Mish's Global Economic Trend Analysis

Over 25% of 401Ks Tapped to Pay Current Bills; Dead-Fish Housing Assets; Walking Away Yet Again
"Debt Doom Loop" in Spain; Deficit Target Impossible Once Again; Bond Rally Masks European Macro Problems
German Economy Shrinks Most in Three Years; Situation Significantly Worse Than Mood
Obamacare Sticker Shock; Expect Insurance Premiums to Soar; Aetna CEO Says Some Rates Will Double
Iran Removes Euro and Dollar From Trade Exchanges; More Symptoms of Iranian Hyperinflation

Over 25% of 401Ks Tapped to Pay Current Bills; Dead-Fish Housing Assets; Walking Away Yet Again

Posted: 15 Jan 2013 10:06 PM PST

At an increasing rate, even during the alleged recovery, consumers are tapping their 401Ks to pay current bills according to a study by advisory firm HelloWallet as describe in the Washington Post article 401(k) breaches undermining retirement security for millions.

A report due out this week from the financial advisory firm HelloWallet found that more than one in four workers dip into retirement funds to pay their mortgages, credit card debt or other bills. Those in their 40s have been the most likely culprits — one-third are turning to such accounts for relief.

The withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year, undermining already shaky retirement security for millions of Americans.

Fresh data from Vanguard, one of the nation's largest 401(k) managers, show a 12 percent increase in the number of workers who took loans against their retirement accounts or withdrew money outright since 2008.

In 2010, 28 percent of participants reported having an outstanding loan against their retirement accounts, an all-time high, according to a survey of 110 large employers by Aon Hewitt, a human resources consultancy. And nearly 7 percent of employees took hardship withdrawals that year — roughly a 40 percent increase since the recession, while 42 percent of workers cashed out their plans rather than rolling them over when they changed jobs.

"401(k)s are not being used for retirement by a large and growing share of workers because they are misaligned with the very basic financial problems most workers face and must address," said Fellowes of HelloWallet, which provides benefits advice to companies.

Using data from the Federal Reserve's Survey of Consumer Finances and the Survey of Income and Program Participation, conducted by the Census Bureau, the report said 30 percent of households earning less than $50,000 a year had cashed out a retirement plan for non-retirement purposes. Only 12 percent of households earning between $100,000 and $150,000 a year and 8 percent of those earning more than $150,000 a year have cashed out a retirement account, the report said.

"The investment advice out there needs to recognize that a large share of participants is not going to use the money for retirement, so they should not be exposed to risky investments," Fellowes said. "There is no investment adviser in the country who would put workers in the stock market if they were told the money being invested was for short-term needs."

Mortgage Connection?

The Washington Post article failed to note "why" people were tapping their 401Ks.

I suspect, but cannot prove, that many low-income households are desperately clinging to their underwater houses, from which they would be better advised to seek council, then walk away.

Higher income groups seem to have less aversion to walking away than those who struggled all their lives to get a home, only to get one at exactly the wrong time.

Dead-Fish Assets

The mentality "My house is the only thing I have" is tough to fight. However, the reality is many homes are worth less than zero because of underwater situations.

Unfortunately, the financial industry is geared to giving the worst advice to the least well off. Counseling groups (typically bank-sponsored) encourage people to keep their dead-fish "assets", best flushed down the toilet.

There are other possible reasons of course, and right at the top of the list is car loans, another depreciating asset.

Lose Your Job, Then You're in Trouble

I do not advise tapping your 401K for numerous reasons, but right at the top of the list is the lost-job nightmare.

Please consider these problems as excerpted from the 401K Calculator article Everything You Need To Know About Borrowing Against Your 401K.

If you lose your job or if you decide to leave your employer, you will be required to pay off the loan in a lump sum. If you don't, you face the potential of the loan defaulting, which will result in a taxable event.
As you pass-up the tax-free compounding of the money you withdraw, you could end up with a significantly smaller fund on your retirement.
Interest payments from a 401(k) loan are not tax deductible.
You will also pay taxes twice on the amount you took out for a loan. Your 401k loan payments are deducted after taxes have been taken out of your paycheck. However, since pre-tax money is usually used to fund a loan, the payments are put back into your 401(k) as pre-tax funds. This means that when you take the money out later, you will have to pay taxes on it again.
There is no flexibility with the terms of repayment and your loan repayment is done automatically through payroll deductions, which will reduce your take-home pay.

Recommended Options

401K Calculator writes "Before you take out a 401k loan, it's vital that you explore other options. Using savings or other types of loan may be a more suitable alternative to borrowing against your retirement funds. You should be careful not to jeopardize your retirement just for a quick cash fix now."

I concur, while adding ... If the reason for the loan is to make a mortgage payment on an underwater home, or if you are for any reason close to bankruptcy, please consult a bankruptcy/mortgage attorney in your state for other options.

"Walking Away" and/or bankruptcy may be far better options than tapping 401Ks.

Unfortunately, I highly suspect many have trashed their 401K to keep or buy rotten fish. Most of the rest are likely bankrupt and on borrowed time, wasting their 401K in a futile attempt to prove otherwise.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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"Debt Doom Loop" in Spain; Deficit Target Impossible Once Again; Bond Rally Masks European Macro Problems

Posted: 15 Jan 2013 04:55 PM PST

Magicians at the ECB have temporarily convinced market participants that Europe is in some sort of recovery. It isn't.

All of Europe is now in recession, including Germany as noted earlier today in German Economy Shrinks Most in Three Years; Situation Significantly Worse Than Mood.

"Debt Doom Loop in Spain"

Bloomberg reports Draghi's Bond Rally Masks Trapping Spain Debt Doom Loop.

The bond rally has sent Spanish borrowing That costs to 10-month lows has distracted attention from the nation's growing debt pile.

Spain's budget deficit probably exceeded 9 percent for a fourth year in 2012 as Europe 's highest unemployment rate, a third recession in four years and the cost of bailing out its banks offset almost all of the government's 62 billion euros ($ 83 billion) of spending cuts and tax Increases, According To Economists at Societe Generale SA (GLE) , Lombard Street Research and the Madrid-based Applied Economic Research Foundation.

Total debt will reach 97 percent of gross domestic product This year, the International Monetary Fund forecasts.

"This is a classic example of the doom loop," Societe Generale's London-based chief European economist, James Nixon, said in a telephone interview Jan. 10. "They just Are not making any progress."

"It's very Difficult To Have promised at home and abroad to deficit of 6 percent and to end up Recognizing That You have almost 9 percent," Deputy Prime Minister Soraya Saenz de Santamaria said today, Referring to the 2011 budget figures delivered by the previous Socialist administration. Pledged Rajoy to deliver a deficit of 6.3 percent for 2012.

'Recovering Confidence'

"We are recovering confidence and credibility Which is Something That is lost very Quickly and Is Difficult to regain," Saenz added in an interview on Antena 3 TV.

No Credibility

There is no credibility and if there is any confidence, there shouldn't be. Yields in Spain, Italy, and Portugal have crashed, but I wonder for how long.

Italy and Spain are known basket cases. More importantly, France, the Hidden Zombie in Europe, is about to take a deep plunge.

"Confidence" may be robust for now, but it's all a mirage based on low rates that cannot last and the foolish notion that Europe has turned the corner just as Germany and France head down the sinkhole.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

German Economy Shrinks Most in Three Years; Situation Significantly Worse Than Mood

Posted: 15 Jan 2013 11:31 AM PST

Germany is in recession. It's not a "technical recession", no matter how anyone labels it. And the recession will pick up steam as the year progresses.

Please consider Germany's economy shrinks most in 3 years as crisis hits eurozone powerhouse.

WIESBADEN, Germany — The German economy was hit hard by the eurozone crisis in the final quarter of last year, shrinking more than at any point in nearly three years as traditionally strong exports and investment slowed, the Statistics Office said on Tuesday.

Economists expect Germany to bounce back after forecasts for weak growth in the first quarter but Europe's largest economy will be less of a pillar of support for the rest of the currency bloc, where many of its peers are deeply in recession.

Gross domestic product shrank by 0.5% in the final three months of 2012, the worst quarterly performance since Germany fell into a recession during the global financial crisis in 2008/2009 and only the second contraction since it ended.

The parlous fourth quarter pushed overall growth for the year down to 0.7%, a sharp slowdown from the 3.0% registered in 2011 and a post-reunification record of 4.2% in 2010. The 2012 figure was a tad below a Reuters consensus forecast for growth of 0.8%.

The government is due to publish an estimate for 2013 growth on Wednesday. An official from the Economy Ministry said growth would be 0.4% this year, less than half the government's existing forecast of 1.0%.

Situation Significantly Worse Than Mood

"The situation is significantly worse than the mood. But the eurozone crisis is far from over. It's wishful thinking to expect otherwise," said Clemens Fuest, incoming head of ZEW research institute.

I certainly concur with Feust. Note the GDP downgrade from 1.0% to .4% for 2013. Expect another and another. The only thing that Europe has going for it is a recovering bond market but don't expect that to last either.

Italy and Spain are known basket cases. More importantly, France, the Hidden Zombie in Europe, is about to take a deep plunge.

Finally, the recent pickup in China is not sustainable, and the US is clearly weakening.

Since Germany cannot export to itself, its export machine will grind to a halt as I said well over a year ago.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Obamacare Sticker Shock; Expect Insurance Premiums to Soar; Aetna CEO Says Some Rates Will Double

Posted: 15 Jan 2013 09:22 AM PST

Consumers are about to find out that the Affordable Care Act, widely known as Obamacare is not exactly affordable. The Wall Street Journal says Health-Insurance Sticker Shock is just around the corner.

Health-insurance premiums have been rising—and consumers will experience another series of price shocks later this year when some see their premiums skyrocket thanks to the Affordable Care Act, aka ObamaCare.

The reason: The congressional Democrats who crafted the legislation ignored virtually every actuarial principle governing rational insurance pricing. Premiums will soon reflect that disregard—indeed, premiums are already reflecting it.

Central to ObamaCare are requirements that health insurers (1) accept everyone who applies (guaranteed issue), (2) cannot charge more based on serious medical conditions (modified community rating), and (3) include numerous coverage mandates that force insurance to pay for many often uncovered medical conditions.

Guaranteed issue incentivizes people to forgo buying a policy until they get sick and need coverage (and then drop the policy after they get well). While ObamaCare imposes a financial penalty—or is it a tax?—to discourage people from gaming the system, it is too low to be a real disincentive. The result will be insurance pools that are smaller and sicker, and therefore more expensive.

Eight states—New Jersey, New York, Maine, New Hampshire, Washington, Kentucky, Vermont and Massachusetts—enacted guaranteed issue and community rating in the mid-1990s and wrecked their individual (i.e., non-group) health-insurance markets. Premiums increased so much that Kentucky largely repealed its law in 2000 and some of the other states eventually modified their community-rating provisions.

While ObamaCare won't take full effect until 2014, health-insurance premiums in the individual market are already rising, and not just because of routine increases in medical costs. Insurers are adjusting premiums now in anticipation of the guaranteed-issue and community-rating mandates starting next year.

Although President Obama repeatedly claimed that health-insurance premiums for a family would be $2,500 lower by the end of his first term, they are actually about $3,000 higher—a spread of about $5,500 per family.

Aetna CEO Sees Obama Health Law Doubling Some Premiums

Bloomberg reports Aetna CEO Sees Obama Health Law Doubling Some Premiums

Health insurance premiums may as much as double for some small businesses and individual buyers in the U.S. when the Affordable Care Act's major provisions start in 2014, Aetna Inc. (AET)'s chief executive officer said.

While subsidies in the law will shield some people, other consumers who make too much for assistance are in for "premium rate shock," Mark Bertolini, who runs the third-biggest U.S. health-insurance company, told analysts yesterday at a conference in New York. The prospect has spurred discussion of having Congress delay or phase in parts of the law, he said.

"We've shared it all with the people in Washington and I think it's a big concern," the CEO said. "We're going to see some markets go up as much as 100 percent."

The Obama administration said last year that "middle-class families" buying insurance through the law's new online exchanges may save as much as $2,300 a year starting in 2014. Nick Papas, a White House spokesman, declined to comment on Bertolini's predictions.

The CBO estimated in 2009 that the law will increase premiums 10 percent to 13 percent for individuals and have little effect on small and large-employer plans. After the subsidies are factored in, individual bills will go down by about 60 percent, the agency predicted.

Fantasyland CBO Projection

Obamacare pretty much did what Romneycare did and the results will be the same - higher premiums.

Specifically, Obamacare mandated acceptance of anyone, provided insufficient penalties for the young and healthy to drop out, and mandated an increase in things that are covered.

The CBO added all of that up and concluded prices would go down by as much as 60 percent. I wonder what alternate universe the CBO lives in.

How Much of an Increase?

Expected increases depend on existing state rules as well as company size. States foolish enough to already have Obamacare-like mandates will be impacted the least.

Big employers will fare best, small companies and individuals will be hit the hardest. Wasn't Obamacare supposed to fix that?

The Journal notes that residents of New York, New Jersey, and Vermont already pay twice what others pay. Those in Massachusetts (the home of Romneycare) shell out almost as much.

Residents of Arizona, Arkansas, Georgia, Idaho, Iowa, Kentucky, Missouri, Ohio, Oklahoma, Tennessee, Utah, Wyoming and Virginia will likely see the largest increases — somewhere between 65% and 100%. Another 18 states, including Texas and Michigan, could see their rates rise between 35% and 65% says Journal writers Merrill Matthews and Mark Litow.

Mr. Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Mr. Litow is a retired actuary and past chairman of the Social Insurance Public Finance Section of the Society of Actuaries.

Aetna Overstating Increases?

It's possible, if not likely, that Aetna is trumping up the increases so when they do happen, a mere 35-50% will not seem so large vs. the projected 100% increases. Then again, Aetna may fully intend to hike some rates by 100% over the course of a few years.

It's also possible that some individual policy-holders in high-cost states may benefit slightly, but if so it will be at huge expense to everyone else.

Thank Obama and Romney

Thanks Obama, and while we're at it, thank you too Romney because Obamacare and Romneycare are for all essential purposes, one and the same.

If you get a raise this year, don't be surprised if all of it (if not more than all of it) is eaten away in higher health-care premiums.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Iran Removes Euro and Dollar From Trade Exchanges; More Symptoms of Iranian Hyperinflation

Posted: 14 Jan 2013 11:53 PM PST

Inquiring minds note that Iran removes euro and dollar from its trade exchanges.

Minister of Economic Affairs and Finance Shamseddin Hosseini said Monday that Iran would no longer use euro and dollar in its trade exchanges according to a decision made by the government's economic working-group. Iranian state news agency IRNA writes about this.

"Iran's government is determined to remove euro and dollar from its foreign trade and is to change its foreign trade pattern," said the minister while speaking to reporters at the end of a meeting with the representatives of the Economic Cooperation Organization (ECO) member countries.

Symptoms of Hyperinflation

Iran removed the Euro and dollar from its foreign trade patterns not because it wished to do so, but rather because it has no euro or dollar reserves it can use.

Regardless of its official statements on trade, euros and dollars are hoarded by Iranian consumers in the black market.

I spoke about the inflation nightmare in Iran on October 4, 2012 in Hyperinflation Hits Iran; Monthly 70% Inflation Rate; Reflections on Economic Warfare. Here are a few snips:

The oil embargo against Iran has worked, assuming one defines "work" as a destruction of the Iranian riall which has fallen 33% in a week, 57% in three months and 75% in a year vs. the US dollar.

On Wednesday, the Tehran bazaar closed in turmoil and police used teargas and batons on demonstrators protesting the currency crisis.

Monthly 70% Inflation Rate

Steve Hanke, Professor of Applied Economics at Johns Hopkins University, has also been following the Iranian currency crisis. He pinged me with these thoughts yesterday.

Hello Mish

For months, I have been following the collapse of the Iranian rial, tracking black-market exchange-rate data from foreign-exchange bazaars in Tehran. Using the most recent data, I now estimate that Iran is experiencing a monthly inflation rate of nearly 70%, indicating that hyperinflation has struck in Iran.

Cordially,
Steve

Iran's Lying Inflation Statistics

As soon as I saw trade exchange news I looked for an update from Steve Hanke. You can find one written January, 9 on Cato: Iran's Lying Inflation Statistics

Today, the Central Bank of Iran released its inflation statistics for 2012. Remarkably, despite all of the international notoriety surrounding Iran's outbreak of hyperinflation in October, the Central Bank claims that Iran experienced an annual inflation rate of only 27.4%.

The Central Bank has a habit of failing to release useful economic data, and what it does release often has what I would describe as an "Alice-in-Wonderland" quality. Indeed, the Central Bank's official annual inflation rate is grossly off from the true rate. Using a well-established methodology, I estimate that Iran experienced an annual inflation rate of 110% during 2012.

The use of lying statistics is not a first for a country with hyperinflation. Indeed, when inflation begins to spiral out of control – such as the most recent cases in Zimbabwe and North Korea – it's all too common for governments to wrap their statistics in a shroud of secrecy.

Official Exchange Rates and Clouds of Secrecy

One way to hide in a cloud of secrecy is to prohibit trades in other currencies. Iran did just that.

Officially, trade is in the Iranian rial. Unofficially, euros and dollars are precious on the black market.

By the way, anyone remember the silly claims the US went to war with Iraq because it was about to price oil in euros? If not, here is a refresher course.

October 6, 2009: Ridiculous Hype Over Secret Oil Meetings
October 13, 2005: Oil Priced in Euros. Would it matter?
February 28, 2011: US Dollar About to Lose Reserve Currency Status - Fact or Fantasy?

Iranian oil is no longer available for either euros or dollars. Yet hyperinflation hit Iran, not the US, not Europe.

Iran's biggest problem is the embargo, of course. However, it is still humorous to read the silly pontifications regarding the demise of the dollar if oil was not priced in dollars.

Oil priced in euros did not matter then, and it would not matter now, embargo or not.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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Economy News

15.1.13

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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