General

There is no evidence that the Federal Reserve’s massive bond-buying effort has led U.S. stock prices higher, according to a report released on Wednesday by the economics research arm of McKinsey & Company. Instead, study co-authors Richard Dobbs and Susan Lund found that the biggest impact of quantitative easing by the world’s major central banks has been the cost-savings delivered to governments. Since 2007, bond-buying programs in the United States, the UK and the euro zone have reduced costs for governments by a total of $1.6 trillion. The finding will come as a surprise to many investors who attribute the rise in stock prices in the United States and elsewhere since the 2007-2009 financial crisis at least in part to easy central bank policies. All told, major central banks have added $4.7 trillion to their balance sheets over the past five years in an effort to push down long-term borrowing costs while keeping short-term interest rates low. The findings are sure to resonate among central bankers as they debate when and how fast they may be able to scale down the monetary stimulus they have used to keep deflation at bay and try and pull ravaged economies from the depths of recession.

While the entire study is over 70 pages long, the rather counter-intuitive findings regarding QE and stock prices can be found on pages 32-36 of the PDF:

The impact of ultra-low rate monetary policies on financial asset prices is ambiguous. Bond prices rise as interest rates decline, and, between 2007 and 2012, the value of sovereign and corporate bonds in the United States, the United Kingdom, and the Eurozone increased by $16 trillion. But we found little conclusive evidence that ultra-low interest rates have boosted equity markets. Although announcements about changes to ultra-low rate policies do spark short-term market movements in equity prices, these movements do not persist in the long term. Moreover, there is little evidence of a large-scale shift into equities as part of a search for yield. Price-earnings ratios and price book ratios in stock markets are no higher than long-term averages.

New figures announced

The Social Security Administration (SSA) has announced that Social Security and SSI beneficiaries will receive a 1.5% cost-of-living (COLA) adjustment for 2014. According to the SSA’s announcement, after the COLA adjustment, the estimated average retirement benefit will rise from $1,275 in 2013 to $1,294 in 2014.

The Centers for Medicare & Medicaid Services (CMS) has also announced next year’s Medicare costs. The standard monthly Medicare Part B premium will be $104.90 in 2014, the same as in 2013. However, beneficiaries with higher incomes (individuals with taxable incomes of more than $85,000 and couples with taxable incomes of more than $170,000) will pay more than $104.90 per month because they must pay an income-related surcharge.

Other important Social Security and Medicare figures are listed below.

2014 Social Security figures

• The amount of taxable earnings subject to the Social Security tax (called the maximum taxable earnings limit) will increase to $117,000 from $113,700 in 2013.
• The annual retirement earnings test exempt amount for beneficiaries under full retirement age will increase to $15,480 from $15,120 in 2013. If a beneficiary has earnings that exceed the exempt amount, $1 in benefits will be withheld for every $2 in earnings above the exempt amount.
• The annual retirement earnings test exempt amount that applies during the year a beneficiary reaches full retirement age will increase to $41,400 from $40,080 in 2013. If a beneficiary has earnings that exceed this amount, $1 in benefits will be withheld for every $3 in earnings above the exempt amount.
• The amount of earnings needed to earn one Social Security credit will increase to $1,200 from $1,160 in 2013.

2014 Medicare figures

• The Medicare Part B deductible will be $147, the same as in 2013.
• The monthly Medicare Part A premium for those who need to buy coverage will cost up to $426, down from $441 in 2013. However, most people don’t pay a premium for Medicare Part A.
• The Medicare Part A deductible for inpatient hospitalization will be $1,216, up from $1,184 in 2013. Beneficiaries will pay an additional daily co-insurance amount of $304 for days 61 through 90, up from $296 in 2013, and $608 for stays beyond 90 days, up from $592 in 2013.
• Beneficiaries in skilled nursing facilities will pay a daily co-insurance amount of $152 for days 21 through 100 in a benefit period, up from $148 in 2013.

According to preliminary data from the 2013 NACUBO-Commonfund Study of Endowments, U.S. educational endowments returned an average of 11.7% net of fees in the fiscal year ended June 30, 2013., which is a significant improvement over the -0.3% return in the prior fiscal year. The average 3 year trailing return as of June 30 was 10.4% for the 206 surveys received  to date, while the average five-year trailing return was 4.3% and 7.1% for the 10-year period. Returns are net of fees and annualized.

Source: Pensions & Investments

October marked another month of strong inflows with global ETFs/ETPs. Combining the US$32.6 billion of net inflows with positive market performance during October global ETF/ETP assets reached a new record high of US$2.3 trillion, according to preliminary findings from ETFGI’s October 2013 Global ETF and ETP industry insights report.

Year to date (YTD) through end of October, global ETF/ETP assets have increased by 19% based on positive market performance and net inflows of US$202.2 billion, which is in line with the level of net inflows at this point in 2012. Equity ETFs/ETPs gathered the largest net inflows with US$193.9 billion which is significantly higher than the US$112.7 billion at this point in 2012, followed by fixed income ETFs/ETPs with inflows of US$21.4 billion which is less than half the US$56.2 billion gathered YTD in 2012. Commodity ETFs/ETPs experienced outflows US$33.0 billion which is a reversal of the US$20.1 billion net inflows at this point in 2012.

Equities have been the preferred area to invest new assets in 2013 with net inflows of US$193.9 billion. North American equity ETFs/ETPs have gathered the largest net inflows YTD with US$117.7 billion, followed by developed Asia Pacific equity with US$32.8 billion, and developed European equity with US$20.7 billion, while emerging market equity ETFs/ETPs experienced net outflows YTD with US$6.3 billion.

YTD, Vanguard ranks first based on net inflows of US$51.6 billion, iShares is 2nd with US$51.3 billion, WisdomTree is 3rd with US$12.8 billion, PowerShares is 4th with US$12.6 billion and SPDR is 5th with US$9.5 billion.

Investors’ embrace of risk is approaching levels not seen since the height of the dot-com bubble.

This year through Oct. 25, some $277 billion has flowed into stock mutual funds and exchange-traded funds – the most since the technology stock bubble 13 years ago, according to TrimTabs.

U.S. stock mutual funds and ETFs have taken in $123 billion of investor money, the first net inflow since before the 2008 financial crisis. Global stock mutual funds and ETFs have taken in $154 billion, the fifth year in a row of net inflow.

Equities have gained popularity again as the threat of rising interest rates chases investors away from the bond market, and as some Internet companies make headline-grabbing initial public offerings, including Facebook last year and the pending debut of Twitter.

Investors have pulled $31 billion out of bond mutual funds and ETFs this year, the first annual outflow since $7 billion in 2004 and the biggest outflow since 2000, according to TrimTabs.

Congress failed to agree on a spending bill for the fiscal year starting October 1, 2013, resulting in the first government shutdown since 1995. According to the Congressional Research Service, this is the 18th time the federal government has shut down as a result of a failure to agree on an annual appropriations bill. Most shutdowns have lasted only a few hours or a few days. The most recent shutdown, in 1995, lasted three weeks.

What happens when the federal government shuts down?

When the government shuts down, federal agencies must generally suspend operations and furlough their employees. However, there are significant exceptions for government functions that promote national security, or protect human life and property. As a result, a shutdown doesn’t impact certain essential functions like the military, law enforcement, TSA, air traffic control, border patrol, emergency and disaster assistance, food safety, foreign embassies, prisons, and federal medical care (among others).

A shutdown also doesn’t impact federal entitlement programs (like Social Security and Medicare) that aren’t funded by discretionary annual appropriations. Funding for these programs is considered mandatory, because the legislation creating the benefit obligates the government to make payment. So benefits under these programs continue uninterrupted, and the employees who administer those benefits are generally exempt from furlough.

Finally, some agencies are funded by multiple year appropriations. Even though these agencies don’t yet have any funds appropriated for the new fiscal year, they may still have funds remaining from prior appropriations, which they can use to continue operations until those funds run out.

So what does a government shutdown mean to you?

What you can do during the shutdown:

• Receive and send mail–the post office is an independent agency unaffected by the budget process
• Buy insurance through one of the new health insurance Exchanges
• Receive your Social Security and Medicare benefits, or apply for new benefits
• Get a passport or visa–but only until the State Department’s available funding runs out (during the 1995 shutdown, 200,000 U.S. applications for passports went unprocessed)
• Conduct business with the United States Patent and Trademark Office–but only until the USPTO’s available funding runs out
• Receive unemployment benefits and food stamps
• Get an FHA or VA mortgage
• Receive medical care at a veterans hospital
• Use the federal court system–but only for about 10 days

What you can’t do during the shutdown:

• Stop paying taxes–the IRS will continue to process electronically submitted tax returns, but if you’re being audited, you’ll get a temporary reprieve
• Get taxpayer assistance from the IRS
• Get a small business loan
• Go to a national park, zoo, or museum–if you’re already overnighting in a national park, you generally have two days to leave
• Get a paycheck, if you’re a federal employee–unless you’re the president, a member of Congress, or in the military; however, in the past workers were paid retroactively after a new appropriations bill was passed

If you need more information, most government agencies have posted their shutdown contingency plans on their websites.

And there’s more to come…

The shutdown is separate and distinct from another looming crisis–the debt ceiling. According to Treasury Secretary Jacob Lew, it’s anticipated that the United States will run out of funds as soon as October 17, and will default on its debts, unless Congress acts to raise the debt ceiling before then. More on that crisis to follow