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‘No Sign of Recession on the Horizon’

Posted on January 10, 2019 by Stephen Slifer -

When the stock market experiences a down day, the market concludes that the economy could enter a recession by the end of this year and that the Fed will lower rates by year-end.

Forget it. Neither of those things is going to happen.

In mid-December the Fed suggested that it would boost the funds rate twice in 2019, from its current 2.25-2.5% target range to 2.9% by year-end. We still expect that to happen. However, in the near-term more and more Fed officials will advocate for no additional rate hikes until some of the current uncertainty comes to an end.

If that happens, which is what we expect, the Fed may well implement two additional rate hikes later this year.

The Fed continues to believe that potential GDP growth is 1.9%. GDP growth last year was 3.1% and the Fed expects 2.3% growth in 2019. Both growth rates exceed potential. Because the economy is at full employment, the Fed worries that inflation could begin to climb.

Potential growth measures how quickly the economy can grow over the longer-term when it is at full employment. It is interested in, say, a three-year growth rate for the labor force and productivity. We take comfort from the fact that growth for both measures has accelerated in the past year and, most likely, potential GDP growth is on the rise.

Growth in the labor force has picked up considerably. At the end of 2017 the three-year growth rate for the labor force was 0.9%. But the labor force increased 1.6% this year as rapid GDP growth lured some previously unemployed workers back into to work. The three-year growth rate in the labor force has climbed to 1.1%. If it climbs as rapidly this year as in 2018, the three-year growth rate will continue to climb.

Productivity growth has quickened. The three-year growth rate remains sluggish at 0.9% because of slow growth in earlier years. But growth this past year picked up to 1.5% and surpassed the 2.0% mark in the two most recent quarters. Like growth in the labor force, growth in productivity seems to be gathering momentum.

This suggests that potential GDP growth is on the rise. The Fed’s 1.9% estimate probably consists of 0.9% growth in the labor force and 1.0% growth in productivity. But, as described above, growth in the labor force has picked up to at least 1.1%. Productivity growth has climbed to 1.5%. Thus, potential growth is no longer 1.9%. It is probably close to the 2.5% mark.

If that is accurate, the economy can grow at a sustained 2.5% pace without generating inflation. If our forecast of GDP growth for 2018 of 2.8% is accurate, the Fed has little reason to further raise rates. That is particularly true if inflation expectations remain in check. In the past couple of months, inflation expectations have slipped from 2.1% to 1.8%.

Also, keep in mind that the yield curve has flattened considerably in the recent months. With the yield on the 10-year note currently at 2.6% and the funds rate at 2.4%, the yield curve is positive by just 0.2%. The Fed does not want the yield curve to invert. It knows that an inverted curve is a warning sign that a recession is likely within the next year.

If potential growth picks up to a pace roughly in line with projected GDP growth, inflation expectations are declining, and the yield curve is extremely flat, the Fed won’t raise the funds rate any time soon.

While recession chatter has become more widespread in the past month or two, there is no recession on the horizon for the foreseeable future.

Shelter from the Storm in 2019

Posted on January 10, 2019 by Barry Eichengreen -

What would have to happen for this to be a tranquil year economically, financially, and politically? Answer: a short list of threats to stability would have to be averted.

First, the trade war between the United States and China would have to be placed on hold. In November and December, financial markets reacted positively to each hint of a negotiated settlement and negatively to each mention of renewed hostilities—and for good reason: tariffs that disrupt trade flows and supply chains do global growth no good. And, as we know, what happens in financial markets doesn’t stay in financial markets: outcomes there powerfully affect consumer confidence and business sentiment.

Second, the US economy will have to grow by at least 2%, the consensus forecast incorporated into investor expectations. If growth comes in significantly lower—whether because the sugar high from the December 2017 tax cuts wears off, the Federal Reserve chokes off the expansion, or for some other reason—financial markets will move sharply downward, with negative implications for confidence and stability.

Third, China will have to avoid a significant intensification of its financial problems. Successfully managing a corporate-debt load of 160% of GDP requires not just selectively restructuring bad loans, but also increasing the denominator of the debt- to-GDP ratio. With infrastructure investment weak and manufacturing production declining, China is increasingly unlikely to achieve the authorities’ 2019 target of at least 6% growth. In that case, slow growth and mounting debt problems will feed on one another, dragging down economic performance in China and much of the emerging-market world.

Fourth, voters in the European Parliament election in May will have to prevent the victory of a right-wing nationalist majority hostile to European integration. Europe needs to move forward in order to avoid falling back; the existence of the euro leaves it no choice. For now, moving forward means creating a common deposit insurance scheme for its banks, introducing at least a modest euro-area budget, and augmenting the resources of its rescue fund, the European Stability Mechanism. But if the common currency’s travails during the past decade have taught us one thing, it is that such measures cannot be force-fed to the European public by the elites.

Durable integration requires grassroots support. And that support must be evident at the polls.

All of these happy outcomes are of course far from assured. But if some of them materialize, they will increase the likelihood of others. For example, if US President Donald Trump ends his trade war, the growth outlook in the US and China will brighten. Robust growth there would create a more favorable external environment for Europe, brightening its own economic outlook and bolstering the electoral prospects of mainstream parties and politicians.

Conversely, a poor outcome on one front will dim the prospects on others. Disappointing growth in the US, for example, would cause Trump to seek a scapegoat. If not Fed Chair Jerome Powell and his colleagues, that someone will likely be Chinese President Xi Jinping. In that case, the trade war will be back on, and growth and financial stability in China would suffer accordingly. This combination of US and Chinese economic woes would then drag down growth in other parts of the world, fanning the populist backlash against the political establishment in Europe and elsewhere.

Similarly, if the negative shock is slower growth in China, the authorities in Beijing will almost certainly respond by depreciating the renminbi. This, too, would incite further trade conflict, with negative repercussions all around.

A final prerequisite for a tranquil year is a limited outcome for US Special Counsel Robert Mueller’s investigation into misdeeds by Russia’s government and the Trump family circle. This conclusion might seem odd. If the US president’s erratic personality, disruptive tweets, and counterproductive policies pose such a serious threat to stability, then surely a scathing indictment by Mueller and his team, leading the House of Representatives to draft articles of impeachment, is the most direct route to removing this danger.

But if the Mueller report implicates Trump’s children—Donald Trump, Jr., Eric Trump, and Ivanka Trump and her husband, Jared Kushner—or the president himself, Trump will lash out, as he does whenever he feels the need to defend himself. The likely targets include not just Mueller and the Democratic majority in the US House of Representatives, but also the Fed, China, Mexico, and the countries of Central America and Europe, as Trump lays down an economic smokescreen to cover his political misdeeds. This will roil financial markets and depress investor confidence. And there will be no obvious end to the disruption, given the low likelihood that the Republican-controlled Senate will vote to convict Trump.

Rather than pursuing impeachment, the Democrats should focus on how to beat Trump in the next presidential election. That means crafting an agenda and agreeing on a candidate. In the meantime, we can only cross our fingers and hope for the best. November 2020 is still a long way off.

Khalaf succeeds Kandarian as MetLife CEO

Posted on January 10, 2019 by Editorial Staff -

Michel A. Khalaf, president, US Business and EMEA (Europe, the Middle East and Africa), will succeed Steven A. Kandarian as MetLife’s president and CEO, effective May 1, 2019, MetLife announced this week. Khalaf also has been appointed to the MetLife board effective May 1.

Kandarian, who is retiring, will serve through April 30, 2019.

Khalaf has been MetLife’s president of EMEA since 2011 and in July 2017 added responsibility for the company’s US Business. In his expanded role, he has overseen:

The group benefits, retirement and income Solutions, and property & casualty businesses in the United States
Global employee benefits (GEB), MetLife’s only horizontal business providing employee benefits solutions to local and multinational employers in 39 markets
Individual and group insurance businesses sold through agents, brokers, banks and direct channels in more than 25 countries throughout Europe, the Middle East and Africa

Prior to taking on the leadership of EMEA, Khalaf was executive vice president and CEO of MetLife’s Middle East, Africa and South Asia (MEASA) region. He joined MetLife through its acquisition of American Life Insurance Company (Alico) from American International Group (AIG) in 2010.

In his 21 years at Alico, Khalaf held a number of leadership roles in various markets around the world including the Caribbean, France and Italy. In 1996, he was named the first general manager of Alico’s operation in Egypt. In 2001, he assumed the position of regional senior vice president in charge of Alico’s Life, Pension and Mutual Fund operation in Poland, Romania and the Baltics, as well as president and CEO of Amplico Life, Alico’s life insurance subsidiary in Poland. Later, he served as deputy president and chief operating officer of Philamlife, AIG’s operating company in the Philippines.

Khalaf is a graduate of Syracuse University with a Bachelor of Science degree in engineering and a Master of Business Administration in finance. He is a fellow of the Life Management Institute.

Kandarian became president and CEO on May 1, 2011, and chairman of the board of directors on January 1, 2012. He joined MetLife in April 2005 as executive vice president and chief investment officer (CIO). From 2007 to 2011, he also led MetLife’s enterprise-wide strategy, which identified key focus areas for the company.

As CIO, Kandarian oversaw the company’s more than $450 billion (as of Dec. 31, 2010) general account portfolio. He enhanced the company’s focus on effective risk management and diversified MetLife’s investment portfolio, including through the $5.4 billion sale of Peter Cooper Village/Stuyvesant Town in 2006. His efforts helped MetLife emerge from the 2008 financial crisis with the strength to execute the company’s $16.4 billion purchase of Alico in 2010.

Glenn Hubbard, currently MetLife’s independent lead director, will become MetLife’s non-executive chairman on Kandarian’s retirement. Hubbard joined the MetLife board in 2007 and became lead director in June 2017. Since 2004, Hubbard has been the Dean and Russell L. Carson Professor of Economics and Finance at Columbia University’s Graduate School of Business.

Conning assesses life and annuity businesses

Posted on January 10, 2019 by Editorial Staff -

Conning, the pension and investment research and consulting firm, has released a proprietary new report, “2019: Life-Annuity Value Creation Strategies: Reorganization and New Players.” According to the executive summary of the report:

Since the financial crisis of 2008, life and annuity insurers have enjoyed almost a decade of positive statutory net income. Over that time, insurers have pursued both organic and inorganic growth strategies to increase net income. This study focuses on the inorganic strategies that insurers have used over the last decade. We focus on how insurers are creating value by strategically repositioning their companies.

Organizational Repositioning to Create Value

We identified 22 case studies of insurers pursuing value creation through organizational repositioning over the period from 2010 into 2018. These case studies represented approximately 25% to 30% of statutory assets and premium at the end of 2017.

Analyzing these case studies based on ownership structure and product features provided insight into potential reasons certain types of insurers may be more likely to pursue organization repositioning than other types. Further analysis explored the types of strategies used and the drivers behind its usage. Our analysis found that stock companies may be more likely to adopt organizational repositioning as a strategy than would fraternal or mutual insurers.

Capital Redeployment

Regulatory pressure, shareholder pressure, and annuity volatility pressure lead some insurers to increase value creation through organizational repositioning. Of these three, regulatory pressure applies to all insurers. Shareholder pressure and annuity volatility are limited to stock companies and annuity providers, respectively.

Our analysis of these pressures suggests that they are likely to remain in place. These continued pressures are likely to create more closed blocks of business. Insurers with those closed blocks will seek to divest them. For those companies, the emergence of new entrants, specialist insurers that want to assume closed blocks of long-tail liabilities, is a favorable development.

The First Wave of New Entrants

The first wave of New Entrants, which entered the market between 2004 and 2010, identified an opportunity for certain types of owners to build a business around managing closed blocks of annuities. For these companies, the attraction to the life-annuity industry was the ability to acquire assets for their asset management businesses at a lower cost.

In terms of value creation, early results suggest this model has been successful, even after accounting for capital infusions from the New Entrants. The business model and opportunity appear to hold the potential for future value creation.

For the broader life insurance industry, the emergence of these New Entrants provided the capacity to absorb closed blocks of annuities. Looking ahead, these companies may provide a similar function for other blocks of business. That further development can be seen in the continued emergence of the second wave of New Entrants and the evolution of their business model.

The Second Wave of New Entrants Emerge

The emergence of a second wave of New Entrants is a strong indication of the attraction of closed blocks and runoff companies to investors. This attraction is driven by the continued flow of capital to asset managers and their need to generate competitive returns for their clients. That need has led asset managers to pursue alternative assets, of which life and annuity blocks are one example.

The second wave of New Entrants benefits from a business model proven by the first wave of New Entrants. Our analysis of the second wave of New Entrants shows there has been a clear evolution to that business model. This evolution appears to be positioned to assume more complex risks and liabilities.

Looking ahead, as more New Entrants form, competition for liabilities could increase and impact pricing if the supply of liabilities is limited. Our analysis indicates that as New Entrants continue to emerge, competition could lead them to expand beyond a focus on annuities. Looking for liabilities beyond annuities may be one solution to reducing the impact on pricing.

A retirement account for cryptocurrency buffs

Posted on January 10, 2019 by Editorial Staff -

BitcoinIRA.com has launched a turnkey, white-label solution that will enable “enterprise businesses” to invest their customers’ savings into a Bitcoin IRA and allow customers to trade inside their account.

It can be used around-the-clock by registered investment advisors (RIAs), wealth managers and other licensed money managers with customers who want to invest in cryptocurrencies, according to a news release this week. Advisors can also allow customers “to trade for themselves and monitor their activity through a back-end administrative portal.”

Bitcoin IRA does not hold any of the funds. Management fees are distributed as trades are completed.

Bitcoin IRA’s enterprise program uses multi-signature “cold storage” wallets from BitGo. It also has a BSA/AML compliance program, two-factor authentication and a $1 million Consumer Protection insurance policy, according to a prepared statement by Bitcoin IRA Chief Operating Officer Chris Kline.

Bitcoin IRA recently launched Self-Trader, which enables customers to buy, sell, and swap cryptocurrencies directly inside their retirement accounts, 24 hours a day, 7 days a week. The launch also included a full BitcoinIRA.com website redesign, a new application process, new real-time cryptocurrency price charts, a knowledge center, order history reporting and more.

Honorable Mention

Posted on January 10, 2019 by Editorial Staff -

Advances in ‘A.I.’ favor direct channel growth: Cerulli

The direct-to-investor channel, which maintains relationships with nearly 40% of U.S. retail investor households, now accounts for more than $7 trillion in assets under management (AUM), according to Cerulli Associates, the global research and consulting firm.

Even with modest return expectations, this segment could easily approach $10 trillion by the end of 2022, the firm predicts. “Growth will be driven by a combination of investor choice and investor returns over the next few years,” a Cerulli release said.

“As direct providers increasingly layer-in enhanced advice offerings with access to highly trained advice personnel, traditional advisory firms will need to redouble their efforts to maintain their market share in the face of the growing presence of the firms in this segment,” said Scott Smith, director at Cerulli, in a prepared statement.

“Encouraging investors to use online planning tools is a prime opportunity for providers to help investors better understand their relative progress toward goals, while also uncovering unmet product needs,” added Smith. “To boost user engagement, providers must consider making their planning suites as modular as possible, with frequent feedback to reward incremental progress.”

“The use of artificial intelligence technology to augment online support and chat features is a major opportunity for platform providers to increase customer satisfaction,” he said.

“By logging users’ previous actions and stated goals, these tools will be better able to anticipate what answers investors seek and present product solutions even before investors know they want them.

“With advances in online advertising, providers are better able to target prospective clients who could be persuaded into action by promotions such as cash additions for significant account transfers. By delivering these offers through targeted advertising, providers can add assets without undermining the profitability of assets gathered organically through other avenues,” Smith added.

These findings are from the January 2019 issue of The Cerulli Edge—U.S. Asset and Wealth Management Edition, which explores the challenges and opportunities facing providers attempting to grow assets under management in the high-net-worth, Millennial, and mass markets.

Securian issues new MYGA contract

Securian Financial has launched SecureOption Choice, a new fixed deferred annuity designed to be competitive in the multi-year guaranteed annuity (MYGA) marketplace, according to a news release this week.

SecureOption Choice, issued by Minnesota Life Insurance Company, offers guaranteed interest throughout the term of the annuity with no exposure to market risk.

Key product features include:

Competitive rates
Liquidity features
3-, 5-, 7- and 9-year guarantee periods
10% free annual withdrawals after the first year

“Clients continue to seek retirement products offering guaranteed returns. SecureOption Choice gives financial professionals a competitive new option to meet this growing need,” said Chris Owens, Securian Financial’s national sales vice president for retail life insurance and annuities, in the release.

SecureOption Choice is available to all Securian Financial-approved distribution channels.

Small employers warm to retirement plans: LIMRA

Only 42% of businesses with fewer than 100 employees offer retirement benefits (either alone or with insurance benefits), even though research shows that Americans’ top financial concern is affording a comfortable retirement, LIMRA reported this week.

But a LIMRA survey shows that 40% of those small business employers regard retirement benefits as “more important now than three years ago,” with 57% saying it is “equally as important.”

The larger the small business, the more likely they were to say retirement benefits are more important today than three years ago. Only 37% of employers with less than 10 employees say retirement benefits are more important now than three years ago, compared with 64% in companies with 50-99 employees.

Separate LIMRA SRI research points out that access to a retirement plan is essential to saving. Nearly 4 in 10 of all workers said they began saving for retirement because their employer offered a retirement savings plan. While 36% of small businesses don’t currently offer retirement benefits to their employees, 4% plan to in the next two years, and 19% of them report they might.

Open multiple-employer plans (MEPs) — retirement plans that are sponsored by multiple employers—could increase coverage for small business employees. Federal proposals in 2018 are intended to broaden the number of small employers who can participate in MEPs (by allowing many unrelated employers to join a single plan).

Citigroup settles 401(k) fiduciary lawsuit for $6.9 million

A $6.9 settlement of a suit filed in 2007 against Citigroup by its 401(k) plan participants has been approved by a federal judge, NAPA Net reported this week.

According to the original suit, Citigroup’s plan fiduciaries put the company’s own interests ahead of participants’ interests “by choosing investment products and pension plan services offered and managed by Citigroup subsidiaries and affiliates, which generated substantial revenues for Citigroup at great cost to the 401(k) plan.”

The settlement included $2.3 million for the plaintiffs’ attorneys, $15,000 for each of two class representatives and $374,100 for case-related expenses.

The remaining $4.2 million can be distributed to the approximately 300,000 former workers and retirees who invested in certain funds in the 401(k) plan between Oct. 18, 2001, and Dec. 1, 2005, or an average of $140 each.

“Defendants, defendants’ beneficiaries, and defendants’ immediate families” were excluded from the settlement.

Citigroup admitted no wrongdoing in the settlement, which the parties reached last August. The bank denied “…all allegations of wrongdoing, fault, liability, or damage to the Plaintiffs and the Class, deny that they have engaged in any wrongdoing or violation of law or breach of duty, and believe they acted properly at all times.”

Citigroup maintained that “(a) the fees charged by the nine investment options at issue were reasonable and not unduly high; (b) the performance of the nine investment options at issue was reasonable and, in any event, irrelevant; and (c) the choice to include the nine funds among many other investment options, was reasonable.”

The judge declared that in the case of Leber et al. v. The Citigroup 401(k) Plan Investment Committee et al. (case number 1:07-cv-09329, in the U.S. District Court for the Southern District of New York) that “the Settlement resulted from arm’s-length negotiations; (b) the Settlement Agreement was executed only after Class Counsel had conducted appropriate investigation and discovery regarding the strengths and weaknesses of Plaintiffs’ claims and Defendants’ defenses to Plaintiffs’ claims; and (c) the Settlement is fair, reasonable, and adequate.”

Two Client-Centric Income Strategies

Posted on January 10, 2019 by Kerry Pechter -

Assume that your clients, a 65-year-old married couple with $1 million in savings, are too risk-averse to rely entirely on the traditional “4%” withdrawal method for retirement income, but too risk-hungry to commit half their money to a single premium immediate annuity (SPIA).

To give them maximum flexibility, you could recommend a variable deferred annuity or an indexed annuity with a guaranteed lifetime withdrawal benefit (GLWB). That would keep all their options open. But, at 65, they’re already past the ideal age for buying that type of product and maximizing its 10-year deferral bonuses.

So let’s consider two other, less orthodox ways to use annuities. I’ll call them the “Safety Last” and Safety First” approaches. The Safety Last approach uses an annuity to guarantee income over the last stage of retirement. The Safety First approach, by contrast, guarantees income over the initial stage.

In this informal thought-experiment, I compare these two strategies. But not in the usual way. Instead of trying to assess them by the amount of annual income they might generate or the final wealth they might deliver, I’ll introduce the ida that they target different risks, and suggest that the “best” method may be the one that eliminates the clients’ biggest financial anxiety. It’s a primarily client-centric approach to income planning.

Safety Last?

The Safety Last approach insures the latter part of life through the purchase of a deferred income annuity (DIA) or its pre-tax cousin, a qualified lifetime annuity contract (QLAC). Suppose that your clients use a quarter of their savings ($250,000) to buy a joint-life DIA or QLAC with a cash refund that returns unpaid premium to their beneficiaries. (Adding a cash refund feature to a joint-life contract doesn’t appear to reduce monthly income as much as it would for a single-life contract.)

Based on data from immediateannuities.com, $250,000 would buy a $40,000 annual income stream beginning at age 80. The clients would invest the remaining $750,000 as you recommend and spend it down by about $30,000 (4%) a year. Assume that $30,000 plus Social Security will cover their essential annual expenses.

A newly-published report from the Employee Benefits Research Institute (EBRI) in recent years offers evidence that people who use between 5% and 25% of their 401(k) balances to buy a DIA or QLAC can raise their personal Retirement Readiness Ratings (a benchmark EBRI created) and reduce their risk of running short of money in retirement. EBRI set the start date of their hypothetical DIA at age 85 in that study.

The study showed that DIAs, as expected, favor the people who live the longest. Anyone who died or fell seriously ill before receiving benefits would lose their premium if the DIA has no cash refund feature, early-distribution-for-illness clause, or flexible start-date. The study also showed that people with very little savings or a ton of savings don’t have much to gain from buying a DIA or QLAC. The poorest people tend to need all their money for current expenses, while the wealthiest aren’t at great risk of running out of money.

But for the so-called mass-affluent, especially those in good health and those who might take comfort in knowing that they’ll have a safe income stream at a time when they might face mental or physical decline, then DIAs or QLACs could make a lot of sense.

Safety first?

Now let’s reverse that strategy and consider buying guaranteed income for the first decade of retirement rather than the latter stages. Instead of applying one-quarter of the couple’s savings to a DIA starting at age 80, they could apply that $250,000 to the purchase of a 10-year period certain annuity paying about $28,000 a year or a comparable 10-year bond ladder.

This was more or less the strategy presented by advisor Dana Anspach, founder of Sensible Money in Scottsdale, AZ, and the principals at Asset Dedication, J. Brent Burns and Stephen J. Huxley, during an Investment & Wealth Institute (IWI) conference for Retirement Management Analysts near Jacksonville, FL, in early December. They used a bond ladder; I use a period certain annuity as a proxy. It’s easy to price with an online calculator.

This strategy eliminates sequence risk. It assures clients that even if their investments go bust during the first few years of retirement they wouldn’t need to sell depressed assets in order to generate income. It appeals to investors who believe in “stocks for the long run,” and who like the idea of giving 75% of their assets ten years to grow undisturbed. At the IWI conference, Burns and Huxley strongly recommended putting part of that money in small-cap value funds, which, they argued, perform best over the long run.

Clients who choose this strategy don’t necessarily face a risk “cliff” when the bond ladder or the period certain annuity ends. Over the initial ten years of retirement, they can harvest gains from their at-risk assets and extend the bond ladder or purchase more years of annuity income.

Where life-contingent annuities can introduce new elements of uncertainty—Will we die early? Will the beneficiaries feel cheated?—into the income planning process, a period certain annuity with a death benefit adds true certainty. (Period certain annuities do not provide mortality credits, however, unless the contract is a “temporary life annuity,” where the payments stop if the annuitants die before the end of the term.)

The larger point

We’ve now looked at two strategies that are driven by two of the risks that concern retirees the most: The risk of outliving their money and the risk of experiencing a market crash early in retirement. In that sense, they’re starkly different from each other. But they’re similar in one way. Both call for annuitizing only 25% of the client’s portfolio while leaving plenty of assets for extraordinary expenses, additional income or aggressive investment. (This example includes annuities with cash refund features so clients have no reason to worry about forfeiting assets if they die early.)

More to the point, these strategies represent a client-centric, risk-driven approach to retirement income planning. Advisors often look for the technique that generates, say, the most monthly income, the lowest taxes, the most final wealth, or the lowest failure rate. Or they may recommend strategies that suit their own habits or revenue models. But, if a client’s sense of security in retirement is the goal, the best solution (all else being equal) might be the one that addresses the risk that worries the client the most.

Largest Global Insurers

Posted on January 10, 2019 by No Author -

In Defense of the Fed

Posted on January 3, 2019 by Stephen S. Roach -

I have not been a fan of the policies of the US Federal Reserve for many years. Despite great personal fondness for my first employer, and appreciation of all that working there gave me in terms of professional training and intellectual stimulation, the Fed had lost its way. From bubble to bubble, from crisis to crisis, there were increasingly compelling reasons to question the Fed’s stewardship of the US economy.
That now appears to be changing. Notwithstanding howls of protest from market participants and rumored unconstitutional threats from an unhinged US president, the Fed should be congratulated for its steadfast commitment to policy “normalization.” It is finally confronting the beast that former Fed Chairman Alan Greenspan unleashed over 30 years ago: the “Greenspan put” that provided asymmetric support to financial markets by easing policy aggressively during periods of market distress while condoning froth during upswings.

Since the October 19, 1987 stock-market crash, investors have learned to count on the Fed’s unfailing support, which was justified as being consistent with what is widely viewed as the anchor of its dual mandate: price stability. With inflation as measured by the Consumer Price Index averaging a mandate-compliant 2.1% in the 20-year period ending in 2017, the Fed was, in effect, liberated to go for growth.

And so it did. But the problem with the growth gambit is that it was built on the quicksand of an increasingly asset-dependent and ultimately bubble- and crisis- prone US economy.

Greenspan, as a market-focused disciple of Ayn Rand, set this trap. Drawing comfort from his tactical successes in addressing the 1987 crash, he upped the ante in the late 1990s, arguing that the dot-com bubble reflected a new paradigm of productivity-led growth in the US. Then, in the early 2000s, he committed a far more serious blunder, insisting that a credit-fueled housing bubble, inflated by “innovative” financial products, posed no threat to the US economy’s fundamentals. As one error compounded the other, the asset-dependent economy took on a life of its own.

As the Fed’s leadership passed to Ben Bernanke in 2006, market-friendly monetary policy entered an even braver new era. The bursting of the Greenspan housing bubble triggered a financial crisis and recession the likes of which had not been seen since the 1930s. As an academic expert on the Great Depression, Bernanke had argued that the Fed was to blame back then. As Fed Chair, he quickly put his theories

to the test as America stared into another abyss. Alas, there was a serious complication: with interest rates already low, the Fed had little leeway to ease monetary policy with traditional tools. So it had to invent a new tool: liquidity injections from its balance sheet through unprecedented asset purchases.

The experiment, now known as quantitative easing, was a success – or so we thought. But the Fed mistakenly believed that what worked for markets in distress would also spur meaningful recovery in the real economy. It raised the stakes with additional rounds of quantitative easing, QE2 and QE3, but real GDP growth remained stuck at around 2% from 2010 through 2017 — half the norm of past recoveries. Moreover, just as it did when the dot-com bubble burst in 2000, the Fed kept monetary policy highly accommodative well into the post-crisis expansion. In both cases, when the Fed finally began to normalize, it did so slowly, thereby continuing to fuel market froth.

Here, too, the Fed’s tactics owe their origins to Bernanke’s academic work. With his colleague Mark Gertler of NYU, he argued that while monetary policy was far too blunt an instrument to prevent asset-bubbles, the Fed’s tools were far more effective in cleaning up the mess after they burst. And what a mess there was! As Fed governor in the early 2000s, Bernanke maintained that this approach was needed to avoid the pitfalls of Japanese-like deflation. Greenspan concurred with his famous “mission accomplished” speech in 2004. And as Fed Chair in the late 2000s, Bernanke doubled down on this strategy.

For financial markets, this was nirvana. The Fed had investors’ backs on the downside and, with inflation under control, would do little to constrain the upside. The resulting “wealth effects” of asset appreciation became an important source of growth in the real economy. Not only was there the psychological boost that comes from feeling richer, but also the realization of capital gains from an equity bubble and the direct extraction of wealth from the housing bubble through a profusion of secondary mortgages and home equity loans. And, of course, in the early 2000s, the Fed’s easy-money bias spawned a monstrous credit bubble, which subsidized the leveraged monetization of housing-market froth.

And so it went, from bubble to bubble. The more the real economy became dependent on the asset economy, the tougher it became for the Fed to break the daisy chain. Until now. Predictably, the current equity market rout has left many aghast that the Fed would dare continue its current normalization campaign. That criticism is ill-founded. It’s not that the Fed is simply replenishing its arsenal for the next downturn. The subtext of normalization is that economic fundamentals, not market-friendly monetary policy, will finally determine asset values.

The Fed, it is to be hoped, is finally coming clean on the perils of asset-dependent growth and the long string of financial bubbles that has done great damage to the US economy over the past 20 years. Just as Paul Volcker had the courage to tackle the Great Inflation, Jerome Powell may well be remembered for taking an equally courageous stand against the insidious perils of the Asset Economy. It is great to be a fan of the Fed again.

When the Fed tightens, emerging market borrowers feel the pinch

Posted on January 3, 2019 by Editorial Staff -

Roughly 80% of cross-border loans to emerging market economies are estimated to be denominated in U.S. dollars. Dollar-denominated credits make up 60% of Europe’s emerging market economies’ cross-border lending and over 90% of foreign banks’ loans to emerging market economies in Africa, Asia, and the Americas. Foreign bank loans account for about half of all emerging market economies’ external liabilities.

In a new research paper, “U.S. Monetary Policy and Emerging Market Credit Cycles” (NBER Working Paper No. 25185), authors Falk Bräuning and Victoria Ivashina find that when the Federal Reserve lowers U.S. interest rates, the volume of cross-border loans by global banks goes up, particularly to emerging market borrowers.

Studying the 1980-2015 period, they find that a four percentage point cut in the Federal Reserve’s target interest rate (a typical decrease during an easing cycle) raised loan volumes in emerging markets by 32% relative to the volumes in developed markets. This was true even after accounting for differences in GDP growth, inflation, and forecast future economic performance.

Loan volumes also respond to the yield spread — the difference between the 10-year U.S. Treasury yield and the federal funds rate. As the spread narrows and banks rebalance their lending portfolios toward riskier assets, a one percent decrease in the U.S. spread increases emerging market economy lending volumes by about 16%. This effect was particularly relevant earlier this decade, when the Federal Reserve kept the federal funds rate at zero and eased monetary policy through unconventional measures that directly impacted long-term rates.

Monetary policy easing also is associated with higher loan volumes to riskier firms. In response to a 25 basis point decrease in the U.S. federal funds rate, firms with a one percentage point higher borrowing cost than their country average experienced a one percent higher increase in loans than that afforded to average borrowers.

When U.S. monetary policy tightens, the pendulum swings the other way. Increases in the federal funds rate of 25 basis points were associated with a 4.2 percentage point larger overall decline in dollar credit for emerging market firms than for developed market firms. Local bank lenders do not offset a contraction in foreign bank credit. Rather, local dollar credit also contracts. A 25 basis point increase in the federal funds rate leads to a 3.5 percentage point drop in local credit.

Changes in eurozone rates affect the volume of euro-denominated cross-border lending of U.S. banks to non-euro borrowers, but they do not affect the volume of dollar-denominated credits. “Foreign monetary policy is relevant only for the loans in the corresponding foreign currency,” the researchers concluded.

The researchers used data from the Thompson Reuters DealScan database on global syndicated corporate loan issues. It showed the same result for non-U.S. banks and for banks with portfolios that have little exposure to the United States. The results apply to borrowers in non-tradable industries and those in countries having little trade linkage with the United States, even when controlling for individual borrowers, their home countries, loan amounts, currency, maturity, interest rates, and lenders in the loan syndicate.

In Austria, earlier retirement was associated with earlier death

Posted on January 3, 2019 by Editorial Staff -

Many workers dream of retiring as early as possible to pursue travel, leisure, sport, and other pursuits. But new research suggests that some individuals, particularly men, might want to postpone retirement. They might live longer.

Austrian men who took advantage of a temporary change in unemployment insurance rules and retired early experienced an increased risk of premature death, according to “Fatal Attraction? Extended Unemployment Benefits, Labor Force Exits, and Mortality,” NBER Working Paper (No. 25124). The effect wasn’t seen in women.

Researchers Andreas Kuhn, Stefan Staubli, Jean-Philippe Wuellrich, and Josef Zweimüller analyzed a unique public program in Austria in the late 1980s and early 1990s that was adopted when that nation’s steel sector underwent dramatic layoffs. To cushion the economic blow to older workers, the Austrian government implemented the Regional Extended Benefits Program (REBP).

This program effectively allowed workers in some regions of Austria to take early retirement via disability insurance or old-age pension programs. It induced a significant increase in early retirement.

Using information from the Austrian Social Security Database, the researchers compiled information on 310,440 men and 144,532 women—excluding those from the steel sector—and compared data from REBP-eligible regions and nearby non-REBP regions. They compared the employment histories, incomes, gender, age, retirement dates, and age at death of those who took early retirement and those who were eligible but did not.

The researchers found that an additional year in early retirement increased a man’s probability of death before age 73 by 1.85 percentage points — equivalent to a relative increase of 6.8%—and reduced the age at death by an average of about 10 weeks. For women, early retirement was not associated with elevated mortality, a finding that is in line with previous research by others.

They also found that the changes in lifetime income associated with early retirement were negligible, particularly when generous government old-age benefits were counted, and that they could not explain the increased mortality among certain groups of the population. Thee researchers suggest that lifestyle changes may explain the study’s mortality findings.

Men in blue-collar occupations, men with low-work experience, and men who had some pre-existing health impairment displayed higher mortality effects than men in white-collar occupations. An additional year in early retirement increased the probability of death before age 73 by 1.91 percentage points for blue collar men, 3.45 percentage points among men who have spent some time on sick leave, and by 2.42 percentage points among men with low work experience.

To check the robustness of their findings, the researchers analyzed data from before and after the early retirement program and found no differences in mortality and early retirement trends between those two periods.

JPMorgan Chase to pay $135 to settle SEC charges

Posted on January 3, 2019 by Editorial Staff -

JPMorgan Chase Bank N.A. will pay more than $135 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs), the Securities and Exchange Commission announced.

ADRs, which are U.S. securities that represent foreign shares of a foreign company, require a corresponding number of foreign shares to be held in custody at a depositary bank. The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.

The SEC’s order found that JPMorgan improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs.

Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring.

This was the eighth action against a bank or broker, and the fourth action against a depositary bank, resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices. Information about ADRs is available in an SEC Investor Bulletin.

“With these charges against JPMorgan, the SEC has now held all four depositary banks accountable for their fraudulent issuances of ADRs into an unsuspecting market,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “Our investigation continues into brokerage firms that profited by making use of these improperly issued ADRs.”

Without admitting or denying the SEC’s findings, JPMorgan agreed to pay disgorgement of more than $71 million in ill-gotten gains plus $14.4 million in prejudgment interest and a $49.7 million penalty for total monetary relief of more than $135 million. The SEC’s order acknowledged JPMorgan’s cooperation in the investigation and remedial acts.

Philip A. Fortino, William Martin, Andrew Dean, Elzbieta Wraga, Joseph P. Ceglio, Richard Hong, and Adam Grace of the New York Regional Office are conducting the SEC’s continuing investigation, with supervision by Sanjay Wadhwa.

Medicare premiums for 2019

Posted on January 3, 2019 by Editorial Staff -

The Centers for Medicare & Medicaid Services (“CMS”) has announced the Medicare Part A deductibles and Part B premiums for 2019. Medicare Part A covers inpatient hospital and hospice care, while Part B covers outpatient services such as doctors’ visits.

According to a Wagner Law Group bulletin:

The Part A deductible for inpatient hospital expenses will be $1,364 in 2019, a $24 increase over the prior year.
For the 61st through 90th day of hospitalization, the per diem coinsurance cost will be $341.
Hospital stays over 90 days will cost $682 per day.
Daily coinsurance for the 21st to 100th day in a skilled nursing facility will cost $170.50 in 2019.
The standard Medicare Part B monthly premium for 2019 will, for most individuals, be $135.50.
Single beneficiaries with incomes over $85,000 and married couples with incomes of over $170,000 will pay a higher Part B premium, based on a sliding scale, as required by the Medicare Modernization Act.

Honorable Mention

Posted on January 3, 2019 by Editorial Staff -

Transamerica sued by its own 401(k) participants

In a federal class action suit, the participants in Transamerica Corporation’s own $1.7 billion 401(k) plan have sued the giant financial services firm, accusing it of violating its fiduciary duties by offering proprietary Transamerica funds that significantly trailed their benchmarks.

The suit was filed December 28 in the U.S. District Court of Northern Iowa by the law firm of Sanford Heisler Sharp, LLP. The complaint alleges the company invested employees’ retirement savings in multiple funds that consistently underperformed their investment benchmarks and other similar collective investment funds, resulting in the loss of millions of dollars in potential savings.

“Transamerica retained too many poor-performing investment options on the plan,” said David Sanford, chairman of Sanford Heisler Sharp and counsel for the plaintiffs and the proposed class, in a release.

According to the complaint, Transamerica offered the plan’s participants “substandard investment options” that were managed by a Transamerica affiliate, Transamerica Asset Management that “consistently underperformed their benchmarks” between 2008 and 2017.

The funds named in the lawsuit are:

Transamerica International Equity Portfolio
Transamerica Small Core Portfolio
Transamerica Large Value Portfolio
Transamerica Large Growth Portfolio
Transamerica High Yield Bond Portfolio
Transamerica Mid Value Portfolio

“During the 2008-2017 time period, the International Equity Portfolio underperformed its benchmark, the Morgan Stanley All-World Country Index ex-USA, by approximately 30%. During the same period, the Small Core Portfolio underperformed its benchmark, the Russell 2000 Index, by over 15%,” the complaint said.

According to the plan documents dated September 1, 2018, “the International Equity Portfolio, the Small Core Portfolio and the Mid Value Portfolio each underperformed their respective investment benchmarks for the past one, five, and ten-year periods. The Large Value Portfolio, the Large Growth Portfolio, and the High Yield Portfolio each underperformed their respective investment benchmarks for the past five and ten-year periods,” the suit said.

Plaintiffs Jeremy Karg, Matthew R. LaMarche, and Shirley Rhodes each filed the case individually and as representatives of approximately 17,000 plan participants in Transamerica’s 401(k) plan. Named as defendants are the Transamerica Corporation and the committees and their members that provide investment advice and services to the plan.

Plaintiffs and the class are asking for compensation for financial losses to plan participants and beneficiaries resulting from the plan’s underperforming investments; divestiture of imprudent investments; and the removal of the fiduciaries who may have violated their duties to the plan’s participants and beneficiaries under ERISA.

What a difference a month makes

For U.S. mutual funds and ETFs, November was the calm before the storm.

Mutual fund assets grew by just 0.6% in November, according to the December 2018 issue of The Cerulli Edge – U.S. Monthly Product Trends Edition. Assets stood $14.5 trillion with one month left in the year.

Net negative flows of $49.5 billion undermined asset growth, but November saw a rebound of sorts, with total assets increasing about 2.9%. Year-to-date total assets have increased 4.9%.

For exchange-traded funds (ETFs), net flows returned to a healthy level in November, with ETF products cumulatively adding more than $47.0 billion. This total was the second largest in any month of 2018 thus far.

Financial wellness. While the term financial wellness can be ambiguous, at its most fundamental level it emphasizes holistic advice and goes beyond a participant’s workplace retirement savings account.

While it is no small task for providers to integrate the myriad financial wellness components, Cerulli views this as a worthwhile initiative, and potential competitive advantage, as plan sponsors (and their advisors/consultants) begin to evaluate these offerings more closely.

Target-date Funds. As the target-date fund category continues to evolve, there are several instances of new products that are no longer pure target-date strategies in the sense of a strictly age-based asset allocation solution, but to refer to them as managed accounts would be overstating their ability to customize for the end-investor.

To create some structure around this hybrid target-date/managed account emerging category, Cerulli references two sub-categories: dynamic qualified default investment alternative (QDIA) and personal target-date fund.

Alight and Advizr in financial wellness partnership

Alight Solutions, a provider of “technology-enabled health, wealth and human capital management solutions,” has added Advizr WorkPlace, a set of financial management and planning tools, as an option among Alight’s suite of financial well-being solutions for the employees of its benefits administration clients.

Three Alight clients, representing over 500,000 employees, have implemented Advizr Workplace, according to a news release. Advizr Inc. is a financial wellness technology company based in New York, NY. Its software supports 401(k) plan participants. It also produces Advizr Core, which advisors can use to help grow their practices.

Advizr is designed to help employees with debt management, budgeting, protection, college savings, and retirement planning. Help from an Alight investment advisor representative is also available, with some restrictions. Advizr Workplace is available as a stand-alone solution to Alight’s benefits administration clients.

According to the release, Advizr allows users to “assess spending, manage debt, evaluate life insurance coverage needs, prioritize and track goals and build a plan for their unique financial objectives and to evaluate ‘what if’ scenarios.

“Research continues to prove that reducing financial insecurity leads to improved employee productivity, morale and retention, while lowering rates of absenteeism and healthcare expenditures,” the release said.

AIG buys Ellipse, a UK group life insurer

American International Group, Inc., announced that AIG Life Limited, a UK subsidiary of AIG Life & Retirement, has completed the previously agreed acquisition of Ellipse, a specialist group life, critical illness and income protection provider in the UK, from Munich Re.

“AIG believes Ellipse’s group protection expertise, alongside its technology-enabled business model, makes it a strong strategic fit with the existing AIG Life Limited operation in the UK,” according to an AIG release.

AIG Life will now distribute both group and individual protection insurance products to UK consumers through financial intermediaries, employee benefits consultants and partnerships.

Money Myths, Legal Realities

Posted on January 3, 2019 by Kerry Pechter -

Aside from knowing that money doesn’t grow on trees, do we really understand where it comes from? Banks supposedly create money out of thin air just by lending. The Federal Reserve magically found trillions of dollars to resolve the financial crisis. But how? And for whose benefit?

That second question—for whose benefit do the banks and the Fed create money—was front and center at the Harvard Law School a few weeks ago. During a two-day conference called, “Money as a Democratic Medium,” a parade of academics presented the case that money over recent decades has been co-opted, even hijacked.

“We’ve allowed money creation to be privatized,” said Morgan Ricks, a professor at Vanderbilt School of Law, who spoke at the conference.

If you’re of a libertarian, gold-loving, neoliberal bent, you’d probably say that industrious people create money and politicians confiscate it through taxation. If so, you’d have been lonely at this conference. Many of the historians and economists there believed that bankers, abetted by lawyers, have stolen the public’s purse.

Law, in fact, is essential to the story. One law professor showed that US law has been explicitly written to prevent blacks from accumulating wealth. A Columbia law professor explained how lawyers invent new kinds of collateral and play regulatory arbitrage. A Connecticut banker described his ongoing legal battle to deposit client money in an interest-bearing account at the Fed.

An all-but-invisible presence at the conference was Modern Monetary Theory, or MMT. MMT is a type of chartalism, a branch of macroeconomics that describes today’s money as circulating government debt, given legitimacy by a government, and financed by taxes. Christine Desan, Ph.D., who organized “Money as a Democratic Medium,” spoke at an MMT conference in late September. The mere fact that Harvard hosted this conference may signal a breakthrough in recognition for MMT, which most mainstream economists consider fringy.

Money and the law: Inseparable

Held in Wasserstein Hall on the law school campus, the free conference featured more than 50 presenters and was attended by hundreds of academics and Harvard students. Several of the presenters offered evidence that, historically and up to the present day, US banks and courts have created byzantine rules that privilege certain parties—often the ones who write the rules—and disadvantage others.

One of the first speakers was Katharina Pistor, a professor at Columbia Law School and the author of the forthcoming The Code of Capital (Princeton, 2019). If you like the current banking system, Pistor had good news: The status quo is protected by a deep moat of securities laws, bankruptcy laws, and contract laws. Globalization makes it harder than ever for national governments to stop securities lawyers from creating exotic new negotiable assets, like a CDO-squared.

“In times of globalization the idea that we could control money top down is problematic,” said Pistor, who seemed appalled by the situation. “Lawyers have pushed the limits on creating new types of assets. It’s hard to regain control over these processes. It’s hard to dislodge control at the national or even the global level. Only the US and the UK acting together could roll back some of the excesses.”

Mehrsa Baradaran

In a presentation that drew a standing ovation, Mehrsa Baradaran, a banking law specialist at the University of Georgia and author of The Color of Money: Black Banks and the Racial Wealth Gap (Belknap, 2017), made a richly-documented case for the idea that African-Americans have been systematically marginalized from the larger economy, with restricted access to banks, credit and homeownership, a traditional path toward capital accumulation.

After the Civil War, the government created the Freedman’s Bank. But the bank failed in the Panic of 1873, taking with it $75 million in savings from 80,000 depositors and leaving many American blacks with an ingrained mistrust of financial institutions, Baradaran said. Injustices continued into the modern era. In its early versions, Social Security didn’t cover domestic workers, many of whom were black women. After World War II, blacks were barred from buying homes in Levittown, the archetypical suburbia that was financed with federally insured loans.

Another speaker was James McAndrews, a former Federal Reserve researcher and a faculty member at University of Chicago’s Booth School of Business. McAndrews is also CEO of The Narrow Bank, or TNB USA, which was founded in Connecticut in 2016 to perform one function. TNB would accept large deposits from institutions and transfer the money to an account at the Fed.

McAndrews wanted to cash in on the Fed’s policy, introduced after the 2008 crisis, of paying member banks 1.95% on their excess reserves. Those banks are not passing those earnings through to depositors, however. McAndrews saw an opportunity to get an account for TNB at the Fed, and pass through 1.90% of that 1.95% to his depositors, taking a five basis-point service fee ($500 per $1 million).

But the Federal Reserve Bank of New York denied TNB USA a Master Account. So last September, McAndrews sued the Fed. The Fed won’t say why it won’t give TNB an account. But, as TNB says in its lawsuit, “If successful, TNB would place competitive pressure—primarily on large banks—to raise depository interest rates for all depositors.”

What about wampum?

Desan, the organizer of the conference, is a law professor who, after setting out to write a legal history, ended up writing a history of English money because, as she told an audience in New York in late September, the English legal system and English money grew up together. A nation’s money, she found, is a legal construct—a creature of the law, a contract.

But what about wampum, cowry shell money and especially gold, which many consider the only true money? Didn’t primitive people create so-called “commodity money” to ease the frictions of barter? Didn’t “goldsmith bankers” invent paper money by circulating gold receipts? Isn’t money a private matter?

Those are well-preserved fictions, Desan explains in Making Money: Coin, Currency and the Coming of Capitalism (Oxford, 2014). The immense abstract quantities of national currencies that now exist did not evolve from the exchange of gold coins between private traders, she says. According to her book (and a growing shelf of financial histories with a similar theme), money in the modern sense appeared when kings and parliaments, to mobilize unprecedented sums for war or infrastructure, began spending IOUs whose value depended on the future redemption of those same IOUs as taxes.

“Making money, a phenomenon almost impossible to explain if we limit our field of vision to individuated exchange, becomes easily comprehensible once we enlarge that lens to include the collective activity that links individuals and communities,” Desan writes. “Money is a way to mark and mobilize material value that can start at the center, work selectively and with limited information, and yet enlist the contributions of a broad group.” If you read this book, you’re bound to look at money in an entirely new way.

The Economic War-of-Choice on China

Posted on December 20, 2018 by Jim O'Neill -

The brewing conflict between the United States and China is typical of zero-sum contests among countries, firms, and individuals. The US is acting under the implicit assumption that if China’s GDP were to surpass that of the US in nominal dollar terms, US economic prospects would be reduced by an amount equal to the margin of China’s gain.

The idea that there needs to be a battle over trade or technological dominance at all is very much in keeping with US President Donald Trump’s approach to economic and foreign policy. The recent arrest of Huawei CFO Meng Wanzhou in Canada itself raises the notion that the Trump administration is resorting to increasingly cutthroat methods to get its way.

Yet lost behind the spectacle of high-profile arrests are a few basic economic facts. For starters, one country’s gain is not necessarily another’s loss. Both the US and China could have vibrant tech sectors that benefit from each other’s innovations. Moreover, China’s economy is a key driver of growth in many other countries, including the US. And given that its economy is already larger than America’s in terms of purchasing power parity, the fear that it will surpass the US in terms of nominal GDP – which is not the same thing as wealth – seems rather beside the point.

It is only natural for a dominant power that finds itself in second place to experience self-doubt or a loss of confidence. But the US will just have to get over it, as the rest of the world did when America became the single largest economy. Besides, the two primary factors behind long-term economic growth are the size of a country’s working-age population and its productivity. China has a significantly larger population than the US does, so it stands to reason that it will surpass the US in nominal size at some point (unless it were trapped in a permanent state of poor productivity). The same is true for India.

Another factor that has been overlooked is the Chinese consumer. For many businesses in a given economy, the size of the domestic consumer market is the strongest determinant of potential growth. At the start of this decade, Chinese government statistics showed that domestic consumption accounted for 38% of GDP; by the end of 2017, that figure had risen to 42-43%. In nominal terms, China’s consumer market is now around one-third the size of America’s, which is why iconic US companies like Apple sell so many iPhones there.

Ten years after the global financial crisis, US domestic consumption remains at around 70% of GDP. But it is unlikely that the global and US economies will be able to rely on this source of demand for another decade, which is precisely why the Chinese market’s rapid growth should be welcomed by all – not least Western companies, whose bottom lines will increasingly depend on Chinese consumers. Given its growth potential, the Chinese consumer market will continue to attract US companies and investors, including from Silicon Valley. So far, Chinese regulations do not seem to have discouraged the big US-based tech companies. Even Google, which left China eight years ago, is reportedly developing a censored search engine to meet the Chinese government’s conditions for re-entering the market. Similarly, leading Silicon Valley investors such as Sequoia have been highly active in Chinese venture-capital start-ups for years

Other countries can certainly disagree with China’s approach to domestic governance. But as a sovereign country, China is justified in pursuing the policies that it sees fit, at least until evidence emerges that its own people object to the course it has charted for itself. The widespread adoption of digital applications such as WeChat – a broader Chinese version of WhatsApp – suggests that Chinese consumers are not particularly put off by government controls, and quite enjoy the wealth of new platforms at their fingertips. Moreover, there has been evidence that some US tech companies appear not to have full control of their own platforms. China’s more controlling line on corporate behavior might not suit freewheeling businesses, but may have some social benefits.

As for the Huawei case, if it turned out that the company did indeed violate contractual obligations not to transfer US technology to Iran, then it is only reasonable that there should be consequences. That is true for any exporting business: US secondary sanctions mean that companies and governments everywhere must consider whether their business with Iran is more important than their business with the US.

But the US also needs to think carefully about its own actions. At some point, the dollar’s status as a global means of payment and reserve currency could be challenged. If the US is too aggressive in its enforcement of secondary sanctions, other countries might either develop payment systems of their own or forbid their companies from doing further business with US firms.

Whether China can become the world’s largest economy without also achieving technological dominance is an open question. But it is not one that other countries should be obsessing over at the expense of their own economic growth and long-term stability.

Numbernomics’ Forecast for 2019

Posted on December 20, 2018 by Stephen Slifer -

Stock market jitters are making investors nervous. We understand why. The expansion is approaching its 10-year anniversary, which makes it geriatric. GDP growth overseas has slowed. Home sales have been shrinking steadily for a year.

However, we believe the stock market’s fears are overblown. For 2019 we expect:

GDP growth of 2.8%.
Inflation should be steady with the core CPI rising 2.3%.
The Fed will boost the funds rate twice in 2019 to 2.75%.
The stock market should reach a new record high level.
Sustained rapid growth in investment spending will quicken productivity and boost the economy’s speed limit to 2.8% by the end of this decade.
This expansion will not end in the foreseeable future.

To forecast GDP growth, we break it down into its major components – consumer spending, investment, trade, and government spending.

Consumer spending

Consumer spending, which is about two-thirds of the GDP, is likely to grow 2.6% in 2019. While the stock market has fluctuated wildly for two months consumer confidence has been unfazed. Why? Jobs. The economy continues to crank out 190,000 new jobs per month. Job creation generates the income that allows us to spend.

Some economists note that consumer debt has climbed to a record high level. But consumer income has also risen and, as a result, debt in relation to income is near a record low level. Consumers are not saddled with excessive debt. If we were, delinquency rates should have begun to climb. That has not happened.

Bottom line: Look for consumer spending to grow 2.6% in 2019. Remember, consumers account for two-thirds of GDP.

Housing

The housing market has declined steadily throughout the year. While disquieting, we had a similar drop in 2014. Ex-Fed Chair Bernanke said that the Fed planned to slow its purchases of its U.S. Treasury bonds. The markets panicked. Long-term interest rates spiked and home sales got crushed. But eventually reality sank in and sales rebounded. We expected something like that to happen again. Is the recent decline attributable to a drop-off in demand? Or is it a supply constraint? We argue it is primarily the latter.

The National Association of Realtors (NAR) reports that there is currently a 4.3-month supply of homes available for sale and that a six-month supply is necessary for supply and demand to be in balance. Hence, there is a considerable shortage of homes available for sale. Realtors cannot sell what is not for sale. If enough homeowners were to put their houses on the market so that there was six-month supply, sales would be 5.8-6.0 million versus 5.2 million currently. Thus, the problem is largely a supply constraint.

Some economists contend that the combination of rising home prices and higher mortgage rates has made housing unaffordable. That is not true for most potential home buyers. The NAR’s housing affordability index, which includes prices, mortgage rates, and consumer income, has been rising steadily.

This index tells us that consumers have 45% more income than is necessary to purchase a median-priced home. In 2007 that same number was 14%. Housing was expensive at that time. That is not the case today.

On the demand side, the average length of time between listing a home and its sale is 33 days. In 2011 the comparable figure was 95-100 days. Clearly the demand for housing remains robust.

For builders the primary constraint seems to be a labor shortage. They cannot find an adequate supply of workers. That puts a lid on how many homes they can produce. Our sense is that housing will climb about 4.0% next year, but that is not fast enough to alleviate the extensive housing shortage.

Investment

Investment spending is another 15% of the GDP pie. Business confidence is soaring. That is true for manufacturers, non-manufacturing firms, small businesses, and big businesses. Small business confidence is particularly noteworthy since it has reached a 35-year high. Why? The tax cuts. All measures of confidence surged immediately after the November 2016 election. The combination of tax cuts, repatriation of overseas earnings at a favorable tax rate, and the elimination of unnecessary, overlapping, and confusing regulations has buoyed business optimism.

That confidence has stimulated investment spending, which surged in the first quarter of 2017 and continues to this day. While some economists suggest this is a short-term development triggered by the tax cuts, we do not share that view. A reduced tax rate and further deregulation will spur investment spending for years to come.

Also, the 3.7% unemployment rate is the lowest in 50 years. Labor shortages are extensive. If firms cannot hire an adequate number of new workers, they might contemplate spending money on technology to make the company’s existing workers more productive. This will provide further stimulus for investment. Thus, we expect investment spending to grow 6.5% for the next several years.

Trade

Trade has gotten lots of attention recently. All economists support the notion of free trade. All countries benefit. But free trade is not fair trade. Not all countries play by the rules. Some cheat. The primary culprit is China, which does not respect intellectual property rights, steals trade secrets, and forces companies who want to do business in China to share their technology. The object of the trade negotiations is to encourage China to reform.

But Trump initially said he was concerned about the size of the trade deficit and wanted to shrink it. To that end, he imposed steel and aluminum tariffs on our neighbors, friends, and allies as well as China. They retaliated. Suddenly a trade war was underway.

While all countries lose as the result of a trade war, not all countries lose equally. As investors scoured the globe to find which countries might fare best in a trade war, their answer was the U.S. After all, trade only represents about 10% of the U.S. economy, versus about 50% elsewhere.

As a result, money has poured into the U.S. stock and bond markets since January. The dollar has climbed 9%. Tariffs imposed by other countries will reduce growth of U.S. exports, but the flood of money into the U.S. by foreign firms who start new businesses here and hire American workers will limit the damage.

That is not the case for emerging economies. They generally import the raw materials required by their manufacturing sector. But those commodities are all traded in dollars. When the dollar rises, their cost of goods sold increases. It becomes more difficult for them to compete in the global marketplace. As a result, their currencies decline. Their stock markets plunge. Indeed, the emerging markets stock index has fallen 23% since February. Slower GDP growth lies ahead.

In October the IMF lowered its projection of 2019 GDP growth for emerging economies by 0.3%. Growth in China should slip to 6.5% this year, the slowest rate of expansion since 1990. Even slower growth is expected in the years ahead. This slower pace of growth outside U.S. borders – China in particular – is one factor weighing on the U.S. stock market.

As growth prospects dim for these countries and the pain intensifies, there is increasing pressure on their leaders to strike a trade deal with the U.S. Thus far that has happened with Mexico and Canada. A deal with Europe seems close. China, not so much. But if Trump broadens and further raises tariffs on Chinese goods at the end of this year the pressure on both sides will intensify. We believe that by spring the U.S. and China will reach an agreement with both sides claiming victory.

Unfortunately, previously imposed tariffs on U.S. goods by China and other countries will reduce growth in U.S. exports, cause the trade gap to widen, and the trade component will subtract about 0.2% from U.S. GDP growth in 2019.

GDP expectations

When we combine these GDP components, we come up with projected GDP growth for 2019 of 2.8%. Our GDP forecast for the next several years differs from others because we expect rapid investment spending to continue for years, which will boost productivity growth and, eventually, raise our economic speed limit to 2.8%. Most other economists expect investment growth to fade soon and potential growth to remain at 1.8%.

Nobody knows exactly what the economy’s potential growth rate is, but we estimate it by adding the growth rate of the labor force to growth in productivity. If we know how many people are working and how efficient they are, we should be able to estimate how many goods and services they can produce.

In the 1990’s potential growth was believed to be 3.5%, consisting of 1.5% growth in the labor force and 2.0% growth in productivity. The economy grew at that rate for a decade and we concluded that in the good times the economy should grow by at least 3.0%.

But in recent years potential growth rate has slipped to 1.8%. The baby boomers are retiring, and labor force growth has slipped to 0.8%. Productivity growth has faded to 1.0% following a growth spurt triggered by the introduction of the Internet in the mid-1990’s and the cloud and apps in the early 2000’s.

While GDP growth of 1.8% is disappointing, it does not have to remain there forever. But to increase it we need to boost either growth in the labor force or growth in productivity. Labor force growth is unlikely to accelerate because the baby boomers will continue to retire for another decade. Fortunately, productivity growth is determined to a large extent by growth in investment. Our bet is that sustained rapid growth in investment will boost productivity growth from 1.0% in recent years to 2.0%, and the economy’s potential growth rate will climb from 1.8% to 2.8%. That means that the economy can grow at a steady 2.8% pace without triggering an upswing in inflation.

Core inflation

We estimate that the core inflation rate will edge upwards from 2.2% this year to 2.3% in 2019. There are components, like housing, that will put upward pressure on the inflation rate. Rents, which represent about one-third of the entire CPI index are growing by 3.3% which reflects the shortage of rental units.

But there are two factors that have kept inflation in check which are not widely discussed.

First, is the role of technology. Whenever we buy anything, we shop first on Amazon and can find the lowest price anywhere in the world. As a result, goods-producing firms in the U.S. have absolutely no pricing power. In the past year prices of goods have risen 0.2%. Prices of services have risen 2.9%. This means that inflation is virtually non-existent for one-third of the economy.

Second, productivity growth is countering most of the faster growth in wages. Given the tight labor market wage growth has accelerated from 2.0% to 3.0%. Most economists worry that this will cause an upswing in inflation. But they are looking at the wrong thing.

If employers pay their workers 3.0% higher wages because they are 3.0% more productive, they don’t care. They are getting 3.0% more output and have no incentive to raise prices. Workers have earned their fatter paychecks. Thus, we are supposed to look at “unit labor costs” which are labor costs adjusted for the increase in productivity. In the past year unit labor costs have risen 0.9%. The Fed has a 2.0% inflation target. As a result, the seemingly tight labor market is not putting upward pressure on the inflation rate.

Fed policy

If productivity continues to climb, it will help to keep the inflation rate in check.

If in 2019 we end up with 2.8% GDP growth and inflation is relatively steady at 2.3%, the Fed will be cautious about further rate hikes. For years the Fed thought that a “neutral” funds rate was about 3.0%. But recent speeches by Fed governors make it clear that the Fed is rethinking that objective and may lower it to 2.75%. Given that the funds rate currently is 2.2%, that implies only two rate hikes in 2019. The Fed is getting close to where it wants to be.

When will the expansion end? We do not know, but probably not before 2022. We want to see two things to happen before we call for a recession:

The funds rate should be at least 5.0%.
The yield curve must invert, meaning that short rates are higher than long rates.

We have found that the U.S. economy has never gone into recession until the funds rate has been above the 5.0% mark. If the Fed raises the funds rate to 2.75% by the end of next year and leaves it there, a 5.0% funds rate will not happen for the foreseeable future.

We have also found that when the yield curve (which we define as the difference between the yield on the 10-year note and the funds rate) inverts, a recession follows within a year. Today the 10-year note is 3.0%, the funds rate 2.2%, so the yield curve has a positive slope of 0.8%.

By the end of next year, we expect the funds rate to be 2.75% and the yield on the 10-year note to be 3.4%. The curve will have a positive spread of 0.65%. By the end of 2019 (and for 2020 and 2021), we expect neither of our preconditions for recession to be met. For this reason, we believe the expansion will continue at least until 2022.

Positive scenario

We have described a very positive scenario. Potential GDP growth rises from 1.8% to 2.8%. Inflation remains steady at 2.3%. The Fed raises rates only twice more and the funds rate peaks at 2.75%. The stock market will climb to a record high level during 2019. But for this to happen, investment spending must continue to grow rapidly, and productivity must sustain a 2.0% pace.

BlackRock, Microsoft & Retirement: What’s Up?

Posted on December 20, 2018 by Kerry Pechter -

Microsoft and BlackRock, have formed a partnership “to make it easier for people to both save for retirement and achieve the lifetime income they need through their employers’ workplace savings plan,” according to a press release the two companies issued December 13.

That sounds significant. An global tech firm and an global asset management firm are strategizing to analyze and manage some of the trillions of dollars of Boomer savings that reside in 401(k) funds. The Wall Street Journal first elaborated on the deal.

The two companies didn’t exactly commit themselves to the guaranteed lifetime income business, however. According to a report in Bank Investment Consultant that cited the Journal article,the envisioned Microsoft-BlackRock platform will offer “target-date funds and other investments like annuities.” “Like,” in this case, could easily mean “similar to” rather than “such as.”

BlackRock didn’t seem to announce anything very new. According to the press release the firm “intends to offer the platform” to retirement plan participants “in connection with next generation investment products that it will design and manage.” It would give participants “more regular engagement with their retirement assets so they have a clearer picture of how their contributions today will translate to long-term retirement income.”

BlackRock already is known to do those things. It offers LifePath dynamically managed target date funds to plan sponsors, it offers the “LifePath Spending Tool” that estimates how much a retiree can spend every year, and it offers the CoRI tool. This tool help pre-retirees figure out how much safe income (based on current bond yields rather than annuity payout rates), their savings can produce.

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The newest news here may be the entry of Microsoft into the retirement space. And the catchiest part may be the Ex Machina sexiness that any mention of artificial intelligence (AI) implies. “Seems like [BlackRock and Microsoft are] hoping to get ahead of the AI curve,” one trade group executive told me.

When I observed that neither BlackRock nor Microsoft are 401(k) recordkeepers, and don’t have direct access to a mountain of big data, the executive said: “There are lots of ways to gather/access big data. The bigger question is what to do with it once you have access, which is where Microsoft comes in.”

The announcement was “short on details, by design,” said a DCIO executive. “This is more about positioning. It’s not about making a big bet. BlackRock has been putting a bet on every chip, but this is not about making a big new bet.” He was referring to BlackRock’s bets on fintech with the purchase of Future Advisor and stake in Acorns, on data analysis with the creation of Aladdin, on institutional investments with LifePath TDFs, and on registered investment advisors with its recent purchase of 5% of Envestnet. BlackRock also has a new deal to integrate its iRetire income support service with eMoneyAdvisor, the Fidelity-owned planning software firm.

“The press release put ‘retirement income’ pretty strong,” he added. “The moral imperative is always hard on income. But I don’t believe this is a reincarnation of SponsorMatch.” That was a reference to an aborted 2007 partnership between MetLife and Barclays Global Investors (purchased by BlackRock for $13.5 billion in June 2009) to offer plan participants an option that combined investments with incremental purchases of future guaranteed income.

Another source was more positive. He told RIJ that BlackRock CEO Larry Fink is serious about partnering with an insurance company on an investment product, such as BlackRock’s target date funds, with a lifetime income benefit and piloting it in the next year or two with a plan sponsor.

BlackRock, according to that version of the story, wants to persuade at least one life insurer that its future in the defined contribution space lies in putting insurance inside a BlackRock investment wrapper, so to speak, where the insurance part isn’t so visible and scary.

“The best way for the insurance industry to be successful is for the asset management industry to see [its products] as another asset class. All of a sudden, you’re no longer on the other side of the fence. The advisor will see [annuities] as a natural component in the portfolio. Then the opportunity for you to grow will be ten-fold. If insurance folks are smart, like the Alliance for Lifetime Income seems to be, they will be the first in line to support the mentality we’re starting to see from BlackRock.”

That might be overestimating both the enthusiasm of the life insurers for the defined contribution space, where Prudential’s IncomeFlex has gotten little penetration, as well as their appetite and capacity for a lot of new equity-linked risk. While the big variable annuity issuers support the Alliance for Lifetime Income’s public relations effort, the variable-annuity-with-lifetime-income-rider business has been shrinking since 2014.

Others are not convinced that BlackRock wants to take on the complexities of retirement risk mitigation. “On first pass, it looks RINO—retirement in name only—a defined contribution savings and investment (for retirement) play, not a process to manage risk exposures in retirement,” said Francois Gadenne, chairman and executive director of the Curve Triangle & Rectangle Institute and a long-time observer of the retirement industry landscape.

“I think BlackRock’s deal with Microsoft is similar to [Ric] Edelman’s deal with Financial Engines as well as Envestnet’s deal with Yodlee. All three cases are efforts to pair a monetization engine with client-data fuel. The next question becomes: Who in the financial industry will do the matching deals with Facebook, Apple, Netflix, Google, etc.?”

An executive acquainted with the challenges of introducing income solutions into the define contribution space told RIJ, “The news release doesn’t say much beyond the fact that Fink and Nadella met and agree that there’s a retirement crisis and that by using investments and technology they might be able to solve for it. But there’s a bunch of tools out there already; the issue isn’t tools but utilization.

“Also, BlackRock doesn’t have a retirement platform, so I don’t know how they can get access to participants. If they want to partner with someone, it would have been better to partner with Intuit, which owns Mint.com. Microsoft got rid of Microsoft Money [in 2009]; if it wanted data it wouldn’t have done that. I’m not sure what the point of the press release was. Maybe just to cause distraction.”

* * *

BlackRock’s announcement could also be interpreted as a cry for help. The big DCIO [defined contribution investment-only] mutual fund and ETF firms are at risk of being marginalized out of the $27 trillion retirement income space. Their skills are getting automated and their fees are being compressed. In contrast to Vanguard, Fidelity and other full-service plan providers, they are razor blade makers without their own razor.

But, while they fit well into the pre-retirement space, they don’t line up as well against the post-retirement challenge. That’s because the asset managers are by nature risk sellers, and retirees, whether they know it or not, are inherent risk sellers too. They need a counterparty that will buy some of their risk.

The beauty of the asset management business is that the customer owns the risk. (This is not true for asset managers who also invest on their own behalf; that’s another business.) The asset managers can offer retirees products that diversify risks (balanced mutual funds), that carry smaller risks (bonds and bond ladders), that hedge risks (managed-volatility, dynamically-allocated funds), and that charge almost nothing for risk (exchange-traded funds).

But asset managers don’t buy risk. They can’t buy risk; it’s not how they make money. That hinders them in the retirement income space, where millions of mass-affluent retirees arguably need to sell some of their longevity risk. (The asset managers have, it’s true, entered the longevity game via variable annuities with living benefits. But the life insurers themselves have retreated from that game, preferring to wrap income riders around less volatile indexed annuities.)

Life insurers, on the other hand, are longevity risk buyers. They match up well with longevity risk sellers. Instead of upside potential, they offer mortality credits. So far, it’s mainly the mutual companies with career agent forces, like New York Life, that have a big appetite for the risk inherent in plain vanilla income annuities.

That reflects a difference in business models. Publicly held life insurers must sell products with bigger profit margins than conventional income annuities generate. Those same insurers also tend to distribute through third-parties, most of whom don’t earn enough on the sale of life annuities to take a big interest in selling them. But that’s fodder for another day.

In short, retirees need long-term counterparties who buy or share longevity risk. The DCIO asset managers like to date their clients, and even go steady. But they shy away from deep commitments. They’re not the marrying kind. The life insurers are better equipped to form long-term relationships with Boomers. Ironically, they have an even tougher time getting into the defined contribution space than asset managers do.

New Jersey to establish auto-enrolled IRA for workers without plans

Posted on December 20, 2018 by Editorial Staff -

The New Jersey Assembly on Dec. 17 passed a bill that would establish a state-run employment plan for private-sector employees whose employers have not offered a retirement plan in the preceding two years, NAPANet reported this week.

In a 52-24 vote, the Assembly approved A 4134, a bill that would establish the New Jersey Secure Choice Savings Program. A December 10 statement from Assembly Appropriations Committee described the program as “an automatic enrollment payroll deduction Individual Retirement Account for certain private sector employees.”

Like similar initiatives in California and Oregon, New Jersey’s plan requires employers who don’t currently offer a retirement plan to “establish a payroll deposit retirement savings arrangement to allow its employees to participate in the plan.” Employees are auto-enrolled but can opt-out of the plan.

States where Democrats control the legislatures have taken the lead in establishing these plans. Legislators there and in other states hope to address the problem that too many of their states’ workers don’t have access to a retirement savings. Those workers are at risk of under-saving for retirement and relying on public services in their old age.

The private retirement plan industry has been ambivalent about these plans. Some industry members expect mandates to drive employer adoption of private retirement plans. Others resist competition from a “public option” in the retirement plan space. Still others worry that such plans will produce a “patchwork” of retirement plans across the 50 states. But the Trump administration has abolished the Obama Administration’s MyRA national auto-enrolled IRA program.

“Open multiple employer plans,” which are the subject of legislation currently before Congress, are a private-sector alternative to the state plans. Some believe that these open MEPs could shrink the coverage gap that state plans are addressing. At any given time, only about half of U.S. workers have access to a retirement plan at work. Low-income and minority workers are especially likely to work at small firms that don’t offer retirement plans.

The New Jersey plan may offer a variety of to-be-determined investment options, the bill said, but the default investment will be a target-date “lifecycle” fund. Fees can’t exceed 75 basis points per year. Businesses less than two years old and businesses that have employed fewer than 25 people in the past calendar year don’t have to participate in the program but they can.

Further details about the program will be established by a New Jersey Secure Choice Savings Board and the finances of the program will be paid out of a New Jersey Secure Choice Administrative Fund.

The bill established penalties for covered employers who don’t help their employees participate in the program or who mishandle funds. The penalties start with a warning, and include a $100 fine for not enrolling employees who haven’t opted out, and become as severe as $5,000 for employers who collect employee contributions but don’t remit them to the savings fund.

The bill was introduced by Assembly members Roy Freiman (D-Hunterdon, Mercer, Middlesex and Somerset), Raj Mukherji (D-Hudson) and Carol Murphy (D-Burlington). The Assembly Financial Institutions and Insurance Committee reported A4134 favorably on Oct. 15, and the Assembly Appropriations Committee followed suit on Dec. 10.

The Senate version, S. 2891, was introduced on Aug. 27. The Labor Committee of the New Jersey Senate approved the bill on Dec. 3 and referred it to the Senate Budget and Appropriations Committee.

Prudential surveys ethnic, gender finances

Posted on December 20, 2018 by Editorial Staff -

Averages are of little or no use for demographic studies. They show you how many numbers are above or below a halfway line, but they don’t tell you anything about people. They can mask a dramatic situation. They can be used to mislead. Averages are more of a crime than a law.

Medians aren’t ideal for demographic analyses either, but they do take humans into account. They show you how many people are above or below a halfway line. In its new study of incomes of various ethnic and gender groups in the U.S., Prudential Financial uses median figures.

Prudential has just published “The Cut: Exploring Financial Wellness Across Diverse Populations,” a follow-up to its 2018 Financial Wellness Census. Both documents support Prudential’s recent emphasis on financial wellness programs in retirement plans.

All of the major retirement plan providers have jumped on the financial wellness bandwagon as a way to extend, integrate and make stickier their product offerings to plan participants, whose post-employment flow into rollover IRAs they’d like to slow or capture.

In “The Cut,” Prudential offers comparative survey data on six groups: Asian-Americans, Black Americans, Latino Americans, Women, members of the Lesbian-Bisexual Gay-Transgender community (LBGT), and Caregivers (people who are employed but who also provide care for an elderly, ill or disabled person at home). These groups are benchmarked against Prudential’s statistics on “the general population.”

Asian-Americans

While Asian-Americans represented only about one in 20 American in 2015, Prudential’s 2017 survey found that they had the highest median incomes of any ethnic group. The median household income for Asians was about $81,000, or 19% above the median for non-Latino whites.

Foreign-born Asian-Americans were concentrated at the high end of this group, possibly due to “foreign-born Asians skewing older as well as immigration regulations favoring highly-skilled immigrants.” Immigrants from India, the Philippines and Japan had the highest household incomes. Immigrants from Bangladesh, Nepal and Burma had the lowest, according to Pew Research Center data cited by Prudential.

Asian-Americans are the biggest savers, the most likely to send money to relatives overseas and the most likely to act as caregivers. Foreign-born members of this group save or invest 47% of their monthly income in accounts marked for growth or retirement, and are the group most likely to use a workplace retirement savings plan.

For U.S.-born Asians, the percentage was 36%. For the general population, the figure was just 10%. “Asian-Americans spend only about 20% of their monthly income on necessities, while the general population spends 46% on average,” Prudential said.

African-Americans

Despite the palpably high representation of African-Americans in television commercials for financial services and luxury goods, Black Americans, along with Latino Americans, lag behind the general population in savings and preparation for retirement, Prudential’s survey showed. But there was an indication that conditions for Black Americans are changing.

“Nearly half of higher-income black households surveyed [those with incomes above $60,000 a year] are Gen X, for example, while less than one in five are Baby Boomers,” Prudential found. “Among the general population, the reverse is true: Boomers accounted for 42% of higher-income households and Millennials only 24%.”

About 60% of Black Americans have incomes below $50,000, while about 10% have incomes over $100,000, according to charts in The Cut. Those with incomes over $60,000 have an average of about $54,000 saved for retirement compared with an average of $276,400 for the general population that has income over $60,000.

Caregivers

People of color are more likely to be caregivers, Prudential found. While more than 30% of Black, Asian, and Latinos reported providing caregiving services, only 22% of white Americans did. Thirty-eight percent of caregivers said they don’t think they would ever be able to retire, for example, versus only 25% of non-caregivers.

The circumstances of caregivers depended in part on whom they cared for. “Those caring for someone other than a parent, spouse or child are more likely than other caregivers (28% versus about 21%) to have household incomes under $30,000 per year, and are notable exceptions. Those caring for spouses tended to be older and have slightly higher incomes than other caregivers.

Income data for Latino-American and LBGT households was lower than that of the general population, in part because those groups skew younger than the general population and are not as advanced in careers. More than half of LBGT women have children, versus 17% of LBGT men.

“The average annual income for women in our sample was $52,521, compared with $84,006 for men—a difference of 37%,” Prudential said. “Women are earning about 63 cents for every dollar earned by men. Lower incomes mean less money available today for saving and investing, and lower Social Security benefits tomorrow for retirement—a double whammy for women after they leave the workforce.”

Organizational Repositioning to Create Value

Capital Redeployment

The First Wave of New Entrants

The Second Wave of New Entrants Emerge

Advances in ‘A.I.’ favor direct channel growth: Cerulli

Securian issues new MYGA contract

Small employers warm to retirement plans: LIMRA

Citigroup settles 401(k) fiduciary lawsuit for $6.9 million

Transamerica sued by its own 401(k) participants

What a difference a month makes

Alight and Advizr in financial wellness partnership

AIG buys Ellipse, a UK group life insurer

Consumer spending

Housing

Investment

Trade

GDP expectations

Core inflation

Fed policy

Positive scenario

Asian-Americans

African-Americans

Caregivers

Data Connection

Lists*