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Commentary

Feb 20
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January 2014 Update: Social Security Enrollment

By | Commentary

This report was finally released yesterday…about a month late for some reason, but at least we have it now. So…just to recap, The umbrella of SS covers about 58M individuals. 38M are retired individuals, about 9M are disabled workers, and the balance are generally spouses/widows/children of retired or disabled workers.

Each month, obviously we have new people retiring, some say 10k per day….and of course we also have people passing away each month. Note that retirements especially are seasonal, and I suspect to some lesser degree, so are deaths, so it is important to compare the current month vs the prior year as this is far more relevant than the prior month.

I track this monthly because SS is a huge piece of the federal budget, and secondly, I am on the lookout for a substantial increase in retirements at some point over the next few years, and I believe that this report will provide evidence of this in real time.

Fortunately, the January 2014 report does not have any evidence of an impending spike. Traditionally, January usually has a large increase in retired workers….I guess people try to retire near the end of the year, and get all of their paperwork completed by January.??Personally, I’d choose to retire probably in the fall….depending on where the tax brackets were in relation to my income, but that’s just me…maybe I’ll cover it in a “fun with math column” when I retire…in about 35 years:)

This January was no exception, with an increase in retired workers of 150k, but 21k under Jan-2013’s 171k, but right in line with Jan-2012 at 153k. Annualized, we are adding 1.15m people per year to the retirement program…roughly the same pace as last year. So while there is no spike…yet…we are still adding a huge number of people to the program.

Quick math…adding 1.2M people, at $1300 per month….So divide 1300 by 12.4%(ss withholding rate)….and you get that it takes an additional $10,484 of monthly income by a worker to support each new retiree. So if for each retiree, we added one new job at 126k per year, we’d be more or less ok right?  Well, there probably aren’t too many of those…so scratch that. If you happen to believe the federal jobs report, we added 2.2M jobs over the last 12 months, including 113k in January. So if we pencil this all out….we need each marginal worker…all 2.2M of them to contribute $8500 per year to cover the 1.2M new retirees. again…divide by 12.4%….If they all can just average $69k of pay, we’ll be fine. Still a stretch huh?? One last try. How many minimum wage employees (assuming Obama’s new $10 rate passes) do we need to add per year just to pay for the additional 1.2M retirees? “Only” 7.5M….per year indefinitely.

So while the long run still appears to be hopeless, that’s been known for a few decades now. There was some good news in the report. For the first time since 1997, the number of disabled workers actually showed a month over month drop falling 12k to 8.930M from last month’s record 8.943M. Drops elsewhere pulled the consolidated number to only +100k overall vs last year’s 146k January total increase. That’s a pretty big drop….it will be interesting to see the February report…..is this just a blip, or could our trend actually be headed down a bit?

Feb 14
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Fun With Math: National Net Worth 2/12/2014

By | Commentary

It’s probably been five years since I looked in detail at this series, but just for fun, I downloaded the latest Fed Z1 report and flipped down to table B.100 which gives us the balance sheet…Assets/Liabilities/Net Worth of the country…actually…just households and non-profits, though that should pretty much cover everything…since you would expect the value of corporations to be included in the balance sheets of households…right?? In any case, it contains great news…the Net Worth increased $2T from Q2-2013 to Q3…up to an all time high of $77.3T

But remember, this is a balance sheet so let’s start at the top. Total assets ring in at $90.9T. Is it just me, or does that sound like a really big number? How about per capita? $90.9T divided by 316M people….gives us $287k of assets per person in the US….on average of course. So…for my family of five…just to be average…I have about $1.4M of assets under my control right? Yeah….not hardly. Now admittedly…I’m not a 1%er by any stretch…but that number seems pretty damned ridiculous to me.

For comparison…let’s look at the value of only real estate assets..$21.611T. Lets say there are 117M households….that would put the value of real estate in the US at $185k per household….for all of it…not just homes, but acreage as well. I guess can buy that. According to Yahoo answers, there are 2.4B acres of land in the US….so on average…land cost is $9,080 per acre. Of course that includes a lot of uninhabitable land with limited value mixed in with Manhattan skyscrapers. Also note we haven’t taken into account that much land is owned by the government.

Rounding out “Nonfinancial Assets” is primarily consumer durable goods….cars…refrigerators, TV’s, furniture ect at about $5T…or $$43k per household. This too seems quite reasonable for a household with a few late model cars and a big screen TV in the furnished game room. All together, nonfinancial assets total $27B.

 

That of course leaves us with a full $63.9T of “financial assets”. Think cash, stocks, bonds, and of course $19.1T of “pension entitlements” Before we investigate this…let’s take a trip back in time to the late 1800’s a la “Little House on the Prairie”. What would a typical family think of as their assets? Their land, their buildings, equipment, animals, and perhaps a small amount of cash(or gold/silver) and stored goods. Primarily anything tangible right? Lets just say, that added all up, the net worth of our Prairie family is $1,000.

Now lets send back in time a few corporate lawyers, MBA’s, accountants and economists. Wait just a minute they explain to Papa….you are selling yourself short. You see…using modern financial and economic theories…let’s expand the definition of wealth beyond just tangible accumulated wealth….let’s monetize your future wealth….and of course…add that to the total. So your little farm here generates $2,000 worth of goods per year in the form of grain, meat, and peach cobbler, at a cost of only $1000. So let’s incorporate you in the state of Delaware, and have an IPO offering and sell for future earnings at a PE of 20….so $20,000. So you see….your real net worth…after some financial trickery we skim a big chunk of isn’t $1000…the value of all that you own….it’s $21,000(at this point who really cares if you are double counting)

And there you have it…voila….nonfinancial wealth….up from $21T in 1995 to almost $64T as of Q3-2013. This, it would seem is the real story of the last 30 years of “growth”. So ask yourself…are we really any better off? The stock market is up pretty big in the last 12 months….but the truth is, we have all of the same factories, all the same employees we did a year ago. Sure…things are always changing, but not that much. Do you really believe auctioning off and bidding up the price of our future cash flows really make us better off? The net benefit to society is the same regardless of whether the government Z1 shows Papa’s net worth at $1k or $21k….

Don’t get me wrong…looking back to 1995, when Net Worth (assets less liabilities…well except the government’s $17T of liabilities of course…those are “assets” for your pension fund) was a mere $28T(vs $77T now) I will grant you that things seem better to me personally. The houses are bigger and they all have granite countertops. The cars are faster, and safer, and they seem to get better gas mileage. The TV is definitely larger, and while I wouldn’t want to go back…the 19” mostly color TV my parents had for the first 15 years of my life never bothered me back then. It would be hard for me to say things aren’t better in some ways…just not $49T better…maybe $10T or so.

Well…I’m clearly rambling now…perhaps the point of all of this is that just about any report the government puts out is a bogus piece of crap. Don’t be fooled….rising prices for “financial” assets or even homes on net don’t actually create any wealth…it can only transfer it. If the price of housing doubles….wealth is transferred from those who own those houses to those who would like to buy those houses. At the end of the day…you have the same house that provides the same shelter….just one family is $150k richer, and one family is $150k poorer. Same goes with the stock market.

Perhaps the real lesson of the last 30 years is that we as a species are pretty easy to fool. Put a chart in front of us with a nice positive slope and more often than not…we’ll believe whatever you say.

Feb 12
0

Clean Debt Limit Passed

By | Commentary

It appears there will be no debt ceiling drama later this month….the house passed a “Clean” debt limit increase last night, and while I suppose it still needs to get through the senate, that seems likely. Rather than set an amount, it looks like again they have set a date…removing the debt limit until March 15/2015…at which point the debt outstanding would become the new limit.

Honestly…I think the republicans did the right thing. They get a week or so worth of “surrender” and “caved” headlines….then it’s all over with. They were never going to win anything material anyway….and they won’t until they get the Senate and the presidency (and even then…don’t hold your breath).

I find it curious how it only took a few years for 500B+ deficits to become normal to the country. Can you imagine…a family with $50k of income…that spent $60-70k per year….would within a few years find itself ruined. This is common sense…we all accept it. Yet when it comes to the nation…the economists and the bankers have nearly al of us convinced that it is quite fine….and that in fact we can do this indefinitely.

I doubt it, but we’ll see:)

Feb 09
0

Fun with Math: Electric Bill Minimum Usage Fees

By | Commentary

I don’t know how this works in the rest of the country…or world for that matter, but in Texas, we have the ability to get our electricity from dozens of providers offering hundreds of different plans. Your price will generally vary depending on the term of your contract, how much renewable energy you want ect…. Although prices are always changing…primarily drivem by the price of natural gas, I have seen prices from ~12.5 cents per kwh fixed for 5 years down to as low as 5 cents for a 3 month contract…or even lower for teaser month to month rates.

Last April, with my contract coming due, I started looking around, ultimately signing a one year contract at 8.5c per kwh….but with a $20 charge for anything under 1000kwh. This was a rather new development….I had seen minimum usage fees before, but they had been set much lower…at 500kwh and only $10.

Living in Houston, the AC generally runs from April to November….pretty much ensuring that I never have to “worry” about going under 1000kwh during those periods. However, looking at my historical usage for Dec-March it varies from 500 to 900kwh, the average usage is about 750kwh. Who cares right….my marginal cost for a kwh is still 8.5c right?

Well, penciling it out, the cost for 765 kwh adds up to about $85….including the $20 fee….the same as using 1000 kwh. so…if in a given month, it looks like I am going to hit 765, essentially I can get my next 235 kwh for free….if only I have a way to use them….and I can ensure that I can actually get to 1000. 1000 kwh may cost $85, but 999 kwh costs about $105.

So…what to do? My heating system uses natural gas, which generally speaking is cheaper than electric heat…but it’s not cheaper than free. Luckily, I have a couple of portable fan heaters rated at 1500 watts….so at full blast for 24 hours, they can “burn” 36kwh in a day each. They aren’t enough to keep the house warm when a polar vortex dips into south Texas, but they certainly reduce the load…and thus the amount of natural gas you need to use.

Now, clearly I lack the expertise to compare the efficiency of electric to natural gas. However, while it’s pretty much a slam dunk to bridge the gap between 765 and 1000 by using what is essentially free electricity (to me)…it occurs to me, it may even make sense at say…500kwh. Penciling it out…say I was going to use only 500kwh for a cost of  $62.50. My marginal cost to get from 500 to 1000 is only $22.50, or 4.5cents per kwh. At 600 kwh, that marginal cost is only 3.5cents per kwh. Is that cheaper than heating with natural gas?? Natural gas at $5 per mcf is pretty cheap, but it’s probably closer to $10 delivered. According to the intertubes, one kwh has about 3400 of btu’s…one mcf has about 1 million….giving me a ratio of about 300/1…and using that $10 per mcf….I hit break even at 3.3cents per kwh….of course assuming 100% efficiency from my gas heating. If that is true, then it makes sense to replace gas heat with electric heat starting right around a baseline usage of 600kwh.

This is all just food for thought. At the end of the day, odds are….it’s not worth the potential $20 savings when you factor in what a pain in the ass and risk space heaters can be….not to mention the time of penciling out your own numbers. Then…monitoring everything and making sure you don’t go over 1000 by too much….or under….in which case instead of screwing over the man….he’ll have pulled one over on you.

I guess the point of all this is that minimum usage fees encourage the use of electricity in certain usage bands… and perhaps the wasting of electricity. Since the electric grid in Texas is pushed to the brink of failure every time it gets below freezing in Houston…maybe they ought to think about prohibiting fee structures that incentivize people to crank up their space heaters at exactly the time the grid is least able to handle it.

 

 

Jan 13
0

When Will Interest Payments Exceed $1T??

By | Commentary

MISH asks:

“When Will Interest on US National Debt Exceed $1 Trillion?”. It’s worth the read…and I suspect we are on the same page with this one…yes…we’re screwed. But…. while the charts he presents interest could hit $1T by as soon as 2018 in a worst case scenario. I find this quite infeasible…in fact, my model…and I’m not exactly an optimist, has the TTM interest passing the $1T mark in May of 2036….a full 18 years later.

There are a handful of differences in our assumptions that result in the large divergence.

1) I only count interest on external debt…the model they use includes internal debt. I have discussed this in detail before, but basically….paying pretend interest on the debt we pretend to owe to ourselves is an exercise in nonsense I’d rather not participate in. Hence…We currently have about $12.4T of external debt, on which we have paid about $218B of cash interest payments over the last 12 months. The rates on that range from almost nothing on the short term bills to 11.25% for the 30 year bonds issued in Feb-1985. So rough math…that gets us an average rate of about 1.8%.It’s not perfect, but it’s close enough. So…if $218B is our baseline….you can see that we have a long way to go to get to $1T.

2) The outstanding debt is all locked in at rates over terms from 1 month to 30 years. Thus, if interest rates doubled tomorrow, it would still take a very long time for that to show up in interest payments. The only debt immediately affected would be new issues, followed by the rolling of expiring debt. However…rates are currently historically low. Say the 30 year doubled from %3.75 to 7.5%… next year, when that 30 year at 11.25% needs to be rolled… the effect would still be to lower the average rate… blunting the impact somewhat. Finally…. Interest rates are unlikely to double overnight, or anytime soon, if ever. If they do…it means the Fed has lost control, and we will likely have bigger problems than when interest payments will hit $1T

3) The Federal reserve currently owns over $2T of the outstanding $12.4T of debt…and is adding $400-$500B per year under it’s QE3 program….so a substantial % of all new debt issued. (they don’t purchase direct, so they likely have a diverse portfolio…not only new issues). So, say the Fed owns $1B of those 11.25% 1985 bonds. In February, Treasury sends the fed their semi annual interest payment of $5.625M. However…all of the Fed’s “profits” are turned around and remitted back to Treasury….so the next day (actually Wednesday)…the fed sends the $5.625M, less maybe some overhead cost right back to treasury. In 2004, total Federal reserve earnings remitted to treasury totaled $18B…or $1.5B per month. In 2013, they were 4X higher at $76B…more than $6B per month. Now, while some of this is MBS and other QE3 holdings, the net effect is that a substantial and growing amount of the interest we pay is turned right back around and sent back to Treasury coffers…lowering the effective interest rate even more. Now…anyone with a brain can see this for the circle jerk that it is….unfortunately, brains seem to be in short supply.

And that gets us to what the article hints at and what I have been saying for about as long as I’ve been blogging….that low interest rate policy has absolutely nothing to do with “stimulating the economy” and everything to do with minimizing the governments interest expense. The Fed simply can’t let interest rates go up because it would ultimately blow up the deficit…just not nearly as soon as 2018. Same is true with QE….they can’t stop because there is nobody else to buy the debt…at least not at 1.8%, when anyone with a ruler and a piece of paper can clearly deduce that one way or another….all of this debt will ultimately be defaulted on….if not outright, then it will at least be inflated away. Still…for now, this is an extremely slow motion trainwreck. Cost pressures from Social Security, Medicare/Medicaid/Obamacare, and interest, while increasing…do so at a glacial pace compared to the financial world use to going at the speed of light. For now, these increases are being offset by healthy revenue gains and help from the Federal Reserve….who are desperately trying to delay the inevitable explosion.

To wrap it all up and answer the question “when will interest hit $1T?”… my best guess is actually never. I seriously doubt we make it long enough to run up a $1T per year tab. Not sure if that’s good or bad.