Why are American Banks “Risky”? — Because American Regulations Say They are “Risky”

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bac, Bank of America, banking, banking crisis, canada, canadian banking, economics, economy, FDIC, financial crisis, panics, politics, royal bank of canada, ry, tangible common equity, tce, tier 1 capital, US

The more I study the banks, the more convinced I become that a lot of the regulations passed to make the banking system “safer” have created the exact opposite result.   One thing that’s not very well understood in political and media circles is that very few big American banks were in danger of becoming truly economically “insolvent” during the financial crisis.  I’ve heard some claims that every bank was “insolvent”, but I’d contest that:  rather, every bank was perceived to be insolvent due to American regulations that dramatically overstate risk.   The reason America has more banking crises than many other nations is because America has the strictest banking regulations.

We’ve heard repeatedly that the Canadian banks are safer than their American counterparts, but this largely based on perception created from looser capital requirements, which make Canada’s banks look “better capitalized” on paper. If the Canadian banks were required to live by the same standards as the American banks (or vice-verse), the American banks would be considered much safer.

Take for example, the Royal Bank of Canada.  RBC’s Tier 1 capital ratio is 13.3% and this is one of the primary ways we assess risks in the banking system.  Meanwhile, Tier 1 capital ratio at Bank of America is slightly lower at 12.89%.  Based on this, Royal Bank of Canada looks better capitalized.  But if we take a look at leverage, we see a radically different story.

RBC’s ratio of Tangible Common Equity to Total Assets is about 3.6%, while Bank of America’s is 6.6%.  This would suggest that Bank of America is significantly less leveraged than RBC.  Leverage, of course, isn’t the only determinant of risk, since some assets are riskier than others.  However, it’s probably a reasonable claim that RBC and BofA have similar asset profiles in their portfolios.

List of Articles on Obamacare

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2014, aca, affordable care act, Barack Obama, democrats, economics, economy, Obama, obamacare, patient protection and affordable care act, politics, ppaca, United States

Here are a few good articles warning about Obamacare’s impact.  If you come across this thread and have one to share, leave a reply or shoot me an e-mail, and I’ll try to add it, so that I can maintain a comprehensive list.

Forbes:  How Much is the Obamacare Mandate Going to Cost You?

Forbes:  How Obamacare Will Make Healthcare Savings Accounts More Costly

Forbes:  The Healthcare Cost Monster Emerges

NRO:  Twelve Reasons to Say No To Medicaid Expansion

IBD:  Obamacare Mandate to Cut Worker Hours, Leaving Poor Worse Off

IBD:  Will Only Suckers Buy Obamacare Insurance?

Reason.com:  Obamacare Finds Its Cost Savings — Stop Paying Doctors

American Spectator:  How Medicaid Expansion Will Create Huge Liabilities for the States

Dr. Milton Wolf:  Obamacare Taxes Mean Layoffs

New York Post:  Obamacare’s New Reality

L.A. Times:  Blue Shield of California Seeks Rate Hikes of Up to 20%

Bloomberg:  Aetna CEO Sees Obamacare Doubling Some Premiums

CATO / NY Post:  Obamacare:  Cuomo, Christie, and State Exchanges

AEI:  Fed Study Suggests a Central Idea Underlying Obamacare is Wrong

AEI:  Will Obama’s Health Care Reform Accelerate the Rise in Healthcare Spending?

AEI:  Obamacare Will Make Healthcare More Expensive, Not Less

RealClearPolitics:  CBO is Increasingly Skeptical About Obamacare

RealClearPolitics:  It’s “I Told You So” on Obamacare

NY Post:  The Wheels Are Coming Off Obamacare

WSJ:  The Devil Made Them Do It:  Senate Democrats Trying To Dodge Responsibility for Obamacare

WSJ:  How Obamacare’s Perverse Incentives Encouraged Arizona Medicaid Expansion

NRO:  Escape from Obamacare:  Small Businesses Look to Self-Insure to Escape Mandate

Reason.com:  The Obamacare Revolt:  Physicians Fight Back Against the Bureaucratization of Health Care

RealClearPolitics:  Healthcare Law Faces Biggest Hurdle:  American Consumers

Forbes:  Connecticut Feels the Burden of Medicaid Expansion

Forbes:  One-Third of Doctors Won’t Accept New Medicaid Patients

MarketWatch:  Obamacare Will Harm Employment

Forbes:  Insurance Premiums Will Spike This Fall

Forbes:  The More Businesses Learn About Obamacare, the More Reluctant They Are to Hire

IBD:  10 Disturbing Facts About Obamacare

USA Today:  Mitch McConnell Editorial, “Obamacare Fails to Keep Promises”

Fiscal Times, “Unravel Obamacare and You Get a Trainwreck“

Associated Press:  “Some Unions Now Angry About Healthcare Overhaul“

Boston Herald:  “Obamacare:  Covering Everything But What You Need“

Reason: “The Obamacare Nightmare Scenario“

Last Updated:   April 1, 2013

Demographics Alone Can’t Explain Low Labor Force Participation

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aca, bls, demographics, economics, economy, employment, federal reserve, jake huneycutt, labor, labor market, labor statistics, minimum wage, obamacare, politics, ppaca, regulations, unemployment

There’s a lot of debate about the recent unemployment numbers.  While the headline unemployment rate continues to creep downward, this is at least partly due to the fact that the labor force participation (“LFP”) rate is declining.  This has led many to question whether the official unemployment figure is painting a picture much rosier than reality.

In this discussion over the “true unemployment rate,” one side argues that the declining LFP rate is a sign that the true unemployment rate is declining much slower than the official number.   On the other end of the spectrum, some have argued that the falling LFP rate is merely the result of a demographic shift with an increasing number of “Baby Boomers” entering into retirement; for this reason, they see the official unemployment rate as a reasonable proxy.  Naturally, there are many people who are in between the two extremes.

My personal take is that the declining LFP rate may be partly explained by demographics, but that overall, the job market is still unhealthy.  If demographics were the primary cause of the low LFP rate, then we should see real wage gains as the supply of labor declined.    This is basic supply and demand; a declining labor force should lead to higher prices.

Instead, we have seen subpar wage growth, which seems to suggest that demographics aren’t the main culprit.  A quick Google search turns up a Wall Street Journal article showing stagnant wage growth over the past 12 months.  Likewise, there’s an interesting and fairly detailed blog on this subject at Zero Hedge:  The Mysterious Case of America’s Negative Real Wage Growth.

I see stagnant wage growth as a chink in the demographic argument, but I decided to take a closer look.  It’s simple enough to eliminate the impact of retiring Baby Boomers on employment figures, by focusing on specific age groups.   For this exercise, I decided to examine the 25 – 34 year old age bracket to see how unemployment and labor force participation has changed for this group since 1994.

How Obamacare Could Harm Growth, Part IV: Restrictions on High-Deductible Plans

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aca, affordable care act, economics, economy, hdps, healthcare, healthcare savings accounts, high-deductible, hsas, insurance, obamacare, politics, ppaca

The markets have hummed along over the past few years, but there have been many problems lurking beneath the surface.  “60 Minutes” recently did a piece on China’s housing bubble, which could have an adverse impact on the world economy.  It’s also no secret that the eurozone nations are still struggling, and it’s plausible that a nation like Spain or Italy could eventually exit the currency union.  My belief, however, is that the Affordable Care Act (a.k.a. “Obamacare”) might actually be the biggest obstacle to economic growth in the US in the upcoming years.

There are several issues in the ACA that could hamper economic growth moving forward.  For this series, I want to focus, in particular, on five issues:

(1) Imposition of higher direct taxes,

(2) Imposition of stealth (hidden) taxes,

(3) Restrictions on employment,

(4) Higher costs associated with low-skill workers, and

(5) Restrictions on high-deductible insurance plans

In my first article, I looked at some of the direct taxes implemented by the ACA and how historical tax increases had harmed private domestic investment and consumer spending.  In my second article, I examined how the ACA’s subsidies could create a cost-spiral, and lead to large stealth taxes on many people purchasing insurance.  In my last article, I examined the employment related provisions of the act and how they might impact the restaurant industry.

For this article, I want to look at the act’s prejudice against high-deductible plans.

Why the Minimum Wage Harms the Poor

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economics, economy, milton friedman, minimum wage

Milton Friedman on the minimum wage and why it harms the poor. It’s a shame our economic policies are based on emotion and ideology, rather than reason.

The minimum wage is the reason why teenage and minority unemployment rates are sky-high. It prohibits many workers from selling their own skills at a reasonable price.

How Obamacare Could Harm Growth in 2014, Part III: The Restaurant Industry

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aca, affordable care act, darden, economics, economy, healthcare, mcdonalds, obamacare, politics, ppaca, restaurants

The market has been roaring over the past few months, but there are still major macroeconomic issues looming in the background. I consider myself a value investor, but I’m also very cognizant of how big macro issues can undermine value. We saw this in the Great Depression and with the recent financial crisis, and there are still numerous currents that could undermine value in the next few years.

The eurozone crisis, Japan’s currency interventions, and China’s real estate bubble are just a few of the macro issues that people should pay attention to. In the next 12 – 24 months, however, I believe that the Affordable Care Act (frequently called “Obamacare”) will be the greatest obstacle to economic growth in the United States.

There are several issues in the ACA that could hamper economic growth moving forward. For this series, I am focusing on five of them:

(1) Imposition of higher direct taxes,

(2) Imposition of stealth (hidden) taxes,

(3) Restrictions on employment,

(4) Higher costs associated with low-skill workers, and

(5) Restrictions on high-deductible insurance plans

In my first article, I looked at some of the direct taxes implemented by the ACA and how historical tax increases had harmed private domestic investment and consumer spending. In my second article, I examined how the ACA’s subsidies could create a cost-spiral, and lead to large stealth taxes.

For this article, I want to look at the employment related impacts of ACA. My view is that some provisions of the law will not only increase prices of certain goods and services, but that it’s also likely that the restraints on trade will result in many lower- and lower-middle income Americans having less disposable income. This could potentially harm consumer spending, which could be a drag on GDP growth.

How the Growth in the Entitlement / Protectionist State Has Increased Income Inequality

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economics, economy, entitlement, medicaid, medicare, politics, social security

Yahoo published an interesting article about a $22 minimum wage.  It was based on a comment by Senator Elizabeth Warren, stating that if minimum wage growth has increased with productivity, the current minimum wage should be $22.

The interesting trend that Elizabeth Warren fails to note is that the growth in wealth disparity in the US largely coincides with the growth of the welfare / entitlement / protectionist state.  This isn’t a coincidence.

Programs like Social Security, Medicaid, and Medicare have resulted in a massive burden to middle income employees, which have reduced their upward mobility.  We’re frequently told these programs aid the middle class, but they require us to pay a tax of 15.3% every year, and we receive little in return.

Social Security is the most egregious offender in many ways, since over 12.5% of our wealth is taken away from us, and in return, we get the money back only with inflation; or in other words, we make a 0% real return.  Technically, even this is optimistic since the real return you receive on Social Security is based on a complicated formula that is only somewhat related to how much you contribute in.  In reality, it’s possible that the average real return on Social Security is negative.  Even in a worst case scenario, most Americans would make significantly higher returns with a 401(k) account than they do with Social Security.

Meanwhile, Medicaid and Medicare have created massive economic distortions in the healthcare system, which has led to a cost spiral.  In the late 1960′s, US healthcare costs were on par with the rest of the developed world.  By 2013, our costs are significantly higher than everywhere else, and it’s almost perfectly correlated with the rise of Medicare and Medicaid. The fact that our tax system encourages employers to maximize insurance coverage also helps create misaligned incentives that encourage over-consumption, driving up costs further.

It’s also somewhat misleading to say that American incomes haven’t increased over the past several decades.  Rather, what’s more true to say is that our incomes are being increasingly eaten up by healthcare expenses. Expect this trend to continue with the latest Federal abomination:  the Affordable Care Act (i.e. “Obamacare”).

It’s worthwhile to note that the two sectors of the economy where expenses have increased the greatest are in healthcare and education.  These just happen to be the two sectors where the most Federal government intervention has occurred over the past five decades, in order to supposedly promote “affordability.”

In essence, while Elizabeth Warren bemoans rising income inequality in America, it’s the policies that she supports that have fueled this disparity.  It’s true that the rich are getting richer, while the middle class stagnates, but that’s largely because the rich aren’t as vulnerable to the ill-affects of the growing entitlement state, whereas the middle class is buried by it.

This is why individuals are best equipped to make their own economic decisions.  When technocrats try to intervene to improve things, they inevitably make them worse by applying one-size-fits-all solutions to all middle income Americans.  The past fifty years is proof of this.

Italy Faces Ugly Future Without Reforms, Eurozone Exit

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austerity, beppo grillo, economics, economy, entitlements, euro, eurozone, five star movement, italy, politics, social security

If Italy’s (EWI) economic situation seems dire right now, it should be said that it has capacity to become significantly worse in the next decade. Italy faces a demographic timebomb that is likely to further exacerbate its lack of competitiveness, high corruption, and other major economic issues.

For many developed nations, entitlement programs have become a major source of economic strain. These programs are often designed on a “pay-as-you-go” basis, so that current retirees are largely funded by taxes from the current working age populace. This contrasts with a 401(k) / compulsory savings type system, where one’s contributions go directly to fund their own retirement.

The difference between the two types of systems is expounded upon by the Washington Post’s Robert Samuelson. In his article, “Would Roosevelt Recognize Today’s Social Security,” he explains how American President Franklin D. Roosevelt initially conceived Social Security more as a compulsory savings system, rather than a pay-as-you-go welfare system. While Samuelson is discussing the issue in the context of the US Social Security system, Italy and most of Europe rely on similar “pay-as-you-go” entitlement programs.

Unfortunately, this type of system creates a nightmare scenario for nations with aging populaces. Things are bad enough in the United States, where we’re worried about having only 2 working-age taxpayers to support 1 retiree in the upcoming years (as opposed to 3 or 4). Italy would love to have “our problem”, as it has one of the ugliest demographic scenarios moving forward.

How Obamacare Could Impact Economic Growth, Part II

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aca, affordable care act, consumer spending, economics, economy, health, healthcare, insurance, Obama, obamacare, politics, private domestic investment, stealth taxes, taxes

There are numerous macroeconomic headwinds that could harm the US and world economies in 2014. Investors are already wary of the eurozone crisis, and many are cognizant of major issues here in the US as well as East Asia. Yet, I’ve noticed very few seem to be worried about the impact of the Affordable Care Act (commonly known as “Obamacare”).

In my view, the ACA is the single most likely factor that could hamper US economic growth within the next 12 – 24 months. Not only will the act create major employment headaches, but it also has the potential to hit consumer spending, lower gross private domestic investment, and constrain GDP growth. In a worst-case scenario, it could possibly even lead to recession.

There are several major issues with the act that could cause significant economic harm:

(1) Imposition of higher direct taxes,

(2) Imposition of stealth (hidden) taxes,

(3) Restrictions on employment,

(4) Restrictions on high-deductible insurance plans, and

(5) Higher costs imposed on low-skilled laborers

In Part I of this series, I examined the direct taxes in the ACA. With this article, I want to focus on two even bigger issues: stealth taxes and the healthcare cost-spiral.

My view is that the stealth taxes in the act, combined with the direct taxes, have potential to hit consumer spending and investment significantly, which could lead to lower-than-expected economic growth in 2014.

How Obamacare Could Harm Economic Growth, Part I

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aca, affordable care act, consumer spending, economics, economy, great depression, obamacare, politics, ppaca, private domestic investment, taxes

We are in the midst of one of the most difficult investment environments of the past 60 years. It may not seem like it, given how the market has charged upwards over the past few months, but enormous macroeconomic issues still linger in the background.

In one regard, I am a classical value investor. I seek out companies with strong fundamentals that are trading at discounts to their intrinsic values. This has proven to be an extremely effective long-term wealth creation strategy, but I’m also very cognizant that there are assumptions underlying value investment. When one of those assumptions gets undermined, what once looked like “value” can suddenly become very expensive.

There are numerous political currents that could undermine value in the next few years, including the ongoing troubles in the eurozone, Japan’s attempts to weaken its currency, and China’s fixed asset bubble. However, the one being most ignored by mainstream investors right now is the Patient Protection and Affordable Care Act, more commonly known as “Obamacare.”

The Affordable Care Act could have a destructive impact on employment, price levels, consumer spending, and overall economic growth in the United States in the upcoming years. At the very least, it will probably result in a relative decline in the growth rate for GDP, and at worst, could even push the US economy into outright recession in 2014.