Insurance Companies

Barack Obama promised to fundamentally transform America, and when it comes to health care he has definitely kept his promise. As a result of Obamacare, health care spending is up, health insurance premiums are up, the number of hours Americans are working is down and employer-based health insurance is becoming an endangered species. Of course employer-based health insurance will not disappear completely any time soon, but it has been steadily shrinking for over a decade, and Obamacare will greatly accelerate that decline. So Americans are going to pay more, get worse care, have more paperwork and a more complicated system, and they are likely to die younger too? Wow, that sounds like a great deal.

The point here is that we can only sustainably distribute the nation's surplus that is left after capital investment. Borrowing or creating vast sums of money to paper over the fact that we're spending more than we generate in surplus fosters an entirely illusory sense of wealth and prosperity. Eventually the interest owed on debt crowds out all other spending, and the debt-based system implodes. Borrowing money to fill the gap between what we want to spend and what we generate in surplus incentivizes fraud and speculation and creates a pernicious sense of entitlement: we can have it all, everyone can have everything they want, and there is no need for sacrifice, thrift or hard choices.

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• Regulator sues Morgan Stanley, eight others over faulty securities (Reuters)
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• KKR, Sycamore looking to buy Jones Group this week (NYPost) - take with lots of salt
• Fiat rethinks alliance with Chrysler after IPO filing (Reuters)
• Young Invincibles Caught in Crossfire Over Obamacare Cost (BBG)
• Mayfair Office Squeeze Spawns New London Real Estate Hubs (BBG)

• Bernanke Resets Policy by Doing Nothing as Markets Soar (BBG)
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• Banks’ $10 Billion Sweet Spot Sets Off Buying Spree for Lenders (BBG)
• Time to taper? Not if you look at bank loans (Reuters)
• Mortgage Lending Reaches 5-Year High (WSJ) ... and then plunges as Fed gives "all clear" for a few months
• Yellen Chances Grow as Obama Aides Test Senate Support (BBG)

Compared with Japan, the United States national debt is a mere $17 trillion or so. But if you convert that number into yen, it comes to about 1.6 quadrillion.

We laugh at children when they talk about bazillions and gazillions but a quadrillion is no laughing matter.  Measuring any currency in quadrillions brings to mind the many hyperinflations seen in the 20th and 21st centuries. For example,  the powerful and very wealthy Germany in the early 1920s and wealthy Zimbabwe, the breadbasket of Africa in 2008.

Japan's soaring national debt is already more than twice the size of its economy. 

One would think Laura Dimon, the daughter of one James Dimon, would be on familiar terms with such concepts as bonds, capital structure and finance (especially the more arcane substrata thereof). After all the father of the graduate from the Columbia School of Journalism (author of such previous pieces as "The Last Office Taboo for Women: Doing Your Business at Work" which examines "the lengths women go to avoid getting caught in the stall") is none other than the CEO of the largest bank in the US, best-known for such "one-time items" as constantly recurring legal charges associated with financial innovation gone horribly wrong (today's rumor of a $750MM settlement over the bank's London-based prop trading group being a case in point). As it turns out, one may be mistaken...

• Syrian Rebels Hurt by Delay (WSJ), U.S. seeks quick proof Syria ready to abandon chemical weapons (Reuters)
• Lavrov Brings Acerbic Pragmatism to Syria Meet With Kerry (BBG)
• Five years after Lehman, risk moves into the shadows (Reuters)
• U.S. shares raw intelligence data with Israel, leaked document shows  (LA Times)
• Japan to raise sales tax, launch $50 bln stimulus (AFP) - so 1) lower debt by sales tax, then 2) raise debt through stimulus.
• Blackstone’s Hilton Files for $1.25 Billion U.S. Initial Offer (BBG)
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• Brussels probes multinationals’ tax deals (FT)
• Wall Street's Top Cop: SEC Tries to Rebuild Its Reputation (WSJ) ... and fails
• Tablet sales set to overtake PCs (FT)
• The end of angst? Prosperous Germans in no mood for change (Reuters)

Moments ago The Hill reported that the Executive Council of the AFL-CIO, the largest federation of unions in the US and one of Obama's staunchest supporters, is expected to consider a resolution, "subject to fierce internal debate, that will call for changes to the Affordable Care Act (ACA) — setting up a potential floor vote this Wednesday before the convention closes." In other words, the one constituency that was supposed to be among the biggest benefactors from Obamacare is about to launch a formal criticism of Obamacare as "frustration has grown within labor as the Obama administration has failed to offer a fix to temper union worries over the law."

But at least "they passed it."

This is at least the 3rd country to take citizen and private corporation's money in order to make themselves whole after profligate spending. How many times must I warn before the message is taken seriously? Interest rates should be spike through the stratosphere, Bernanke or not!!!

The ever-expanding role of government in healthcare provides an excellent example of Ludwig Von Mises’ warning that “The Middle of the Road Leads to Socialism.” Beginning in the 1940s, government policies distorted the health care market, causing prices to rise and denying many Americans access to quality care. Congress reacted to the problems caused by their prior interventions with new interventions, such as the HMO Act, ERISA, EMTLA, and various federal entitlement programs. Each new federal intervention not only failed to fix the problems it was supposedly created to solve, it created new problems, leading to calls for even more new federal interventions. This process culminated in 2010, when Congress passed Obamacare.

While many begrudge the rise in interest rates and their concomittant tightening of financial conditions, Nomura's George Concalves notes that the move has been a "blessing in disguise" for most long-only bond investors. Insurance companies and pension-funds, who need 'yield' to cover long-term liabilities, have been underweight since the Fed began Operation Twist (on the basis of the yield became too compressed) but the recent sell-off in Treasuries (which does not reflect any asset-allocation or great rotation since stocks have been just as weak) enabled these funds to put money to work. This helps to explain the very notable flattening in the yield curve (5s30s -17bps in the last week) as duration extension is more economically attractive. Concalves suggests Taper fears are overdone and that should rates back up another 25bps, there is more dry-powder to put to work in bonds.

From the historical perspective, concentrating virtually all systemic risk into the state is a Grand Experiment. Cheap, abundant oil, expanding working-age populations and rapidly increasing productivity conjured the illusion that the state was large enough and powerful enough to absorb infinite risk with no real consequence. The problem is the state's ability to tax/print/borrow money to cover payouts and losses is not infinite. Having transferred virtually all systemic risks to the state, we presume the state is so large and powerful that a virtually limitless amount of risk can be piled onto the state with no consequences. Offloading risk onto the state does not make the risk vanish; it simply concentrates the risk of collapse into the state itself.

The general manager of Fanxin, China's largest insurance dealer, has been arrested (after fleeing the coutry with CNY 500 million) and the entire industry is now under close scrutiny after regulators found that the company was selling unauthorized fixed-income financial agreements. Fanxin offered huge commissions to its staff to sell 'wealth management products' that were merely used to buy more insurance products in what appears a ponzi-like scheme. Investors were 'encouraged' to purchase these with promises of yields up to 20%. As Caixin reports, "such a high yield promise is definitely unsustainable," as Fanxin customers "thought they were buying the normal wealth management products like the ones offered by banks," but actually these products were made by Fanxin and funds were put into higher risk insurance products. In an unsurprising echo from the 'liar loans' of the US, the documentation was often forged or had fake contact information that could have been easily detected, but insurance companies ignored the problems for the sake of premium revenues.

With impeccable timing.

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• China to launch fresh pharmaceutical bribery probe (Reuters)
• Defeat at J.C. Penney Hurts Ackman as Performance Trails (BBG)