Gauging The Gauges (Part 1)

As we put 2013 into the rear view mirror and focus our attention towards the horizon in front of us. I believe this coming year will be full of far more surprises than the preceding. And, quite possibly, even rival the past five. Why?

As of today there has been many mantras that have held firm. i.e., “Don’t fight the Fed.,” “Just buy the dip,” The trend is your friend,” etc. Anyone going against this school of thought in both intellectual argument as well as monetary positioning has found themselves on the wrong side. Even though the argument for holding such a view or position can be intellectually made. The results so far have shown in dramatic fashion; there are times intelligence – means nothing.

An example of this is described elegantly in Nassim Nicholas Taleb’s tour de force, Antifragile: Things that gain from disorder. (Nov. 2012 Random House) In it, he once again gives his example of the black swan. (I’m paraphrasing)
“Centuries of arguments that were based on the reasoning and so-called proof by the intellectuals that black swans didn’t exist, were laid to waste with just one sighting.” This example shows quite vividly that dogma – is not proof. Which is precisely what I believe the mantras posted above will prove to be in the end. Just when is anyone’s guess.

Of course prudence and diligence in trying to be positioned for that guess is all one can do. However, to make that “guess” one has to not only look at the gauges; one must know whether or not those gauges are accurate. Just because one believes their eyes are wide open doesn’t mean they aren’t running blind. This is where I feel 2014 will prove more difficult to many from politicians, to business leaders and financial players. Or, more importantly, the population at large.

Change, real change takes place this year in a myriad of ways. Across all sectors public as well as private that have not been at play since the financial crisis of 2009 was addressed. Today, we have traded in the previous vehicle for a different one, while many are assuming the gauges on this dashboard read exactly as the previous. They don’t and here’s why…

First: The Federal Reserve (Fed.) shocked many with their decision to actually begin tapering their monetary program by $10 Billion dollars a month. Some say this is chump change in the larger picture. Fair point however, that’s $120 Billion dollars that is no longer going to be funneled into the markets. If that figure isn’t large enough how about the 5 to 1, or 10 to 1, or even 15, 20 to 1 leverage that we know takes place in the financial markets. Quick math dictates you quite possibly be looking at $600 Billion on the low side to as much as $2.5 TRILLION or more on the high side no longer sloshing in and around the markets looking for a home (any home!) in a search for yield. Can you say Twitter®?

The issue doesn’t stop there. Every so-called “smart crowd” across the financial media is touting this is a good sign based on blah, blah, blah. Emerging markets are picking up the slack, China this, China that. All I’ll say is, did anyone see what is currently transpiring in China’s money market funding the day the Fed. announced the dreaded taper? All heck is now breaking loose. Why is this something that is quite possibly more important than China’s economic data?

Well if one remembers anything about the financial crisis in 2009, it wasn’t until the “breaking of the buck” in the money markets when all bets were off. Too many forget or disregard that point. What happens if China doesn’t respond to their growing crisis correctly? This is a new issue where there is no gauge – only an “idiot light.” And just like those indicators, once they lit up, the damage was already done. Was the taper the initial factor here? Hard to know but one needs to find a way to correctly gauge what effect corresponds from here on in.

Next is healthcare. Regardless of what I’ve heard or read one thing is clear too me. Less than 1 in 1 million have any idea about what will transpire this year for their healthcare coverage. The debacle that has happened since the roll out is miniscule in both its disruption or cancellations of policies. Employer provided insurance which dwarfs privately purchased plans goes into effect this year. With all the changes, turmoil, and confusion with new compliance regulations and more, businesses will feel either compelled or complacent in dropping employer-provided coverage. Period.

If you want to argue not true, then my guess is you’ve either never owned a business where you were responsible for meeting payroll or, you’ve never held a position high enough in any business where that decision fell at your level.

To help make this point a little more clear, one has to think of what’s transpiring from the position of both a small business owners perspective, as well as the larger corporate entity with a boardroom level decision-making structure.

They may make their decisions based on differing criteria yet the outcome will be the same regardless of criteria or process. (I can make this assessment because I’ve been at the helm of both the small and larger corporate entity with sales nearing $100 million annually)

When an owner is faced with the prospect of an expense – any expense – that not only can rise by double-digit percentages but rather double, triple, or more at any time. There’s only one thing that can be done to help ensure survival of that business. Find a way to remove it – immediately.

Some will say this won’t happen. I’ll contend the ones that say that haven’t an understanding of what it takes to truly run, and be in charge of a business.

When your accountant tells you your profit margin can’t absorb a 10% raise in any given expense let alone an exponential one, followed by your attorney advising you that; he can’t give you any advise because the law is changing day to day, and at will, so your only knowable protection against fines or suit is to discontinue the practice and possibly give a stipend letting the employees shop for their own. That’s exactly what will be done by the vast majority.

The once held premise that employees will leave no longer can or will be gauged as once before. Why? Because the companies they would have applied to will be doing, or contemplating the same.

Add onto this the previously under reported “49” rule also becomes forefront in any business decisions. (Under 50 employees the mandate to provide insurance is negated.)
Along with the same for 35 hour workers. Again, the under reporting of this phenom will be brought front and center this year. It was treated or regarded as some inconsequential news story during the past two years. Today – it’s law. Businesses regard anything and everything with a whole lot more diligence, and act accordingly, once anything is now deemed law. The effect this has on the economy is entirely unknown.

If a persons premium can rise from as little as $10.00 per month to as much as monthly premiums doubling or tripling where one is talking $100’s of dollars. Once again if you use simple math based on the number of possible people effected you again talking about $100’s of Billions of dollars annually coming right out of the economy – this year alone.

Some will disregard the significance of such increase. But lest I remind you – there are many, very hard working, financially prudent families where an extra $20.00 throws their household budget into chaos. For many it doesn’t take much to put them over the edge or into a crisis. Every dollar is accounted for and needed. Keep that in mind.

What does all this do to the prices or pricing of anything else in the economy? Does Walmart® sales go down? Does 401K contributions go down? Or, worse – redeemed? Do car sales continue higher if a health insurance payment rises this year at the equivalent of a car payment? Will 2013’s gauges even work in the new 2014 model? Hard to tell, we’re going to have to wait and see.

© 2014 Mark St. Cyr