BUZ LIVINGSTON: The Good, The Bad and The Ugly

Published: Wednesday, August 6, 2014 at 04:23 PM.

Last week Social Security and Medicare trustees delivered their annual audited report to Congress. While both programs face long term problems neither are about to go bankrupt. Social Security has sufficient funds to cover projected retiree benefits for the next 19 years. In 2034, when the trust fund is depleted, payroll taxes will cover 77 percent of projected benefits. That’s not a Ponzi scheme, in a Ponzi scheme you get zero. The mouthpieces for the financial services industry holler loudest about Social Security and bankruptcy…the same folks taxpayers bailed out.

Low healthcare inflation over the last year extended Medicare’s Part A Hospital Insurance fund an additional four years to 2030. Since the Affordable Care Act passed, Part A’s solvency has been extended thirteen years. But boomers aging and placing higher demands on Medicare could thwart these improvements.New medical technology could also affect projections negatively.  Be careful what you wish for, Obamacare repeal might drain Medicare Part A sooner. Even in 2030, payroll taxes will cover eighty five percent of Medicare Part A charges.

Medicare Part B premiums will not increase for the third consecutive year but things are not as rosy for Social Security disability beneficiaries. In 2016, over nine million recipients will face 20 percent reductions due to increased demand. In the halcyon days of bipartisanship Congress shifted retirement trust fund dollars to the disability program. They did it six times and I guess under Democratic and Republican presidents.

Gross Domestic Product (GDP) grew at a 4 percent annual rate in this year’s second quarter and first quarter numbers were revised upward, too. Moody’s Analytics Mark Zandi notes accelerating growth in the U.S. economy and projects GDP rising over 3 percent this year and next. Consumer confidence continues on an upward tick with spending rising 2.5 percent in the second quarter. 

These numbers look good but storm clouds loom for world financial markets. It is unclear how the continuing Eastern European crisis will play out. Industrialized nations in Western Europe depend heavily on Russian oil and natural gas.  Sanctions against Russia could affect economic growth. On the other hand, countries dependent on Russian petroleum exports could expand renewable energy to blunt an impact from trade restrictions.

More critical for the world economy is Argentina ’s debt default. Argentina has a tiny economic footprint but their debt nonpayment roiled world equity markets. Imagine for a moment if the world’s reserve currency defaulted on its debt. Congress cannot allow the US to default on our debt; economic Armageddon would occur. With this background investors must evaluate timing risk and market risk. Assets with a higher market risk than timing risk should be in cash, certificates of deposit or high quality, short term bonds. Conversely when market risk is less than timing risk, investors should look at equities.  Over time inflation decimates cash and cash equivalents and exposes more danger than market risk.

I gave you the good and bad but here’s the ugly: Some advisors claim they can time the market or sector rotate or whatever but it’s snake oil masquerading as investment advice.    



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