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Why Are Stocks So High?

Posted on August 1, 2019 by Kerry Pechter -

The stock market notoriously climbs a “wall of worry.” But a new academic paper, “How the Wealth Was Won,” suggests that we probably should be worried about a rising stock market that, for decades, has grown much faster than economic growth can explain and where the “equity premium” has sunk to low levels.

The paper’s authors, Martin Lettau of Berkeley, Sydney Ludvigson of NYU and Dan Greenwald of MIT, divide the past 67 years into two eras. From 1952 to 1988—from roughly the birth of the H-bomb to the Savings and Loan Crisis—fundamental economic growth accounted for 92% of the increase in stock prices, they found.

But from 1989 to 2017 (from the end of Communism through the tech boom, two Gulf Wars, the digital boom, the Iraq War, and the Great Financial Crisis) only 24% of the $23 trillion in real equity wealth created by the non-financial sector can be attributed to economic growth, the authors found.

Greenwald

“It was largely luck that stock returns were as high as they have been since 1989,” MIT’s Greenwald told RIJ this week. “Our model predicts that the rate of returns on equities, including dividends and buybacks, should have been 5.3% a year. But they’ve averaged a 10.6% return.” That’s about twice the rate that the traditional “equity risk premium”—the reward to investors for taking the extra risk associated with equities vs. bonds—would normally suggest.

Something else must have been going on, and the authors believe it was changes in what they call “factors shares.” By this they mean the division of the U.S. economy’s fruits between investors and workers. “Factors shares have been more relevant than economic growth as a measure of fundamental value in the stock market,” the paper said.

For decades, the profits have largely accrued to investors (in the form of dividends, stock buybacks and capital gains) and not to workers (in the form of wages). “What’s unusual, over this entire period, the share of output going to profits has grown, relative to the share going to wages,” Greenwald said, adding that “workers still typically get more than two thirds of output.”

He and his co-authors attributed 54% of the $23 trillion in real equity wealth created by the nonfinancial sector from 1989 to the end of 2017 to “reallocation of rents to shareholders in a decelerating economy… Economic growth accounts for just 24%, followed by lower interest rates (11%) and a lower risk premium (11%).”

“This large divergence is attributable to the good luck equities have enjoyed over the post-war period, driven primarily… by a string of favorable factors share shocks that redistributed rents to shareholders,” the paper said. In economic terms, “rents” means unearned income, passive income or, technically, “any payment to an owner or factor of production in excess of the costs needed to bring that factor into production.”

At the same time, the “equity premium” is low. That is, investors have shown a willingness to pay a lot for stocks. “We know that asset prices and stock valuations vary by too much to be driven by cash flows,” he said. “When the stock market goes up by two percent in one day, it doesn’t mean that investors think that profits will go up by two percent. You can attribute that to market demand. Effectively, investors are saying that they are willing to hold risk at a lower price.”

There are many possible causes and effects associated with the sharp change in factors shares since 1989—the loss of labor’s bargaining power, the export of manufacturing jobs, automation, globalization, monopoly pricing power, the retirement savings boom, or massive deficit spending—but this paper wasn’t meant to pursue them, Greenwald said.

Whatever the reasons for the shift, workers have been the losers. Even though millions of Americans have been investing in mutual funds through workplace retirement plans for 30 years, and some of them have accumulated significant nest eggs, there’s apparently still not much overlap between workers and investors.

“Only about half of households report owning stocks either directly or indirectly in 2016,” the paper said. “Even among those households that own equity, most own very little: the top 5% of the stock wealth distribution [equity owners] owns 76% of the stock market value and earns a relatively small fraction of income as labor compensation.”

Depending on your point of view, you might conclude from this paper either that the stock market is dangerously overvalued, or that the shift in factor shares and a shrinking risk premium justifies current stock values, or that the height of the stock market is a symptom of advanced inequality in the U.S., rather than the sign of a healthy economy.

Is Politics Getting to the Fed?

Posted on July 25, 2019 by Robert J. Barro -

From the early 1980s until the start of the financial crisis in September 2008, the U.S. Federal Reserve seemed to have a coherent process for adjusting its main short-term interest rate, the federal funds rate. Its policy had three key components: the nominal interest rate would rise by more than the rate of inflation; it would increase in response to a strengthening of the real economy; and it would tend toward a long-term normal value.

Accordingly, one could infer the normal rate from the average federal funds rate over time. Between January 1986 and August 2008, it was 4.9%, and the average inflation rate was 2.5% (based on the deflator for personal consumption expenditure), meaning that the average real rate was 2.4%.

The long-term normal real rate can be regarded as an emergent property of the real economy. From an investment and saving standpoint, economic equilibrium balances the benefit from a low safe real interest rate (which provides low-cost credit for investors) against the benefit from a high real rate (which implies higher returns for savers).

In the Great Recession, the federal funds rate dropped precipitously, reaching essentially zero by the end of 2008. That was appropriate, owing to the depth of the crisis. But what few expected was that the federal funds rate would remain close to zero for so long, through the end of then-Fed Chair Ben Bernanke’s term in January 2014 and beyond.

The Fed’s prolonged low interest-rate policy, which was supplemented by quantitative easing (QE), seems misguided, considering that the economy had long since recovered, at least in terms of the unemployment rate. The nominal federal funds rate was not placed on an upward trajectory until the end of 2016, starting under then-Chair Janet Yellen and rising gradually to 2.4% in December 2018 under her successor, Jerome Powell. Throughout the period up to late 2016, the negative real federal funds rate was well below its own long-term normal.

It is hard to view today’s nominal federal funds rate of 2.4% as high. With an inflation rate of 1.7%, the real federal funds rate is only 0.7%. And yet the Fed’s “high” interest-rate policy was fiercely attacked by Wall Street, which regarded it as a mistake, and as the cause of the weak stock market from the end of 2018 through early 2019. Many financial commentators argued that the Fed should pause its monetary-policy “normalization” and eventually shift to interest-rate cuts.

That view is not crazy if you are focused solely on boosting the stock market. On average, interest-rate cuts do tend to stimulate the stock market by making real returns on bonds less competitive. But that does not mean it is good economic policy always to be cutting rates, as U.S. President Donald Trump seems to think.

It is no secret that Trump regards the stock market’s performance as an indicator of his own performance. But it has been surprising to see the Fed join the rate-cutting bandwagon. In early 2019, it indicated that it would pause its rate increases, and now it is signaling a sequence of rate cuts in the near future. I, for one, cannot see how the Fed’s sudden reversal fits with the coherent monetary policy that it maintained from 1984 until the financial crisis.

Nonetheless, Powell has tried to justify the move toward rate cuts as consistent with that prior policy. First, he points out, rightly in my view, that inflation has remained tame. Then, he argues that the economy’s prospects may be weaker than low unemployment and recent strong real GDP growth suggest. There may be something to that argument, given Trump’s trade war and worsening prospects for global growth.

Even so, it does not follow that rates should be cut before actual economic weakness appears. I do not know of convincing evidence that the Fed should “get ahead” of a slowing real economy.

The danger, then, is that the Fed will be tempted to cut rates as a result of external pressure, on the assumption that it can always rationalize cuts by pointing to variables that seemed to augur a growth slowdown sometime in the future.

It is telling that Powell has not mentioned (at least that I have heard) the fact that the nominal and real federal funds rates remain well below long-term normal values. (This deviation is even more apparent for interest rates in some other advanced countries, such as Germany and Japan.)

The desire to restore normalcy should still be putting upward pressure on rates, just as it did during the period of rate increases between December 2016 and December 2018. Indeed, it was Bernanke’s earlier failure to initiate the normalization process that made things more difficult than necessary for Yellen and Powell.

My view is that the shift in 2019 away from normalization is primarily due to the intense opposition to further rate increases last December, when the loudest objections came, notably, from stock-market analysts and the Trump administration.

The entire point of central bank independence is to establish a credible monetary policy by insulating the relevant decision-makers from such influence. That is what we learned from the early 1980s, when Fed Chair Paul Volcker hiked the federal funds rate up to the level necessary to choke off inflation.

The big difference, of course, is that President Ronald Reagan supported Volcker, whereas Trump is Powell’s chief antagonist. Powell’s challenge, then, is to maintain Volckerian discipline and independence in the face of growing political pressure. At the moment, his prospects for success are not great.

House MEP bill could fuel pension risk transfer deals

Posted on July 25, 2019 by Editorial Staff -

“The Rehabilitation for Multiemployer Pensions Act of 2019,” or H.R. 397, has passed the House of Representatives. Word on the street is that, if the bill becomes law, it could generate billions of dollars in new business for life insurers such as Prudential, MassMutual and Principal Financial that are active in the pension risk transfer business.

According to a Congressional Budget Office estimate, the bill calls for loans and grants to insolvent or near-insolvent multiemployer pensions totaling almost $49 billion between 2019 and 2024 and almost $68 billion over the subsequent decade.

The plans, known as MEPs, are defined benefit pension plans that cover workers at more than one company. The workers or the companies in the plan typically have something in common, such as the same union or the same industry.

Introduced by Ways & Means Committee chair Richard Neal (D-MA), the bill would provide certain insolvent or near-insolvent multiemployer defined benefit pension plans with loans and grants from the government. The newly created Pension Rehabilitation Administration within in the Department of the Treasury would administer the loans.

Under the bill, certain pension plans facing insolvency could apply to the PRA for a loan or apply jointly to the PRA and Pension Benefit Guaranty Corporation (PBGC) for loans and grants; some plans would be required to apply.

Those loans and grants could be used to buy group annuities from a life insurer. According to the bill, the annuity contracts purchased shall be issued by an insurance company which is licensed to do business under the laws of any State and which is rated A or better by a nationally recognized statistical rating organization, and the purchase of such contracts shall meet all applicable fiduciary standards under the Employee Retirement Income Security Act of 1974.

A plan could borrow up to the amount it needed to pay lifetime benefits to people who already receive benefits (referred to as being in pay status), to former employees who are entitled to receive benefits in the future (called terminated vested participants), and to their beneficiaries.

The loan period would be 30 years and the interest rate would be tied to the rate for 30-year Treasury bonds. If the PRA evaluated the application and determined that a plan could not repay a loan in full and still remain solvent, the plan would receive a smaller loan, and the difference would be covered by grants from PBGC.

Those grants could not exceed the estimated value of benefits that would otherwise be guaranteed under current law by PBGC if the plan was insolvent on the day of its application. Pension plans would not be required to repay the grants received from PBGC.

The bill also includes several provisions that would increase revenues, including ones that would modify the required distribution rules for certain beneficiaries of tax-favored retirement plans after the death of the employee or account holder, increase penalties for certain required filings and notices, and require information sharing related to the heavy vehicle use tax.

Envestnet updates ‘financial wellness’ app

Posted on July 25, 2019 by Editorial Staff -

Envestnet MoneyGuide, provider of the widely used MoneyGuidePro financial planning software, this week released an enhanced version of MyBlocks, a digital client engagement tool for advisors. Its part of Envestnet’s effort to delivering “financial wellness” to advisors and end-clients.

On the MyBlocks user interface, there are bite-sized “blocks” linking users to information about financial wellness topics such as: Social Security, “retirement compatibility,” college loan debt, and building emergency funds. MyBlocks is a separate product offering outside of the firm’s MoneyGuide suite.

An Envestnet release described MyBlocks as a “digital marketing tool to accelerate the path from prospect to client.”

“We wanted to create a familiar user experience to break down client and advisor inhibitions toward financial planning,” said Tony Leal, President of Envestnet MoneyGuide, in the release.

Twenty-one blocks are currently available, with more in development. Each block is grouped by topic, such as:

Protect Your Family: life insurance and long-term care
Explore Retirement Topics: social security, health care, and longevity
Have Some Fun: retirement compatibility game and an inflation quiz
FastPath to Freedom: credit card debt, college loan debt, retirement savings, building an emergency fund and, saving for an experience or financial goal
Blocks addressing long-term care analysis, income protection, and financial goals and concerns are scheduled to be released later this quarter. The current iteration includes:

A new self-registration feature that advisors can use for existing clients or as a prospect-engagement and lead-generation tool. It also facilitates email and social media marketing efforts.

Integrated data aggregation with Envestnet | Yodlee. A suite of Yodlee FinApps allows for linking accounts, viewing a summary of accounts, reviewing transactions, budgeting, and analyzing expenses.

Capability for advisors with MoneyGuide subscriptions to import a full financial plan, eliminating the need to request paper statements.

Enhanced prospecting feature with Redtail CRM. Prospects who go through MyBlocks self-registration will be imported into Redtail as a new prospect and/or household. Alerts can be created in Redtail to notify the advisor when a new prospect registers. Prospect workflows and activities can also be set up within Redtail for MyBlocks prospects.

Overall, MyBlocks can serve as the digital component of a hybrid digital/human advice model, helping advisors save time and serve middle-class customers that they might not otherwise be able to serve cost-effectively. “Because they can be incorporated into a collaborative, or even a self-service model, blocks open up financial planning to a new audience that was previously priced out of the market,” said Joel Bruckenstein, the fintech expert.

MyBlocks integrates with MoneyGuideOne, MoneyGuidePro, and MoneyGuideElite. Additional blocks and integrations will be rolled out throughout 2019 and continue into 2020. Those who purchase MyBlocks before Sept. 30, 2019, will receive free aggregation with Yodlee.

Your copy of ‘How America Saves,’ small biz edition

Posted on July 25, 2019 by Editorial Staff -

Vanguard today issued its sixth annual How America Saves: Small business edition—a comprehensive assessment of plan design trends and participant savings behavior in small business 401(k) plans served by Vanguard Retirement Plan Access (VRPA).

The new research, a companion piece to the firm’s ‘How America Saves 2019‘ report on retirement savings in corporate retirement plans, finds that small business plan participants are benefiting from enhanced plan design features, including professionally managed allocations, which have led to increased plan participation and optimized portfolio construction. Similar to their large corporate counterparts, small business participant behavior has improved, with decreased trading activity and reduced plan withdrawals, Vanguard said in a release.

Participant use of professionally managed allocations has increased. In 2018, two-thirds of VRPA participants were invested in a professionally managed allocation, with a total of 61% of participants invested in a single target-date fund. Among new plan entrants, three-quarters of participants were invested in a single target-date fund.

The increased use of professionally managed allocations has also improved portfolio construction and reduced extreme equity allocations. The percentage of participants holding broadly diversified portfolios was 79% in 2018, while the percentage of participants with no allocation to equities was 3%. At the other extreme, the fraction of participants investing exclusively in equities was 7%.

In addition to the increased use of professionally managed allocations, Vanguard reports the following:

Automatic enrollment is increasing plan participation and plan deferral rates. Employees enrolled in plans with an automatic enrollment feature have an overall participation rate of 82%, compared with a participation rate of only 54% for employees hired under plans with voluntary enrollment. Additionally, for individuals earning less than $30,000 in plans with automatic enrollment, the participation rate is more than double that of plans with voluntary enrollment.
Plan participants have decreased their trading activity. Participant trading or exchange activity is a measure of a participant’s willingness to change their portfolio in response to short-term market volatility. While daily trading is nearly universal for Vanguard defined contribution (DC) plans, with virtually all plans allowing it, only 7% of participants initiated one or more portfolio trades or exchanges in 2018.
Reduced plan withdrawals sustain retirement savings. Plan withdrawals are an optional plan provision, and participants using the feature could jeopardize their retirement savings if they rely upon it throughout their working career. Among VRPA DC plans, 85% allowed plan withdrawals for those who have reached age 59 ½. However, in 2018, less than 1% of participants in plans offering any type of withdrawal used the feature.

According to the Small Business Administration, small businesses represent 99.7% of American employers. VRPA—which is a service for retirement plans with up to $20 million in assets—was launched in 2011 to provide access to cost-effective, flexible 401(k) plans for small business owners and their employees.

Recordkeeping and other services are provided through Ascensus, one of the nation’s top recordkeeping firms, and include a call center, compliance testing and documentation, participant education materials, dedicated plan sponsor and participant websites and trustee services. Through VRPA, Vanguard serves 11,300 plan sponsors with 480,000 participants as of year-end 2018.

As of May 31, 2019, Vanguard managed $5.4 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers 414 funds to its more than 20 million investors worldwide.

Honorable Mention

Posted on July 25, 2019 by Editorial Staff -

Jackson enhances variable annuity benefits, adds Fidelity as money manager

Jackson National Life Insurance Company has announced several benefit updates to its family of variable annuities (VAs), including Perspective II and Perspective Advisory II. The changes are designed to streamline many of the add-on options offered through these products, by focusing on the most popular benefit designs.

As part of this launch, Jackson introduced LifeGuard Freedom Accelerator and Accelerator DB—two new benefits available through the Perspective family of VAs. LifeGuard Freedom Accelerator provides the potential for consumers to grow their income by offering higher levels of guaranteed withdrawals for each year they defer taking income. LifeGuard Freedom Accelerator DB adds the option for investors to leave a legacy, to help protect their families financially. Consumers who are seeking additional details about these benefits should partner with a financial professional who offers Jackson products.

Along with the release of the new benefits, Jackson has also introduced an option that provides the potential for more frequent increases of the guaranteed benefit value as a result of positive market performance. With these and other changes, Jackson has aligned the benefit platforms across its commission and fee-based VAs, Perspective II and Perspective Advisory II, providing consistency in options regardless of how consumers choose to engage their financial professionals.

Jackson also announced a new relationship with Fidelity Institutional Asset Management that will give advisors and their clients access to subaccounts managed by Fidelity through Jackson’s variable annuity offerings.

DPL Financial Partners, Lighthouse Life offer life settlements to RIAs

DPL Financial Partners, an insurance and annuity purchasing platform for registered investment advisors (RIAs), is partnering with Lighthouse Life Solutions, LLC (“Lighthouse Life”) to allow DPL’s member RIAs to sell unneeded life insurance assets for cash.

“Life settlements are a natural extension of our product lineup,” said DPL Founder and CEO David Lau in a release. He explained that many life settlement providers require a lengthy review process that includes a medical evaluation, but Lighthouse Life typically conducts a brief telephone interview with the insured and makes an offer within a few days, not weeks or months, later.

According to DPL’s Lau, life settlement transactions are best suited to older investors who own low cash-balance permanent life, or even term life policies when they typically have a convertibility feature. Clients may no longer need the policies because their liability profile has changed and/or they may be having trouble covering the premiums. In many cases, he said, liquidating the asset via a life settlement is a superior option to letting the policy lapse and receiving no value.

ACLI rebuts Wall Street Journal editorial on SECURE Act

Susan Neely, president and CEO of the American Council of Life Insurers (ACLI), made the following statement about today’s Wall Street Journal editorial “IRAs in Political Sights”:

“Low and middle-income Americans struggling to save for retirement are depending on the U.S. Senate to pass the SECURE Act. Only the wealthiest of Americans, less than one percent, use the ‘stretch IRA’ for estate planning. SECURE’s ‘stretch IRA’ provision shouldn’t derail a package to help millions of working Americans save for retirement.

“One provision of the SECURE Act will get more than 700,000 Americans who work for small businesses to save for retirement. The Senate should seize the historic opportunity at hand to pass this bill and confront America’s retirement savings challenges.”

The American Council of Life Insurers (ACLI) advocates on behalf of 280 member companies dedicated to providing products and services that promote consumers’ financial and retirement security. 90 million American families depend on our members for life insurance, annuities, retirement plans, long-term care insurance, disability income insurance, reinsurance, dental and vision and other supplemental benefits.

Scott Boyd joins Principal Financial

Principal Financial Group has hired Scott Boyd as head of sales for Workplace Savings and Retirement Solutions in the company’s Retirement and Income Solutions division, effective August 12, 2019. He will report to Jerry Patterson, senior vice president, Retirement and Income Solutions, at Principal.

Most recently, Boyd served as senior vice president for full-service teams at Prudential, focusing on offerings in the corporate, governmental, tax-exempt and Taft Hartley markets. He also managed the business development and intermediary relations teams, serving distributors.

Prior to Prudential, Boyd was a strategy consultant for PricewaterhouseCoopers in Boston. He has a BS degree in Civil Engineering from Union College in Schenectady, New York and an MBA from the Johnson School at Cornell University. Additionally, he holds Series 6, 63 and 26 registrations and is a registered representative of Prudential Investment Management Services LLC (PIMS).

Candidate Buttigieg proposes raising FICA limit to $250,000 to support Social Security

Democratic presidential candidate Pete Buttigieg wants to add new revenue to the Social Security program by raising the so-called FICA limit and boosting the amount of annual wages subject to the payroll tax that funds America’s 80-year-old pay-as-you-go social insurance program.

Buttigieg’s proposal, announced last Saturday at a forum in Iowa sponsored by AARP, is similar to but more moderate than similar proposals from Sen. Bernie Sanders (D-VT) and other Democratic presidential candidates.

The mayor of South Bend, Indiana, Buttigieg said he would raise the maximum annual earnings currently subject to the Social Security payroll tax to $250,000 from $132,900. Workers and employees pay a combined 12.4% tax on their earnings—6.2% each—up to an amount that rises annually with the average national wage.

“That would go a long way toward sustainability on the Social Security side,” Buttigieg said. Americans ages 65 and older are expected to comprise about 23% of the electorate in 2020. That’s their largest share since at least 1970, according to The Pew Research Center.

In February, Bernie Sanders introduced legislation that would continue to apply the 12.4% tax on earnings below the current limit and above $250,000. Three others running for the Democratic presidential nomination, Sen. Cory Booker (D-NJ), Sen. Kirsten gillibrand (D-NY) and Sen. Kamala Harris (D-CA) have proposed solutions to Social Security’s funding problems. Without additional revenue, the program will be able to pay only about 75% of its promised benefits starting in 2034.

Of ‘Thrillers, Spillers, and Fillers,’ Plus the Mueller Hearings

Posted on July 25, 2019 by Kerry Pechter -

My wife was re-arranging plants in a big pot on our deck the other day. She follows the rule of (green) thumb that every big pot needs a “filler, a spiller and a thriller.”

It means that an impressive pot needs a tall, conspicuous flower that catches your eye (thriller), a spreading plant that overflows the edges of the pot (spiller) and, underneath, a bunch of greenery (filler) that covers the dirt.

All long-lived ideas have three components, but this one seems like it applies especially well to retirement income portfolios. You need a solid foundation of guaranteed income, a chunk of medium-term growth, and something exciting or foolish that might pay off big, like cannabis stock, a 1967 Porsche Targa or a three-day trip to Las Vegas every winter.

Advisors know that metaphors and stories come in handy when talking to clients, and that different types of yarns (i.e., about golf or fly-fishing) are effective with different people. It’s not hard to imagine an advisor hearing a near-retiree say that he or she wants to spend more time in the garden.

If you casually mention the thriller/spiller/filler metaphor, well, it’s practically a done deal. If you’re such an expert on plants, the client will logically assume, you must be a genius on investing.

* * *

If you’re not a lawyer or haven’t watched many criminal trials, you wouldn’t have noticed that this week’s “Mueller hearings” followed the classic criminal trial format.

The Democrats were the prosecutors, the president was the defendant, the Republicans were his lawyers, and Mueller was the prosecution’s sole witness. Democratic representatives led Mueller methodically through his own evidence; they needed nothing more than for him to confirm what he had already written, which until then had been successfully obscured by AG William Barr.

On cross-examination, the Republicans used several classic techniques for defending guilty clients. When the facts are against you, you impugn the motives of the witness (Mueller conspired with Democrats), or challenge the law (“Exoneration isn’t in any law book”), or use the “fruit of a poison tree” defense (The case began with the unverified Steele dossier, so all sequelae is disqualified), or claim presumption of innocence, or say that your client was framed. They did all that.

The media may say “Mueller said nothing new.” He didn’t have to; he just had to confirm his findings. Mueller seemed bored with the petty deceptions of the president and his men, but he verged on anger that anyone would acquiesce to foreign meddling in a US election.

‘APIs’ and the Future of Annuities

Posted on July 25, 2019 by Kerry Pechter -

Anybody with a stake in the annuity business—as an advisor, distributor or manufacturer—needs to know at least a little about application programming interfaces, or APIs. Last week, RIJ reported on the June launch of Envestnet’s Insurance Exchange, whose seamless integrations of data and software depend on these interfaces. This week, we take a second (but non-technical) look at them.

By now we all use APIs almost every day, and certainly whenever we shop online. For example, a FedEx or UPS might add its API to an e-commerce site—a Land’s End or L.L. Bean platform, maybe—to facilitate “ordering shipping services and automatically include current shipping rates, without the site developer having to enter the shipper’s rate table into a web database.”

Catching up with the API technology train as fast as possible is essential for the survival of the annuity business. Any company that wants to do business on the web, that wants to “bolt-on” third-party services as easily as Lego blocks, and that wants to give customers the fluid experience they expect online, has to use APIs.

The worlds of advice and financial product distribution are clearly headed in this direction, and life insurance companies have to follow. Six annuity issuers—Allianz Life, Brighthouse Financial, Global Atlantic, Jackson National, Nationwide and Prudential—have already begun to integrate with the Insurance Exchange. Others are expected to join later this year.

Walther

“I was just talking about API technology with one of our major distribution partners,” Corey Walther, head of business development and distribution relationship management at Allianz Life said in an interview with RIJ. “We were joking that, a year or 18 months ago, that topic would never have come up, even at large organizations. But here was the president of a distribution firm initiating a conversation about APIs. It’s going to be a requirement in the future.”

They’re just like Lego blocks

Lego blocks and APIs, in fact, are often compared. With APIs, “developers don’t have to start from scratch every time they write a new program,” said an article at thenewstack.io. “They no longer have to build a core application that tries to do everything. Instead, they can contract out certain responsibilities by using already created pieces that do the job better. So APIs are the Lego bricks of software development: standardized tools for software to communicate with other software, leading to faster building and deployment… and faster load times.”

APIs are central to Envestnet’s cloud-based technology strategy. They’re the neurotransmitters that allow advisors to integrate insurance products and investment products on the same web page. They form a network that allows Envestnet to offer clients an á la carte menu of services instead of a prix fixe list. (For the “restaurant analogy” of APIs, click on image below.)

To build the Insurance Exchange, Envestnet first created FIDx, a stand-alone company in Berwyn, PA. FIDx builds bridges—integrations, in developer-speak—between software inside Envestnet and software tools from outside vendors. It often relies on the vendors’ existing APIs to make the connections. For instance, FIDx can integrate Envestnet’s MoneyGuidePro planning tool and Insurance Technologies’ annuity order-entry and illustration tools using Insurance Technologies’ FireLight Embedded API.

“Advisors won’t have to change the way they do business,” Rich Romano, the chief technology officer at FIDx, told RIJ. “Their businesses are enhanced. They can process annuities the same way they process their managed account businesses.”

For example, Riskalyze, the client financial risk assessment tool for advisors, has an API that allows it to integrate with Saleforce or Redfin, two customer relationship management software providers. Advisors can import client data from one to the other without cutting and pasting or re-entering anything. This technology, by now taken for granted in most of the e-commerce world, is relatively new to the annuity divisions of life insurers.

Thanks to APIs, annuity distributors and advisors can use the Insurance Exchange without necessarily abandoning any of their existing current technology partners. It means that advisors have more tools at their fingertips, so that they can more easily offer the comprehensive financial planning that clients want. At a mundane but important level, integration also reduces the cost of rework associated with NIGO (not in good order) annuity applications.

“The ‘north star’ for our vision is that advisors shouldn’t have to duplicate-entry anything,” said Walther at Allianz Life. “They should be able to go from proposal to implementation to monitoring, and it should all be tied together at the household level.”

Allianz Life’s partnership with Envestnet and FIDx “has never been just about selling fee-based annuities,” he told RIJ. “There’s a much bigger game that’s being played. It’s about the ability to bring ecosystems together more effectively. We’re taking asset management and insurance out of their silos.

“We can leverage tools like LifeYield, which shows people how to optimize their Social Security claiming decision and how best to take withdrawals from pre-tax accounts,” Walther added. “Or Riskalyze. We’re exploring integrations with BlackRock iRetire. Envestnet in effect becomes the Microsoft operating system. If you use a different CRM system or a different planning system, you can bolt those on.”

Ganguly

Dev Ganguly, the chief information officer at Jackson National, told RIJ, “We use FireLight as our ‘Intel Inside’ for order-entry and illustration. Those are Lego blocks that we outsource to FireLight. We have other Lego blocks for things like post-issue [services]. FIDx fits together our Lego blocks with Envestnet’s. APIs are the connectors between the blocks. Even today, not many insurance companies think about all the ways APIs approach. At Jackson we have taken the API approach.”

Green fields for insurers

“The carriers have two big boxes they want to check,” said John Yackel, leader of Strategic Initiatives at Envestnet. “First, they want to make their current business more efficient. And they’re telling us, ‘Get me into new markets that I haven’t gone after before.’” That would include the 15,000 advisors in the RIA channel who manage $1.2 trillion. “Annuities have only 3.3% penetration in that market,” he added, “so they look at it as a green field.”

“But it’s not just about fee-based business,” said Ganguly. “We look at ‘fee-based’ as a revenue model but we look at ‘advisory’ as a mindset. We’ll also leverage the power of the platform to do brokerage or commission-based business. The biggest benefit is the fact that two ecosystems, investments and insurance, are coming together. ”

Cetera, Allianz SE and Capital Group offer model retirement income portfolio tool

Posted on July 18, 2019 by Editorial Staff -

Cetera Financial Group, a network of broker-dealers, along with Allianz Life, Allianz Global Investors, PIMCO, and the Capital Group asset management firm have introduced SetIncome, a tool that “enables retirees to generate a reliable source of retirement income to last the rest of their lives,” the companies said in press release.

“These firms have come together to bring leading asset management and annuities solutions within a powerful technology platform to create better retirement outcomes and fill a critical gap in the marketplace, effectively disrupting the retirement income landscape,” Jacqueline Hunt, member of the board of Allianz SE, said in the release.

“Clients working with a Cetera-affiliated financial advisor can use SetIncome to create a retirement income plan with guaranteed fixed annuity and asset management models, which includes American Funds by Capital Group,” the release said.

SetIncome combines annuities and traditional asset management strategies, allowing financial advisors to “create an optimized income strategy for their clients in just five clicks of a button.”

Athene offers ‘Amplify,’ its first structured index annuity

Posted on July 18, 2019 by Kerry Pechter -

The latest entry into the fast-growing, highly concentrated, $12.3 billion-a-year structured index annuity market is “Amplify,” a new registered index-linked annuity contract (RILA, as structured index annuity are now called) from Athene. Amplify is the first RILA from Athene, which is the second-biggest seller of fixed index annuities (FIAs) after Allianz Life.

The commission-based insurance contract features terms (“segments”) of one year, two years, and six years. For downside protection, it offers either a 10% “floor,” where the owner absorbs the first 10% in index decline, or a 10% “buffer,” where the owner absorbs the net index decline beyond 10%, over each of those terms.

Amplify’s yields are linked to the performance of three popular index options (S&P500, Russell 2000 and MSCI-EAFE), or to a blend of those three. No hybrid (stock/bond) or exotic volatility-managed indices, which allow a narrower range of gain or loss than traditional all-equity indexes, are offered so far.

Amplify’s current caps on one-year credited interest range from 15.25% to 17% (for the buffer option) and from 13.5% to 15.5% (for the floor option), depending on the index chosen. In each case, the participation rate (the investor’s share of the gain up to the cap) is 100%. That’s more than double the upside potential offered by the typical FIA.

Two-year caps for the floor option range from 23% to 29%, depending on the index chosen. Caps do not apply to the two-year buffer option, which includes a participation rate of 115% on both the two-year MSCI EAFE index option and the six-year blended index option. All other participation rates are 100%.

For up-to-date rates, click here.

The annual expense ratio is 95 basis points (0.95%). Athene said it chose to make the expense ratio explicit rather than factoring it into its crediting rates. Implicit expenses would have reduced the crediting rates, and the products in this category compete largely by having the highest potential returns.

Athene said the same motivation drove its decision to offer the same 10% floor or buffer over the one-year, two-year, and six-year segments, even though a client’s downside risk exposure changes as the segments grow longer.

The RILA category—at least one broker-dealer executive strongly objects to the use of this opaque acronym—is aimed mainly at advisors of investors who want a tax-deferred accumulation vehicle with more upside potential than an FIA but more downside protection than a variable annuity.

Though RILAs are technically annuities (offered only by life insurers and convertible to a lifetime income), investors aren’t using them as such. RILAs rarely offer a guaranteed lifetime income rider; the expense of such a rider would add about another 1% of drag to the performance of RILAs and make them less competitive.

Asked if its new RILA might “cannibalize” Athene’s FIA sales, an Athene spokesperson said, “We feel that the products are complementary rather than overlapping. When you look at the sales trends, the momentum in RILAs isn’t happening at the expense of FIAs. The RILA might appeal to people with different risk appetites, or who are at different times in their lifecycle. It’s part of a continuum of products.”

Because this product is both commission-based and registered with the Securities and Exchange Commission, it will be distributed through the independent broker-dealer channel, which the SEC regulates through FINRA. Athene will also distribute the product through banks.

Insurance agents without securities licenses or broker-dealer affiliations (who traditionally sell the most FIAs) can’t sell it. Representatives of registered investment advisors (RIAs) who don’t take commissions (and charge asset-based fees) won’t be able to sell it either.

Different RILA issuers dominate in different distribution channels. AXA is the top-seller in the independent broker-dealer channel, where two-thirds of all RILA sales take place. It also sells its product through the 5,000 or so members of its career sales force, AXA Advisors. Its products are also sold in the bank channel and in the independent broker-dealer channel.

Overall the top five issuers of RILAs—AXA, Brighthouse, Allianz Life, Lincoln Financial, and CUNA Mutual—accounted for all but a smattering of sales in the first quarter of 2019, according to Wink’s Sales and Market Report.

Brighthouse’s Life Shield Level Select 6-Year product was the top-selling RILA overall in the first quarter of this year, and the top-seller in both the bank and independent broker-dealer channel. In the wirehouse channel, it had two of the three top-selling products—the Level Select 6-Year and the Level 10 contract.

T. Rowe Price Launches Retirement Payout Vehicle

Posted on July 18, 2019 by Kerry Pechter -

T. Rowe Price, one of the “big three” target date fund (TDF) providers, has introduced a payout vehicle that aims to deliver a non-guaranteed, 5% per year income stream to retirees from retirement plans that the Baltimore-based financial services firm administers.

The new product is the “Retirement 2020 Trust–Income,” a collective investment trust (CIT) that resembles T. Rowe Price’s Retirement 2020 TDF, but with an income feature for retirees.

“We had a plan sponsor come to us looking for a way to take a participant’s savings balance and create an income process,” said Michael Oler, vice president and Retirement Income Product Manager at T. Rowe Price. “They wanted to provide a solution that was liquid, that was easy to communicate to participants, and simple to monitor. The payout strategy checked a number of those boxes.”

T. Rowe Price did not disclose the name of the plan sponsor who requested the service. Generally speaking, a managed payout fund could be attractive for a defined contribution plan sponsor that has discontinued its defined benefit plan and whose employees are accustomed to having an income solution at retirement.

Oler

The money in the trust would still remain in the defined contribution plan. Some plan sponsors are said to want to keep large 401(k) accounts in the plan because they help maintain the size of the plan and the economies of scale that help keep overall plan costs down. Conserving small-balance clients would be counterproductive, given that they can cost more to maintain than they earn.

The Retirement 2020 Trust – Income was set up as a CIT because the client that requested it was a trust investor, a T. Rowe Price spokesperson said. But it will have the same “glide path,” or asset allocation that becomes more conservative over an investor’s lifetime, as its mutual fund twin. That glide path starts at about 90% stocks, starts falling 25 years prior to retirement and reaches about 55% stocks at the retirement date (presumably age 65). The stock allocation levels off at 20% of the portfolio 30 years after retirement.

The payout version of Retirement 2020, either as a CIT or a mutual fund, won’t be available to active participants in T. Rowe Price-administered retirement plans, only to former plan participants who have separated from service and are over age 59½ (the date from which there’s no federal tax penalty for withdrawals from qualified retirement accounts).

“We start communicating the availability of the payout option at age 55. It’s available to them but they can’t vest in it until they’re terminated. This gives them a few years to use the income calculator to determine how much income their savings can generate. Then we’ll have communications that go out to people who have been terminated and over 59 ½ reminding them of the service. Our call center staff will be trained on the product,” Oler said.

Through a web portal, T. Rowe Price will provide “an overview of the strategy, along with modeling capabilities to show how much monthly income could be generated by transferring a certain amount into the strategy, or conversely, how much they would need to transfer to receive a certain amount of monthly income. Product information will also be added to termination kits to remind participants about the availability of the strategy.”

Every September 30, the managers of the Retirement 2020 Trust will calculate the following year’s payout based on the trust’s average monthly net asset value over the previous 60 months. The 5% will be paid out in 12 monthly installments by direct deposit or check. If the recipients are over age 70½, the distributions will count toward their required minimum distributions. This distinguishes the product from a systematic withdrawal plan of a certain amount or certain percentage from a 401(k) account.

“It’s important to point out that Retirement 2020’s managed payout program is not a 5% withdrawal annually; rather, it pays 5% of the rolling 60-month NAV (net asset value),” T. Rowe Price said. “The significant difference is that the participant maintains the same number of shares as distributions are paid, where a withdrawal is the continuously reducing number of shares that will eventually deplete.”

As for the expense ratio, “Pricing for the Retirement Trusts vary depending on multiple factors, including, but not limited to, a plan’s eligibility to invest in the Retirement Trusts as well as total assets invested. Our pricing for plans eligible to invest in the Retirement Trusts begins at 46 basis points and decreases as a plan’s invested assets increase,” a T. Rowe Price spokesman told RIJ. There is no additional fee for the managed payout feature.

The investment is entirely liquid. Investors can buy or sell additional units in the trust at any time. According to the prospectus for the mutual fund TDF for 2020, “At the target date, the fund’s allocation to stocks is anticipated to be approximately 55% of its assets. The fund’s overall exposure to stocks will continue to decline until approximately 30 years after its target date, when its allocation to stocks will remain fixed at approximately 20% of its assets and the remainder will be invested in bonds.”

“It has the same glide path and the same fees as our other TDFs. Just as there are five-year vintages in the TDF, we expect to have five-year vintages in the managed payout funds,” Oler told RIJ.

“About 40% of the assets in our TDFs are in shorter-dated vintages, up to 2030, if you translate that to the overall TDF market, it’s about $1.8 trillion,” said Joe Martel, a T. Rowe Price target date fund portfolio specialist. “In terms of assets, that’s a meaningful market. The retirees who retire in the next 10 years are people who will have spent more years in defined contribution plans than current retirees. They’re used to the defined contribution model and to TDF investments.”

Vanguard introduced a managed payout mutual fund-of-funds about 10 years ago, and continues to offer such a fund. Its target payout is 4% per year. It has an expense ratio of 32 basis points per year (0.32%) and has an asset allocation of 53% stocks (including 24% Vanguard international stock index), 22.5% fixed income and 24% alternatives (including about 7% commodities). With a 4% payout, the fund runs a low risk of running to zero before the client dies (assuming a 30-year retirement).

Fidelity’s managed payout fund for people retiring in 2020 has evolved into a Fidelity Simplicity RMD 2020 Fund. It’s intended to be used in conjunction with the firm’s systematic withdrawal plan. The two can work together to ensure that clients distribute enough money from retirement accounts each year to fulfill their required minimum distributions. The expense ratio for that fund is 61 basis points (0.61%) per year.

These funds are useful in providing non-guaranteed income for retirees who are not “constrained;” that is, retirees who have adequate savings to last for a lifetime and who can afford to draw down an income from a liquid account that fluctuates with the market.

Retirees who need to squeeze the maximum income from a designated portion of their savings might be better off pooling their longevity risk with others in order to get a higher income yield.

For instance, a $300,000 purchase premium for an immediate annuity for a 70-year-old man would yield an income of $1,892 per month for life (with 10 years certain) or $1,747 per month for life (with cash refund). By contrast, the Vanguard fund would pay out about $1,000 per month and the T. Rowe Price Retirement 2020 Trust would pay out about $1,250. So keeping $300,000 liquid would cost a 70-year-old man at least $500 a month in income, or $60,000 over 10 years.

Honorable Mention

Posted on July 18, 2019 by Editorial Staff -

Fidelity, in pursuit of Vanguard, bolsters its index fund line-up

Fidelity Investments, which has followed the ongoing mass-investor trend toward passive investing and now manages more than $482 billion in index funds for clients, has launched five new index mutual funds (with ticker symbols and expense ratios):

Fidelity Mid Cap Growth Index Fund (FMDGX, 0.5%).

Fidelity Mid Cap Value Index Fund (FIMVX, 0.5%).

Fidelity Small Cap Growth Index Fund (FECGX, 0.5%).

Fidelity Small Cap Value Index Fund (FISVX, 0.5%).

Fidelity Municipal Bond Index Fund (FMBIX, 0.05%).

As with Fidelity’s 53 existing stock and bond index funds and 11 sector ETFs, “The new funds have lower expense ratios than their comparable funds at Vanguard,” said a Fidelity release, reflecting competition between the two prominent competitors in the retail and institutional investment markets. The five new funds are available to individual investors, third-party financial advisors and workplace retirement plans.

Fidelity’s launched a line of “ZERO” expense index funds last year, and its index funds feature expense ratios as low as 0.015%, or 1.5 basis points.

The index funds also carry no investment minimums for individual who invest directly with Fidelity or through a financial advisor. Fidelity is the financial industry’s second largest index mutual fund provider after Vanguard. The firm’s index mutual fund assets have increased 144% in the last three years and are now approaching $500 billion.

Subscription-based advice resonates with investors: Schwab

Since introducing new subscription-based pricing at the end of March 2019, Schwab Intelligent Portfolios Premium has added $1 billion in new assets under management, Charles Schwab reported this week.

The service has also seen a 25% increase in account opens, a 40% increase in average household assets enrolled, and a 37% rise in new-to-Schwab household enrollments. Overall client assets managed by Schwab’s digital advisory solutions total $41 billion, up 23% year-over-year, the company said in a release.

Schwab Intelligent Portfolios Premium offers unlimited one-on-one guidance from a Certified Financial Planner (CFP), access to the financial plan 24/7 via a comprehensive digital planning experience, and a diversified portfolio of low-cost exchange-traded funds (ETFs) that automatically rebalances over time.

In March, pricing for Schwab Intelligent Portfolios Premium was changed from an asset-based advisory fee to an initial one-time $300 fee for planning, and a $30 monthly subscription (advisory) fee ($90 billed quarterly) that does not change at higher asset levels.

Clients also pay the operating expenses on the ETFs in the portfolios, including Schwab ETFs. Based on a client’s risk profile, a portion of their portfolio is placed in an FDIC-insured deposit at Schwab Bank.

“Wealth” costs more than $1 million these days: Ameriprise

Only 13% of people who have one million dollars or more in investable assets consider themselves “wealthy,” according to Ameriprise Financial’s new Modern Money study, which surveyed more than 3,000 U.S. adults ages 30-69 with at least $100,000 in investable assets, including more than 700 millionaires.

About half (53%) of the investors surveyed know exactly how much they want or need to save or invest, while 43% have a detailed plan. Only four percent of respondents have no financial plan.

Millennials and Generation X investors focus on paying down debt. Baby Boomers cite protecting accumulated wealth as their second priority, reflecting the fact that many are in or nearing retirement. “They all cite saving for retirement as their top priority, regardless of where they fall on the age spectrum,” an Ameriprise release said.

About half (49%) of respondents believe their approach to making long-term investing decisions is different or very different from what they saw their parents do growing up, compared with 42% who say it’s similar or very similar.

With respect to how they make investment decisions: 46% say they do it themselves, 38% say they do it with someone else in their lives, and 9% say their spouses or partners do it. Half (51%) of respondents agree that aligning investments with personal values is more important today compared with 10 years ago.

Respondents commonly cite “the money a job pays” as the most important factor in choosing a career path. Flexibility and work-life balance rank second, followed by health and dental insurance and vacation time.

For more information about the study, go to Ameriprise.com/modernmoney.

Global Atlantic to educate advisors on income planning

To help retirees successfully transition from saving for retirement to dependable income they can rely on in retirement, Global Atlantic has launched a new “Income Ready” initiative. It features dedicated educational websites for financial advisors and consumers looking to learn more about developing a retirement income strategy.

GetIncomeReady.com, the consumer website, features educational resources for individuals who are planning for retirement. These features include videos, a retirement income needs calculator and sample stories to illustrate strategies.

The financial advisor website, IncomeReady.com, is designed to educate and prepare advisors to engage clients in income planning discussions. The website features educational materials including client income insight videos, an interactive experience that aims to dispel common annuity myths, and retirement case studies, as well as other resources advisors can use to support their client conversations. Advisors can also use the website to request a live Alliance for Lifetime Income workshop on the best ways to communicate with clients regarding retirement income needs.

Techniques Advisors Use to Generate Income for Retirement Clients

Posted on July 18, 2019 by No Author -

No Need for Lower Rates, but Rate Cuts Likely Anyway

Posted on July 18, 2019 by Stephen Slifer -

Many Fed officials are itching to cut rates. They keep saying that they see the potential for substantially slower GDP growth later this year. But with each passing data release there is no evidence that is happening or is on the verge of happening. It is true that inflation is running below the Fed’s target and, while we expect it to climb almost to the 2.0% target level by yearend, the Fed could justify a rate cut by saying it wants to bring inflation back to or even slightly above, target quickly.

That would make sense, but to keep harping on some fear of future economic weakness seems implausible. If the economy were truly teetering on the brink of a significant slowdown, wouldn’t stock market investors be getting a case of the jitters? They are not. The stock market is at a record high level.

Wouldn’t small business owners be getting nervous? That is not happening either. Small business confidence has edged lower in the past six months, but it has backed off from a record high level in August of last year, which was the highest level of optimism since July 1983. Confidence remains at a lofty level.

Wouldn’t we begin to see smaller employment gains as business people become more reluctant to hire? Monthly employment gains have shrunk from the 200+ thousand gains last year to about 180 thousand. But what did you expect? Employers simply cannot find enough qualified workers. Labor shortages are widespread. Most firms would love to see more qualified workers show up on their doorstep.

The only economic weakness we can find is in the manufacturing sector. The purchasing managers index has slipped considerably despite the fact that it is still consistent with 2.6% GDP growth. But the problem is not the level of interest rates. If rate levels were truly too high, wouldn’t you expect to see both the manufacturing and service sectors showing signs of softening?

That is not happening. The manufacturing sector has weakened but the non-manufacturing sector has not. The non-manufacturing index remains at a relatively lofty level of 58.2 while service sector employment is robust and driving the economy.

We believe that manufacturing has been hit by the imposition of tariffs that began in the spring of last year and the ensuing trade war. Foreign investors quickly recognized that in the event of a trade war the U.S. would fare better than any other country because trade is such a small part of the U.S. economy. As the year progressed foreign funds poured into the U.S.

That boosted the level of the dollar, which meant that U.S. exports became more expensive for foreigners to purchase and, as a result, exports growth slowed. The solution is not to lower interest rates but, rather, reach trade agreements with China, the E.U., the U.K., Mexico and Canada. Once that happens the manufacturing sector will quickly heal.

The other piece that people focus on is the yield curve. With the funds rate at 2.38% and the 10-year at 2.12%, it is slightly inverted. While an inverted curve is typically a reliable indicator of an impending recession, it generally happens because the Fed has raised rates too quickly and Fed policy becomes “too tight.”

But with the funds rate today at 2.38% (by most estimates still below a “neutral” level), does anybody seriously believe that interest rates are too high and thereby impeding the pace of economic activity? Sorry, don’t buy it! The curve may be inverted, but for all the wrong reasons. Long rates have fallen below short rates, rather than short rates rising above long rates.

It is true that upon occasions in the past the Fed has cut rates to provide a little “insurance” in case something bad were to happen. But when it did so rate levels were much higher than they are today, and there was at least some hint that growth had begun to fade. The absence of any evidence that the pace of economic activity is slipping is what makes the Fed’s recent laser-like focus on lower interest rates so hard to comprehend.

It is true that the core personal consumption expenditures deflator is at 1.6% compared to the Fed’s 2.0% target. While we expect that rate to edge upwards as the year progresses and reach 1.9% by year-end, we could at least understand an argument by Fed officials that inflation has run below target for so long that it now wants it to climb above target for a while so that its average level for the cycle is 2.0%, and it needs lower rates now to make that happen quickly. That is, at least, a logical argument. This myth about slower growth ahead is not.

While we firmly believe lower rates are unnecessary, the reality is that Fed Chair Powell has done nothing to counter the widespread belief that it will cut rates at the end of this month. He certainly had ample opportunity when he presented his semi-annual report to Congress.

If the Fed does NOT lower rates at month end when such action is so widely anticipated, it can anticipate a sizable negative reaction in both the stock and bond markets. It does not want that to happen either. Thus, the best bet now is that the Fed will cut the funds rate by 0.25% at its July 30-31 meeting.

We have a hard time seeing how lower interest rates will boost the pace of economic activity. Clearly, lower rates will reduce the cost of corporate borrowing, which will, in turn, reduce costs and increase profits. Thus, the stock market will benefit. But even if firms have a desire to boost production, they will need more workers to make that happen and it will not be any easier to find qualified workers in the months ahead than it is today.

Thus, it is not clear to us that GDP growth will quicken in the quarters ahead even with lower interest rates. If the rate cuts stimulate demand, we could envision a slightly higher inflation rate as firms, perhaps, raise wages to attract additional workers, and then test the waters to see if they can get away with slightly higher prices.

But keep in mind that productivity gains thus far have countered all of the increase in wages so that unit labor costs are actually declining. Also, the Internet allows U.S. consumers to easily find the cheapest available price. That means that goods-producing firms will continue to have little pricing power and any increase in inflation is likely to be small.

Could lower rates actually make things worse? Probably not. Our biggest argument against a rate cut is that it provides the Fed with less ammo to use when the next downturn arrives—whenever that may be. While the end of the expansion has never been in sight for us, a rate cut—if it actually occurs—would push rates to levels that are even farther below a level that could bite and, therefore, extend the life of the expansion even farther.

The Fed’s story is confusing to us. Not only do we think lower rates are unnecessary, they are unlikely to help the Fed achieve its goals. Instead, Trump should focus on trade agreements around the world. Nonetheless, the Fed seems to have widely advertised its intention to lower rate. Let’s see what it does at the July 30-31 meeting and re-evaluate afterwards.

Honorable Mention

Posted on July 11, 2019 by Editorial Staff -

At AIG, Solash and Scheinerman move up as Greer retires

AIG Life & Retirement announced this week that Todd Solash, president, Individual Retirement, and Rob Scheinerman, president, AIG Retirement Services (AIG’s Group Retirement business), have been named CEOs of their respective businesses following Jana Greer’s retirement as president and CEO, Retirement.

Ms. Greer built AIG into the broadest annuity provider in the United States, according to a release. She announced her retirement earlier this year and has partnered with Mr. Solash and Mr. Scheinerman to ensure a smooth transition. Mr. Solash and Mr. Scheinerman have assumed their new roles, reporting directly to Kevin Hogan, executive vice president and CEO, AIG Life & Retirement.

Solash joined AIG in 2017 as President of Individual Retirement, a provider of investment and lifetime income solutions. He has overseen product innovations across fixed, index and variable annuities and led enhancements to the AIG experience for customers and distribution partners. Mr. Solash is based in Woodland Hills, California, where the Individual Retirement business is headquartered.

Scheinerman joined AIG in 2003 and has led AIG Retirement Services since 2017. AIG Retirement Services is a leading retirement plan provider for healthcare, K-12, higher education, government, religious, charitable and other not-for-profit organizations. Under his leadership AIG Retirement Services has improved the participant and plan sponsor experience, improved digital capabilities and strengthened customer relationships. He is based in Houston, where the business is headquartered.

Beth Wood named to top marketing role at Principal

Beth Wood has joined the Principal Financial Group as senior vice president and chief marketing officer (CMO), effective July 22, 2019. She will run Principal’s Global Center for Brand and Insights, which includes brand, market research, analytics and business intelligence, global firm relations and external communications.

Wood will report to Dan Houston, Principal’s chairman, president and CEO. She will be based in Des Moines, Iowa.

Most recently, Wood served as vice president and chief marketing officer of the individual businesses at Guardian Life Insurance, where she led Guardian’s digital marketing transformation across the life, disability, annuity and wealth management businesses.

Prior to her roles at Guardian Life, Wood was second vice president, marketing, at MassMutual. She’s also held marketing management positions in the consumer-packaged goods and healthcare industries, with Frito-Lay and Johnson & Johnson.

Wood earned a bachelor of science in marketing and communications from Babson College in Wellesley, Mass, and a digital marketing certification from Cornell University and digital transformation certification from University of California Berkeley, Haas School of Business.

Barnabas Capital to distribute Great American annuities

The Index Frontier 5 and Index Summit 6 variable-indexed annuities, issued by Great American Life, are now available through Barnabas Capital, according to a release this week by Great American. The two annuities “are designed for investors who are dissatisfied with low fixed income yields and seeking more protection than offered by equities,” the release said.

Owners of Index Frontier annuities can allocate money to indexed strategies that let them participate in market growth while receiving a set level of protection from loss. The Index Summit 6, launched in May 2019, is the only annuity on the market to offer indexed strategies with both upside and downside participation rates, Great American said. Losses are capped at 0% or 10% each term.

Strategies feature a 50% downside participation rate and current upside participation rates of up to 120% for the first term.

Great American Life Insurance Company is a member of Great American Insurance Group and is rated “A+” by Standard & Poor’s and “A” (Excellent) by A.M. Best for financial strength and operating performance.

Prudential explains its “four building blocks” of success

Prudential Financial, Inc., has released its 2018 sustainability report, detailing how the company supports its four building blocks of long-term vitality: Financial sustainability, customer focus, investing in people and responsible impact.

The report, Building for Financial Resilience, covers calendar 2018. Highlights include:

Financial sustainability

In 2018, Prudential generated earnings per share (EPS) of $11.69 on an after-tax adjusted operating income basis. These financial results reflect a balanced mix of businesses and risk profile, an understanding of customers’ needs and risks, and efficient deployment of capital.

Customer focus

Fortune magazine’s “2018 Change the World” list recognized Prudential for pioneering the modern pension risk transfer through which the company takes on responsibility for increasingly expensive pension obligations.

Investing in people

Long-term diversity improvement among senior management now affects performance share and unit awards for executives at the senior vice president level and above.

Responsible impact

In 2018, Prudential produced over 5.5 million kilowatt hours of renewable energy through initiatives such as two solar panel installations and installment of LED lightbulbs during office renovations.

Prudential’s 2018 Sustainability Report was prepared in accordance with the Global Reporting Initiative Standards Core option, aligned with the International Integrated Reporting Coalition’s framework, in support of the Task Force on Climate-related Financial Disclosures (TCFD) and in accordance with the Sustainability Accounting Standards Board’s provisional guidelines for insurance companies.

View Prudential Financial’s 2018 Sustainability Report here.

Merrill Lynch to use Envestnet | Tamarac solutions

Envestnet | Tamarac today announced that it will provide more than 200 Merrill Private Wealth Management teams with access to its portfolio management and reporting solution, which offers aggregated performance reporting to clients with complex needs.

In addition to aggregated performance reporting, Merrill private wealth advisors will also receive portfolio analyses, including interactive reports on performance metrics and a dashboard that includes information held at other financial institutions, if the client prefers. Tamarac and Merrill have begun onboarding and setting up servicing for an initial group of up to 1,000 Merrill Private Wealth Management clients.

Hazards may lie ahead for life/annuity industry: AM Best

Posted on July 11, 2019 by Editorial Staff -

A new special report from AM Best, the insurance ratings specialist, evaluates the readiness of the life insurance and annuity (L/A) industry to weather an economic storm like that of 2008-2009. Firms are “more resilient” than a decade ago, but some of the pre-conditions of the Great Financial Crisis (GFC) have reemerged, the report said.

Looking back over the past decade, the report (“Are Life/Annuity Insurers Prepared to Weather Another Economic Downturn?”) notes that the L/A industry adjusted to the GFC in part by shifting its product mix toward fixed annuities from variable annuities.

Between 2007 and 2018, for instance, the percentage of total annuity premiums going to variable annuities dropped to about 40% from about 60%. Fixed products have fewer options for owners, owner behavior is more predictable, and the market risks associated with general account products are more manageable.

As part of their re-stabilization process, insurers also raised their holdings of investment grade quality bonds to pre-crisis levels. Many L/A insurers maintained liquidity by reducing holdings of collateralized mortgage obligations and increasing holdings of cash, cash equivalents, and U.S. government securities. Corporate bond holdings also rose.

But new risks have emerged. Within the investment grade category, insurers have steadily increased their allocations to Class 2 bonds, with BBB rated bonds having the highest exposure. Allocations to untested assets such as collateralized loan obligations and holdings in mortgage and alternative assets have also increased.

The L/A industry also will face several accounting and regulatory changes over the next few years, the report said. Term products likely will see relief from less redundant reserves, and variable annuity reserves and capital requirements will change to better reflect the economic benefits of hedging and eliminate non-economic volatility.

Companies were already identifying the need to improve legacy technology and upgrade systems before the financial crisis. AM Best expects that pace of such changes will quicken as technological advances create more opportunities to accomplish these goals.

The new report also reviews the chain of events that led to the 2008-2009 crisis. In 2006, after the industry had enjoyed several years of tailwinds, economists begin warning about global economic volatility, credit cycle downturns, and possible corrections in equity markets. An inverted yield curve, which may presage a recession, also appeared in 2006.

Macroeconomic conditions in the United States deteriorated as the effects of the subprime crisis emerged. Loan securitizations flooded the financial system at a time when new loans, and the securities derived from them, began to challenge market stability and diminish companies’ ability to manage risk effectively.

The same thing could happen again, AM Best warned. The current geopolitical, interest rate, and equity market environment resemble those of 2007 in some ways, possibly leading to higher economic volatility. Available capital also has grown steadily since the financial crisis; however, as economic conditions change, so may risk charges.

The Case for Lower Rates is Vanishing

Posted on July 11, 2019 by Stephen Slifer -

The markets continue to look for a 0.5% cut in the federal funds rate by yearend. No doubt some members of the Fed’s Open Market Committee continue to lean in that direction. While there remains an expectation that the economy is going to soften noticeably between now and yearend, there is virtually no evidence that a slowdown is underway.

Having said that, a number of Fed officials suggest that the Fed could lower rates in a determined effort to nudge inflation to or above its 2.0% target rate. Our sense is that the economy is continuing to chug along at about a 2.5% pace, and that by year-end the inflation rate will rise on its own close to the 2.0% pace the Fed would like to see. Thus, we anticipate no need for a rate reduction any time soon.

Two weeks ago we outlined half a dozen events/economic indicators that would influence Fed policy makers at their July 30-31 gathering. Thus far, four of those six pieces of information have become available and the odds of a rate cut at the July meeting seem remote.

One of the primary reasons for expecting slower GDP growth in the second half of the year would be an escalation of the trade conflict with China. But at the conclusion of the recent G-20 meeting Trump and Chinese President Xi Jinping agreed to restart trade talks between the two countries. This clearly represents a truce in the trade war.

While serious obstacles remain, we remain convinced that an agreement of some sort will be reached in the second half of this year. It is in the interest of both countries to make that happen. If it does, the need for lower rates to support GDP growth that some argue is teetering on the brink of recession would largely disappear.

At the end of last month we received May data on the Fed’s preferred inflation gauge, the personal consumption expenditures deflator excluding the volatile food and energy components. It rose 0.2% in May after a similar increase in April. While the year-over-year increase remains below target at 1.6%, this inflation measure has risen at a 2.0% pace in the past three months.

We expect monthly increases in the second half of the year to continue at a 0.2% pace which would lift the increase for 2019 as a whole to 1.9% and imply a 2.4% increase in 2020. If so, there is no reason for the Fed to cut rates to bring inflation back to its 2.0% target. It will get there on its own without any assistance from the Fed.

The Institute for Supply Management’s index of conditions in the manufacturing sector continued to slide in June. It edged lower by 0.4 point to 51.7. After reaching a peak of 60.8 in August of last year, this series has been steadily falling. However, the ISM indicates that at its current level the index is consistent with 2.6% GDP growth, a pace that should not generate cause for alarm. The index levels of roughly 60.0 late last year were the highest in a decade and were consistent with GDP growth of between 4.0-4.5%.

While the murky trade situation has softened the manufacturing sector it has not pushed it over a cliff. Furthermore, the solution is not lower interest rates but a solution to the trade difficulties with China in particular.

The market jumped on the minuscule 75,000 increase in payroll employment for May as clear evidence that a slowdown was underway. Unfortunately for the lower rates crowd, June produced a solid increase of 224,000. The three-month moving average increase in payroll employment now stands at 171,000. While clearly less than the 235,000 average increase last year, with the economy at full employment it is exactly what one would expect. There simply are not enough workers for employers to hire. It is not a sign of weakness. Rather, it is a sign of strength that the economy is growing as quickly as it possibly can. Lower rates will not help.

Looking ahead we should see an increase in the core CPI index for June of 0.2%. The year-over-year increase should remain at 2.0%. With somewhat larger increases in recent months we expect the core CPI to rise 2.2% this year and 2.4% in 2020.

Finally, on Friday, July 26, we will get our first look at second quarter GDP growth. We expect to see a growth rate of 1.5% following a 3.1% increase in the first quarter. While second quarter growth did slip, that is hardly a surprise given the steamier-than-expected first-quarter pace. In the first-half of the year as a whole the economy will have risen 2.3%, which is roughly in line with what economists had anticipated and presumably faster than potential growth.

While many FOMC members believe that rates will be 0.5% lower by year-end, there is a slightly larger number of members who believe that no rate cuts are required. The jury remains out, but what we have seen in the past month suggests that the no-rate-cut crowd may be supported in July by one or more of their previously dovish colleagues.

Where’s the Nuance in News about Annuities?

Posted on July 11, 2019 by Kerry Pechter -

BlackRock will be incorporating an annuity into its institutional target date funds (TDFs) for 401(k) plans, and the $6.5 trillion asset manager has been among the financial services companies that have lobbied for the passage of the SECURE (Setting Every Community Up for Retirement Enhancement) Act, according to a recent report in the Wall Street Journal.

“While BlackRock isn’t currently in the annuity business, the firm is now in talks with insurers to provide such instruments as a part of retirement offerings it wants to launch. The firm joins financial companies from State Street Corp. to TIAA that are competing to reshape 401(k)-type plans,” the Journal reporter wrote.

The SECURE Act is intended, in part, to encourage employers to include guaranteed lifetime income options in the 401(k) plans they sponsor by reducing their risk of getting sued if the annuity partner they choose ever fails to fulfill its promises to participants. The Act passed the House of Representatives by an almost unanimous vote in late May. But the Senate version of the legislation has faced sustained resistance from Sen. Ted Cruz (R-TX), as PlanAdviser.com reported this week.

BlackRock has tried to identify itself with retirement income before by promoting an index and calculator called CoRI, which helped investors figure out how much they’d have to hold in bonds to generate a desired income in retirement, based on their current age and current bond yields. But no insurance company partner was involved in that. Last December, as RIJ reported, BlackRock announced a retirement-related partnership with Microsoft.

Asset managers that distribute TDFs through 401(k) plans have to be concerned about the strong tendency among recent retirees to “roll over” their plan accounts to individual IRAs at brokerages and fund firms like Vanguard. If asset managers could incorporate annuities into the final stages of their TDFs, more money might stay in 401(k) plans.

BlackRock wouldn’t tell me what kind of annuity it might attach to its TDF. But the logical choice would be an institutionally-priced variable annuity with a guaranteed lifetime withdrawal benefit. That could give BlackRock a chance, if not an exclusive right, to manage the money in the variable annuity sub-accounts, which are similar to mutual funds. Prudential has tried to do this for years with its IncomeFlex TDF product for 401(k) plans, but plan sponsor anxiety about the legal and financial liability that might stem from designating the wrong annuity provider has slowed the development of that type of business.

“State Street Global Advisors plans to roll out in 2020 its first workplace retirement offering with a lifetime income feature for a multibillion-dollar U.S. client. When a participant in the target-date-like offering turns 65, he or she can choose to move a portion of funds out into a group-deferred annuity,” the Journal also reported.

* * *

Speaking of the SECURE Act, here’s an instance of misinformation about annuities in the popular press. On July 9, Phil DeMuth wrote on the Wall Street Journal‘s opinion page, “The insurance industry loves the SECURE Act’s mandate that annuities be offered as a payout option in all retirement plans.” (If you don’t recognize the name, DeMuth has co-written a couple of financial books for consumers with celebrity economist and comic actor Ben Stein.)

Does the SECURE Act require all defined contribution plan sponsors to offer annuities? I don’t think so. To make sure you didn’t miss the point, a cartoon illustration above the article depicts a fox with a briefcase labeled, “Annuities,” guarding a chicken house full of nest eggs.

What’s most scary about this op-ed piece, aside from its distortions: It was the Journal readers’ most popular online “read” for the past three days. Dozens of commenters condemned annuities and warned of a government conspiracy to confiscate 401(k) savings. Confirmation bias is real.

* * *

In a similar vein, whenever I read an article in the popular press that refers generally to “annuities,” I wince inside. The overall message of my 2008 book, Annuities for Dummies, was that the five or six financial products called “annuities” are more different than alike, often sharing only the owner’s option, rarely exercised, to convert the underlying value to an irrevocable lifetime income stream.

Today I received a note from the ever-vigilant National Association for Fixed Annuities, which mainly advocates for index annuities. The blast e-mail protested a July 2 Forbes article that chided the septuagenarian members of the Rolling Stones for letting the annuity advocacy group, Alliance for Lifetime Income, sponsor their 2019 tour.

The writer also used the occasion to smack down “traditional commercial annuities,” whatever they are, for the usual reasons. He must have meant retail index annuities, because he referred to commissions as high as 8%. But the Alliance leans at least as much toward variable annuities. Where’s the nuance?

I once worked for Prevention, a quaint, bygone, but once widely read magazine that championed vitamin and mineral supplements. Vitamins and annuities both seem to inspire cult followings—and disproportionate outrage. I’m still trying to understand why.

Envestnet’s Big Annuities Play

Posted on July 11, 2019 by Kerry Pechter -

The new Envestnet Insurance Exchange (Envestnet Ix) now lets advisors analyze, illustrate, compare, select, purchase and integrate almost any type of annuity into a client’s financial plan without leaving the digital comfort zone of Envestnet’s wealth management platform.

That might not impress 20-somethings who grew up playing with “widgets” and Application Program Interfaces, or APIs. But it’s a milestone for retail annuity issuers who have struggled for years to eliminate the technical impediments to blending annuities and investments in the same plans.

Ultimately, it took Envestnet, the cloud-based turnkey asset management platform that now serves more than 3,500 companies, including 16 of the 20 largest U.S. banks, 43 of the 50 largest wealth management and brokerage firms, and over 500 of the largest Registered Investment Advisors (RIAs), to get this done. Back in 2006, when members of a variable annuity trade group tried to tackle it, the whole idea was premature.

Bruckenstein

“This development did need to wait for all the technologies to align properly,” said Joel Bruckenstein, organizer of the annual “T3” fintech conferences for advisors. “There are still some impediments to RIAs embracing annuities. But I think Envestnet Insurance Exchange has great potential.”

Nobody has higher hopes for the ability of the Envestnet Ix platform to encourage advisors, both fee-based and fee-only, to embrace annuities than the major annuity issuers. Six of them—Allianz Life, Brighthouse Financial, Global Atlantic Financial, Jackson National, Nationwide, and Prudential—helped Envestnet pilot the Exchange and now offer their products on it. More are expected to follow. Insurers will be supporting the service with ongoing fees.

But the question, “If you build it, will they come?” still hangs over the project. Annuity issuers certainly want more attention from RIA advisors, but it remains to be seen if those advisors will make room in their clients’ portfolios for annuities. Technology like the Envestnet Ix is necessary for that to happen, but no one knows yet if it will be sufficient.

The seamless ideal

To appreciate the significance of Envestnet Ix, you have to go back 10 or 15 years. Amazon, eBay and PayPal had begun using APIs to tie together unrelated blocks of software into seamless user experiences. Life insurers were still isolated in “legacy” IT systems, unable to communicate easily with the outside world or even among their own product silos.

In the mid-2000s, the National Association for Variable Annuities trade group (now the Insured Retirement Institute advocacy group) created an initiative to achieve “straight through processing” for variable annuities. NAVA hoped to make processing a variable annuity (VA) application “as easy as dropping a mutual fund ticket” for a broker-dealer rep.

The challenge was daunting, the effort heroic. Software startups came forward with product illustration tools, order-entry systems, and secure electronic signature gizmos. Common languages and protocols (XML, PPfA) were invented. The Depositary Trust & Clearing Corporation, based in New York, had to be involved so that money could move from brokerage accounts to VA subaccounts.

That project made headway with broker-dealers but didn’t reach completion. The Great Financial Crisis didn’t help. Later, the controversy over the Department of Labor fiduciary rule slowed things down. Then, in November 2017, Envestnet, having snowballed since 1999 into a giant technology hub for advisors, created a company called Fiduciary Exchange (FIDx) to begin building out a series of “exchanges” that would add insurance products and credit products to Envestnet’s investment products platform. The first in the series is Envestnet Ix, which launched last month.

Consultants regard Envestnet Ix, or something like it, as a must-have for annuities. “This service pulls annuities into the asset allocation process. Annuities are no longer an afterthought for the advisor who has already built an asset allocation,” said Dennis Gallant of Aite Group, a Boston-based financial services consulting firm.

Romano

“For instance, a client might have a million dollar investment portfolio,” Rich Romano, the FIDx chief technology officer, told RIJ. “Today, if they have a $250,000 annuity, it is off-platform. In the Exchange, you can see those things side by side. They appear in one document. Now the annuity is inside of the account as its own investment. That’s revolutionary.”

A big part of the project involved the incorporation of FireLight into the Envestnet asset management platform. FireLight is a creation of Insurance Technologies, the veteran annuity software designer based in Colorado Springs, CO. The annuity issuers load their product data into FireLight, which then facilitates the entire electronic annuity purchase process, from data collection to application to pricing to illustration to compliance review to e-signature.

Massey

“FireLight is a very powerful e-App solution, used by nearly 50 carriers, but it’s always been a separate platform from investments,” said Doug Massey, executive vice president at Insurance Technologies. “So we created FireLight Embedded, a sophisticated set of APIs that allows FireLight to run seamlessly inside of third-party systems like Envestnet Ix.” Broker-dealers who currently use FireLight competitors, like iPipeline and Ebix-AnnuityNet, will be able to use them with Envestnet Ix, but not as seamlessly.

RIJ asked Romano what he considered the most difficult part of the project. “The lion’s share of work was around positioning annuities to a client’s needs,” he said after a pause. “We said, ‘Let’s get away from that transactional view, and look at it from the customer’s point of view. Where does the annuity work in a retirement saving strategy, or an estate planning strategy, or an income planning strategy.’”

Envestnet Ix aims to be a big tent. It is designed to accommodate all types of insurance products, all types of compensation models, and advisors from the bank, broker-dealer and RIA channels. For advisors who want to buy annuities but don’t have insurance licenses, Envestnet Ix will offer a Guidance Desk where an insurance-licensed intermediary can bridge the gap.

If you build it, will they come?

But even if RIAs have the ability to use annuities through Envestnet Ix and other platforms like those operated by RetireOne and DPL Financial, will they actually start recommending them to their clients? And will annuity manufacturers begin tailoring products more toward RIAs? The jury is still out.

“There are still some impediments to RIAs embracing annuities,” Joel Bruckenstein told RIJ. It is not just the processing. Product design is also important, and I think the insurance firms are at work designing products that will resonate better with RIA’s. Furthermore, I do not think the Exchange is just about annuities. I see other types of insurance being distributed through the exchange as well.”

Gallant

“It would be great if this can bring in advisors who don’t use annuities, but it will still take time,” said Gallant of Aite. “Just because the process is more convenient, it doesn’t make the products less complex. One thing that might change the tide: As broker-dealers and RIAs take discretion away from individual advisors and move toward model portfolios, you might see them installing annuities in asset allocation plans at the broker-dealer level.”

In his recent report, “What Advisors Want from Annuity and Insurance Providers–2019,” researcher Howard Schneider of Practical Perspectives, found that of the 24% of advisors who are annuity “enthusiasts,” only 12% are RIAs and only 7% are under age 40.

“RIAs have particularly distinct attitudes and behaviors towards annuities and insurance,” Schneider wrote. “Many RIAs do not fully integrate these solutions into their practices, lacking the licensing, experience, orientation, and comfort in using annuities and insurance with clients, especially as an investment substitute or supplement.”

“The advisors may not be using annuities yet, but these new tools will allow them to start looking and comparing,” said Massey, who has been working on this problem for more than a decade.

“With so many Boomers retiring, we’ll see more advisors looking at these products,” he added. “Advisors will start to say, ‘Oh, that’s how it works,’ or ‘Now it makes sense.’ Integration was so expensive to do in past, and the risk of coming up short was so high, that nobody was willing to try. Now they can try it.”

MMT Isn’t a Joke

Posted on June 27, 2019 by Kerry Pechter -

There’s a lot of misinformation about Modern Monetary Theory (MMT) going around. I keep hearing that MMT is about “printing up a lot of money” to pay for social services. It’s not. I also hear Democratic politicians talking about taxing the rich to pay for middle-class benefits. They need to read up on MMT.

Here’s an example of what I’m talking about. A news story last week described Sen. Elizabeth Warren’s plan to “raise” $2.75 trillion to finance universal daycare by taxing the very rich. That kind of talk annoys people. With the help of MMT, it wouldn’t be necessary.

MMT says that the federal government doesn’t have to shake down rich people to pay for daycare. It can gradually spend new money (not taken from anywhere) on daycare and then gradually tax enough of it out of circulation to prevent inflation. [Money vanishes when you pay your income taxes; we’ll save that discussion for another day.] The wealthy might find that more palatable than the Robin Hood scenario.

It’s not about “printing the money.” It means that, in reality, Uncle Sam spends and taxes; he doesn’t tax and spend. The distinction may sound trivial, but it’s fundamental, as Alexander Hamilton recognized. (The big problem of whom to tax and by how much doesn’t go away.)

As long as Warren and other Democrats believe (and say) that soaking the rich is the only way to “pay for” stuff, their plans won’t make sense to most of the country. A few politicians seem to get it. Rep. Alexandria Ocasio-Cortez (D-NY) has a glimmer of MMT. When Anderson Cooper asked her “how you’ll pay for” the Green New Deal, she replied, “The same way we pay for the military or the Space Force.” Through appropriations.

MMT says the government should exercise its power of direct money creation instead of pretending to borrow, which only creates (or enables the creation, via the banks) of towering balance sheets and Himalayas of debt. [A topic for another day: The federal debt isn’t a tax on grandchildren, because the Fed’s IOUs (cash or bonds) are money. The federal government’s liabilities sit in your wallet, your bank account and your retirement account. If that weren’t true, the whole system would have collapsed long ago. Instead, it has lifted billions out of poverty—and financed lots of wars.]

But MMT, if acted on, would be wildly disruptive to the status quo, so a lot of people hate it. It would dis-intermediate much of the private financial system. MMT proponents would break up the big banks, reinstate Glass-Steagall, raise reserve requirements, strengthen the consumer financial protection bureau, forgive most student loans, drive down fees, reinstate anti-usury laws, etc. They would shrink the financial sector to its pre-1980 dimensions.

So far, MMT’s enemies have been trying to discredit it either by equating it with something stupid (printing money willy-nilly) or by making jokes about it. Some, for instance, have mocked and tried to diminish MMT by calling it a “political idea masquerading as an economic idea.”

That’s meant as an insult, but it only acknowledges MMT’s essence: It reunites economics and politics as political-economy (a once respected discipline). Ultimately MMT represents the idea that the federal government has as much responsibility to protect its citizens’ human (political) rights as it does to protect their property (economic) rights. You may disagree, but MMT isn’t a joke. It’s really not.

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The seamless ideal

If you build it, will they come?

Data Connection

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