Healthcare Law Stands

It was a victory for President Obama and Democrats, affirming the central legislative achievement of Obama’s presidency.  The vote was 5 to 4 upholding the current law.  However, the President's claims that the penalty for not obtaining health insurance was not a tax was incorrect according to the Supreme Court. 
   

“The Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax,” Chief Justice Roberts wrote in the majority opinion. “Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”

       

At the same time, the court rejected the argument that the administration had pressed most vigorously in support of the law, that its individual healthcare mandate was justified by Congress’s power to regulate interstate commerce. The vote was again 5 to 4, but in this instance Chief Justice Roberts and the court’s four more conservative members were in agreement.

       

The court also substantially limited the law’s expansion of Medicaid, the federal-state program that provides health care to poor and disabled people. Seven justices agreed that Congress had exceeded its constitutional authority by coercing states into participating in the expansion by threatening them with the loss of existing federal payments.

       

The court’s ruling was the most significant decision since the New Deal and the most closely watched case since Bush v. Gore in 2000. It was a crucial milestone for the law, the Patient Protection and Affordable Care Act of 2010, allowing almost all of its changes to roll forward.  According to the law, in 2016, the first year the tax will be fully in effect, it amounts to $695 for an individual and $2,085 for a family, or 2.5% of household income - whichever is larger.  The biggest obstacle in 2016 for the Government will be figuring out how to impose the tax.

Interesting Weekend Ahead

A crazy few months in Europe are about to get even more interesting this weekend.  There’s a presidential runoff in Egypt, the Greeks will try again to decide which party should run the country, and France will hold legislative elections that will likely impact the current president’s ability to get things accomplished during his term.

Egypt

On Saturday and Sunday, Egyptians are going to choose between two leading presidential candidates: Muslim Brotherhood member Mohamed Morsi and Ahmed Shafiq, a former air force general and civil aviation official who served under Mubarak.  Some have argued that the choice is really between two men who are unlikely to bring about the kind of change protesters demanded in 2011 during the historic uprising.

Greece

In early May, voters didn't give either of Greece's two most established parties a majority, crippling the country's ability to form a government. This weekend's vote will hopefully end the stalemate. Greeks want it to happen sooner than later, as the debt crisis threatens the stability of the European Union's single currency. 

France

Much attention was paid to Socialist Party candidate Francois Hollande's presidential victory in May. It was the first time France had had a Socialist president in 17 years and brought promises of widespread change to France's political landscape. That's why this weekend's legislative election is crucial. In order for Hollande to meet his goals, he needs similarly aligned lawmakers to win seats. Though Hollande beat Nicolas Sarkozy, the former French president is still working against his successor in trying to get his followers elected into the legislature.

 

The Bubble in US Government Bonds

1.5% for 10 years.  Yes, that is what we are talking about this week.  We don't know of too many people who would find such a rate that attractive, (especially for the next decade).  But that is what you are signing up for if you decide to loan money to the United States government by purchasing a 10 year Treasury note.

Two years ago, the 10 year yield was above 3%, and 5 years ago, it was sitting at 5%.  And if you'd like to step back to the early 80's, you could get around 15% annually.  With rates at these levels now, we would be very cautious about putting money into Government bonds.  The incentive for investors to do so is just not there.  Why would you buy a 10 year bond yielding 1.5%, when you could purchase a dividend paying company that yields more than 1.5% and offer the potential for appreciation over time.  Sure, the "safety" factor exists in bonds compared to stocks, (since you know you're going to get paid back).  But are they really that safe when so many investors are bidding to own these things at a time when there exist so many more favorable risk/reward scenarios?

The following chart showing the rate of the 10 year demonstrates the 30 year bull run we've had in Treasury prices. Though bond prices could certainly go higher in the short to medium term, we are very skeptical when looking further down the road.

Employment Growth Slows...Again

Non farm payroll employment increased in May by 69,000, and the unemployment rate was essentially unchanged at 8.2 percent, the U.S. Bureau of Labor Statistics reported today.  The civilian labor force participation rate increased in May by 0.2 percentage point to 63.8 percent, offsetting a decline of the same amount in April. The employment-population ratio edged up to 58.6 percent in May.  Unfortunately total non farm payroll employment for March was revised from positive 154,000 to positive 143,000, and April was revised more significantly from 115,000 to just 77,000.  While the numbers are still positive and there is job creation happening in the economy, the numbers are beginning to trend lower.

Click on chart for larger image

The chart below shows the current recovery compared to previous recoveries over the past century. As you can see it has more of a "U' shape rather than a "V" shape.  This shows the depth of the recent employment recession - worse than any other post-war recession - and the relatively slow recovery; mainly due to the lingering effects of the housing bust, financial crisis, and ongoing government intervention. 

 Click on chart for larger image