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Prepared by Philip Gotthelf

The Day After Taxes

(April 16, 2015) April 15, 2015 has passed with little media fanfare. However, I had noticed a distinct change in consumer behavior as Tax Day 2015 approached… spending slowed. We might conclude the decline in consumerism was coincidental. Some analysts claim inclement weather is to blame. Others maintain that the recent pop in crude oil prices and gasoline weighed negatively upon consumer confidence. However, several economic conditions kicked into high gear during 2014 that may have impacted consumer psychology as we all faced the day of tax reckoning.

One notable is the Obama Care penalty for those who did not have 2014 health coverage. The “fee” is 1% of your taxable income or $95 for adults and $47.50 for children… whichever is higher. Thus, if taxable income is $50,000, your fee would be $500, not $95. For the working middle class, that 1% came as a surprise because many misinterpreted the “higher of the two” rule and thought the maximum penalty (fee) would only be $95.

Young people who signed up for Obama Care have discovered just how expensive coverage can be. The Budget Office estimates 23 million Americans will qualify for incentives. The remainder face premiums or the Obama Care “fee,” “penalty,” or “tax” (as it was ruled by the Supreme Court). On a comparative basis, the drop in energy costs to consumers is a fraction of the healthcare burden. Inflation is laughable compared with Obama Care obligations. We see that 2014 was the transitional year that defined Obama Care for Americans. There has been considerable sticker shock and the reaction is not positive.

To be sure, Obama Care financially impacts the middle class. Premiums for average payers soared from 40% to as much as 400%. Deductibles doubled and even quintupled. As much as 33% to 50% of the 7.5 million newly insured Americans previously had insurance that was cancelled. Over 14 million American now have subsidized healthcare, courtesy of the U.S. middle class.

As I have previously pointed out, if you are Warren Buffett or Donald Trump, you don’t care about health insurance… you can write a big fat check to any doctor. Indeed, the rich can keep their doctors and never worry about in-network or out-of-network. For the middle class, healthcare restrictions apply at much higher costs. Further, discretion to deny coverage has been expanded. For example, the controversial hepatitis-C drug Sovaldi demonstrates the new Obama Care era. At $1,000 per pill, coverage is routinely denied for this drug that literally represents a lifeline for those with severe liver deterioration. The sole criterion for denial is cost.

This denial of coverage represents the exact situation so many Obama Care critics brought up…the so-called “Death Panels.” In this instance, the ability to evaluate coverage on cost alone creates a life or death situation. We now see that decisions about healthcare under Obama Care are about economics rather than quality of care and quality of life. This reality is one of the many factors impacting public mood. Sovaldi is a very limited situation. More commonplace are denials for mammograms, blood tests, and colonoscopy exams. These routine tests were generally covered with a small co-pay. Much higher deductibles under Obama Care have shifted the burden to consumers. As healthcare costs become a reality for Americans, economic constraints are palpable.

Small businesses must contend with the “Employer Mandate” requiring all businesses with 50 or more full-time equivalent employees (FTE) to provide health insurance for at least 95% of their full-time employees and dependents up to age 26, or pay a “fee” in 2015. Since this mandate was supposed to be implemented in 2014, many business owners began the compliance process and discovered just how unaffordable the Affordable Care Act is. This has forced business owners to take defensive action by either limiting employment to less than 50 full-time workers or creating part-time positions.

The huge controversy over President Obama’s statement that “if you like your doctor you can keep your doctor… PERIOD” and “if you like your plan, you can keep your plan… PERIOD” may not have been fully appreciated within the context of healthcare costs and services under Obama Care. The reason many insurance contracts were cancelled is because they did not comply with standards set by the new law. Replacement contracts are far more expensive because they must provide broader coverage and account for children up to the age of 26.

Iran, ISIS, and Hillary’s email server have displaced the Obama Care controversy as political news, but April 15th brought the Obama Care reality home for millions of tax payers. Equally important, Obama Care literally wages war against middle class Baby Boomers who are seeing health coverage shrink as cost skyrocket. Just when the population from 55 to 65 needs more medical attention, the rug is being pulled out from under them.

Softening of the Numbers

Economic numbers have been softening. Tax refunds are likely to be reduced by Obama Care and the post April 15th splurge may fizzle… carrying weak numbers into the next quarter. Stock markets have been encouraged by weak economic data because the generalization is that the FED will keep interest rates low. At some point, fundamentals take over. On the fringe of mainstream analysis are some voices calling for the inevitable correction. Depending upon the perspective, the anticipated “correction” is the usual 5% to 15%. Then, there are those like James Rickards (author of Currency Wars and most recently The Death of Money) who claim that a global monetary meltdown is fast approaching.

According to Rickards, there is no way out of the global currency crisis short of a total realignment. Like all previous runaway printing presses, unbacked global currencies and naked public sector obligations will come together into an ultimate confidence crisis. The description is much like Dr. Neil DeGrasse Tyson’s description of a super nova. As the star runs out of fuel it expands like a huge balloon before imploding into a condensed super-gravity dwarf… then it explodes into stardust.

Consider that the huge surge in the U.S. Dollar has squeezed our export profits as U.S. goods and services became more expensive in converted currencies. The dip in U.S. business is currently rippling through our economy. U.S. job growth has slowed which implies less consumer spending. The West Coast dockworker “slowdown” back-logged billions in imports and exports while causing commensurate losses for those shipments that were time-critical. Although lower energy prices are good for consumers, the precipitous declines in crude oil and natural gas have caused energy companies to cut back on existing budgets and future plans.

Just as we would have brushed aside the thought of General Motors going bankrupt, so too is the thought of the major oil companies becoming insolvent. Yet, the debt structures of these giants over the past ten years have been based upon an upward crude oil price trajectory. Capital expansion for Big Oil has been predicated upon rising crude oil prices. These huge companies face serious problems that are not easily solved in the near term. At the same time, the “War on Coal” has decimated the entire coal industry, costing thousands of jobs. Indeed, even with the fracking boom and oil & gas revolution, the U.S. energy sector is vulnerable.

The Tip & Dip

In 1999, FED Chairman Alan Greenspan had bought into the Y2K story and eased interest rates “just in case.” The century and millennium changed without a glitch and Greenspan reversed the easing process. At the same time, investors who had been lured by the sizzling Dot.Com phenomenon faced capital gains taxes on shares they converted into Dot.Com investments. When investors discovered how much they owed in taxes, they backed off stocks just enough to “tip” the scales from bullish to bearish. By the time President Clinton left office, the “dip” was in progress.

Forward to 2014. Stocks have had an impressive run to all-time highs. The 2014 tax burden was realized this week and stocks have not reacted. The question is whether poor economic numbers will tip the scales or will the prospect of raising interest rates weigh in as the catalyst. History teaches that bull trends cannot be sustained on enthusiasm alone. All uptrends eventually require substance.

When President Clinton turned the White House over to President Bush, the 2001 recession was already in play. Greenspan realized what he had done and eased interest rates again. This ignited the housing boom that many analysts believe led to the Financial Crisis. Obviously, 9/11 interrupted the Bush Recovery, but the war effort did represent an increase in military spending that showed up in GDP performance. This includes government hiring for new agencies like Homeland Security and the Federal Transportation Authority. Republicans allege that Bush ’43 was “as bad as the Democrats” on growing the government and spending money.

By the end of the Bush ’43 term, the economy was red hot. The scales were tipped by the real estate bubble rather than economic malaise. We have a different situation today where states like Kentucky, Ohio, Pennsylvania Montana, Illinois, Virginia, West Virginia, Texas, and Wyoming are suffering from the War on Coal and must proactively work to make up for economic deficiencies left from their respective coal sectors. I already mentioned the dockworkers’ slowdown. Add the devastating California drought to the equation. It all adds up to potential disaster if our economy continues to stagnate.

Europe and Asia

European and Asian stock markets have followed the U.S. pattern of rallying on good and bad news. The strong U.S. Dollar suggests more exports to the United States. Zero and negative interest rates in Western Europe are believed to be the answer. But, there may simply be too much emphasis upon the U.S. capacity to bail Europe out. If Japan is any example, Europe may be in the doldrums for a very long time.

China is using monetary policy to avoid its own housing bubble… hoping for a soft landing. We see that China must rely upon the U.S. as its driving force. The stronger Dollar represents good news, but it won’t matter if U.S. consumers close their wallets. The whole world cannot expect the United States to spend their way out of recession.

There are bright spots like airlines that will increase margins as jet fuel declines or, at least stabilizes. But, transportation in general does not seem to be waking up to lower fuel costs. Operating overheads should ease for truckers, rail, and ships. Unfortunately, the California dockworkers’ action put many transportation firms behind 2015 targets.

I have maintained that lower commodity prices will be critical for any recovery. The more consumers have to spread around as prices decline, the greater the velocity of money due to transaction volume. Major uncertainty still holds economies hostage. No SPECIAL REPORT would be complete today without mentioning the Middle East. Much to my dismay, Crude oil has recovered to move above my short 51 May strike. Even with this rally, I caution that Iran has a huge stockpile waiting at the terminals. If President Obama gets his way, this oil will begin to flow to Europe.

We may very well be on the verge of a crude oil price war that will reshape the entire sector…once again! Frankly, I am not sure how many times oil & gas can be resculptured before the foundation material begins to crumble. Let’s face it… Prior to 2007, fracking wasn’t even on the radar. Now, fracking is all we ever hear about. If the Middle East engages in price warfare, fracking will be crushed. If fracking is crushed we can kiss the oil & gas boom goodbye. This makes the Iranian negotiations even more dubious.

April 16, 2015
Philip Gotthelf
Commodity Futures Forecast
P.O. Box 566, Closter, New Jersey

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