Why a $7.2 Billion Loss from the USPS This Year is Not a Concern

Just recently, the Federal Reserve System announced that first-quarter losses from the United States Postal Service stood at 1.8 billion dollars. At this rate, the USPS is on track to cost American taxpayers over $7.2 billion by the end of the fourth quarter. To put this into perspective, this amount is equivalent to a $20 million dollar loss per day, with no hope of any profit for quite some time, if at all. At first glance this may pose a concern, but once the numbers are dissected, you will see that it fails in comparison to the bigger picture. In fact, when looking at the numbers (with respect to federal spending), one might consider it irrelevant or even a waste of time to correct. In order to fully grasp this idea, it’s important to evaluate the bigger picture.

If these sustained losses of the USPS occurred any time prior to the turn of the millennium, it could have caused a financial scare bigger than that of the Lehman Brothers’ bankruptcy in 2008.  Looking back, and trying to comprehend the fall of the USPS, would have been practically impossible. We don’t have to worry about this however, because these aren’t the times we live in today. Today, we are in the third round of Quantitative Easement, known as QEIII. The monthly toll of QEIII comes to $35 billion per month indefinitely, or at least until the unemployment rate hits 6.5%. How long this will continue until unemployment reaches that percentage is a whole other conversation.

Our federal stimulus this year alone will be at $420 billion; an acceptable number, considering the total cost of the federal stimulus since 2008 exceeds $4 trillion. This is probably why the market shrugged off QEIII when it was announced, rather than questioning the necessity of additional stimulus.

No matter how you look at it, QEIII has quite a toll to be accountable for. This $420 billion stimulus is enough to bail out the postal service at a quarterly loss of $1.8 billion for the next 20 years. This year, the total amount of printed QEIII could cover the losses of the USPS until the year 2033. If we assume that QEIII will continue for the next four years, your great grandkids will not have to worry about issues when mailing a letter, all courtesy of the Federal Reserve (any takers on what the federal deficit might look like?).

With this bigger picture now in perspective, it’s easier to understand why the $1.8 billion loss isn’t an immediate concern to Congress, and why it probably won’t be moving forward.  Could it be because the federal government only looks at the bankrupt state of the USPS as only 1.7% of the QEIII toll annually? Possibly. Think of it this way: if the fall of the USPS fails to pose a threat to the financial arena, what will?   More importantly, what will the final toll be when all the dust settles?

How "Depressed Data" Hurts the economy

It is no secret that market indexes like the Dow Jones Industrial Average have made a roller coaster seem like a little speed bump.   These drastic “shifts” in the market are unfavorably becoming the norm.  Unfortunately, this trend is going to continue. 

“Depressed Data” (lowering economic and financial expectations way down) is causing the market to rally under false pretenses, which in turn is giving way to excessive downturns in the market.  By lowering expectations, or depressing data, the market is being artificially inflated to move upward on subpar news.  When the market is being propped up on insufficient data, its foundation becomes weak; which paves the way to excessive volatility.   This strategy of being “overly optimistic” is causing an unnatural rise in the market.  For example, the market has rallied several times in the past couple of years when the unemployment filings went up.  Since unemployment filings came in below expectations (unemployment was lower than the data anticipated) the market rallied as a positive, or optimistic, sign.  Only because the depressed data showed unemployment filings were not as bad as initially thought, the market rallied accordingly.  This approach to sustaining growth in the market is not without consequence. 

Consumer confidence in May 2012 dropped to a 5 month low as investors are becoming more cynical about the economy.  Who can blame them?  Volatility has been present on a seemingly day to day basis, and despite what the talking heads say there seems to be no long term solution in sight.  This is a trend that needs to change to reverse this effect.  The problem is that Wall Street is not concerned about how the market gets propped up, only that it happens.  Simply put, this is a short term solution to a long term problem that is not going away.   

Because of the depressed data and the expected volatility, investors are using methods known as annual reset to lock in their gains on an annual basis without the threat of volatility.  Annual reset is able to do this because returns investors receive with this strategy are not stocks or securities, and therefore are exempt from volatility associated with securities.   These capped earnings guarantee that your money will never go backwards, or lose value, to any external events.  In fact, investors that implemented this approach prior to 2001 never lost a penny during 09/11/01, nor the financial collapse of 2008.  If you compare the average return of a $100,000 in the market (S & P 500) to this strategy from 1998 to 2011, annual reset outperformed the S & P 500 by at least $50,000 in most cases.  30 years ago these returns would not be typical; however they are today due to the volatility and Federal stimulus.

This is why investors are exploring fresh tactics in order to offset their losses, and instead are taking advantage of moderate returns.  They are embracing financial guarantees which are absent on Wall Street.  Investors are taking comfort with strategies of lifetime income and tax deferred growth just to name a couple.