Hillary Clinton's Plan for Social Security

Faced with increasing pressure from Bernie Sanders for the Democratic nomination, the Clinton camp has recently found it necessary to finally address the issue of Social Security, a topic widely discussed by Senator Sanders. We've written at length about the issues facing Social Security, as well as the flaws in Bernie Sanders' well-intentioned plan for revitalizing this program, upon which so seniors widely rely.

Ms. Clinton's proposal, however, not only lacks substance, but credibility. After all, in previous mention of the topic, her comments have been limited to "don't touch it". Then, as now, not touching Social Security puts us on a path to the program's demise. This is not our view, but that of the Trustees of the Social Security Administration. And lest you believe as Ms. Clinton proclaims that the whole idea of Social Security insolvency is a myth promoted by the GOP, consider that the Trustees of the Social Security Administration, the same ones attempting to alert the public to the impending disaster, are all Obama appointees - and all Democrats.

Clinton's plan to fix Social Security is, first, to kill the notion of privatizing the system. Well, she may be right about this, but killing a proposal hardly provides a fix. Second, she'd "consider" raising the cap on wages subject to the Social Security tax (currently $118,500 per year). Lastly, she'd like to make some sort of adjustment for women, seeing that women often work less years than men, and therefore accrue less Social Security benefits. And, sorry folks, that's about it.

Just to recast the problem, quoting the 2015 report of the Social Security Administration, the present value deficit of the Social Security Trust Fund, in other words, the difference between what is projected to be paid in benefits and what is expected to be gathered in taxes and investment income, is roughly $10 trillion. Removing the cap on wages alone (which goes somewhat beyond what the candidate has proposed) is a relative drop in the bucket. And this is the only aspect of her plan that can actually be quantified.

Here's the basic problem. With an aging society and demographic imbalances, the current level of tax and earnings will only float the Trust Fund until 2034, or roughly another 20 years. After that, benefits, already meager, would have to be reduced by a third. Now here's the tough part, There are only two possible solutions for addressing this crisis: either increase taxes, or cut benefits, or provide some combination of the two. The subtlety comes in how this is done. How do you raise taxes fairly and keep from cutting benefits to those who need them the most? For this, we've previously provided our views, available here.

What's Working in this Market Correction

The New Year starts with a bang, with hundred points swings in the Dow Jones Industrial Average each day this week. Unfortunately, the swings have all been to the downside, with the S&P falling nearly 5.0% this week. In this environment, investors may be tempted to throw up their hands and sell everything, or watch from the sidelines like a deer in the headlights as portfolio values head ever lower. Let's look at what's actually working.

First, while some portion of the selloff was likely initiated by the Fed's modest rate hike in December, the 0.25% increase has all been directed at the short end of the yield curve. Bonds, especially long-dated bonds have performed quite well, with the yield on the 30-year UST falling below 3% (2.93% as of this writing) from a level of 3.04% just last week. Eleven basis points of declining yield has the price of the US Treasury 2x ETF (UBT) rising from $73 to $76 over the same period. That's a 4% gain for the week, while everything else seems to be swimming furiously in a sea of red.

This leads us to our first trade for the New Year, bonds, and specifically UBT as an ETF play available to retail investors. UBT is levered 2x which means that a rise in long term interest rates would also cause this instrument to fall disproportionately in value. But if your view is that the economy may be hitting a rough patch, where stocks are susceptible, then bonds may provide a safe port in the storm. This is especially true if you believe economic growth and inflation, the principal enemies of bonds, will continue to be subdued. It's also worth noting that UBT traded as high as 97 back in February 2015, when the long bond traded at 2.25%. Not to say this is where things are headed, but with the softness we're seeing in global markets, difficult to rule it out either.

Oil continues its rapid decline, now bordering on a free-fall. The inverse leveraged ETF, SCO, has done especially well over this period, rising from $80 in the beginning of November to its present level of $160. How much lower oil can go is anyone's guess, but WTI is now roughly where it was during the 2009 recession (along with other commodity prices). Hard to believe it falls much further, yet SCO may still form a reasonable hedge against long positions, certainly in energy and perhaps, also, industrial stocks.

SKF, the inverse leveraged ETF on financial services stocks, also has our attention. This instrument can not only provide a hedge against other long equity positions, but highlight the risks specific to the financial services sector. Some concern with financial services profits may be warranted following the poor performance of markets in the latter part of 2015 and the disastrous 4th quarter results posted by Jefferies on December 15. Customarily a harbinger of things to come at the larger Wall Street names, our concern can only be amplified by the exposures of these firms to deteriorating credits in the oil patch.

On the long side, defensive sectors like healthcare and utilities may prove a good place to hide, collecting dividends and waiting for markets to sort themselves out. As to cash, which investment advisors tend to dismiss, it's beating stocks by 4.89% this year.

2016 Market Predictions

It's time to take stock of markets in 2015 and provide our thoughts on where things are headed in 2016. Before we get to the predictions, let's take a look at the consensus view of economists and market mavens heading into 2015 to see what they got right, and what they got wrong.

Consensus forecast for 2015 GDP by economists under a survey conducted by the Philadelphia Federal Reserve Bank at this time last year was for 3.00% growth. This view was confirmed in a similar survey of the Wall Street Journal on January 5, 2015.  Now, with only one day remaining in the year, it looks like 2015 GDP will be closer to 2.00%, a substantial miss. Not surprising, really. In a recent report of Goldman Sachs, researchers found that the consensus forecast for GDP has been wrong in 13 of the past 16 years with economists consistently erring on the side of optimism.

Stock market predictions are equally skewed it turns out. With the S&P 500 wavering on either side of flat for the year, the consensus forecast of stock gurus by CNN Money for 2015 was for a gain of 8% on the year (the index is at 2063 as of this writing, in the red for the year). Nonetheless, stocks still trade at over 19x trailing earnings, a historically high market multiple.

Predictions for the bond market were even further from the mark, with market forecasters expecting a substantial rise in bond yields (and decline in bond prices) for several years now. Yet the UST 10-year currently stands at 2.29% (versus 2.22% this time last year). Hardly the drubbing professionals were expecting. 

This having been said, let's take a look at where things could be headed in 2016.

GDP will likely slow further from its tepid pace of 2015 as the dollar strengths, global demand weakens and oil (as well as other commodities) continue to drag down the energy and materials sectors. With the economy reaching full employment (irrespective of the falling labor participation rate) gains in personal income will likely be limited. While the argument can be made that a low unemployment rate increases the leverage of workers over management, income gains from this source will be far lower than moving people from unemployment to employment, as reflected by a lowered unemployment rate. 

At the same time, consumers continue to be concerned about the economy and their personal levels of savings, as reflected in a rising savings rate. Rising savings with limited income gains spells trouble for retailers and consumer spending more generally. Don't look for any gains in governmental spending either in an election year. At the same time, a strengthening dollar jeopardizes corporate profits and exports. Piece it all together and it's hard to make an argument for rising GDP in 2016.

In this environment, and with stocks at lofty levels, the market will be vulnerable. Against a backdrop of Fed tightening volatility will be inevitable. Profit margins will compress and if p/e multiples contract, the downside for stocks could be pronounced.

US Treasury bonds may present the best opportunity for gain, if the foregoing conclusions about growth and corporate profitability are plausible. With slower growth comes lower inflation, benefiting holders of fixed income instruments. While the Fed may be tinkering at the short end, their ability to control the long-end (absent an unwind of long QE positions) is limited. With a lowered Federal budget deficit forecast for 2016 comes lower Treasury issuance, with an emphasis on the short end, as the Treasury has already so indicated. If there is global turmoil in the year ahead, the fear trade will rush investors into UST, with significant price appreciation a distinct possibility.