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Tuesday, September 23, 2014 12:36 PM

Miracle Not Enough to Save Italy; Disruptive Eurozone Breakup Awaits

Analysis of what's happening and what to do about problems are two different things.

Financial Times writer Wolfgang Münchau provides an excellent example in Italy Debt Burden is a Problem For Us All.

Münchau's opening gambit is "We need extreme and co-ordinated policy to make it possible for Italy to ultimately stay in the eurozone."

Münchau states, "I think it is high time to address the consequences of failure with more clarity than is usually done. Put bluntly, Italy’s economic position is unsustainable and will result in eventual debt default unless there is a sudden and durable change in economic growth. At that point, Italy’s future in the eurozone would also be in doubt – and indeed the future of the euro itself."

High Time For Honest Assessment

Actually, it is indeed "high time" for something. What we need is an honest assessment from political leaders and euro puppets that the euro is doomed.

The flaws of the euro are well understood. I am 100% certain that Münchau could write a playbook on them with ease.

Münchau even admits that it would be "naive" to believe economic reforms can save Italy.

"The economic adjustment needed goes much beyond a few structural reforms. Italy needs changes in the legal system, it needs to bring taxes down to the eurozone average, and to improve the quality and efficiency of the public sector. It needs, in other words, to change the entire political system. Even that may not be enough."  

According to Münchau (and I wholeheartedly agree), Italy needs economic reform, a new legal system, lower taxes, less government spending, pension reform, and more productivity. And even that might not be enough! 

Nonetheless, to support his political beliefs, he seeks a miracle.

Miracle Requested

"I could see the ECB buying a wide range of debt instruments, starting with asset-backed securities and covered bonds as already announced. On top of that, it could buy other types of financial securities – bonds from the European Stability Mechanism, the eurozone’s rescue umbrella, and from the European Investment Bank. The Commission could use the EIB to launch a big programme of infrastructure bonds. The best hope for Italy is that some of that trickles down into the real economy. I am optimistic that these programmes will have a noticeable positive effect on the eurozone as a whole, but much less certain of their effect on Italy."

Miracle Might Not Be Enough!

Münchau asks for that set of miracles from the ECB, yet is "less certain of their effect on Italy". Why? because "radical reform is not enough".

Note the irony in Münchau's conclusion "Italian debt sustainability requires policies at eurozone level that have so far been ruled out. This is where the eurozone’s success or failure will be decided."

Eurozone Already Failed

Spain's unemployment rate is close to 25%. Its growth and unemployment prospects are nil.

Spain has no chance of meeting budget targets. Nor do France and Italy. Greece and Cyprus are in depressions. France is waiting on deck with problems as big as Italy's.

Any thinking person with an ounce of common sense he would readily admit the eurozone has already failed and it cannot and will not be revived by wishful thinking.

Miracles are not coming. However, there are choices, all of them unpalatable, to the eurozone nannycrat.

Eurozone Choices

1. Voluntarily dismantle the eurozone in the least destructive manner
2. Dismantle the eurozone by populist choice with huge financial disruptions
3. Suffer through decades of stagnant growth and extremely high unemployment

Option 4, pray for a miracle is not a logical choice.

Unless done voluntarily, it's easy to predict what will eventually happen: After suffering long enough in option 3, a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and declare all the bailouts and debt foisted on their country to be null and void. That person will be elected.

What to Do About It

No miracle that can keep the eurozone project intact. If Münchau was honest with himself, he would admit it.

The only thing that makes any sense to do is dismantle the eurozone, by choice, before someone like Marine Le Pen in France, Beppe Grillo in Italy, or an unknown person in Spain or elsewhere does it by force.

Disruptive Eurozone Breakup Awaits

Instead of seeking miracles that won't work and are not coming in the first place, how about an honest dialog on the best way to break up the eurozone?

Unfortunately, that will not happen because it is politically unacceptable.  A disruptive breakup of the eurozone awaits.

Mike "Mish" Shedlock

12:01 AM

Video: The Bizarre Reason Your Health Insurance Plan Was Cancelled

There are lots of reasons why your health care plan may have been cancelled but this one is arguably the most bizarre.

Please play the video or the following discussion will not make much sense.

Link if video does not play: Why Your Plan Was Cancelled: Health Insurance and the Affordable Care Act.

I am automatically skeptical of such videos and articles. So I did some digging. It appears the video has it right.

"De Minimis Variation"

PDF page 36 of 40 of Federal Register, Vol. 78, No. 37 / Monday, February 25, 2013 / Rules and Regulations, spells things out nicely.

§ 156.140 Levels of coverage. (a) General requirement for levels of coverage. AV, calculated as described in § 156.135 of this subpart, and within a de minimis variation as defined in paragraph (c) of this section, determines whether a health plan offers a bronze, silver, gold, or platinum level of coverage. (b) The levels of coverage are: (1) A bronze health plan is a health plan that has an AV of 60 percent. (2) A silver health plan is a health plan that has an AV of 70 percent. (3) A gold health plan is a health plan that has an AV of 80 percent. (4) A platinum health plan is a health plan that has as an AV of 90 percent. (c) De minimis variation. The allowable variation in the AV of a health plan that does not result in a material difference in the true dollar value of the health plan is +- 2 percentage points.
Outside of the video, the above obscure government doc was the only place I found an accurate discussion of bronze, silver, gold, and platinum ranges.

Since I did not have the term "de minimis variation" in my search, it took me a while to find that doc.

As Typically Presented

Most sites offer woefully inadequate explanations. For example Medical Mutual accurately defines Actuarial Value (AV) as "the percentage of total spending on Essential Health Benefits (EHBs) that is paid by the health plan," yet, falls woefully short in describing the various metals as follows.

  • Bronze: 60 percent of Actuarial Value
  • Silver: 70 percent of Actuarial Value
  • Gold: 80 percent of Actuarial Value
  • Platinum: 90 percent of Actuarial Value

That is what we have come to believe, and similar explanations appear on numerous healthcare sites. Ten percent ranges seem reasonable, but they are against the law.

Health Insurance AVs

  1. 0-57 Invalid
  2. Bronze AV: 58-62
  3. 63-67 Invalid
  4. Silver AV: 68-72
  5. 73-77 Invalid
  6. Gold AV: 78-82
  7. 83-87 Invalid
  8. Platinum 88-92
  9. 93-100 Invalid

Range Analysis

  • Number of 1-Point Ranges: 100
  • Acceptable Ranges: 16
  • Invalid Ranges: 84

Competition Not

If for any reason, health care providers do not want to modify pre-existing plans that are just outside the acceptable ranges, their only option under the law is cancellation.

The legislation guarantees "If you like your plan you may not be able to keep it."

What reason might insurers have to cancel plans?

Thanks to ACA, the providers all have captive audiences. They all understand that no other provider can offer a plan in anything but the 16 of the 100 possible ranges.

If a plan outside one of the allowed ranges makes a smaller percentage profit than something inside one of the ranges, there is a huge incentive for providers to simply dump the plan.

And Obamacare was supposed to increase competition!

Mike "Mish" Shedlock

Monday, September 22, 2014 4:25 PM

Bidding Wars Stop; Millennials Leave Their Parents' Basements, But Not For Homes; Pent Up Demand?

Bidding Wars Stop

With cash-paying investors on full retreat, existing home sales dropped 1.8% in August, according to the National Association of Realtors.

Lawrence Yun, NAR chief economist says that's a good thing because "first-time buyers have a better chance of purchasing a home now that bidding wars are receding and supply constraints have significantly eased in many parts of the country.”

While I agree it's a good thing that bidding wars stopped, the fact of the matter is home prices are once again in la-la land, especially for cash-strapped millennials loaded up with student debt, in low-paying jobs.

Pent Up Demand?

Yun states, "As long as solid job growth continues, wages should eventually pick up to steadily improve purchasing power and help fully release the pent-up demand for buying.”

There is arguably a pent-up demand for homes by millennials if wages do catch up, but that assumes millennials have the same value-set and attitudes towards debt as their parents.

In reality, median wages have not gone up much but home prices have. More importantly, attitudes of millennials are not the same as that of their boomer parents.

Millennials Leave Their Parents' Basements, But Not For Homes

Fortune reports Millennials Finally Leave Their Parents' Basements.

Jed Kolko, chief economist at Trulia, put together this graph, which shows that Millennials are finally moving out of their parents’ houses, after years of living at home:

But that’s where the good news ends. Over the past two years, Millennials have been moving away from home, but they don’t actually have enough money, or desire, to form their own households. The homeownership rate among Millennials continues to fall:

The falling homeownership rate and falling “headship rate”—which is the share of Millennials who are the head of a household regardless of whether they own real estate—suggest that this generation is still doubling up with friends or other relatives even if they aren’t living with Mom and Dad.

The one bright spot in the Census data for the youngest workers: between 2012 and 2013, median income for those aged 15 to 24 shot up by 10% from $31,000 per year to roughly $34,000 per year. But this is the first time since 2006 that this age group has seen any increase in income at all, meanwhile the cost of shelter has risen 16% since that time. Income for the older half of the Millennial generation rose just 1.1% between 2012 and 2013.

This poor performance could mean that the housing industry is building too many homes, according to Kolka. This is quite the surprise given that single-family housing construction is still well below pre-crisis and even pre-bubble norms.
Census Data

I commend Fortune for linking to the actual data. Few mainstream media articles do.

For those who wish to take a closer look: Income and Poverty in the United States: 2013, Issued September 2014. Here are a couple of charts and stats that caught my eye.

Real Median Income

Full-Time Employment

Real Medium Income Notes

  • Real median household income for those 15-24 shot up by 10.5% but only from $31,049 to $34,311. That's not enough to support buying a nice house in most areas. Moreover, the 15-24 demographic has 6.3 million households and typically that age group does not buy houses anyway.
  • Real median household income for those 25-34 (about 20 million households) was only up 1.1% to $52,702. Home prices rose more, making homes less affordable.
  • Real median household income for those 35-44 (about 21 million households) was only op 0.7%, but to a better looking to $64,973. 
  • Those aged 45-54 and 55-64 actually saw incomes declines of 0.3% and 3.3% respectively on household populations over 23 million each.

Attitudes, Wages, Home Prices

That data is from 2013, but it's very safe to conclude nothing much changed in 2014. None of the income data is supportive of more household formation. Wages have not kept up with home prices in the key demographic groups. Things are far worse if you factor in attitudes.

Attitudes - Fed's Biggest, Most Futile Fight

I have been talking about attitudes for years. For example, please consider Please consider Teenagers Scared Over Plight of their Parents; Attitudes - Bernanke's Biggest, Most Futile Fight

That 2010 post contains an email from "Nancy Drew" about her daughters, aged 15 and 17 with their friends scared half-to-death about their parents' financial woes.

Such memories last a long time.

I wrote then and I repeat now ... "Those fretting over base money supply and foolishly screaming hyperinflation (or even inflation), simply do not understand the dynamics of debt deflation, nor do they understand how small the increase in base money is compared to debt that will be written off, nor do they understand the role of changing social attitudes towards spending."

Clash of Generations

On May 30, 2014 I wrote Clash of Generations - Boomers vs. Millennials: Attitude Change Will Disrupt Wall Street and Corporate America

If you haven't read that, please do. And if you have, I suggest it's well worth another look.

Pent Up Demand to Sell 

Yun thinks another housing boom is just around the corner. He talks of a pent-up demand to buy.

I suggest there's a pent-up demand to sell for three reasons:

  1. Aging boomers seeking to downsize
  2. All-cash equity buyers looking to take profits 
  3. Some of those who were underwater and hoping to get out will do so if and when they get a chance

Will millennials be able to plug all of that pent-up selling pressure? I think not.

Mike "Mish" Shedlock

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