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Wednesday 07.20.2016

Student Debt Helps, Not Harms, the U.S. Economy, White House Says

The White House just released a big report on student debt that contains all the familiar horrors about for-profit schools, indebted dropouts and students defaulting on their loans. But it has an interesting conclusion: That growing stack of $1.3 trillion in student debt is helping, not hurting, the U.S. economy.

That conclusion is sure to rankle the many student advocates and special-interest groups—from real-estate agents to employers seeking new tax breaks for their young workers—that argue student debt is a big “drag” on the economy. (Hillary Clinton and Donald Trump have each decried the rise in student debt.) But the 77-page report from the White House Council of Economic Advisers backs up its claim with numerous charts and studies from economists and academics.

The surge in student debt occurred largely on President Barack Obama’s watch, though it began several years earlier. Since early 2009, when Mr. Obama took office, student debt has nearly doubled, to about $1.3 trillion today, according to the New York Federal Reserve. The uptick owed much to the sorry state of the economy: During high unemployment, enrollment in college and graduate school typically rises, the White House notes. That’s because for workers, the so-called opportunity cost of going to school–the wages they lose from not working—is lower.

Between 2005 and 2010, college enrollment grew 20%, the biggest increase since the 1970s, the report notes. Individual, not just aggregate, student-debt burdens also grew, but they remain manageable. Borrowers owed an average $17,900 in debt from college, but not grad school, in 2015. (The report doesn’t cite a source for that figure. Other studies show that, upon graduation at least, undergraduate borrowers owe, on average, between $29,000 and $37,000).

Current U.S. economic recovery may end up as longest ever

The seven-year-old economic recovery in the U.S. is already the fourth longest since 1850, and the odds of the current expansion breaking the record is not so farfetched.

The long road back from the Great Recession began in mid-2009 and July marks the 84th month of recovery. By next February the expansion is likely to move into third place. The expansion can break an all-time record of 120 months if the economy continues to chug along until June 2019 — three years from now.

What puts the record within reach is an ultra-cautious and highly accommodative Federal Reserve, says High Frequency Economics in a research paper. Most modern recessions have been proceeded by a cycle of Fed Interest rate hikes that make loans — car loans, mortgages, corporate credit — more costly to obtain. During the current recovery the central bank has kept its benchmark short-term interest rate near zero almost the entire time.

The Fed did raise rates for the first time in nine years in December, but only by a quarter of a percentage point. It’s held off raising rates again so far this year because of fresh worries about the health of the labor market, the broader U.S. economy and unsettling developments overseas such as the U.K. vote to exit the European Union. Money is still dirt cheap.

Comerica Bank to Cut Workforce by 9%, Close 38 Branches

Comerica Bank, reporting lower profits in its second quarter, announced plans to reduce its workforce by about 9% and consolidate branches in an attempt to drive additional income.

Comerica’s efficiency plan will cut about 790 of its 8,792 full-time employees and close some 38 of its 473 branches. The move is expected to drive additional annual pre-tax income of about $140 million through the end of 2017, and $230 million by year-end 2018, the bank said.

The Dallas-based regional bank reported second-quarter net income of $104 million, or 58 cents per share, well below analysts’ estimates of 69 cents per share of income. Net income was also 23% lower than the $135 million (73 cents per share) reported in the same quarter a year ago. Falling profits were attributed to overall higher expenses, continuing low interest rates, and a troubled energy loan portfolio that threatens repayments.

Comerica’s energy loans declined by $356 million from the previous quarter. The bank reported $550 million of nonaccrual loans, reflecting uncertainty over timely repayments. “”We have completed 88% of the spring redeterminations for our ([energy] exploration and production) customers, and borrowing bases have come down about 22% on average,” Ralph W. Babb Jr., Comerica chairman and CEO, said. “Criticized energy loans have declined $281 million to 57% of energy loans as of the end of the second quarter. While oil and gas prices have improved, we remain cautious and believe with our reserve allocation at over 8% of energy loans as of June 30, we are adequately reserved. Credit quality in the remainder of the portfolio remains strong.”

Why Steve Forbes Was Surprised by Gold’s Rally

America's '$13 trillion gorilla' is getting even bigger

There seems to have been one constant source of hope for the US economy over the past year: the US consumer.

Even as the stock market was falling, the UK was exiting, and corporate earnings kept disappointing, the US consumer has shown a resiliency that has buoyed the hopes of many economists.

According to the Macquarie consumer equities team, recent trends have highlighted that not only is the American consumer looking strong, but there are good reasons to think the outlook will only improve.

The Macquarie team said in a note Tuesday that macro data continued to show "that the global economy's $13 trillion gorilla, the US consumer, is getting even stronger." In fact, the team says, the rising income of American consumers has caused American consumers to grow their spending at a historic rate, no matter how you measure it.

Brexit could mean weakest global growth since 2009

Britain's vote to leave the European Union is already weighing on the world economy and could push growth below 3% for the first time since the global financial crisis.

The International Monetary Fund on Tuesday cut its forecast for global economic growth by 0.1% to 3.1% for 2016, a result that would match last year's pace of expansion. But the IMF said it was difficult to predict the fallout from Brexit, and warned that its revised forecast may be way too optimistic, saying more negative outcomes are "a distinct possibility."

"With Brexit still very much unfolding, the extent of economic and political uncertainty has risen, and the likelihood of outcomes more negative than the one in the baseline has increased," the IMF said.

Investors and businesses are worried about Brexit because no country has left the EU before. It is unclear what kind of access to EU markets the U.K. will be able to negotiate. The U.K. government said Tuesday the formal two-year exit process won't start this year, so the separation will drag on at least until 2019.

European Central Bank approves easing of capital controls in Greece

Greece’s creditors have approved a series of initiatives devised by the Bank of Greece aimed at relaxing the capital controls which are currently in place.

The Governor of the Bank of Greece Yannis Stournaras formally sent the request to the European Central Bank on Monday. The plan, which involves lifting all restrictions on withdrawals from any cash deposits, aims to bring back the 15 billion euros that are believed to have been taken out of banks and store ‘under the mattress’.

According to the Governor’s request, bank account holders will be able to withdraw up to 840 euros in cash every two weeks.

The cash withdrawal limit on available funds from abroad will increase from 10% to 30%, while all restrictions on the repayment of loans will also be lifted.

Goldman Sachs Announces Its Biggest Layoffs Since Financial Crisis

This year’s Goldman Sachs summer party will be less crowded.

The Wall Street bank announced on Tuesday morning that it had slashed 1,700 positions in the past three months. It’s the firm’s largest quarterly reduction in headcount since the financial crisis, and it underscores the troubles Goldman is having maintaining profitability at a time when Dodd-Frank and other regulations have significantly limited its ability to make money.

The firm now appears to be leaning toward slashing budgets as the key to boosting its bottom line. Goldman CFO Harvey Schwartz, in a conference call with analysts, called the quarter challenging, and said that the company had embarked on a cost-cutting plan that will save it $700 million a year. Earlier this year, Goldman told employees to cut back on travel plans.

The layoffs mean that Goldman reduced its staff by 5% in the second quarter alone. It’s the third quarter in a row that the firm has eliminated positions. All told, Goldman has cut 2,100 employees in the past nine months. On top of new regulations, the reductions come at a time when Wall Street’s business in general has been slowing. Goldman reported better than expected earnings for the second quarter. But revenue from a number of key segments, including equity underwriting and stock trading, were down dramatically.

More and More Investors Think Central Banks and Governments Will Bring Out the Chopper

Investors are awaiting unprecedented coordination from monetary and fiscal policymakers to kick-start their economies, with Japan seen as the most likely first actor.

Nearly one-third of clients and colleagues surveyed by Citigroup Inc. think that so-called helicopter money could be on its way within a fortnight, as the Bank of Japan meets at the end of July.

"Among respondents, only 31 percent personally thought helicopter money was coming, while 43 percent thought the market expected some form of helicopter money," wrote strategists led by Global Head of G10 FX Strategy Steven Englander.

Helicopter money was first discussed by Milton Friedman back in the 1960s, when he made the case that central banks could simply print money and have it rain down on the populace in order to boost consumer spending and inflation. It's now better understood as a central bank-financed tax cut or set of public works projects, and in many respects is virtually the same as quantitative easing if central bank asset purchases are not unwound afterwards.

California Obamacare premiums increasing 13.2% next year

California's health exchange has been one of the biggest and most successful state Obamacare programs. But today, Covered California, as it's known, announced an average statewide premium increase of 13.2 percent for 2017, setting off a round of criticism and defensive responses.

“These outrageous premium hikes are the consequence of California’s failure to adopt health insurance premium regulation like the majority of the states and the disappearance of federal subsidies for insurance companies to even out bumps in the road ,” said Jamie Court, president of Consumer Watchdog, which sponsored an unusccessful rate regulation initiative in 2014.

Insurance companies said the rate hikes -- more than three times the increases of the last two years -- were the result of factors beyond their control.

“In 2017, Covered California prices are influenced by higher spending on medical care, particularly skyrocketing prices on specialty drugs, and the sunset of two federal programs," said California Association of Health Plans President & CEO Charles Bacchi. “California’s health exchange opened up access to health care for millions, with 11 health plans in Covered California competing over price and quality and in most of the regions of the state," Bacchi said.

Turkey fires 21,000 teachers and demands suspension of every university dean in country in post-coup crackdown

Turkey’s post-coup crackdown took a more sinister turn on Tuesday after tens of thousands of teachers were fired and all the country’s university deans were told they faced suspension.

The licenses of 21,000 staff working in private schools were revoked, more than 15,000 employees at the education ministry were sacked, and the state-run higher education council demanded the resignation of 1,577 university deans.

The purge is part of President Recep Tayyip Erdogan’s heavy-handed attempt to root out supporters of Fethullah Gülen, the US-based cleric accused of orchestrating the failed revolt, whose movement is accused of infiltrating state institutions.

Ankara says the reclusive Mr Gulen, who wields enormous influence in Turkey through loyalists in various apparatus as well as a private school network school, hatched the plot to end Mr Erdogan's 13 years in power from his home in Pennsylvania. "I'm sorry but this parallel terrorist organisation will no longer be an effective pawn for any country," Binali Yildirim, Turkey’s prime minister, said.

U.S. government system dividing America?

America "Dead Broke" - $199 Trillion in the Red

It’s no secret that Social Security is underfunded, but the extent of the problem is glossed over by politicians and the media. This time on Financial Sense, we speak with Dr. Laurence Kotlikoff, William Fairfield Warren professor at Boston University and author of 19 books, about his study of the Social Security problem and his write-in candidacy for the presidential race.

The true health of Social Security isn’t accounted for, Dr. Kotlikoff said, and he projects a fiscal gap of $199 trillion when we take into account the present value of all projected future spending and expenditures, including servicing the official debt and Social Security.

“We’re $199 trillion in the red,” Dr. Kotlikoff said. “The country is dead broke. That $199 trillion is 53 percent of the present of taxes. So, another way of saying this is, we are 53 percent underfinanced, and we need a 53 percent immediate and permanent tax hike.”

That figure will balloon to more than 70 percent if we wait 20 years, he added. Younger generations will have to pay for the shortfall, and the problem is growing rapidly. “It’s generational warfare and fiscal child abuse that we’re involved in,” he said. “Social Security’s fiscal gap, which is part of that $199 trillion figure, is today according to the trustee’s report … $32 trillion dollars. Last year, it was $26 trillion. It actually grew by $6 trillion.”

Sports Authority Hurrying To Close Stores Faster Than Originally Planned

When Sports Authority failed to find a buyer for any of its stores that wasn’t a liquidator, the company began its going-out-of-business sales at all of its stores. Back then, the company predicted that the sale would past roughly all summer, meaning that remaining retail employees would have jobs for about that long. Now, the chain reportedly hopes to wrap things up at the end of July.

That means you can expect even more deep discounts on hockey skates and ski pants, which may be something that you’re into. It’s unfortunate for employees, though, who expected to have a job through Labor Day weekend.

While Sports Authority isn’t confirming or denying that it’s closing early, the Wall Street Journal talked to store employees and managers across the country, who said that they were told that most of the stores would close at the end of July instead of at the end of August as planned.

Presumably, merchandise left in already-closed stores would be transported to a few stores that stay open, creating even bigger piles of ski pants, leggings, and college sports-themed holiday sweaters to get rid of.

June housing starts down

Privately owned housing starts in June showed an increase from May, but decreased from June 2015, according to the U.S. Department of Housing and Urban Development. June housing starts were at a seasonally adjusted annual rate of 1,189,000, an increase of 4.8% from May’s revised estimate of 1,135,000, but a decrease of 2% from last year’s 1,213,000.

Of those, single-family housing starts in June came in at a rate of 778,000, an increase of 4.4% from May’s revised figure of 745,000. “June’s data release shows monthly starts are still about 20% below historical averages,” Trulia Chief Economist Ralph McLaughlin said. “Similarly, our new study finds the rate at which new housing is supplied relative to demand is about 15% below historical norms.”

Additionally, privately owned housing units authorized by building permits in June hit a seasonally adjusted annual rate of 1,153,000. This is a 1.5% increase from May’s revised rate of 1,136,000 but is 13.6% below last year’s 1,334,000.

Of these, single-family authorizations in June were at a rate of 738,000, 1% above May’s revised figure of 731,000. “While restrictive zoning regulation is often named as public enemy number one, our latest research suggests delays in permit approval better explains why new supply is abundant in some areas and stingy in others,” McLaughlin said. “This is because zoning can be changed, while uncertainty over project approval cannot.”

Poor Voters Prefer Clinton To Trump In New Poll

Although presumptive Democratic nominee Hillary Clinton’s lead disappeared in recent national polls, she still maintains a large lead over Republican challenger Donald Trump among the unemployed and those who make under $50,000 a year, according to a Morning Consult poll released Tuesday.

Clinton leads Trump 43 to 37 percent among voters who make under $50,000 a year, and has a much larger lead among the unemployed, at 44 to 34 percent respectively.

Trump makes up for the shortfall with his lead among voters who make over the $50,000 annual mark. Forty-four percent of voters who make between $50,000 and $100,000 annually support Trump, compared to Clinton’s 41 percent. Trump’s lead increases with people who make $100,000 or more annually, earning 45 percent compared to Clinton’s 41 percent.

Workers who hold traditional “blue collar” jobs support Trump over Clinton, with 44 percent for Trump and 38 percent for Clinton. Optimism about the future of the country also varies with income level, according to the poll. Those who made more money were less likely to view the country as, “on the wrong track.” Of those who made more than $100,000 a year, 68 percent reported they felt the country was on the wrong track.

Millennials Are Facing Existential Crisis

The world is ‘Addicted to Debt’

While everyone was talking about Brexit last month, the Bank for International Settlements released its 86th annual report. Based in Basel, Switzerland, the BIS functions as a master hub for all the world’s central banks. It settles transactions among central banks and other international organizations. It doesn’t serve private individuals, businesses, or national governments.

Because it is relatively free from political considerations, the BIS can speak about economic issues more directly than its member central banks can. And its candor has grown steadily in recent years.

When central bankers like Janet Yellen or Mario Draghi speak, we have to discount their statements because they have policy agendas to promote. While the BIS has an agenda, too, the bank isn’t tied to any particular economy or government. Its analysts are paying attention to how the world functions in toto.

So let’s dig into the BIS annual report, parse how its views differ from everyone else’s, and discuss why we are all feeling considerable angst about the future. At SIC 2015, we had the honor of hearing Bill White Speak. He is a former BIS chief economist and now chairs the OECD Economic Development and Review Committee. Bill is more plugged in to the international central banking network than anyone else I know. Bill famously pushed Alan Greenspan to raise interest rates in 2003 so the Fed would have a cushion to use in the next crisis—which he thought would come along in a few years. Sure enough, he was right.

This job pays $263,500 for a few days' work

If you get an invitation to join a corporate board, you'd better accept it. The pay already was good and keeps getting better.

The median total direct compensation for outside directors hit $263,500 last year, an increase of 3% from the prior year, according to an analysis of pay packages from the 500 largest companies by revenue released Tuesday by Willis Towers Watson, a global professional services firm.

Not bad for a job that only requires an average of about eight meetings a year. Much of that pay comes from stock awards, a median of $150,000 to be exact. But in a new development, directors scored a median of $108,000 last year just in total cash payments. That's the first time the cash payment to directors has exceeded $100,000, and this piece of pay alone was up 6%. That $108,000 cash payment includes a median of $100,000 for a retainer, $2,000 for board meeting fees and other cash for being part of various committees. A fifth of companies increased their annual cash retainers last year.

The increases in pay could be the result of more companies looking to get away from paying per-meeting fees to directors and paying "more for value of contributions," says Robert Mustich, Willis Towers Watson's managing director of executive compensation for the East Coast.

54 million Americans think their best long-term investment is cash

When it comes to a long-term investment strategy, more people are sticking with a zero-risk, zero-return mentality. A surprising 54 million Americans said they preferred cash investments for money they did not need for 10 years or more, according to a recent report by Bankrate.com.

Overall, one quarter of Americans said real estate was the most favored investment option for savings they wanted to stash for over a decade, closely followed by cash. Stocks and precious metals were a distant third, tied at 16 percent, while bonds were the least popular at 5 percent.

"While cash investments are entirely appropriate for short-term needs, such as an emergency fund , they are completely inappropriate for long-term investment horizons," Greg McBride, Bankrate.com's chief financial analyst, said in a statement. "Returns on cash investments often trail the rate of inflation, with savers losing buying power as a result."

Younger millennials, or those at ages 18 to 25, overwhelmingly chose cash as their preferred investment for they money they would not need for at least 10 years. That was by more than a 2-to-1 margin over the next highest category, real estate. (Millennials are also less likely to own a home because they simply can't afford one, according to a separate report from the U.K.'s office of National Statistics.)

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