The Flattening – continued

Data: Factset; Chart: Lazaro Gamio/Axios

I’m sharing this chart with you as a follow-up to our post last week. This picture tells a much better story then I can!


Is This Good?

MarketWatch is reporting on a Federal Reserve data release related to consumer credit growth, which climbed by 7.7% (seasonally adjusted annual rate) in October 2018. The growth in consumer credit was mostly fueled by credit-card usage which advanced at the fastest clip in 11 months.  Furthermore, it is only the third time ever in which revolving credit eclipsed $1 trillion. Student and auto loans (non-revolving credit) grew at a 6.7% rate in the month, which was in line (6.6%) with the previous period.

The MarketWatch article is stated that although “credit-card usage can be perilous, economists generally welcome a rise, as it suggests a desire to spend.” Yes, consumer confidence has remained near decade highs amid a stronger job market, but “sentiment” is a concurrent indicator. Credit-card debt is only about 26% of all consumer debt, having been as much as 38% in 2008.  However, we have seen a tremendous increase in both auto and student loan debt, so the 26% isn’t likely the result of leaner personal income statements, but because total debt has grown to greater than $13 trillion (including mortgages).

I don’t know about you, but I am concerned about the growth in mortgage debt, auto and student loans, and credit-card debt, which continue to grow fairly rapidly. At what point does this stop being an engine to economic growth and instead of a major impediment to future economic activity?

All of this debt being accumulated by the “average” American worker has to be impacting their ability to set-aside funds for their retirement through a either a company-sponsored defined contribution plan or a personal IRA.

How Are Those Talks Going?

The following press release was posted (11/29) on the website for the Joint Select Committee on Solvency of Multiemployer Pension Plans:

Pension Committee Co-Chairs: ‘We have made meaningful progress toward a bipartisan proposal and work will continue’

WASHINGTON – Joint Select Committee on the Solvency of Multiemployer Pension Plans Co-Chairmen Orrin Hatch (R-Utah) and Sherrod Brown (D-Ohio) released the following statement today committing to continue their work to solve to the multiemployer pension crisis past Nov. 30. When the Joint Select Committee was created, it was expected members would vote on a package by this Friday. Hatch and Brown say that while they have made significant progress and a bipartisan solution is attainable, more time is needed and the committee will continue its work.

“The problems facing our multiemployer pension system are multifaceted and over the years have proven to be incredibly difficult to address. Despite these challenges and a highly-charged political environment, we have made meaningful progress toward a bipartisan proposal to address the shortcomings in the system to improve retirement security for workers and retirees while also providing certainty for small businesses that participate in multiemployer plans.

“While it will not be possible to finalize a bipartisan agreement before Nov. 30, we believe a bipartisan solution is attainable, and we will continue working to reach that solution.

“We understand that the longer that these problems persist, the more burdensome and expensive for taxpayers they become to address, and we are committed to working toward a final agreement as quickly as possible.

“We would like to thank all the members of the Joint Select Committee for their hard work and continued dedication to addressing the issues that plague the multiemployer system. It has not been an easy job and all of their contributions have been, and will continue to be, vital to our work.

Well, it has been a little more than one week since the above was posted.  I haven’t heard anything about on-going discussions.  Have you? I realize that the passing of President George H. W. Bush has distracted many in Washington DC, while the passing of a two-week stopgap spending measure probably had a few others taking their eyes off the ball.  But, don’t you get the feeling that something will always take priority over passing critically important legislation to protect and preserve the pensions for millions of Americans?

Discussions related to this issue have been on-going for decades, and what is there to show for it? We got MPRA, which was anything but a fix for those in challenged plans. The employees who worked years while also contributing to their pension funds in anticipation of getting this benefit upon retirement deserve better. Waiting at this juncture is not an option! Earlier this year, we were talking about 114 plans that were defined as being in Critical and Declining status. Today, that number is 121. As those in DC struggle to come together more and more plans will begin to see their funded status deteriorate to the point that they will also be labeled as C&D. This is unacceptable. October and November have been challenging months for the markets.  Please don’t wait for another Great Financial Crisis before doing something?

The Flattening

The Earth may be round, but the U.S. Treasury yield curve is certainly flat! The flattening trend has many industry participants fearing what this development might portend, especially if the yield curve inverts. Historically, an inverted yield curve has “predicted” a U.S. economic recession every time during the last 50+ years. Unfortunately, the period from inversion to the recession has taken as little as 14 months to as much as 3 years to occur. During the 18-months following the inversion, the U.S. equity market has returned nearly 15% on average.

According to Jonathan Golub, Credit-Suisse, we are experiencing the flattest period since June 2007. As a point of reference, “in early February, the yield curve (2-10 year spread) stood at 78 bps. Today it is only 12 bps”. However, despite this recent decline in the spreads, futures point to relatively little change over the next couple of years.

According to an analysis conducted by Ron Ryan, Ryan ALM, the Treasury yield curve was last inverted on February 27, 2007, which showed a -31 basis point differential between 2s and 10s. Furthermore, the 1s-30s spread was last inverted in January 2007 at -6 bps.  The greatest differential in the 1s-30s spread occurred in March 1980 (I think that I was on Spring break in Virginia at that time) when the spread hit -281 bps. The lowest spread in the 2s-30s was -54 bps, which occurred in March 1989.

While the U.S. Federal Reserve has been successful in “normalizing” rates on the short-end (2.25% Fed Funds rate) the rest of the world is still sitting with negative real rates (Germany and Japan to name a couple). Can the U.S. remain the sole growth engine globally? Currently, U.S. recession indicators are muted, but there are signs that growth is slowing. We’ve recently seen indications of this in housing and commodities.



We can’t Have Social Insecurity

According to a recent study by Nationwide, 49% of adults who have been retired for 10 or more years rely primarily on Social Security for their income, while 43% of recent retirees are in the same boat.  It is great that they have this safety net to fall back on, but the fact that so many of our retirees are so reliant on this benefit is clearly a reflection of the poor state of our retirement industry. An industry where defined benefit pension plans have mostly disappeared within the private sector and one in which folks are forced to depend on their ability to fund, manage, and disburse a retirement plan.

Worse than having so many need this benefit, is the fact that many in Congress, past and present, truly believe that monies “set aside” in the Social Security Trust Fund will not be able to meet future needs (see the chart below) and that significant changes must be brought about to “rescue” this vital program.

By thinking that the U.S. Government will not be able to meet future Social Security payments, Congress has been fretting about how to “save” this benefit for the generations of retirees to come. Some of those considerations include:

  • Reducing benefits (always the most obvious fall-back position)
  • Raising the Social Security tax rate (presently 12.4%, split between employee and employer).
  • Raising the amount of income subject to Social Security tax (capped at $128,400 in 2018).
  • Raising the full retirement age once again.  It is currently either 66 or 67 depending on the year in which you were born.
  • Reducing annual cost-of-living payouts (COLAs). Seniors are already short-changed through the use of CPI-U and not the CPI-E. A further hurdle in getting annual increases might just prove devastating to millions.

Given how critically important Social Security is to the livelihoods of so many Americans, it is almost inconceivable that Congress would act to dramatically alter this benefit. I would like to encourage them instead to spend some time reading Warren Mosler’s brilliantly insightful book, “The 7 Deadly Innocent Frauds of Economic Policy”, which clearly lays out the case that the U.S. Government can always meet its debt obligations, including Social Security.

As a reminder, the U.S. enjoys the benefits of having a fiat currency.  The potential impact from spending what is necessary to meet future Social Security needs is to create demand for goods and services that exceed our country’s ability to meet that demand.  Currently, that is not an issue as we have an abundant and underutilized capacity. Furthermore, and according to Mosler, “we know that the government neither has nor doesn’t have dollars. It spends by changing numbers up in our bank accounts and taxes by changing numbers down.”

Lastly, we have the capability and means to improve our retirement industry, and therefore the lives of our future retirees. Let’s challenge ourselves to look beyond the status quo before a greater share of our population is primarily relying on the Social Security system during their “golden” years!

Degree Inflation By Corporate America?

The U.S. economy would seem to be on a good footing based on an unemployment rate of 3.7%, which represents the lowest figure since December 1969.  In addition, there were 7 million job openings as of September 30, 2018, and “only” 6.8 million officially unemployed.  However, there seems to be a trend, developed during the last decade or so, in which Corporate America is requiring a college degree for jobs that have historically not needed one.

According to Joseph Fuller, Forbes, this “degree inflation,” was predicated “on the belief that these college-educated employees would be smarter, more productive, and more engaged than workers without a degree.” But, only about one-third of the US adult population has attained a four-year college degree. According to Mr. Fuller, “the result is a misalignment between supply and demand for these kinds of jobs.”

Furthermore, studies have shown that these degree-holders doing jobs that would ordinarily only require a high school degree are not performing at a higher level. Worse, they tend to be less engaged and have higher turnover rates. By requiring a college degree, companies are holding back many working-Americans from achieving a career path to a better standard of living.

Thinking that the only way to achieve future success is to attain a college degree, many high school graduates are going to college and incurring massive educational expenses when the job that they ultimately occupy didn’t need a degree at all.  There is a correlation to the tremendous expansion in the use of student loans ($1.5 trillion in debt) that we’ve witnessed since 2006.

Today, we have more than 40 million Americans with student loans and those outstanding balances have more than doubled to roughly $34,900 per student in just the last 12 years. Worse, we now have more than 11.5% of outstanding student loan debt that is 90-days or more dilinquent.

The great recession is likely to blame for this unfortunate trend, as recent college graduates during that time were happy to get any job so that they could actually begin to repay their student loan debt.  Taking any job, especially one in which you are over-qualified, keeps others out of the workforce and wage growth lower than we should be witnessing with these levels of unemployment.

Lastly, the impact from these trends has forced many younger Americans to remain at home with relatives. We have the greatest percentage of 18-34 year-olds living at home or with other family than we’ve ever had.  This has a profound impact on the economy.  This trend will only be reversed if Corporate America would once again require only a high school degree for jobs that have historically only needed one.

A Very Real and Painful Reality

It is truly unbelievable that the Joint Select Committee failed to produce a viable piece of legislation to protect the pensions for millions of Americans in Multiemployer pension systems by their self-imposed deadline (November 30th). I know that they’ve announced that they will continue talking, but talk is cheap, and as they play their collective fiddle, many Americans are seeing their financial futures go up in flames.

You may recall that earlier this year we wrote a post titled, “Let’s Focus On Carol” (8/22/18).  Her story had been shared with me to highlight the potential impact to retirees who found themselves in struggling (failing) pension plans. Under MPRA, many plans have been seeking benefit cuts and more than a handful have been granted “relief”. Well, it is certainly no relief to the pensioners who are seeing their futures darkened.

Carol has shared with me an update on her situation.

“Well, I just got the letter from the PBGC confirming the cuts. It seems that between transferring the “original plan” to a new “successor plan” and taking 61% of my pension and a % from other retirees, the original plan will avoid running out of money in the future. So, on January 1, 2019, instead of my regular pre-taxed check of $2,249.00, I will receive a “new” pre-taxed check of $889.14. The way the letter is written, it almost sounds as if we should be happy that they found a way to keep Local 805 afloat. I am numb…. can’t even function. How could the government approve these cuts knowing that by doing so, they are putting people out on the streets? A cut of $20.00 a month is one thing, but cutting $1,359.86 from my income every single month will put me in an early grave (my emphasis). I feel like I’m living a nightmare….Is there any help for me after January 1st when the first cut comes?”

It truly is incredible (inconceivable?) that any government agency would permit the slashing of benefits to our retirees of this magnitude. Don’t they get that these individuals won’t have any recourse but to fall onto the social safety net, which they would absolutely prefer not to do? Furthermore, don’t they realize the potential impact on our economy from the lack of spending that will result from these terrible cuts?

Lastly, the draft legislation that has been floated calls for as much as $3 billion per year going to the PBGC to “sure up” this insurance fund and to meet future calls on this capital. If protecting the taxpayer was the rationale to not going forward with the Butch Lewis Act, how is a direct payment to the PBGC better than a 30-year loan to these struggling pension plans that would have protected the benefits for the pensioners in the critical and declining systems while extending the life of these plans? It certainly seems to me that loans totaling $30-$40 billion paid back in 30 years is far superior then paying the PBGC $3 billion per year with no cap on the number of years.