Financial News Friday – July 18, 2014

U.S. Debt Path ‘Unsustainable’ Thanks to Social Security, Health Care: CBO (CBO, ThinkAdvisor)

The nonpartisan Congressional Budget Office (CBO) projects unsustainable increases in US debt held by the public over the next 25 years. Unless some action is taken, under current law deficits would become increasingly large over the next few years. The CBO lays the blame on factors such as, “an aging population, rising healthcare costs, and an expansion of federal subsidies for health insurance.”

The government is on track to have the smallest deficit since 2008, but as the Bipartisan Policy Center states “The budget outlook deteriorates significantly beyond the 10-year window.”

The CBO states that:

• The rising amount of federal debt would leave less money for investment in private productive capital, which would harm growth.
• “Federal spending on interest payments would rise, thus requiring higher taxes, lower spending for benefits and services, or both to achieve any chosen targets for budget deficits and debt.”
• “The large amount of debt would limit policymakers’ ability to use tax and spending policies to respond to challenges such as economic downturns or financial crises.”
• “The large amount of debt could also compromise national security by constraining defense spending in times of international crisis or by limiting the country’s ability to prepare for such a crisis.”

Yellen Tells Congress That Fed Will Continue to Prop Up the Economy (NYTimes)

Federal Reserve Chairwoman, Janet Yellen, appeared before Congress on Tuesday to give members an update on the US economy. Yellen restated the Fed’s uncertainty about market conditions, “The outlook for the economy and financial markets is never certain, and now is no exception.”

She also warned that the Fed now believes there to be overvaluation in specific segments of the market, stating “Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched.”

If the labor markets continue to improve, with discouraged workers reentering the workforce, “then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned.”

However to help curb investors’ fears about the Fed’s recent timeline regarding the end of quantitative easing and to balance out the previous comment, Yellen noted, “if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.”

U.S. Stands to Lose Billions From Corporate Tax Inversions (Yahoo Finance)

Tax inversions, where a corporation moves its headquarters from a high tax nation to a low tax nation, are becoming progressively more of a problem for the US.

A nonpartisan research panel estimates that the US could gain around $20 billion in revenues over the next 10 years if the inversions were halted.

Unfortunately, Congress and the IRS will probably go the route of increasing regulation to prevent companies from reincorporating abroad rather than making the US more tax friendly to multinational corporations.

79% of Expats Considering Giving Up U.S. Citizenship: Law Firm (ThinkAdvisor)

According to a recent survey of 400 Americans expats, 79% of Americans living abroad are either exploring options around or are actively considering renouncing their citizenship.

The reason largely stems from the Foreign Account Tax Compliance Act, FATCA, which requires US taxpayers to report their foreign accounts and assets.
FATCA causes much difficulty for expats because many banks no longer allow Americans living abroad to open accounts with them, citing the difficulty of following FATCA.

Stanford’s Ponzi Victims Cannot File Compensation Claims: U.S. Court (Reuters)

In 2012, Allen Stanford was sentenced to 110 years prison after defrauding investors for around $7 billion with a Ponzi Scheme involving certificates of deposits (better known as CDs.)

When SIPC (Securities Investor Protection Corp, a non-profit that guarantees investments in the event of a brokerage firm’s bankruptcy) denied the reimbursement claim to investors, the SEC quickly filed suit but after fighting its way to an appeals court, the decision has been upheld.

The problem with the suit was that Stanford Group Company, a SIPC member, did not issue the fraudulent CDs. Instead Allen Stanford’s offshore bank, Stanford International Bank, which was not a SIPC member or chartered US bank, issued the CDs used to defraud investors.

SIPC also contended that it was not created to guarantee investments or protect investors from fraud and its sole purpose is to insure brokerage companies so that investors can recover their funds in case the brokerage falls into bankruptcy.

Use this as a reminder that you should always do your due diligence before making an investment. Never be afraid to walk away if something seems too good to be true.

Amazon Introduces Kindle Unlimited: An Endless Book Buffet For Voracious Readers (Fox News)

Amazon has just unveiled the Netflix of books.

There are other unlimited ebook services out there, e.g. Oyster and Scribd, but neither has the market penetration, nor the name recognition of Amazon and its Kindle readers. Although shipping with 600,000 ebooks, Amazon has yet to strike a deal with the publishing industry’s biggest players: Hachette, HarperCollins, MacMillan, Penguin, and Simon and Schuster.

However, as the service becomes more popular, it’s likely that the major publishers will sign on to the platform.

I’d wager the deals they work out will look similar to Netlfix where there is a window (maybe 6 months to a year) where you can only purchase the books a la carte before it arrives in the lending library.