Securitizing Health Care

As the health care debate rages, we are offered a series of poor choices due to our political system's inability for consensus. On one side is the growing chorus for a government plan. Seriously, have these proponents not been to a DMV? All the government plan will achieve is to exert Wal-Mart style cost pressures that will run private capital out of business. And what makes supporters think the government can manage such a program efficiently? The track record of Medicare is hardly inspiring - the program is likely to be insolvent in the near future!

On the other hand, it is hard to argue with the fact that we have a seriously broken system. One in six Americans is uninsured, in a system where the costs of being uninsured are more dramatic because of inflated prices. Many more are excluded from the system because of pre-existing conditions. And the system does not encourage healthy lifestyle choices or preventative medicine, because of the lack of long-term commitments from the patients in question.

Democrats are living in la-la land, ignoring the cost side of the balance and seeking to run capital out of the industry. Republicans, even worse, seem to think that sticking their fingers in their ears and yelling 'socialism' means that we don't have a problem that needs fixing. What's missing is smart ideas that, like all the good ones, straddle the middle.

So here's an idea to consider - and it's not even that original. For all the criticism of our housing boom, Fannie Mae and Freddie Mac have dramatically changed home ownership in this country by providing coordination. The US government managed to achieve much greater home ownership rates without running the program by supporting these agencies whose role was to buy mortgages, repackage them and sell them to private industry. Before the distortions in recent years, this meant low risk to the government, aggressive competition in private markets and, well, a free-market system that largely worked.

In concept, I can't see why this isn't a valid idea for insurance. You have a pool of, let's say 100 people, 50 of whom might be relatively young workers, 10 of them are over 80, maybe 2 of them have cancer, 15 have diabetes, ... you get the idea. By pooling them, and doing so on a large scale and only government can, you offer the insurance companies the ability to greatly increase market share, but only if they are willing to pick up the unhealthy insurees as well as the healthy ones.

There would have to be some controls to ensure pools stay largely the same (i.e. if you're in Pool A, you are highly likely to stay in Pool A) - this gives insurance companies the incentive to improve your healthcare metrics as a risk mitigation tool.

Just thinking aloud ...

The Tests Aren't That Stressful

So the banks' stress tests were finally released, and it was received with much enthusiasm. $75B in new capital. Roger that! Now the stock market can boom, we can talk of all the green shoots we see ... life is beautiful! It's a fiction we all want to believe. I know I do. I have one of my best friends without a job, and tepid economic environment causes me some discomfort personally. Plus, the booming stock market can make me feel like investing guru ... the next Warren Buffet.

Maybe it's the pessimist in me, but I say hold on to your horses! My initial suspicions arising from the relatively small size of the capital requirements ($75B is peanuts in today's bailout world) are unfortunately being confirmed by a couple of disturbing pieces of evidence.

First are the assumptions of the stress test themselves. The "adverse" scenario assumes 8.8 percent unemployment for this year, and 10.3 percent next year. Umm, newsflash - unemployment is already 8.9%, and it seems like 10.3% next year should be the baseline, not an adverse scenario.

Then there is news that the Fed modified the deficit computations under pressure from banks. Bad move! If there's one thing Japan should teach us, it's that a loss of confidence can be incredibly detrimental to the recovery of the financial system. At this point, it feels a lot like the regulators are becoming salesman for the banks, while shoveling public money with no end in sight.

So be nervous ... while we'd all like the dark clouds to pass, things might not be as rosy as they seem.

Add One More Scandal to the "Cleanest Admin Ever"

This time it's Obama's "urban czar". If the facts in this story are true, this is far more disturbing than any of the previous controversies. This does not appear to be questionable judgment or any such thing, but out-and-out pay-to-play Blago style.

Big Brother is Trying ...

This was one of the most disturbing stories I could have read in a really long time. There is a proposal at the federal level to start an enhanced drivers' license, with a built-in radio chip that can be used supposedly to reduce forgery. Even when you get past the national drivers' license program (which I know privacy advocates have screamed hoarse about but I've never really looked into), this is an amazing leap into our privacy.

Yes, officials argue it will only be used for authentication and not tracking. But really? How hard is it once a radio chip is embedded to track the license. It might start slow, oh let's say pedophiles or potential terrorists, but it is only a matter of time before that line moves.

This is far more significant than the wiretap program that got everyone's attention. I have no problems with the wiretap program as a short-term measure - if you are on the cell phone of a known terrorist or talking to a suspected terrorist abroad, well, maybe it's ok to listen in on your conversations. Again, a stop-gap - after all, if I happen to be some killer's insurance agent, my privacy rights can't be trampled on for too long!

But this is far more insidious. The government can, and if not stopped, will probably ease into various forms of tracking. Power exerts because it can. If this sounds like a grand conspiracy theory, it's not. What we need to appreciate, and I have to remind myself this all the time, is that what makes democracy work in the US is not that white people are instinctively more democratic (which a scary number of elites have suggested in one way, shape or form in relation to Iraq), not the climate, but those brilliant words of the Founding Fathers and those after, those amendments to the constitution that says, guess what, you have the right to privacy, you have the right to own a gun to defend yourself, you have the right to pray to the God of your choice, or not to pray, you have the right to become so insanely rich that you don't know what to do with it ... this is what defines America. She has no great history stretching eons, no unique language that can be used to whip up linguistic fervor, nothing ... but those words ... those words that have given you the right to do whatever you goddamn want as long as you aren't breaking any laws, insult whoever you goddamn want, participate in any fringe looney group as long as you don't break any laws. You start chipping away at that, and you start chipping away at America.

The Fairness Doctrine

One of the items on the Congressional agenda is the Fairness Doctrine, where the Government would require broadcasters to provide equal time for both sides. While it sounds good at first listen, the Fairness Doctrine is, to borrow from the Jurassic Park movies, the dumbest idea in the history of dumb ideas!! First, the government mandating coverage flies in the face of the First Amendment. Second, who gets to decide if something is a liberal/conservative view point or a balanced view point? Some bureaucrat gets to decide if Wolf Blitzer is being a liberal or just a neutral commentator? Come on!!

It appears to me that if there is any place for the Fairness Doctrine, it should be NPR and PBS, which are directly funded by taxpayers. And yet, any unbiased listener recognizes that these organizations are loaded with liberals. Virtually every show at these networks, with the exception of the Newshour with Jim Lehrer, takes a decidedly biased view on the issues. Maybe we can start with dictating that such organizations need to be more balanced or lose taxpayer funding?

Full Disclosure: I listen to NPR and PBS extensively, and have contributed to NPR in the past. I have however decided against further support for NPR until their editorial content changes to present more view points.

The Peg is Here to Stay

Hillary Clinton urges China to keep buying US debt. I'm no economist, but does this signal a strong dollar policy with respect to the yuan? After all, the reason China buys US debt is to finance the US trade deficit with China. That deficit is an artifact of weak US exports relative to US imports. For China to continue to buy US debt, the trade deficit must be sustained, China must maintain the peg to the dollar, for if the yuan appreciates relative to the dollar, there are smaller deficits to finance!

Video of the Day: Santelli Goes Ballistic

Quote of the Day: Eric Cantor on the Stimulus Bill

House Republican Whip Eric Cantor (R-VA) on the haste in voting on the $800 billion or so stimulus plan less than 24 hours after being released. (If you're counting, it was released at 9 pm, contains 1,1419 pages, and is being tabled at 9 am, but what's a few hours between friends!)

Those in favor of speed over commonsense may just be afraid of letting the People know what they are ramming through.

What a Bank, What a Bank ...

At a time when it takes a little inner saint to not cuss at banks, I stumbled on a bank that actually makes the world a better place. Now, now, in this day and time, that almost seems impossible, unless you're talking of some international microfinance bank like the Grameen Bank, which isn't the type of bank you or I would necessarily do business with (although we might chose to give our charitable $ that way).

But skepticism step aside - here's the Shore Bank of Chicago. It's a bank formed with an express motive of achieving social and environmental goals while making a profit. Now, normally when I see something like that, I think it's a tired cliche every business now uses nowadays, but turns out the Newshour with Jim Lehrer did a piece on them. Watch the piece and become a convert!

Oh, one more thing - they currently offer one of the highest yields on online savings in the country! Make money and help disadvantaged communities ... God, I feel like Superman!!

The Daschle Fiasco Finally Ends

Today was not a good day for the Obama White House. Two candidates for senior cabinet positions resigning. But while much of the coverage has claimed the two resigned for "tax reasons", like this one, that's not quite true in Daschle's case. No one thought Daschle's tax problems were a dealbreaker - what was was that his appointment flew in the face of Obama's pledge to not hire any lobbyists.

As Time magazine reports:

According to the White House, the important thing is that Tom Daschle is not technically a lobbyist. "If you're not registered to lobby, you can't be a lobbyist," explains White House spokesman Robert Gibbs. And Daschle, the former Senate Democratic leader who is up for the top health post in the Obama Cabinet, never filled out the paperwork to register.

Of course that's baloney, since Daschle effectively acted as a lobbyist. From the Time article:

Daschle, for instance, was a high-paid "policy adviser" at Alston & Bird, a lobbying firm with dozens of brand-name pharmaceutical and health-services clients. "Senator Daschle focuses his services on advising the firm's clients on issues related to all aspects of public policy," boasts the firm's website. One of Alston's clients, EduCap, a nonprofit student-loan company that spent six figures lobbying to change federal loan laws, took Daschle on two cushy overseas trips, one to the Bahamas for a board meeting and another to the Middle East to meet with foreign leaders.

What's particularly disturbing about this, if you were swept by the Obama hype of change, is that Obama supported Daschle despite these facts, and trying to spin the unofficial lobbyist status. Turns out he's just another politician - who would have thought?

Adding insult to injury is that the WH now argues that this will be the cleanest administration to date. That's a bit like arguing that a thief who didn't mug his victim because a cop showed up isn't a thief after all!

Enjoy Stimulus Now, Pay Your $14,000 Share Later

Kevin Hastett wrote a incredible must-read piece on Bloomberg titled 'Enjoy Stimulus Now, Pay Your $14,000 Share Later'. Really, you must read it to understand the fiscal implications on your household budget are.

An excerpt:

Under President George W. Bush -- a big spender in his own right -- the federal budget deficit reached a record $455 billion in fiscal 2008, more than double a year earlier. Government bailouts of banks and other industries that started under Bush, and may accelerate under President Barack Obama, will help push the deficit toward that $1.7 trillion mark.

And just what does that mean for your personal finances?

If your family income in 2006 was between $75,000 and $100,000, the extra taxes that you will have to pay at some point in the future add up to about $14,000. If your income was between $100,000 and $200,000, your future tax hike will be about $28,000. If your income was between $200,000 and $500,000, then your future tax bill just went up by $90,299.

The longer the deficits last, the larger those numbers get. And all for what?

The Flawed Small Car Argument

More ranting about CAFE standards. I was thinking about a concept in transportation planning called latent demand. It goes something like this. A city determines travel times are too much in their community. So they build new freeways, wider roads, that in the short term reduce travel times. But people then start to buy property in areas previously considered too far from the city center, and kaboom, their travel times are back up where they were, or often higher!

That's the flaw in the implicit assumption that forcing smaller cars on the public is the solution to our transportation energy needs. You don't have to look too far from your circle of friends to realize the person with a new fuel-sipping Honda is more likely to take a long road trip than one who takes a gas-guzzling old pickup.

I'm a tree-hugger, and I want to see true environmental change, but this is not the way. In the end, for true progress, we have to get past the cliched simplistic solutions, and a solution not based in government but societal change of less consumption.

The Wrong (and Right) Way to Fuel Efficiency

I've been thinking about fuel efficiency standards this evening. The intent is to force auto makers to make more fuel friendly cards. Every automaker essentially has to meet quotas for fuel efficient cars. Especially as the economy worsens, new CAFE standards will kill the auto makers. With fuel prices so low, there is little incentive for the average consumer to chose to buy fuel sippers. Suddenly, the already delicately positioned auto makers may be left with huge inventories of small vehicles that they will have to sell at small, if any, profit.

Environmental advocates will protest that there is a need to reduce fuel consumption and greenhouse gas emissions. But really, even if we accept those goals, CAFE standards are the wrong way to go. They are the spineless politicians' way to avoid what is the truly effective solution - raise the cost of fuel! If fuel is more expensive, there is consumer demand for smaller cars (think a few months ago), and automakers will respond. This way, the government is not forcing them to make low-demand vehicles, but achieves the same result with a lot less economic pain.

Isn't it strange that politicians were complaining about high fuel prices and global warming at the same time?

Unlimited Calling, Text and Web for 50 Bucks!

Clark Howard reports on Boost Mobile's new offering - unlimited cell phone calling and web access for 50 bucks! Dang!! The downside is phone selection and accessibility (it's on the Nextel network) but 50 bucks includes not only unlimited calling and texting but also web access? Whoa!!

PS: International long distance isn't as cheap as calling cards, but it's certainly a lot cheaper than other cell phone companies. The rate to India is $0.30/minute, which in a bind is not shabby. Also, outgoing international texts are not free.

PPS: There is NO contract!!!

The History of the Castrati

I watched a play on the castrati last night. While the play itself was a bit out-in-left-field for me, it was interesting in that I had never heard about the castrati (yes, history was always a weak spot). These were boys who were castrated for the purpose of becoming great soprano players. I thought this might have been a myth, but this article from the Urological Sciences Research Foundation website suggests there were valid medical reasons why this was the case.

The genital mutilation caused a unique physical appearance too. An excerpt from the USRF article:

The manner in which the castrati appeared to their audiences can be judged from our clinical experience of eunuchoidism due to spontaneous primary hypogonadism. A tallness of stature, which was unusual in the 18th century, was commented upon by contemporary writers and was due to failure of the epiphyses to close at puberty, thereby allowing the unopposed action of growth hormone and other growth factors. There was a smooth pale skin, with, later in life, fine wrinkles around the eyes, no beard, plentiful scalp hair, a tendency to obesity, rounding of the hips, and narrowness of the shoulders; the pitch of the speaking voice was similar to that of a female.

I did find some disparities between what I read online and what was talked about in the play, so I guess take I have to everything with a grain of salt, unless I decide to make a trip to the library.

Dow Weighting

I've never been a fan of the Dow Jones index, but now there are distortions that make it seem downright silly! From John Maudlin's latest commentary citing Jim Bianco:

...if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63 points. If IBM opens at zero, it loses 652.95 points [IBM has risen since then -- JM]. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE, and Alcoa combined.
The DJIA is not normal as the index committee is not doing their job during this crisis, possibly because to the political fallout of kicking out a Citi or GM. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos.

I.O.U.S.A.

I've been wanting to watch the documentary film, I.O.U.S.A for a while now, and thankfully the movie makers have produced a 30-minute version you can watch for free on their website. This is a must-watch movie on how much of a debt crisis the US faces, with some nifty graphics and historical perspective. Watch it ... trust me, you'd be glad you did!

Get Ready for A Second Wave!

Just when things seemed to be looking up, looks like they're getting worse. Suddenly, job losses ... big ones. The unemployment had been creeping up, and that was no surprise in a recession, but suddenly it seems things have gotten a lot worse. Bloomberg reports 21,000 job losses in a day, by companies such as Hertz.

Circuit City's liquidation was big news, because it means another 30,000 decent-paying jobs, but also this - would people keep buying electronic items if they were nervous the companies that sold the products would not be in business?

Intel saw a 27% drop in revenues. That's from a company that's in a duopoly competition with a weak competitor!

And there's more bad news I could whip up from the news. And I think we'll get a lot more coming this year. But there's some perspective we need to maintain here ...

Take that 21,000 jobs in a day. It scared the bejeezus out of me! It's a big number. It's a lot of families that have to suffer. But it's about 0.01% of the American labor force. Unemployment might have cracked 7%, but it's still a lot below historical highs.

And take all this talk of the Great Depression. I don't know of anyone calling for GDP to drop 5% this year, or in any year. If my memory of history is correct, the Big Kahuna shaved 30% from GDP. Ouch!

So take a deep breath! Things will get worse. A lot worse. But we'll all survive.

Geithner Must Go!

So there's been some red faces over the recent revelation that Treasury Secretary nominee Tim Geithner did not pay his taxes from his IMF job from 2001 through 2004. After an IRS audit flagged his 2003 and 2004 returns, he paid the taxes for those years, but did not pay his overdue taxes for 2001-2002 until the Obama transition team pointed it out shortly before he was nominated.

President-elect Obama seems to be willing to call it an "innocent mistake", as do many in the press, but hold on! This isn't Rep. Charlie Rangel, who underpaid on his taxes. That was embarrassing because Rangel heads the committee that oversees the IRS. Geithner was working all those years and paid ZERO in taxes. That wasn't oversight, it was an attempt to defraud!! The alternate explanation is that he is pretty darned inept, which should rule him out as a custodian of our billions. Either way, this incident should disqualify him from becoming Treasury Secretary.

How Cheap is the Market? (corrected)

I have run a few models suggesting decent long-term returns, and might chose to share those results at some point, but in the meanwhile, I thought some perspectives on valuation and expected long-term returns in the stock market.

Much of the gyrations on Wall Street deal with predicting what's happening now or next year, whereas the true driver of long-term returns is valuation and long-term earnings growth. The problem is Wall Street values the market on a multiple of recent earnings, which are highly volatile. Take a look at the chart below:


The blue thin line and thick trendline are the trailing 12 month (TTM) earnings for companies that make up the S&P 500 index. The problem with the traditional way of valuing the market using a multiplier of TTM earnings (or worse, some future year's earnings) is that it indicates that the market is worth 46% less now that it was a few years months ago. Indeed, that's consistent with the sell-off we see in the market, but for a long-term investor, is a whole bunch of bull!!

The pink line and red trendline represent a 10-year moving average of the TTM earnings. Essentially you are smoothing historical earnings to make long-term decisions while smoothing cyclical variability. Voila, it's fairly smooth. For a long-term investor, the market value hasn't changed in the last few years months - only the price.

So what does it all mean? The next chart is the S&P 500 price history, and the trend of 12, 16 and 25 times the 10-year earnings average. Think of this as a low, median and high value. I have been working on charts since 1910, but I need to verify a few things, so I'll only present the last almost 15 years.


Notice that the big crash in 2000-01 did not make the market cheap. It just took the market from ridiculously overvalued to expensive. And that explains why we have had mediocre returns since that time. In contrast, valuations today appear to present a much rosier picture in the long-term.

That "in the long-term" is the key piece! Short-term, prices could ... heck, almost certainly will fall more. As I write this, the markets are in a 3-day rally, but I expect any rally will fizzle. How low could markets go? I don't know that there is a clear answer in the data.

I would normally be tempted to answer down to the level of 14x 10-year earnings. That would suggest about 630 - quite a haircut more! But given the low level of interest rates and poor outlook for sovereign debt, I'd imagine that level seems low. I intuitively think 16x earnings is a bit high for a market bottom, and my guess is that the market will probably end up bouncing between 750-800 before a gradual rebound.

But we don't know. And at present levels, we can reasonably expect a decent return. How much? Earnings have historically grown about 6% a year. The dividend yield is about 3.2%. If we assume no multiplier change, that's still over 9% a year - a lot better than treasuries or CDs!

Shocking Compilation of the Day: Foreclosure Sales

A compilation of some shocking numbers I've come across in the last few days:

Over a third of all home sales currently are foreclosed properties! Translation: Any increase in home sales ("we have a bottom") is because of the glut of cheap homes.

23% of all homeowners with a mortgage owe more on their mortgage than their house is worth. Translation: Holy Shit!!

A foreclosure near your home depresses the value of your home from somewhere between $5,000 to over $20,000, depending on who did the study! Translation: This foreclosure thing does affect you, at least in the short-term.

Story of the Day: Fart Research!!

So evidentally the foul odor in farts has an important physiological role in controlling blood pressure. Oh dear! Please don't take this as an invitation to share. If you must regulate your BP, please find the restroom nearest you!!