Mish's Global Economic Trend Analysis

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• Obamacare Creates Incentive to Work Less; CBO Estimates Obamacare Will Cost 2 Million Full-Time Equivalent Jobs by 2017
• Treasury Debate: Gundlach (Bull) vs. Rosenberg (Bear); Price Inflation on Hold; What About Gold?
• Controversy in Detroit: What's a Fair Settlement of Bondholder and Pension Obligation Claims?

Obamacare Creates Incentive to Work Less; CBO Estimates Obamacare Will Cost 2 Million Full-Time Equivalent Jobs by 2017 Posted: 04 Feb 2014 02:11 PM PST MarketWatch reports Obamacare plans to exceed $1 trillion, create reluctant workers. The CBO projects that insurance subsidies and related spending will account for increasing chunks of deficit spending, starting at $20 billion this year and steadily increasing to $159 billion in 2024, for a collective cost of just under $1.2 trillion. The cumulative total from the ACA for the next decade could reach $1.35 trillion. In several charts in its report, the CBO calls these "effects on the cumulative federal deficit." But in footnotes and other portions of the 175-page report, the CBO points out there are other sources of revenue generated under the ACA that are expected to make it deficit neutral. Labor Market Effects of the Affordable Care Act Inquiring minds are also in interested in labor force projections. For that let's dive into the massive 182 page PDF CBO Budget and Economic Outlook 2014 to 2024 report. Incentive to Work Less On PDF page 44 (Report page 38) a curious footnote reads "By providing subsidies that decline with rising income (and increase with falling income) and by making some people financially better off, the ACA will create an incentive for some people to work less." A detailed explanation is found in Appendix C on PDF page 123. How Much Will the ACA Reduce Employment in the Longer Term? The ACA's largest impact on labor markets will probably occur after 2016, once its major provisions have taken full effect and overall economic output nears its maximum sustainable level. CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor — given the new taxes and other incentives they will face and the financial benefits some will receive. Because the largest declines in labor supply will probably occur among lower-wage workers, the reduction in aggregate compensation (wages, salaries, and fringe benefits) and the impact on the overall economy will be proportionally smaller than the reduction in hours worked. Specifically, CBO estimates that the ACA will cause a reduction of roughly 1 percent in aggregate labor compensation over the 2017–2024 period, compared with what it would have been otherwise. Although such effects are likely to continue after 2024 (the end of the current 10-year budget window), CBO has not estimated their magnitude or duration over a longer period. The reduction in CBO's projections of hours worked represents a decline in the number of full-time-equivalent workers of about 2.0 million in 2017, rising to about 2.5 million in 2024. Although CBO projects that total employment (and compensation) will increase over the coming decade, that increase will be smaller than it would have been in the absence of the ACA. The decline in full-time-equivalent employment stemming from the ACA will consist of some people not being employed at all and other people working fewer hours. Why Does CBO Estimate Larger Reductions Than It Did in 2010? In 2010, CBO estimated that the ACA, on net, would reduce the amount of labor used in the economy by roughly half a percent—primarily by reducing the amount of labor that workers choose to supply. 2 That measure of labor use was calculated in dollar terms, representing the approximate change in aggregate labor compensation that would result. Hence, that estimate can be compared with the roughly 1 percent reduction in aggregate compensation that CBO now estimates to result from the act. There are several reasons for that difference: CBO has now incorporated into its analysis additional channels through which the ACA will affect labor supply, reviewed new research about those effects, and revised upward its estimates of the responsiveness of labor supply to changes in tax rates. Don't worry. This won't cost 2 million jobs, only 2 million equivalent full-time jobs.  Perhaps a many as 6 million work fewer hours each week. The CBO did not estimate the breakdown. Regardless, that cannot possibly happen, can it?  Didn't Obama claim ACA would create jobs? Hmm. What else did he promise? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Treasury Debate: Gundlach (Bull) vs. Rosenberg (Bear); Price Inflation on Hold; What About Gold? Posted: 04 Feb 2014 12:11 PM PST I happen to like 10-year US treasuries here, and have since rates got near 3%. I believe job growth is way overstated due to double-counting of part-time jobs, the global economy is slowing more than economists expect, and the US economy is slowing more than economists expect. Betting Against Treasuries a Fool's Game? Jeffrey Gundlach CEO of DoubleLine Capital goes even further. Gundlatch claims Betting Against Treasuries a Fool's Game. The market was "entering 2014 struck by a greater consensus entering any year that I can remember, that the dollar has to do well, gold is for losers and bond yields will rise," said Jeffrey Gundlach, chief executive officer of DoubleLine Capital, which manages $49 billion. "Things were so lopsided in terms of that positioning. That was late in that way of thinking." The amount of bets against 10-year Treasuries by hedge funds and other large speculators shrunk to as low as 58,000 contracts last month from a 19-month high of about 189,000 in November, data from the Commodities Futures Trading Association show. Mr. Gundlach predicts yields will fall in 2014, with demand rising from investors such as banks seeking high-quality collateral to meet new regulatory requirements and as a haven for others from political and economic turbulence in nations ranging from Turkey to Argentina. Gundlach (Bull) vs. Rosenberg (Bear) One long-time bond bull recently turned bearish, and he sees no reason to change course. Yields will reverse and end the year at 3.5% to 3.75% as the economy improves, according to David Rosenberg, the chief economist at Gluskin Sheff & Associates. "The economy is on a moderate accelerating trend," Mr. Rosenberg said. "We're coming out of a flight to quality on emerging markets. This is a blip rather than a long-term trend. The yield decline is temporary." Will the US Economy Accelerate? David Rosenberg thinks the economy is going to accelerate. If the economy does accelerate, the Fed will increase tapering, not reduce it. Looking for another opinion? Marc Faber Bullish on Treasuries and Gold Taken from a Barron's roundtable discussion, ZeroHedge reports Marc Faber Warns "Insiders Are Selling Like Crazy... Short US Stocks, Buy Treasuries Gold". Faber: What I recommend to clients and what I do with my own portfolio aren't always the same. That said, my first recommendation is to short the Russell 2000. You can use the iShares Russell 2000 exchange-traded fund [IWM]. Small stocks have outperformed large stocks significantly in the past few years. Next, I would buy 10-year Treasury notes, because I don't believe in this magnificent U.S. economic recovery. The U.S. is going to turn down, and bond yields are going to fall. Abby just gave me a good idea. She is long the iShares MSCI Mexico Capped ETF, so I will go short. Q: What are you doing with your own money? Faber: I have a lot of cash, and I bought Treasury bonds. ... I have no faith in paper money, period. Insider buying is also high in gold shares. Gold has massively underperformed relative to the S&P 500 and the Russell 2000. Maybe the price will go down some from here, but individual investors and my fellow panelists and Barron's editors ought to own some gold. About 20% of my net worth is in gold. I don't even value it in my portfolio. What goes down, I don't value. Curious Position US treasuries are a curious position for someone frequently in the hyperinflation camp, which brings up this humorous conversation from Barron's. Faber: I recommend the Market Vectors Junior Gold Miners ETF [GDXJ], although I don't own it. I own physical gold because the old system will implode. Those who own paper assets are doomed. Zulauf: Can you put the time frame on the implosion? Faber: Let's enjoy dinner tonight. Maybe it will happen tomorrow. Price Inflation on Hold If the economy implodes (or even modestly declines) US Treasuries will benefit. Even a frequent hyperinflationist and firm disbeliever in paper assets gets it! Here's my claim: Deflation Will Return: Europe First, Then US Strong consumer price inflation, is on hold for a long time. US hyperinflation in this environment is next to impossible. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Controversy in Detroit: What's a Fair Settlement of Bondholder and Pension Obligation Claims? Posted: 04 Feb 2014 09:49 AM PST A huge battle between pensioners and bondholders is on. Last week, a Bond rating agency blasted Governor Rick Snyder's $350-million Detroit pension rescue plan as being too favorable to creditors at the expense of bondholders. Today, the New York Times reports Detroit Turns Bankruptcy Into Challenge of Banks. Amy Laskey,a managing director at Fitch Ratings, said in a recent report that she sensed an "us versus them" orientation toward debt repayment. And in the view of bondholders, bond insurers and other financial institutions, it only grew worse last week after the city circulated its plan to emerge from bankruptcy and filed a lawsuit on Friday. The suit, brought by the city's emergency manager, Kevyn D. Orr, seeks to invalidate complex transactions that helped finance Detroit's pension system in 2005. In a not-so-veiled criticism, the city said the deal was done "at the prompting of investment banks that would profit handsomely from the transaction." Of even greater concern to creditors is the city's 99-page "plan of adjustment," the all-important document that details how Detroit proposes to resolve its bankruptcy and finance its operations in the future. Banks, bond insurers and other corporate creditors think they are being asked to share a disproportionate amount of pain under the plan, still in draft form and not yet filed with the bankruptcy court. "The essential issue is the near-total wipeout of the bondholders," said Matt Fabian, a managing director of Municipal Market Advisors. He said Detroit's case appeared to be heading toward a "cramdown," or court-ordered infliction of losses on unwilling creditors. The plan calls for the city to give pensioners up to 50 cents on the dollar for their claims, while other unsecured creditors, like those that bought Detroit's general-obligation bonds, would end up with about 20 cents on the dollar. The pensioners' claims would be paid with cash, while general-obligation bondholders would receive notes that Detroit proposes to issue. The debt that raised $1.4 billion for the city pension system in 2005 would suffer bigger losses still. The plan of adjustment does not accept the entire $1.4 billion as a valid claim, only about half of it. So the investors who bought that debt, called "certificates of participation," often called COPs, would end up with about 10 cents on the dollar. It would come in the form of a different series of notes, which has lags built into the payment schedules. What's a Fair Settlement? Last summer, Gov. Rick Snyder of Michigan said the intent was to "determine the best path forward that respects, and is fair to, pensioners and all parties." In bankruptcy, the court has an obligation of fairness. However, it's not unprecedented for judges to take one side or another. Until now, the article claims "municipal bondholders have not had losses of principal forced on them by a court." Here is a key point: Both the pension obligations and bondholder debt are unsecured debt. Why not treat both pensioners and bondholders equally? The proposal currently on the table is for pensions to get 50 cents on the dollar (a 50% haircut) and bondholders 20 cents on the dollar (an 80% haircut). I have a simple proposal. Give everyone 35 cents on the dollar (a 65% haircut). Neither side would be happy, but the ruling would be fair. I also recommend the court trash the city's defined benefit plan entirely, or Detroit will be back in bankruptcy in a number of years. Finally, if bondholders do not think they got a fair shake, they will demand higher interest rates going forward. Regardless of what the judge decides, the Detroit bankruptcy settlement will affect municipal bond interest rates going forward, not just in Michigan, but nationally. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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