveling.

Pig in a python

That initial hole was largely demographic. The number of Americans 65 and older is projected to increase to 69.4 million in 2030 from 35.5 million in 2000, the Census Bureau says. That's not entirely bad news -- much of the increase comes from Americans living longer -- but it is a problem if you're trying to figure out how to pay for all those people to retire.

Because the baby-boom generation is so much bigger than succeeding generations, the ratio of people in the retirement years, 65 and older, to those in the working years, 20 to 64, will rise from 20.6% in 2005 to 35.5% in 2030, according to the Census Bureau. That will put a strain on any retirement system that depends on contributions from current workers, as Social Security does, to pay the benefits of current retirees.

• A painful fix for the credit crisis
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• The year's scariest investment news
• Why Wall Street rescues are failing

 

Fortunately, Social Security is only one part of the stream of cash that we use to pay for retirement in the United States. Most of the other sources aren't based on funding current benefits from current contributions. They rely on current savings, invested over time, to produce a future sum sufficient to pay for retirement or part of it.

There are three big pieces to this saving and investing part of the retirement cash flow:

• Traditional pensions. With these, most of the saving and investing is done by employers, which also bear the risk that retirement assets will fall short of promised benefits. As of 2005, only 37% of workers were covered by a traditional pension, according to the Employee Benefit Research Institute. And a growing number of company pensions are winding up in the hands of the Pension Benefit Guaranty Corp., a government agency and payer of last resort that is underfunded to the tune of $14 billion, as I described in "The year's scariest investing news" on Feb. 26.

 

• Accounts funded by contributions from workers. These include 401(k)s and individual retirement accounts. The Employee Benefit Research Institute estimated workers had about $7.5 trillion in these retirement accounts as of October 2007.

 

• Home equity. For most people, the house they live in is their biggest retirement asset. In retirement, people cash in on the value of their homes by selling and then buying less expensive houses, renting or moving in with the kids. More people are also using reverse mortgages to extract equity from their homes in retirement. As of October, working from numbers published by the Federal Reserve and changes in home prices measured by the S&P/Case-Shiller index, I calculated a total value of about $20.7 trillion for the value of all U.S. residential real estate.

Additionally, Americans should embrace private pensions--personal tax deferred savings in index annuities, index cds, or variable annuities---investments that can give them either guarantee of principal, guaranteed income or both.

 

U.S. Retirement Deficit Reaches $6.6 Trillion: 'God Help the Poor Gen Xers'

The following article is essentially a lobbying perspective for Social Security and Medicare.   That's okay, of course, everyone has a point of view and their point of view is to preserve the status quo of the current Social Security system.   From my perspective, that's not what's important.   The real insight--is the $6.6 trillion gap that they are reporting. 

Today I launched WealthVest into Next Financial and my message was that the period from 1950 to 2000 may be a 50 year golden age of retirement in the United States.   However, we never moved Social Security to a funded platform and our nation has been spending the savings--one generation stealing from another.   

Now with the loss ($10 trillion at the worst) of trillions in household wealth due to the housing bubble popping and the lost decade of the U.S. equity markets, the problems are coming home to roost.   Americans need to develop a private pension approach to our 2010 retirement crisis.  

American's retirement crisis has reached epic proportions, according to a recent study by Boston College's Centerfor Retirement Research. The study estimate

s that the current retirement income deficit, or the gap between the retirement savings of U.S. households and what they need to have in order to maintain their living standards past retirement, is a whopping $6.6 trillion -- five times the projected federal deficit for 2010.

"The key sources of income retirees are relying on are either under attack, in the case of Social Security, or disappearing, in the case of traditional pensions," said Ross Eisenbrey, vice president of the Economic Policy Institute, at a press conference on Wednesday. "The early Boomers are better off than the late Boomers, and God help the poor Gen Xers. Seventy percent of them are on a track that leads to a fallen standard of living in retirement."

According to the latest retirement income data, half of 65-and-older households have an annual income of less than $29,744 -- about half the median income of younger households. Traditional pensions are disappearing in favor of 401(k) plans, which allow employers to shift much of the cost and all of the risk to their employees, and on top of this, Congress is considering cutting Social Security to balance the federal budget.

Maria Freese, director of government relations for the National Committee to Preserve Social Security and Medicare, said that the $6.6 trillion estimated retirement deficit is a "conservative number" and that the crisis could become far worse if Social Security is compromised.

"There's an old saying that goes, 'When you're trying to get out of a hole, the first thing you have to do is stop digging.' The last thing you want to do is to buy a bigger shovel, and that is unfortunately what we see happening with many policy makers here today in Washington," Freese said. "Instead of exploring ways to strengthen Social Security and improve our private pension system, the only discussion we hear these days are the various ways Congress could cut Social Security, and presumably they're hoping nobody notices."

President Obama has appointed a National Committee on Fiscal Responsibility and Reform to look into various ways to reduce the national deficit, including possible cuts to Social Security, despite the fact that Social Security has not contributed a dime to the federal deficit. Eisenbrey warned that future generations planning on collecting Social Security will be in trouble even without the proposed cuts to the program.

"Social Security, our one nearly universal pension plan, is scheduled to replace a much smaller share of pre-retirement income in the future than it has in the past," he said. "That's without the fiscal commission or Congress doing anything more. An average earner who retired at 65 in 2002 gets benefits that replace 39 percent of his pre-retirement income. By 2030, this will fall to 28 percent due to a higher normal retirement age, higher medicare deductions, and income taxes levied on Social Security benefits."

Political action group Retirement USA announced the retirement income deficit Wednesday morning as part of "Wake Up, Washington!" month, a speak-out on retirement security that will run from September 15 to October 15, 2010. Organizers of the event hope to call the attention of voters and policy makers to the magnitude of America's retirement crisis before elections in November.

"The number should be a wake-up call," Freese said.

 

U.S. Heads up Global Retirement Market - Retirement Income Planning - Life and Health Insurance News

A recent Allianz survey found continued growth in the U.S. retirement market.   The results are detailed below.

The U.S. remains the leading retirement market, accounting for more than half of the world’s total retirement assets of nearly $28 trillion, according to a new report.

The report by Allianz Life Insurance Co. of North America, Minneapolis, Minn., forecasts the U.S. retirement market will dominate the world pension market until the end of the decade even though it is only expected to grow by a 3.6% compound annual growth rate (CAGR).

Despite its low growth, the net increase in the U.S. during this period will equal the total volume of continental Western Europe today, the report says.

In size, the U.S. retirement market is followed at 11.5% by the United Kingdom. Western Europe’s combined retirement assets came to slightly more than 20% while Australia and Japan each claim 3% of the global market.

The emerging economies of Asia and central and eastern European, which are still in the early stages of building up their individual funded pension systems, represent only minor shares (1.8% and 0.4%, respectively), Allianz finds.

The report expects global retirement assets to accumulate to $46 trillion by 2020. The global retirement market is forecast to grow by 66%, representing an annual growth rate of 4.7%.

Total pension assets would increase to $46 trillion from $28 trillion, the study says.

At year-end 2008, global pension assets stood at $26 trillion, down by roughly 15% from year-end 2007 ($30 trillion), the study finds.

What the study does not go on to describe is the movement toward guaranteed income and guarantee of principal products and their increasing popularity.  LIMRA has forecast significant growth in these product areas, because their popularity is highly linked to demographics--as people (baby boomers) reach their 60's and later 60's, they needs will evolve from accumulation to income.  They investment practice biases will naturally evolve from growth to preservation of capital. Index annuities and fixed annuities are the key products for these changing savings preferences.

Wade Dokken

 

via lifeandhealthinsurancenews.com

 

Allianz Life--A Market Leader in Annuities-commentary by Wade Dokken

Allianz Life is a significant partner for WealthVest Marketing.   They are the market leader in index annuities and their investment in service, supervision, compliance, back office processing, and sales support are second to none.  They also are headquartered in my former home of lovely Minneapolis city, the Alliance Life Insurance coverage Firm of North America (Allianz) was founded again in the year 1896. Today, it is likely one of the principal life insurance coverage and annuity offering companies within the country. Allianz Life Insurance Firm of North America has made a reputation and place for itself in the insurance coverage market by way of sheer hard work, higher efficiency by way of new and modern ideas, wonderful customer service and a few of the most interesting annuity products offerings.

Tom Burns, Chief Distribution Officer, Allianz

The financial brokers working for the corporate all by the 12 months are the spine of Allianz annuity. Allianz Life Insurance coverage Company of North America is a part of the Allianz SE which is one of the greatest financial providers group within the world. Ranked as number 20 on the world’s largest Fortune International 500 companies on this planet, Allianz SE enjoys a very excessive market worth and popularity in the worldwide monetary market.

Right now, Alliance Life Insurance Firm of North America gives a wide range of some of the finest annuities within the world. Allianz annuity is known for their profitable returns, security and high efficiency value. Aside from fastened and variable annuities, Alliance Life Insurance coverage Firm of North America additionally provides a number of different value added finance administration merchandise similar to life insurance and different long term insurance.

Allianz Annuity Products

Allianz annuity presents 3 totally different sorts of annuity merchandise, specifically:

Allianz Fixed Annuity

The Allianz fastened annuity merchandise include the well-known Allianz Dominator plus Annuity. It is a product that provides its prospects a guaranteed rate of interest that last for an extended period of time. The cash that a person will get to build up by this Allianz annuity plan will get them to safe guard themselves against financial crunches sooner or later when the money from paycheck seizes put up retirement. The Dominator plus Allianz Annuity is a single premium annuity that provides a multi 12 months cost guarantee. Beneath this annuity plan, a person can select for himself for herself the GIR interval after which they will select to entry their full amassed money. Until then, you’re assured of an interest rate.

Fastened Index Annuity

A hard and fast index Allianz annuity is very popular as a consequence of a further feature. This function is a minimal assured rate of interest along with the chance to earn higher curiosity from an increase in the monetary markets. And this particular curiosity is earned with out really collaborating in the market. Among the mounted index Allianz annuity merchandise include Alliance EnduranceSM Plus Annuity, Allianz EnduranceSM Elite Annuity, Allianz MasterDex 5SM Plus Annuity, Allianz MasterDex 10SM Plus Annuity, Allianz MasterDex XSM Annuity and Allianz Pro V1SM Annuity.

Allianz Variable Annuity

A variable annuity gives the prospect to switch a part of the investment danger you undertake offering you with further benefits you can avail by shelling out additional charges. Guaranteed revenue funds, assured demise profit to your beneficiaries and accumulation advantages are among the predominant advantages of Allianz Variable Annuity.

Allianz Life has over 100000 unbiased annuity agents, together with different monetary registered representatives, all by means of the world.

 

Allianz Life--A Market Leader in Annuities-commentary by Wade Dokken

Allianz Life is a significant partner for WealthVest Marketing.   They are the market leader in index annuities and their investment in service, supervision, compliance, back office processing, and sales support are second to none.  They also are headquartered in my former home of lovely Minneapolis city, the Alliance Life Insurance coverage Firm of North America (Allianz) was founded again in the year 1896. Today, it is likely one of the principal life insurance coverage and annuity offering companies within the country. Allianz Life Insurance Firm of North America has made a reputation and place for itself in the insurance coverage market by way of sheer hard work, higher efficiency by way of new and modern ideas, wonderful customer service and a few of the most interesting annuity products offerings.

Tom Burns, Chief Distribution Officer, Allianz

The financial brokers working for the corporate all by the 12 months are the spine of Allianz annuity. Allianz Life Insurance coverage Company of North America is a part of the Allianz SE which is one of the greatest financial providers group within the world. Ranked as number 20 on the world’s largest Fortune International 500 companies on this planet, Allianz SE enjoys a very excessive market worth and popularity in the worldwide monetary market.

Right now, Alliance Life Insurance Firm of North America gives a wide range of some of the finest annuities within the world. Allianz annuity is known for their profitable returns, security and high efficiency value. Aside from fastened and variable annuities, Alliance Life Insurance coverage Firm of North America additionally provides a number of different value added finance administration merchandise similar to life insurance and different long term insurance.

Allianz Annuity Products

Allianz annuity presents 3 totally different sorts of annuity merchandise, specifically:

Allianz Fixed Annuity

The Allianz fastened annuity merchandise include the well-known Allianz Dominator plus Annuity. It is a product that provides its prospects a guaranteed rate of interest that last for an extended period of time. The cash that a person will get to build up by this Allianz annuity plan will get them to safe guard themselves against financial crunches sooner or later when the money from paycheck seizes put up retirement. The Dominator plus Allianz Annuity is a single premium annuity that provides a multi 12 months cost guarantee. Beneath this annuity plan, a person can select for himself for herself the GIR interval after which they will select to entry their full amassed money. Until then, you’re assured of an interest rate.

Fastened Index Annuity

A hard and fast index Allianz annuity is very popular as a consequence of a further feature. This function is a minimal assured rate of interest along with the chance to earn higher curiosity from an increase in the monetary markets. And this particular curiosity is earned with out really collaborating in the market. Among the mounted index Allianz annuity merchandise include Alliance EnduranceSM Plus Annuity, Allianz EnduranceSM Elite Annuity, Allianz MasterDex 5SM Plus Annuity, Allianz MasterDex 10SM Plus Annuity, Allianz MasterDex XSM Annuity and Allianz Pro V1SM Annuity.

Allianz Variable Annuity

A variable annuity gives the prospect to switch a part of the investment danger you undertake offering you with further benefits you can avail by shelling out additional charges. Guaranteed revenue funds, assured demise profit to your beneficiaries and accumulation advantages are among the predominant advantages of Allianz Variable Annuity.

Allianz Life has over 100000 unbiased annuity agents, together with different monetary registered representatives, all by means of the world.

 

Consumer Confidence

By Rom Badilla

The U.S. Conference Board released its monthly sentiment index, which rebounded after plummeting in the previous two months. The Consumer Confidence Sentiment Index, which is based on a representative sample of 5000 households, increased to by two and half points to 53.5 in August, surpassing market forecasts as economists were expecting an index reading of 50.7. The August increase reverses the freefall of the last two months as Consumer Confidence reached a 2010 high of 62.7 in May. While encouraging, confidence among consumers remains low relative to the period prior to the onset of the recession as the index averaged 103.4 in 2007.

As reported on the Conference Board website, Director, Lynn Franco stated that, “Consumer confidence posted a modest gain in August, the result of an improvement in consumers’ short-term outlook. Consumers’ assessment of current conditions, however, was less favorable as employment concerns continue to weigh heavily on consumers’ attitudes. Expectations about future business and labor market conditions have brightened somewhat, but overall, consumers remain apprehensive about the future. All in all, consumers are about as confident today as they were a year ago.”

Looking beyond the headlines, the Expectations component of the survey, which represents people’s outlook, increased 7.4 percent to an index value of 72.5 in August. However, the Present Situation component fell 5.7 percent to 24.9. Furthermore, employment prospects remain relatively low. The Labor Differential Index, which is by defined by subtracting the Jobs Hard to Get component from the Jobs Plentiful component and is correlated to the official unemployment rate, mires in negative territory suggesting difficult employment conditions. The Labor Differential Index fell from -40.7 in July to -41.9 in August. As a source of comparison, the index reached a low of -46.1 in November 2009 and peaked in March 2007 at 11.4. (Click to enlarge)

Labor Differential Index (White) & Unemployment Rate (Red)

In addition to today’s consumer confidence release, Standard & Poor/Case-Shiller released its Home Price indices. The 20-city composite, which measures home values in the largest metropolitan markets in the U.S., increased slightly by 4.23 percent on a year over year basis in June. The increase came in above consensus surveys as economists expected an increase of just 3.5 percent. The better than expected number follows a May reading of 4.64 percent which was revised upward from initial readings by 0.3 percent. In addition, home prices on a national level increased. For the second quarter, the S&P/Case-Shiller U.S. Home Price Index increased by 3.6 percent from last year. Furthermore, the first quarter home prices were revised upward from an initial increase of 2.0 percent to a final 2.3 percent.

Disclosure: None

via seekingalpha.com

This is great counter-balance to the last two months of sentiment--which is often self-perpetuating.

The Next 100 Million

Our current recession, which may end at the end of this quarter, has been severe.  The impacts upon housing, unemployment, business formation, and the toll on existing companies and our citizens exceeds any recessions since the “Great Depression.” However, in the middle of these trying times, Joel Kotkin has authored “The Next Hundred Million.”  Mr. Kotkin’s book is an irrepressible optimistic view of our country, our culture, our people, and most importantly, a contagiously cheery future predicted for our youth.

As a man with three children and fourteen nieces and nephews, “The Next 100 Million” is a riveting book.  If this is to be our destiny, then let us grow quickly from 300 to 400 million Americans.

Embracing a forty-year optimistic scenario near the trough of a severe recession challenges our sense of reality.  But consider that forty years after the 1929 crash, America was at near its post WWII zenith.   This is our 5th recession in the past forty years.   They have all ended.

America is evolving, but along the same cultural identities that have shaped our nation up today. Our fertility rates remain higher than any other western democracy and indicate faith in the future. By 2050, our population will be younger than any of our major economic competitors.   China’s aged will represent a 20% greater portion of their population, than will ours.  Western Europe, Japan and Russia are predicted to have population declines.

Our expected future nation will continue to be fed by the aspirations of people around the world.  Over 165 million express a desire to move here today-an immediate 50% potential growth in our society.    I’m certain American media influences the dreams of Chinese, Indians, Mexicans or others whom see us as a future home-but in all businesses, referrals matter, and my hunch is that just as my great grandfather convinced my great great grandmother to follow him from Norway, so it is true for today’s immigrants.   The American experience matters.

On the critical issue of the most highly skilled immigrants, American currently attracts 50% of the entire global pool of the highly skilled who do move from their homeland. Between 1990 and 2005, 25% of all venture-backed public companies were founded by immigrants. These immigrants are driving our economy.  The yearning of the world’s gifted to be American is not wavering.

Our essential national character of optimism, a beacon for immigrants, faith in free markets, and a DNA wired for 

Heath Care Costs: The New Economic Challenge

We founded WealthVest Marketing to focus upon products which are guaranteed.  We predicated this bias for three reasons.  The first is painfully straightforward—after over a decade of flat equity market performance, Americans will likely reduce their exposure to equities for their discretionary savings.    The experience has been painful for some and not what they anticipated.  It is obvious to us that fixed annuities and fixed index annuities are perfect for this change in investment behavior.

The second reason is also straightforward.   We believe that the baby boom generation is rapidly transitioning from accumulation products to products better suited for income.   Again, fixed index annuities, fixed annuities, and single premium income annuities are very well suited for this need change.

Thirdly, we believe the long bull market in bonds is near its end.  The current phase is actually scary, because it has elements of deflation (excess manufacturing capacity, excess labor capacity and falling consumer prices), however we must all believe that the Fed and Congress will fight to not let this tragedy occur.
Implicit in the final point is two thoughts.  First, our economy will recover and interest rates will naturally rise to higher levels.   The second point is a broad question about the social safety net, our changing demographics, and America’s ability to reconcile these pressures.  Europe, as evidenced in Greece, France, Spain and Portugal has serious conflicts between their expressed guarantees to their citizens, and their changing demographics.  They have simply made promises that exceed their ability to pay in light of their aging society and the global competitive pressures.   If India, China, Brazil, Eastern Europe and other economic competitors do not need to price pensions, or broad-based health insurance into their products, then they have a competitive advantage.  In fact this is the case.

Finally, the overall need to contain health care costs—whether paid by companies or governments, is a driving financial concern for the developed world.    As their societies age, the health care costs rise disproportionally and this is the great fear.  This was the heart of the health care debate—America’s essential need to reduce our investment in health care.   Ourgovernment costs are high because of Medicare, CHIPS, and Medicaid.   Our it is our overall societal costs that are the concern.
This blog focuses on health care costs.   We will feature a series on our public policy issues.

One of the largest segments of the health care debate was centered on the overwhelming costs in terms of implementation and individual spending. Paul Krugman elaborates on the problem at hand in the New York Review of Books “ The Health Care Crisis and What to Do About It.” “The US health care system is more privatized than that of any other advanced country, but nearly half of total health care spending nonetheless comes from the government. Most of this government spending is accounted for by two great social insurance programs, Medicare and Medicaid.” To remedy the expensive problem that Krugman touched on, the United States created both an incredibly comprehensive and costly reform.

The projected government spending on health care reform is a staggering $ 829 billion. Well what does that mean in total expenditures? To quantify these numbers there are some startling statistics. In 1960 health care spending accounted for 5% of the United State’s GDP, today it represents roughly 16% of our total GDP.

The Congressional budget office states that health care reform will lower our budget deficit by $81 billion dollars by 2019.   Despite this estimate from the very institution that controls and regulates bill spending, 81% of the American public believes that health care reform will increase the deficit. The major problem facing Washington is trying to explain to the American public that the reforms being made will increase frugality. The creation of the Independent Medicare Advisory Board (IMAB), the “bundling” of Medicare programs and the presence of a truly transparent and competitive insurance has helped to reduce overall health care costs.

Social Security and Medicare respectively are the two largest annual expenditures of the United States Federal Budget. Some say the real business of the U.S. Government has become a money redistribution machine moving funds from young to the old. Social Security costs $730 billion annually and Medicare costs roughly $491 billion annually.

Furthermore, the prices are estimated to rise exponentially as our society ages. The Graph below comes from the 2009 report from the Social Security and Medicare Boards of Trustees.

If these projections are accurate, then there is an obvious impending crisis. The best way to fix the issue at hand is to radically change the institutions responsible for Medicare spending. The creation of the Independent Medicare Advisory Board is a good first step in curbing Medicare costs. Prior to the Independent Medicare Advisory Board, there was the Medicare Payment and Advisory Commission, an organization with little institutional power and no track record of success.

The IMAB on the other hand is an independent fifteen-person board that is chosen by the president and approved by the senate. Their task is to write proposals that will improve the current state of Medicare. Congress cannot modify or filibuster these proposals. It can make a counter play but it has to of equal cost of the IMAB’s proposal. This is essential to reducing costs.

As Newsweek stated in its article How Health Care Reduces The Deficit in 5 Not So Easy Steps, “Making the process of passing tough reforms easier is the single most important thing you can do to make sure tough reforms actually happen.” However, the IMAB is only going to have this much oversight for a temporary period of time. But beginning in 2020 their political clout would be significantly limited. Jacob Goldstein of the Wall Street Journal elaborates, “ Leonhardt notes, the commission would only intervene to reduce spending if costs for each Medicare beneficiary rose faster than non-Medicare health spending — which may not be enough to keep Medicare solvent in the absence of significant tax increases.”

Another component of health care reform that has lowered overall costs is the bundling of Medicare programs. John Reichard the CQ HealthBeat Editor reports that, “Medicare ran a similar program from 1991 through 1996 to test bundled payment for cardiac bypass surgery at seven hospitals. Medicare estimated savings of about 10 percent on bypass patients treated in participating hospitals. Savings for the program totaled $42.3 million while Medicare patients and their insurers saved another $7.9 million.”

Essentially the objective of Medicare bundling is that the individual will pay for health care in terms of total care provided instead of individual related treatments. The best example of someone who would benefit immensely from “bundling” is a diabetic. Diabetes is obviously an illness many different side affects. Instead of paying for individual treatment for each one of those individual, the diabetic would be paying for treatment as an overall package.

One of the largest benefits of the current health care reform is that it makes the market more competitive. Right now the connotation of Health Insurance competition is negative. Insurers fight over getting the healthiest clientele and those who really need coverage are often given the short stick. Several of the changes made by health care reform make the industry more competitive and transparent. Newsweek magazine furthers in “ How Health Care Reform Reduce the Deficit in Five Easy Steps”,

“The insurance “exchanges” imitate the market in which federal employees (including congressmen) purchase their health care insurance. Participating insurers can’t discriminate based on pre-existing conditions, they have to answer to regulators if they attempt to jack up premiums, and consumers will be able to rate their insurers, a rating that everyone else will see when shopping for their insurance. If all goes well, consumers will be able to log onto the exchange’s Website, compare insurance plans, and choose their favorite. That means insurers will have to compete for customers.”

I believe more market incentives should be added in future reform.   The greater individual consumers feel the cost of health care decisions (including life style choices), then cost-consciousness will rise.   Perhaps health premiums and their tax benefits should be more transparent.   Clearly, health savings accounts and their success at bringing pricing decisions to the individual should be our stated public policy.    Anything that can drive further competition by insurers on a national basis should be attempted.

These reforms would lower prices and increase quality. If consumers are able to rate and compare plans there is a much greater degree of transparency and consumer knowledge. Consumers will try to find a plan that offers a good balance of costs and quality. Insurance companies will transition to this balance saving the consumer money.

A Little Slice of Market History

On December 31, 1964 the Dow closed at 874.2.  Seventeen Years later on December 31, 1981 the Dow closed at 875.  Over that time period the GDP of the US grew by 370%, the sales of the Fortune 500 more than sextupled, and the Dow inched up a mere fraction of a point.

How is it possible that the economy could expand by such a large degree when the Dow grew by only one tenth of a percent?  This is the question that Warren Buffett posed in a 1999 interview in Fortune magazine on the nature of the current market.  The simple answer is that the value of the economy grew but the price investors were willing to pay for a share of the future of that economy did not.  So the actual question is what caused investors to have such a low valuation of the economy despite its huge growth.  It is important to remember the simple, often forgotten, idea behind investment which Buffett defines as, “laying out money today to receive more money tomorrow.”  In effect the value of an investment is the expected return and a decline in investor valuation signals a decline in expected returns.  Thus, the answer to the question put forth by Buffet can be found by looking at the value of expected returns.

The career of Wade Dokken began at a historic low valuation in the market, and everyone whose career had an early 1980’s beginning has experienced an unprecedented market run.   We formed WealthVest Marketing to market guaranteed annuities, index annuities, and income annuities—because we believe that we may be in another period—not unlike the 1964-1982 period—and a period unknown to almost all current financial service professionals.   So, this is a story of stock market valuation—and over-valuation.

Every asset has some level of uncertainty attached to its future value.  This uncertainty is quantified by risk which effectively lowers the future value of an asset.  Investors need to compare this risk between multiple assets and, as a result, for any meaningful comparisons to be made there has to be some kind of standard of risk to be compared to.  This comes in the form of what is called the risk free rate which is derived from the interest rates on long term government bonds, an asset with effectively no risk.  This is the baseline value to which all investments are ultimately compared to.  Even minor changes in these interest rates can have huge effects on market valuation.  Buffett underlines the far reaching nature of these rates by saying, “In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates, changes the value of every financial asset.”  Overall, the risk free rate is the first thing an investor looks at when trying to determine how much he should pay for even one dollar in the future.

This graph is a perfect example of how changing interest rates can have a huge impact on the markets.  As the risk free rate rises it lowers the value of other assets because of the inherent risk associated with them.  It comes down to the idea that if two assets have identical rates of return but differing levels of risk, then the asset with lower risk will always be more valuable.  In the case of an asset with effectively zero risk, a small increase in the interest rate can significantly depreciate even the value of assets with much higher rates of return.  Conversely, a drop in the risk free rate can significantly inflate the value of an asset (in my opinion this is the dominant risk today—and why we are structuring innovative index annuities, which fundamentally reduce inherent investment risk).    This is the first part of the explanation as to why the stock market preformed so poorly in the period from the mid 60’s to the early 80’s.  Interest rates steadily increased threefold from 1964 to 1981 where they finally peaked at 15.32%, a level which is almost unfathomable today.  This served to suppress the relative value of assets during this period despite significant gains in the economy.