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Top 5 Threats to Your Financial Security

I’ve always considered myself a glass-half-full kind of guy. Tomorrow will be better than today; opportunities will ceaselessly abound. 

Sometimes, though, I get down … and I’ve been a little down lately. I say that because I see more economic fallacies passed off (and accepted) as profound, and more misbehavior tolerated – if not encouraged – than I have seen in my investing career.

Though I don’t believe an apocalypse is imminent, there are a few extenuating factors that could lead to one if they continue along the same ominous trajectory.

1. A Reckless Federal Reserve. No organization has more impact on financial markets than the Federal Reserve. And at no time has the Fed had more impact than it has today.

Through endless money pumping (given the concealing euphemism “quantitative easing”) at $85 billion per month indefinitely, the Fed has filled the economy with trillions of dollars of new monetary units.

Much of that money has found its way into the asset markets: bond markets are at all-time highs (the average yield of junk bonds is below 5% for the first time ever), interest rates are at all-time lows, the collectibles market is booming (many cable-television outlets have multiple shows dedicated to collecting), and farmland prices are soaring.

The Fed’s money has, of course, infiltrated the stock market. Stocks, too, are at an all-time.

This is reason for concern, because the stock market is the only legitimate game in town for income and yield investors. Unfortunately, it has also become an increasingly dangerous game. Thanks to the Fed’s promiscuous monetary ways, stock values are today driven as much by anticipating the Fed’s monetary policy as they are by company fundamentals, thus making the stock market a riskier market.

2. Piling Up of Debt. The Fed and the Treasury Department have a unique symbiotic relationship. The Fed is able to inject new money into the economy by purchasing the Treasury Department’s debt. In turn, the Fed’s demand for this debt lowers the borrowing cost for the Treasury.

At the same time (and this goes under-reported), the Fed monetizes the Treasury’s debt. I say that because at the end of the year the Fed remits all its profits (which include interest payments on Treasury debt) to the Treasury Department, thus further lowering the Treasury’s borrowing cost.

This incestuous alliance between Fed and Treasury undermines the economy in a more inconspicuous, more sinister way.

High levels of government debt weaken individual property rights, because debt must be paid from productive sources – your and my property and labor. Government debt also retards capital accumulation (the source of wealth creation), because government debt is  spent mostly on current consumption. What is spent can’t be invested.

In short, the debt is a big deal, and a potentially dangerous one to the well-being of our economy.

3. Belief in the “Free Lunch.” The height of naivety is to believe in the free lunch – something for nothing. Naivety was exemplified by the believers in Obamacare, who thought this bureaucratic monstrosity would lead to lower cost, better service and universal coverage.

It didn’t take long to discover the opposite is true.

Stories abound of double-digit premium increases for individual health policy holders (around 19 million).  According to management consulting firm Oliver Wyman, single adults age 21 to 29 earning 300% to 400% of the federal poverty level can expect a 46% premium increase. Meanwhile, analysis by WellPoint projects small-group premiums will increase 13% to 23% on average.

Obamacare also hits larger employers, many of whom are subject to a tax penalty if the healthcare policies they provide are insufficiently generous. Employers are reacting to the law’s mandates through rational actions – by lowering wages and by reducing hours, because the penalty doesn’t apply to employees who work fewer than 30 hours per week.

I can’t say I was surprised to read that U-6 employment, which includes people employed part time for economic reasons, ticked up for the first time since July 2012

4. Meaningless Job Growth Statistics. Speaking of employment, we were told by the Bureau of Labor Statistic that the unemployment rate edged down to 7.5%, thanks to 165,000 new jobs being created in April.

It seems intuitive: more jobs, lower unemployment. But if we dig a little deeper we find things aren’t quite as intuitive as they appear.

The unemployment rate factors in only those actively seeking work. If you’ve thrown up your arms in frustration and taken to playing Grand Theft Auto full time, you’re no longer considered unemployed.

The sad truth is the labor force participation rate remains at a decades-low 63.3%. If participation had held constant since December 2007, when the recession started, the unemployment rate would be 11%.

5. Dependency Rising. This is the most subtle and troubling indicator of the five, because government dependency rots the very foundation of economic prosperity – a productive, self-sufficient labor force.

Sadly, our society is becoming less productive and less self sufficient.

The latest USDA report shows the number of Americans on food stamps hit an all-time high last month. According to the bureaucrats at the USDA, 47.8 million Americans – that’s 15% of the population – are subsidizing their food intake at taxpayer expense. Concurrently, the number of Americans receiving federal disability benefits hit a record 10.96 million in April – marking the 195th consecutive monthly increase.

Dependency and idleness are hardly the mettle of a great society.

One, two or even three of these factors set on the same disturbing trajectory might make no difference. But if all five take to the road to perdition, the stock market, the economy, and our financial security will be the worse for wear.

And that’s why I tend to see things a little half empty these days.

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