Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.
Protests Spread Across U.S. as Unrest in Ferguson Abates (Toluse Olorunnipa, Elizabeth Campbell and Esme E. Deprez, Bloomberg) Protesters snarled traffic and threw rocks and bottles at police as they marched through dozens of U.S. cities last night (Tuesday into Wednesday, 25-26 November), while Ferguson, Missouri, avoided a second day of widespread rioting. For more on Ferguson see articles listed below.
Japan Is Running Out of Options (William Pesek, Bloomberg View) Pesek argues that the time for regulatory reform to "increase competitiveness" and to "eradicate Japan's deflationary mindset" is what is needed. Econintersect: Is it true that free markets can correct all problems? We will consider that possibility when someone can show us a "free market". Is it time to abandon mythology and deal with the economy as a controlled system - controlled by the state or the oligarchy? And in deep trouble when the state and the oligarchy are the same?
Who Are These Economists, Anyway? (James K. Galbraith, Thought & Action) James K. Galbraith has contributed to GEI. Little has been added to the understanding of how the economics profession missed the Great Financial Crisis (even when it was in progress - Econintersect) that Galbraith presented in this classic article in 2009. And, with the exception of a few relatively shunned (by the mainstream of the profession) economists, little has been done to advance the state of the practice of economics beyond the sad condition which "couldn't see it coming". (Many of the handful who have made progress have had pieces post on GEI.) Unfortunately for the economics profession, more than five years after it was written this article is still timely
How the Health-Care Bureaucracy Killed Me (Malcolm MacDougall, The Daily Beast) MacDougall was given the run around and was denied treatment repeatedly for prostrate cancer until finally he resorted to writing this article. Five days later he died.
Oil Volatility Here to Stay Regardless of OPEC Decision (Inyoung Hwang and Jonathan Morgan, Bloomberg) Whatever the outcome of tomorrow's OPEC meeting, options traders are betting on oil-price swings. A number of oil ministers seem to believe that the decision from the Organization of Petroleum Exporting Countries isn't likely to make much difference. Slowing global demand and a U.S. shale-drilling boom has created a glut that won't fade any time soon. About half of the analysts Bloomberg interviewed expect an OPEC production cut to come from this meeting and the disagreement there has produced high volatility in futures prices as some of the remaining analysts bet there will be no cuts. There is more discussion on this 'behind the wall'.
Articles about events, conflicts and disease around the world
Broker-dealers sound off as AIG leads off with first annuity for 401(k)s (Darka Mercado, Investment News) Bet you thought that annuities within retirement plans were a bad idea. You know, why pay fees and expenses to an annuity for tax deferral when that is already built into the 401(k) structure. Well, this annuity is a different deal - it has been approved by the IRS to provide a way to avoid the dreaded RMD (required minimum distribution. Under the new rule, up to 25% or $125,000 of a retirement plan balance may be placed in a QLAC (Qualified Longevity Annuity Contract) from which distributions or annuitized life income can be started at any age (after age 59 1/2). The initial annuity product that qualifies is the AIG American Pathway DIA. That product may be purchased up to age 83 with distributions deferred from 12 months to 40 years. This sounds like a great product for use when part of the retirement account is to be used to provide income for a younger spouse or child as beneficiary after the annuitant's death. See also next article for another new option for 401(k) accounts. See also New 401(k) annuities can make retirement income a sure thing (Scott Hanson, CNBC).
Govt guarantees 401(k) rollovers into pensions (John Waggoner, CNBC) You can now roll your 401(k) assets into your company's pension plan and the Pension Benefit Guaranty Corp. (PBGC) will guarantee the portion you roll over. This will allow one to select a lifetime income stream from part or all of a 401(k) account and have the income guaranteed by the government sponsored PBGC. The amount rolled over can produce income in excess of the current maximum insured annual income amount, which is $60,165 a year for 2014, scaled for inflation in future years. Thus, if you had a pension providing $60,000 a year income in 2014, and rolled over an amount which would fund an annuity paying $10,000 a year the new total income of $70,000 a year will be guaranteed by the PBGC.
Let's consider a case study example. Joe S. has a company pension paying $54,000 a year and $600,000 in his 401(k) he could consider the following option: Assume Joe is 72 years old and the annuity income provided by his pension plan for someone starting to receive distributions at his age is $7,000 a year for the rest of his life. He could rollover $200,000 into his pension paln and start receiving an annual income of $68,000. This would be in excess of the previous PBGC insured amount of $60,165 but would all be insured. The amount received from his increased pension would be in excess of the approximately $8,000 a year RMD (required minimum distribution) he would have received had he not done the rollover. The amount distributed by RMD would likely increase incrementally (assuming no significant investment losses in the 401(k) account) and would probably exceed the $14,000 a year within 10-12 years and keep increasing for several years thereafter, both estimates depending on the average annual gain for the investments in the account. The remaining $400,000 in the 401(k) would be maintained as before, subject to the RMD rules. This would offer some degree of inflation protection.
Additional inflation protection could be attempted by converting part of the remaining $400,000 (up to the maximum allowed for this account which is $100,000) to the deferred distribution 401(k) annuity described in the preceding article. He could delay any distributions up to 40 years (in which case, for Joe, certainly would benefit his beneficiaries rather than himself unless he later elected an earlier distribution to start during his lifetime (or lived past age 112). If he wanted to defer more than $100,000 he could presumably elect the maximum $125,000 transfer from the original $600,000 401(k) account before doing the $200,000 transfer to the company pension plan. (Note: The maximum allowed transfer to the deferred annuity is 25% of the 401(k) balance or $125,000, whichever is smaller.)
Herbalife Launches Big Stock Buyback And Debt Offering (Nathan Vardi, Forbes) This February post was loaded with premonition of trouble for Herbalife. They had just announced a $1 billion debt offering to help finance a big $1.5 billion stock buyback. This is another example of the extractive processes now being used in corporate finance to enrich executives and large shareholders rather than to build a company for the future. See next article. The Herbalife problems seem to have arrived in spades: earnings per share have collapsed 92% is just a year and revenue is shrinking. For more details see Stock Manipulation 101: Using Stock Buybacks to Mask Deep Business Problems (Tony Sagami, Connecting the Dots).
From Value Creation To Value Extraction (Shareholders Unite, Seeking Alpha) This is repeated from 24 November WWRT. The author argues that corporate stocks have become vehicles for "massive extraction" rather than a means of funding of corporate development corporate. He cites stock buyback programs as the penultimate vehicle for the extraction operation. He refers to a Harvard Business review article which we have discussed previously: Profits without Prosperity by William Lazonick. The financial engineers have found a way to extract most of (and in 2007 more than) the total net income of U.S. corporations. Any wonder little investment is taking place?
Oil Bust of 1986 Reminds U.S. Drillers of Price War Risks (Asjylyn Loder, Bloomberg) Can the experience og 1986 be repeated? It was 28 years ago that Saudi Arabia over-produced and drove the price of oil down to $10 a barrel. That action effectively destroyed U.S. oil production for a quarter of a century. See also Drill On: U.S. Mantra as OPEC Power Wanes in the Face of Shale (Bradley Olson, Joe Carroll and David Wethe, Bloomberg). Econintersect: At what point will U.S. drilling be seriously curtailed? Would it be with prices in the $60s? How about $50s where most current U.S. drilling operations cannot recover all their costs? How about the $40s where billion would be lost in the U.S.? Saudi Arabia's production costs are between $20 and $30. But Saudi Arabia insists the situation will not come to test these limits - see Saudi Arabia Says Oil to Stabilize (Laura Hurst and Grant Smith, Bloomberg)
ECZ14 – December Euro (Last:1.2477) (Rick Ackerman, Rick's Picks) Rick Ackerman contributes to GEI. Ackerman projects the near-term bottom for the EURUSD currency couple to be $1.08 to be reached within the next few months. Econintersect: For those who think that many major declines occur in three major waves, $1.08 could be the bottom of the second wave. Completion of the pattern would entail a future peak between 1.30 and 1.35 (possibly by late 2016 or early 2017 and the ultimate wave 3 bottom around or a little below 1.00 before the end of the current decade. These longer-term possibilities were not discussed by Ackerman.
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