Saturday, February 28, 2009

Lady Isabella Squirrel and the Bard

We have just posted another tale in the Squirrel Chronicles, this is Lady Isabella Squirrel and the Bard. It is a tale about a Lady in Waiting Squirrel to Queen Elizabeth I in the year 1599 when the Earl of Essex was to have quieted Ireland and instead returned to London to stir up a revolt against the ailing Queen. Enlisting Shakespeare to write three plays, Henry V, Julius Caesar and Hamlet, the Queen, with the astute help of Lady Isabella, works with Shakespeare to form these plays to propagandize their Royal views to the people and thus defeat Essex. Politics then and now.

Wednesday, February 25, 2009

Remember the Depression

In the book by Liaquat Ahmed, Lords of Finance, he recounts the major bankers whose actions through and post WW I led inevitably to the Depression of the 1930s. He also intertwines Keynes as a shadow like figure lurking in and out of the process. However he makes two interesting points.

First, one immediate result of financial instabilities of then and now is massive inflation. This inflation benefits some and disadvantages many. It benefits those with hard assets, the land owners, and it benefits the civil servant, since Government keeps raising their salaries and benefits. I can recall my mother's fear that after WW II we would face another Depression and that my father should take a job with eh Police Department as her father had worked with the Ports and Harbors Department. It would guarantee an income. The logic here befuddled me then and now. In New Jersey the State workers are now compensated at industry levels if not higher and their benefits are massive. This places a burden on the state taxpayers which is exploding. However we now hear outbursts from the people about the state workers and the state workers response are hostile, not a good way to deal with those who are putting gold in their mouths! It may be different this time around. But the ones who did poorly in the Depression were doctors, professionals of many types, and the laborers. Also not to mention the entrepreneurs just disappeared, and they and they alone are the engine that drives the US economy, more than any other country.

Second, the collapse of London as the world's financial capital occurred since the US, especially New York, was the financier of the European parties in WW I. This was the tipping point for the loss of London's preeminence. This time around the swap may be from New York to Shanghai.

In the Appendix, there is reference to a 1999 Time magazine cover story about "The Committee to Save the World" composed of Alan Greenspan, Robert Rubin, and Larry Summers. Somehow one always gets to the top and then descends again. The Camus tale of the Myth of Sisyphus as played out again and again. Clearly there is a mapping between the Lords of Finance and the Committee to Save the World, I leave the details to the reader.

Now back to the G20, one of my favorite issues. The BBC quotes Sarkozy as saying, "Capitalism must be given a new foundation!" The BBC continued:

"....As well as greater supervision of all financial markets and instruments, leaders underlined the need to reassess the issue of pay at finance firms. Mr Sarkozy added said people could "no longer tolerate the reward package system for traders and bankers". There has been much criticism of bankers' bonuses, which have been high despite their bank's poor performance. Leaders also said they wanted to crack down on tax havens. Ms Merkel said: "As far as uncooperative players, tax havens or areas where non-transparent business is carried out are concerned, we need to develop sanction mechanisms. These must be made very concrete," she said She added that a list would be drawn up "clearly showing which the uncooperative jurisdictions are.""

Sarkozy is playing a dangerous hand. He fells that France is in a strong position and that now he can dictate to all the others. Sarkozy is not DeGaulle. DeGaulle, a French father and Irish mother, was French. Sarkozy still is Hungarian in many ways. That results in a dissonances that must be dealt with, for it is a historical world view that will not lead to a safe conclusion for all.

The China People's Daily states:

"In view of the seriousness of the ongoing, surging global financial crisis, leaders participating in the meeting called for assuring, without fail, the success of imminent London financial summit. The crisis can be phased out only when the structural reform is done to the international financial system, they noted. At a news conference held at the end of the meeting, Chancellor Angela Merkel called for adopting a "sanction mechanism" to penalize "tax havens" and establishing a blacklist of those unwilling to adhere to the international cooperation prior to April 2. The incoming April London Summit, the follow-up meeting of the Washington Summit on Financial Market and World Economy which was convened on 14-15 November 2008, is primarily up to the task of designing a suitable response to the global financial crisis. To this end, said Chancellor Merkel, the Berlin meeting is hoped to contribute in reforming the international financial system. "A clear message and concrete actions are necessary to engender new confidence in the markets and to put the world back on a path toward more growth and employment," Merkel said. Leading EU nations, nevertheless, have their own respective expectations for the London financial summit."

China is watching to Europe talking and to the US swinging in the breeze. There may very well be a repeat of what occurred a century ago. The names are different but the characters are the same. This time, however, there is a sleeping giant in China on the edge, safe and secure, able to redirect its stored up resources for internal infrastructure buildup, and when this ends they will emerge a true giant against a very injured United States.

Monday, February 23, 2009

Another Day of Disaster

This is another day of disaster. Looking at or Baseline Portfolio, such as Verizon, Kraft, DuPont, Dow, J&J, Alcoa, and no financials, just food, soda cans, drugs, stuff we use every day, has taken another nose dive.

The Figure below shows in the first Figure of the Portfolio value and its return. The drop from Inauguration Day is unrelenting. These are NOT financial stocks. They are core stocks in companies that make what we live on day to day. They are telephone calls, mac and cheese, vanilla wafers, aluminum cans, band aids, drugs. They are core chemicals and the other items which make up or economy.

The second is the effective yield curve if we were to purchase this portfolio today and seek only dividends, assuming no change in dividends.

We are seeing a 6.8% dividend yields starting from 5.5% in December. As we have said before the above yields are indicators of future massive inflation and the drops in stock value show that we may readily hit a DOW 6,000 or even lower. Thus we are looking at 20% inflation and a collapsing DOW. And things are very well most likely to get worse!

Vraiment, les Occidentaux divisés

Truly the West is divided. On Friday last week Le Monde published a story regarding the G20. Again I am amazed as to the total lack of coverage of this event since it may very well become a defining moment for the new Administration.

Le Monde states:

"Français et Allemands ont travaillé en pleine entente sur la régulation, Berlin acceptant largement les propositions françaises. "Notre ministère des finances avait rédigé un papier qui était plus ennuyeux. Celui des Français était plus politique", commente Ulrich Wilhelm, porte-parole d'Angela Merkel. Mais les deux pays font face à un raidissement britannique et à une inconnue américaine. Londres est soupçonné de vouloir faire diversion, en élargissant l'ordre du jour du sommet de Londres."

Simply stated, the French and Germans have a plan and the US and UK are left in the dark. Regarding the specifics, Sarkozy is quoted as:

"Sur les hedge funds, les Européens veulent pouvoir enquêter en profondeur sur leurs comptes quand les plus libéraux se contenteraient de simples informations données volontairement par leurs gestionnaires aux autorités de contrôle."

Namely they are seeking to have a strong and transparent and international regulatory body control hedge funds. This would have a dramatic effect on the US based industry which albeit having its problems is not as bad as the regulated banks.

Finally Le Monde states:

"Unies sur la régulation financière, les deux capitales connaissent encore quelques tensions. Mme Merkel a envoyé vendredi aux capitales européennes ses propositions de conclusions pour la réunion de dimanche : coordonner les plans de relance économique et lutter contre le protectionnisme, pour protéger le marché intérieur européen."

Merkel has become the salesperson and Sarkozy the strategist. Merkel is going about with the over sale of the new regulatory regieme. The question is what is the US doing, for even the UK is concerned and attmpting to see its way through. This could lead to closed markets in the financial world, akin to trade barriers in the 1930s, these would become financial trade barriers. The result could make for a total tail spin into the dirt!

Finally there is a lack of credibility in the new Administration. Le Monde states:

"C'est le second souci. "Obama est du côté des Européens" continentaux, assure M. Wilhelm. Mais le calendrier est défavorable, le sommet intervenant trop tôt. M. Obama est préoccupé par le sauvetage de l'économie américaine, beaucoup plus urgent que la refondation de l'architecture financière mondiale à long terme. "Les Américains ne seront pas prêts sur la régulation pour le 2 avril. En revanche, ils vont accuser les Européens de n'avoir investi que 1,5 point de leur produit intérieur brut (PIB) dans la relance de l'économie, alors qu'eux y ont consacré 5 points", explique un ancien ministre français."

The US will not be ready by April 2nd for discussions on regulation. The question is what was the problem. The European view was lack of regulation but as we demonstrated yesterday there are many reasons, interlinked and some obvious and some subtle. The Europeans must beware of the law of unintended consequences and the fact that all too often the heavy handed Germans combined with the intellectually arrogant French can be a deadly mix!

Sunday, February 22, 2009

Rumblings from the G20 Again

As we stated several weeks ago in a detailed White Paper, the New York Times today reports that Merkel and Sarkozy are planning an assault on the US regulatory structure at the G20 meeting in London early April.

The Times states:

"French President Nicolas Sarkozy said that ''Europe wants the system to be refounded,'' and stressed the importance of the April meeting.

''We all want London to be a success and we are all aware that it's (our) last chance,'' Sarkozy said. ''We cannot afford a failure in London.''

European leaders also backed Merkel's call for a ''charter of sustainable economic activity'' that would subject all financial market activities around the globe to regulation, including credit rating agencies.

Merkel's proposal envisions giving increased powers to the IMF, which the leaders agreed needed to receive double its current funding in order to help members respond ''swiftly and flexibly'' to a crisis."

It will be another crisis moment for the new Administration and we believe that this may be additive to all of the other issues. We will be following this closely.

The details reported by Reuters today makes the sense of confrontation ever more clear. Specifically Reuters states:

"Below are highlights from a "chair's summary" of conclusions from the meeting that was seen by Reuters:



- We have today underscored once again our conviction that all financial markets, products and participants must be subject to appropriate oversight or regulation, without exception and regardless of their country of domicile. This is especially true for those private pools of capital, including hedge funds, that may present a systemic risk.

- We also agreed that credit rating agencies should be subject to mandatory registration and oversight.

- We have today agreed on advocating reforms to ensure that banks build additional buffers of resources in good times.

- A list of uncooperative jurisdictions and a toolbox of sanctions must be devised as soon as possible.

- The Financial Action Task Force, OECD and FSF should submit proposals in their respective fields to the G20 Finance Ministers meeting in March, for review at the London Summit.

- We will strongly advocate (at the London summit)...the development of an effective early warning system by the IMF and FSF, working in close cooperation.

- We will strongly advocate (at the London summit)...the adoption of principles on compensation practices to prevent bonus payments that contribute to excessive risk-taking."

This is further exacerbated by the massive drops in Central European currencies such as the Polish zloty and the Czech currency. The Russian currency also continues to drop. In many ways this appears as if it were 1930 again. That presents many real threats to the Administration which may lack both the understanding of long term European history as well as that of the early part of the 20th century.

History has a strange way of repeating itself again and again.

An Interesting Chart: The Rear View Mirror

The Congressional Research Service recently published a paper on the Causes of the Financial Crisis. It is a very good compilation of all the things that people think may have led to where we are.

They list 26 things that led to the crisis. Twenty six things and the same people in Congress who asked for and obtained this backward looking report never saw one of them in the past two years or even more!

This is like a patient arriving in your office who is morbidly obese, with a three pack a day habit for thirty years, who lives a rather profligate life, also does crack, and then presents with small cell lung carcinoma, renal failure, has an MI on the table, and well you get the point. These problems were a long time coming. You could see the weight gain, you could smell the cigarette smoke, you could see the drug use in the eyes, and on and on. It was more than just a light at the end of the tunnel and finding out it was the train.

These 26 causes as seen by CRS are:

1. Imprudent Mortgage Lending
2. Housing Bubble
3. Global Imbalances
4. Securitization
5. Lack of Transparency and Accountability in Mortgage Finance
6. Rating Agencies
7. Mark‐to‐market Accounting
8. Deregulatory Legislation
9. Shadow Banking System
10. Non‐Bank Runs
11. Off‐Balance Sheet Finance
12. Government‐ Mandated Subprime Lending
13. Failure of Risk Management Systems
14. Financial Innovation
15. Complexity
16. Human Frailty
17. Bad Computer Models
18. Excessive Leverage
19. Relaxed Regulation of Leverage
20. Credit Default Swaps (CDS)
21. Over‐the‐Counter Derivatives
22. Fragmented Regulation
23. No Systemic Risk Regulator
24. Short‐term Incentives
25. Tail Risk
26. Black Swan Theory

This is worth the read. Each of these has in some way been accused as being the dominant element in the crisis. Each has its advocate and in a way it was the perfect storm. Could this have come about with only one of these, how about two, maybe three, or do we need all 26. The following chart depicts a possible cause and effect relationship amongst these causes. That is there were early causes and causes of causes. This means that there were canaries that were dying off well before the ultimate deaths.

Some of the causes are derivative of the others and some are just ways of rephrasing one or a few of the others. The Black Swan theory of Taleeb is an artifact that sells well, but it is the generally accepted Court Jester theory of evolution, also the one phrased by Eldredge and Gould and known as punctuated equilibrium. Simply changes occur when major events disrupt equilibrium. The direction of the change in a Darwinian sense in towards the survival of the fittest. However in an economic sense, the fittest may or may not be to those in power. Things happen that tend to disturb what we would commonly look towards as the fittest.

Saturday, February 21, 2009

Sub Primes in New Jersey

The New York Fed published a paper on Sub Prime Mortgages in New Jersey and the data is quite enlightening. The first Table depicts the defaults as of August 2008 by state and shows that New Jersey if 5th in ratio of sub-primes in foreclosure on the basis of total homes. Namely the Table states that NJ has 3 of 1,000 housing units in foreclosure as compared to 6.2 for Florida and 4.6 for California.

Now the details of the counties can be shown in the following map. The highest foreclosures were in Union, Linden, Irvington and Plainfield. All of these towns have a well established housing base and are major Democratic strongholds. They are used again and again for carrying the New Jersey Democratic vote. Other counties, especially Republican counties account for only 64 of the 10,500 foreclosures!

The third Table depicts the default by Zip codes. The green boxes are zip codes where 75% or more of the sub prime loans are foreclosed. This is for Essex County. This is a county of older houses as is Union and the problem is clearly one of providing mortgages to people who clearly cannot afford them.

In addition, this was the Congressional District of Senator Robert Menendez before he went to the Senate. He pressured the banks to lend the funds and as seen in the following chart the lending went to those least able to afford them. 75% of the defaults were in ten zip codes! This was not a county as one finds in Florida or California where there was a great amount of new development. In fact there has been little or no development here in fifty to seventy five years. These were houses with well defined prices that were flipped and sold to those who clearly could not afford them, apparently driven by very strong political pressure.

Our observation and possibly conclusion is that the Democrats through their influence may have actually created circumstances which led to this collapse. The data at least for this part of New Jersey appears to bear this out.

Red Queen and the Court Jester: World Views

In a recent Science magazine article on evolution, Michael Benton presented a wonderful article on The Red Queen and the Court Jester world views in evolution.

Simply put, the Red Queen model is one of incrementalism in the milieu of the competing species, a collection of small but unending incremental changes results in the ultimate change in the involved species. This model is called that since in Through the Looking Glass, Alice says (Chapter 2):

"A slow sort of country!' said the Queen. `Now, HERE, you see, it takes all the running YOU can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!' "

To Darwin it was incrementalism, the slow and unending and environmentally controlled changes in selection, a gene at a time, or better yet a base pair at a time.

The Court Jester Model is an evolutionary model which is effected by large unpredictable changes. An example is a meteor smashing into earth and then all hell breaking loose. The current economic crisis is another example.

The Red Queen model is that of Darwin and the Court Jester is that of Van Valen.

In France, philosophically all Frenchmen are either Cartesians or Pascallians. The Cartesians start by doubting everything and ending up in abject certainty, whereas the Pascallians are those who have core beliefs and end up probabilistic believers in their world. There is a tension between the diptych sets of doubt-certainty and belief-probabilistic.

In our current economic environment there are the free market players versus the regulators. The Free market players are the Court Jesters, "stuff happens" and the market adjusts. They believe in the fundamental structure of the market. In many ways they are Cartesians. The Regulators are the Red Queens, they believe that they are smart enough to ensure incrementalism and that they can control this uncertain but incrementally changing monster we call an economy.

On the sidelines are the likes of Taleeb and Norouri who are Court Jester believes, at least from their actions. On the other side are the Krugmans and Steiglitzs who are believers in a vision while being able to project a patina of controllability.

In 1990 I wrote a paper on Telecommunications at Harvard and looked at the evolution of telecommunications in the same dichotomous manner. World view is essential to understand. What is the world view of the people making the decisions and from that one could possible hope to ascertain what the result may be.

The current Administration is in my opinion a group of Red Queen people facing a Court Jester challenge. There is an impedance mis-match here, a tremendous impedance mis-match, and this will result in cognitive dissonances until they better understand their and our predicament.

Perhaps this was the cause of the Depression of the 1930s. Perhaps it is best to look at these economic events in evolutionary terms. Perhaps both Red Queen and Court Jester modes operate simultaneously. What is most important to do is to understand your world view and try to reconcile it with the reality of the moment, then and only then will your actions have the opportunity to resonate with the challenge.

Let them Eat Cake! Says Gibbs

The White House Press Secretary, Robert Gibbs, reprimands CNBC reporter Santelli for in his not reading the Administration's plan. He arrogantly told the Press Corp how Santelli could and should have downloaded the Administration's Plan and then how he could have printed it, as if Santelli had no competence in the use of computers and only the technically advanced White House held such knowledge. This is akin to Marie Antoinette saying "Let them eat cake" , a statement of abject arrogance which led to a less than welcome outcome. The Press Secretary should have seen and heard the mass of cheers and jeers behind Santelli. Frankly it was not what Santelli said but the visceral response of the pits, that is what should be worrying the White House, not "some cable TV reporter". Gentlemen, you missed what truly just happened in front of your faces! This may very well be a harbinger of things to come. Gibbs then said he would buy Santelli a cup of coffee, decaffeinated! More cake! There is a problem here and the arrogance of this nature fuels it more than any Rush Limbaugh rant on mid-day radio. In addition, remember that Santelli is reporting from the pits in Chicago...duhh!

Friday, February 20, 2009

If All Else Fails Listen to the Customer (read Taxpayer)

Behind my desk is a sign that states, "If all else fails, listen to the customer!" This was the result of having done many turn arounds in the 1980s. I saw many technical start ups with great products and no customers. The opposite was also true, there may be many customers and a poor product. Sooner or latter the customers disappear.

Rick Santelli of CNBC went on a rant yesterday regarding the administrations mortgage bail out plan. Then today Jared Bernstein, the economic advisor to VP Biden, rebuked Santelli and then proceeded to tout the great advantages of the Administrations program. Let one say that Santelli was resonating with more chords than Bernstein. In fact Bernstein presented himself with the arrogance of those in power, not one in the midst of a whirlwind.

Let me return to the problem again. The problem is that banks have junk on their books, junk because, despite the fact that is may have some value, no one believes it has any value. Thus there is no first mover and the markets are frozen. One Darwinian approach is to just let nature take it course. There are some problems here. The next is the recapitalize the banks. Equity is not the way to go because it is a balance sheet problem of junk on the balance sheet. It means removing the junk, remember the TARP.

The way to do it is as we have suggested weeks ago. Create a Federal Home Loan Bank, buy the junk at a haircut, who cares as long as it is above the current water level. Now everyone believes it is zero, so anything is better than nothing. Then move the mortgages to the FHLB and reissue them with certain covenants. However, issue them to vetted borrowers. Do not issue them to frauds, for there are many of them. Make real criminal indictments part of the issuance, namely if you lie to the FHLB you do hard time. Abject terror is frequently a strong motivation. This is one of the lessons learned from the Joe Stalin School of Management, after all I ran a business in Russia.

There will also be a strange phenomenon if one does this, namely, the bad borrowers just will not even apply, they will collapse on their own and then the DoJ should target them! The arrogance of a Jared Bernstein should be eliminated when seen against the backdrop of the motivated and spirited and justified Santelli mobs at the gate. Remember the Bastille.

Latest DoL Numbers

The above are the latest Department of Labor statistics. There now appears to be increases in the CPI and the PPI, a dramatic switch from two weeks ago. The IPI is still negative. This increase along with our previous observation concerning our Canonic Portfolio which sees a forward looking inflation at 20% may be the beginning of a perfect storm. Collapse of value, massive inflation, exploding Government debt and the total destruction of the entrepreneurial market.

Thursday, February 19, 2009

Another Day of Drops

The Canonic Portfolio has now gone to a targeted 52.5% loss for the year. Namely if the market continues to respond to the perceived economic conditions the stock market of "reasonable" dividend yielding stocks will drop to 52.5% of what they were on January 1, 2009.

There is money in the system, on the sidelines, and elsewhere, but it is not entering the market. If this continues we may be looking at a very bleak year.

There is a second curve which is even more interesting. This is the Dividend yield of the portfolio if it were bought at the date of the axis value, for example as of today the portfolio would yield a dividend of 6.43% up from the initial yield of 5.5%. This is a 20% increase in dividend yield. The increase in effective dividend yield is also a measure of forward looking inflation. Thus this metric shows we are looking at potentially a 20% inflation. We will be measuring this rate as well. The Market seems to be factoring in a tremendous inflation rate in anticipation of forward looking changes. This may be the Canary in the Mineshaft!

Wednesday, February 18, 2009

The Home Mortgage Proposal and The Contract Clause

In May of 1987 I bought a condo in the ski area of New Hampshire for a determined amount. That fall the Stock Market crashed. The following summer, 1988, the condo was worth 25% less and the following year it was worth 40% less. I and my fellow borrowers never thought of getting a cram down on the mortgage. I waited seventeen years to sell the condo at almost the same price I paid when I bought it. If I sold it earlier I would loose money, and that was the risk of my venture into real estate, and in fact into any transaction in life.

The Constitution has a clause called the Contract Clause and it reads:

"Article I Section. 10. Clause 1: No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

In the infamous Blaisdell Case, HOME BLDG. & LOAN ASS'N V. BLAISDELL, 290 U.S. 398 (1934), which was the Roosevelt Court that abrogated the Contract Clause, the Chief Justice, Justice Hughes, states the words of Justice Marshall uttered more than a hundred years earlier:

"The occasion and general purpose of [290 U.S. 398, 428] the contract clause are summed up in the terse statement of Chief Justice Marshall in Ogden v. Saunders, 12 Wheat. 213, 354, 355: "The power of changing the relative situation of debtor and creditor, of interfering with contracts, a power which comes home to every man, touches the interest of all, and controls the conduct of every individual in those things which he supposes to be proper for his own exclusive management, had been used to such an excess by the state legislatures, as to break in upon the ordinary intercourse of society, and destroy all confidence between man and man. This mischief had become so great, so alarming, as not only to impair commercial intercourse, and threaten the existence of credit, but to sap the morals of the people, and destroy the sanctity of private faith. To guard against the continuance of the evil, was an object of deep interest with all the truly wise, as well as the virtuous, of this great community, and was one of the important benefits expected from a reform of the government.""

Justice Marshall knew very well that a persons word was their bond. Agreements mean something, words mean something, contracts mean something. If the Government comes in and abrogates an agreement that means something, it means that agreements may have no value. It is the beginning of the end of an economy. It stops trade. All one has to do is look at Genoa in the 7th century and see how the early letters of credit started the expansion of Mediterranean trade, slowed during the Muslim dominance, and then recaptured from Venice.

In the current Administration plan it recommends:

"Institute Clear and Consistent Guidelines for Loan Modifications: Treasury will develop uniform guidance for loan modifications across the mortgage industry, working closely with the bank agencies and building on the FDIC’s pioneering work. The Guidelines will be used for the Administration’s new foreclosure prevention plan. Moreover, all financial institutions receiving Financial Stability Plan financial assistance going forward will be required to implement loan modification plans consistent with Treasury Guidance. Fannie Mae and Freddie Mac will use these guidelines for loans that they own or guarantee, and the Administration will work with regulators and other federal and state agencies to implement these guidelines across the entire mortgage market. The agencies will seek to apply these guidelines when permissible and appropriate to all loans owned or guaranteed by the federal government, including those owned or guaranteed by Ginnie Mae, the Federal Housing Administration, Treasury, the Federal Reserve, the FDIC, Veterans’ Affairs and the Department of Agriculture."

The unintended consequences may very well be the total collapse of new credit. Why deal with any financial institution with a nexus to the United States if the terms of any loan can be summarily changed by the US Government.

The plan we suggested was quite different and one would have assumed more compliant with the Administration. It was the recreation of the Federal Home Loan Bank. To repeat:

1. Deal only with "qualified" borrowers. Let that definition be as with the current Administration proposal.

2. Pay off the existing mortgage with a 20-25% haircut. That most likely puts cash into the system, and eliminates risk. The latter is more important. The payout may be over some period of time and an interest consistent with Government bonds could apply. Thus it would cost the Government a large sum but it would be spread over a ten year period.

3. Issue new mortgages to the homeowners for the same face amount but for 40 years at 3%, for example. The Government could finance the payments to the original holders with these assets.

4. If the borrower sells the house at less than the face value of the loan after a minimal holding period, say three to four years, the Government eats the loss. If the house is sold for more than the loan value the Government gets 25% of the upside.

5. No Contract abrogation.

The main advantages of this proposal are:

1. Eliminates Bank balance sheet uncertainties.

2. Is financeable because of the Federal underwriting, in effect a swap like structure.

3. Avoids violating what little is left of the Contract clause thus maintaining the integrity of the markets.

4. May even be profitable!

Just a few thoughts for the day. The advantage of the new Administration is that it allows for new thoughts every day. That is an improvement in itself.

Tuesday, February 17, 2009

Healthcare Summary

This Table is from the New England Journal of Medicine and is a great summary of the Stimulus plan for Healthcare. It shows an expenditure for HIT in excess $19 billion which exceeds my previous number from HR1 and its Section 3000 by $12 billion. I must go back and figure out where the remainder is hidden. It grants physicians up to $65,000 for implementation which is what I may have missed the first time through.

The total is $136 billion! Of that $87 billion goes to states for Medicaid programs. Additional $25 billion goes to assist in unemployment health coverage and the comparative effectiveness is a total of $1.1 billion.

One needs to become a biblical scholar reading the document again and again and reinterpreting it. Almost 17.5% of the Stimulus is for Healthcare and most of that is directly for payments to states and subsidies for COBRA payments.

Response to Signing the Stimulus

This is our December 1, 2008 portfolio of classic American stocks. The declines each time the Administration takes another action is remarkable. The forward looking loss in American core business for 2009 is now in excess of 50% for this year. We may be looking at a DJIA hitting 4000 by year end if this is sustained. That means we may likely see in excess of 10.5% unemployment as well, possibly 15%. Confidence is ebbing away rapidly. The announcement of the mortgage bailout on Wednesday may likely add more bad news. Despite the erosion of the contract clause of the Constitution and the fact that mortgage holders can unilaterally have their contracts rewritten by a court, this bodes poorly for any future growth. The markets require some form of certainty. If a court can rewrite a financial agreement then the pricing of that agreement has no value. This means that this uncertainty will be factored into future agreements and thus make them less available and more costly. Beware the unintended consequences!

Monday, February 16, 2009

Health Information Technology: Every Part of HR1 Creates Another Permanent Government Agency!

The HR1 section on Health Information Technology is the third element of HR1 we have analyzed. There is a clear pattern.

I: Health Information Technology, SEC 3000 et al creates a $3 billion Government Czar and infrastructure to develop an Electronic Health Record as defined:

"(13) QUALIFIED ELECTRONIC HEALTH RECORD.—The term qualified electronic health record means an electronic record of health‐related information on an individual that— (A) includes patient demographic and clinical health information, such as medical history and problem lists; and (B) has the capacity— (i) to provide clinical decision support; (ii) to support physician order entry; (iii) to capture and query information relevant to health care quality; and (iv) to exchange electronic health information with, and integrate such information from other sources."

II: Broadband; SEC 201 Creates an NTIA Broadband Czar for $7 billion. It also mandates but does not fund 50 State plus territories Broadband Czars which will add to the real estate tax payers load.

III: Clinical Effectiveness SEC 802 creates a Clinical Effectiveness Czar and a massive organization. This is $700,000,000 for comparative clinical effectiveness research.

Each of these has a Czar, an organization, initial funding, and what appears to be a perpetual life. It is clear that HR1 is one of the greatest generators of Government bureaucracy ever known. Broadband is wasteful, clinical effectiveness is a natural part of the practice of medicine, as is evidence based medicine, and the medical record issue is best done in the private sector, as was the Internet with the IETF.

Now let us briefly look at the definition of the Electronic Health Record as in the Bill and as stated above. It is vague and it grossly fails to provide what we hare argued before is required. It must be patient focused, capable of handling complex multimedia elements, displayable and annotateable, and capable of be cross indexed and analyzable across and wide patient base and across a wide set of highly complex variables. If it has any use other than a data collection it must be able to be used for clinical trials. That should be a minimal benchmark.

The EHR section mandates "(iii) The utilization of a certified electronic health record for each person in the United States by 2014" Frankly is was easier to build an atomic bomb than to implement this nationally in five years. It is not the execution but defining what the answer is. The FAA has failed to upgrade the ATC systems for forty years and we all know what has to be done and there is a central point of control! How is this to be mandated from some Government Czar when the answer is unknown and the Government has an abysmal track record!

I would suspect that as one goes section by section through this massive bill that the theme of more, bigger, costly Government spending will be seen and that further the infrastructure built is both permanent and expansive. The shame is that no one was allowed to comment on these expenditures.

HR 1 Broadband: I have the Distinct Disadvantage of Experience!

Broadband, yes this was a deployment in Kutztown, PA which I photographed in 2003. We then did 35 detailed market, engineering and business plans for markets in New Hampshire, Massachusetts and Vermont, we even got RUS funding, even built out a portion on our own, and then hit the brick wall of the greedy towns and their Franchises. This is the snake in the woodpile that this Bill somehow glosses over. Also the small fact that there may not be a business model which works.

Thus it is worthwhile providing the HR1 words on broadband, and then look at facts. Somehow all the cheerleaders for broadband have never: (1) ever built anything, (2) have even had to create a business to pay salaries, (3) have any idea as to the technology, (4) ever negotiated a franchise. Regrettably I have, and I have done this in over 20 countries, the hardest is the US! Politics, the worst kind, local politics.

Now to the Bill. First the preamble:


For an amount for ‘‘Broadband Technology Opportunities Program’’, $7,000,000,000, to remain available until September 30, 2010: Provided, That of the funds provided under this heading, $6,650,000,000 shall be expended pursuant to section 201 of this Act, of which: not less than $200,000,000 shall be available for competitive grants for expanding public computer center capacity, including at community colleges and public libraries; not less than $250,000,000 shall be available for competitive grants for innovative programs to encourage sustainable adoption of broadband service; and $10,000,000 shall be transferred to ‘‘Department of Commerce, Office of Inspector General’’ for the purposes of audits and oversight of funds provided under this heading and such funds shall remain available until expended:

Provided further, That 50 percent of the funds provided in the previous proviso shall be used to sup2 port projects in rural communities, which in part may be transferred to the Department of Agriculture for administration through the Rural Utilities Service if deemed necessary and appropriate by the Secretary of Commerce, in consultation with the Secretary of Agriculture, and only if the Committees on Appropriations of the House and the Senate are notified not less than 15 days in advance of the transfer of such funds:

Provided further, That of the funds provided under this heading, up to $350,000,000 may be expended pursuant to Public Law 110–385 (47 U.S.C. 1 note) and for the purposes of developing and maintaining a broadband inventory map pursuant to section 201 of this Act:

Provided further, That of the funds provided under this heading, amounts deemed necessary and appropriate by the Secretary of Commerce, in consultation with the Federal Communications Commission (FCC), may be transferred to the FCC for the purposes of developing a national broadband plan or for carrying out any other FCC responsibilities pursuant to section 201 of this Act, and only if the Committees on Appropriations of the House and the Senate are notified not less than 15 days in advance of the transfer of such funds: Provided further, That not more than 3 percent of funds provided under this heading may be used for administrative costs, and this limitation shall apply to funds which may be transferred to the Department of Agriculture and the FCC."

Yes indeed that is $7 billion for these many yet to be specified tasks! Now to Section 201!

SEC. 201.

The Assistant Secretary of Commerce for Communications and Information (Assistant Secretary), in consultation with the Federal Communications Commission (Commission) (and, with respect to rural areas, the Secretary of Agriculture), shall establish a national broadband service development and expansion program in conjunction with the technology opportunities program, which shall be referred to the Broadband Technology Opportunities Program. The Assistant Secretary shall ensure that the program complements and enhances and does not conflict with other Federal broadband initiatives and programs.

(1) The purposes of the program are to—
(A) provide access to broadband service to citizens residing in unserved areas of the United States;
(B) provide improved access to broadband service to citizens residing in underserved areas of the United States;
(C) provide broadband education, awareness, training, access, equipment, and support to— (i) schools, libraries, medical and healthcare providers, community colleges and other institutions of higher education, and other community support organizations and entities to facilitate greater use of broadband service by or through these organizations; (ii) organizations and agencies that provide outreach, access, equipment, and support services to facilitate greater use of broadband service by low-income, unemployed, aged, and otherwise vulnerable populations; and (iii) job-creating strategic facilities located within a State-designated economic zone, Economic Development District designated by the Department of Commerce, Renewal Community or Empowerment Zone designated by the Department of Housing and Urban Development, or Enterprise Community designated by the Department of Agriculture.
(D) improve access to, and use of, broadband service by public safety agencies; and
(E) stimulate the demand for broadband, economic growth, and job creation.

(2) The Assistant Secretary may consult with the chief executive officer of any State with respect to—
(A) the identification of areas described in subsection (1)(A) or (B) located in that State; and
(B) the allocation of grant funds within that State for projects in or affecting the State.

(3) The Assistant Secretary shall—
(A) establish and implement the grant program as expeditiously as practicable;
(B) ensure that all awards are made before the end of fiscal year 2010;
(C) seek such assurances as may be necessary or appropriate from grantees under the program that they will substantially complete projects supported by the program in accordance with project timelines, not to exceed 2 years following an award; and
(D) report on the status of the program to the Committees on Appropriations of the House and the Senate, the Committee on Energy and Commerce of the House, and the Committee on Commerce, Science, and Transportation of the Senate, every 90 days.

(4) To be eligible for a grant under the program an applicant shall—
(A) be a State or political subdivision thereof, a nonprofit foundation, corporation, institution or association, Indian tribe, Native Hawaiian organization, or other non-governmental entity in partnership with a State or political subdivision thereof, Indian tribe, or Native Hawaiian organization if the Assistant Secretary deter mines the partnership consistent with the purposes this section;
(B) submit an application, at such time, in such form, and containing such information as the Assistant Secretary may require;
(C) provide a detailed explanation of how any amount received under the program will be used to carry out the purposes of this section in an efficient and expeditious manner, including a demonstration that the project would not have been implemented during the grant period without Federal grant assistance;
(D) demonstrate, to the satisfaction of the Assistant Secretary, that it is capable of carrying out the project or function to which the application relates in a competent manner in compliance with all applicable Federal, State, and local laws;
(E) demonstrate, to the satisfaction of the Assistant Secretary, that it will appropriate (if the applicant is a State or local government agency) or otherwise unconditionally obligate, from non-Federal sources, funds required to meet the requirements of paragraph (5);
(F) disclose to the Assistant Secretary the source and amount of other Federal or State funding sources from which the applicant receives, or has applied for, funding for activities or projects to which the application relates; and
(G) provide such assurances and procedures as the Assistant Secretary may require to ensure that grant funds are used and accounted for in an appropriate manner.

(5) The Federal share of any project may not exceed 80 percent, except that the Assistant Secretary may increase the Federal share of a project above 80 percent if—
(A) the applicant petitions the Assistant Secretary for a waiver; and
(B) the Assistant Secretary determines that the petition demonstrates financial need.

(6) The Assistant Secretary may make competitive grants under the program to—
(A) acquire equipment, instrumentation, networking capability, hardware and software, digital network technology, and infrastructure for broadband services;
(B) construct and deploy broadband service related infrastructure;
(C) ensure access to broadband service by community anchor institutions;
(D) facilitate access to broadband service by low-income, unemployed, aged, and otherwise vulnerable populations in order to provide educational and employment opportunities to members of such populations;
(E) construct and deploy broadband facilities that improve public safety broadband communications services; and
(F) undertake such other projects and activities as the Assistant Secretary finds to be consistent with the purposes for which the program is established.

(7) The Assistant Secretary—
(A) shall require any entity receiving a grant pursuant to this section to report quarterly, in a format specified by the Assistant Secretary, on such entity’s use of the assistance and progress fulfilling the objectives for which such funds were granted, and the Assistant Secretary shall make these reports available to the public;
(B) may establish additional reporting and information requirements for any recipient of any assistance made available pursuant to this section;
(C) shall establish appropriate mechanisms to ensure appropriate use and compliance with all terms of any use of funds made available pursuant to this section;
(D) may, in addition to other authority under applicable law, deobligate awards to grantees that demonstrate an insufficient level of performance, or wasteful or fraudulent spending, as defined in advance by the Assistant Secretary, and award these funds competitively to new or existing applicants consistent with this section; and
(E) shall create and maintain a fully searchable database, accessible on the Internet at no cost to the public, that contains at least the name of each entity receiving funds made avail1 able pursuant to this section, the purpose for which such entity is receiving such funds, each quarterly report submitted by the entity pursuant to this section, and such other information sufficient to allow the public to understand and monitor grants awarded under the program.

(8) Concurrent with the issuance of the Request for Proposal for grant applications pursuant to this section, the Assistant Secretary shall, in coordination with the Federal Communications
Commission, publish the non-discrimination and network interconnection obligations that shall be contractual conditions of grants awarded under this section.

(9) Within 1 year after the date of enactment of this Act, the Commission shall complete a rulemaking to develop a national broadband plan. In developing the plan, the Commission shall—
(A) consider the most effective and efficient national strategy for ensuring that all Americans have access to, and take advantage of, advanced broadband services;
(B) have access to data provided to other Government agencies under the Broadband Data Improvement Act (47 U.S.C. 1301 note);
(C) evaluate the status of deployments of broadband service, including the progress of projects supported by the grants made pursuant to this section; and
(D) develop recommendations for achieving the goal of nationally available broadband service for the United States and for promoting broadband adoption nationwide.

(10) The Assistant Secretary shall develop and maintain a comprehensive nationwide inventory map of existing broadband service capability and avail ability in the United States that entities and depicts the geographic extent to which broadband service capability is deployed and available from a commercial provider or public provider throughout each State: Provided, That not later than 2 years after the date of the enactment of the Act, the Assistant Secretary shall make the broadband inventory map developed and maintained pursuant to this section accessible to the public."

That's all folks! Now it is worth looking at details.

There is a lot of money going to Hawaii! Why, one can only guess! Then it also requires that the projects be complete in 2 `years! Try and get a franchise in that time, then get equipment, then pull on the poles etc. No way can this be done! It is physically impossible, but I forgot this was Congress, reality plays no role. Also the NTIA has no infrastructure, policies, procedures and the like to accomplish this. That in itself will take years and if not done properly will result in massive fraud. USDA and its agency RUS has decades of experience and a group of competent and dedicated people. They are not being used.

This is doomed to failure. Say goodbye to $7 billion. This is not a stimulus it is a total and complete waste of the taxpayers money. Finally it is in the purview of the State to select the areas to be built out, in effect the States create market plans, and then somehow third parties submit bids for these parcels. States in charge of markets, again unlikely to work.

Looking at Section 802: The Camel's Nose in the Tent

The Section 802 of the Stimulus is worth a read because it may very well change the way Medicine is practiced in the United States. Here it is in detail:


(a) ESTABLISHMENT.—There is hereby established a Federal Coordinating Council for Comparative Clinical Effectiveness Research (in this section referred to as the ‘‘Council’’).

(b) PURPOSE; DUTIES.—The Council shall—

(1) assist the offices and agencies of the Federal Government, including the Departments of Health and Human Services, Veterans Affairs, and Defense, and other Federal departments or agencies, to coordinate the conduct or support of comparative clinical effectiveness and related health services research; and

(2) advise the President and Congress on— (A) strategies with respect to the infrastructure needs of comparative clinical effectiveness research within the Federal Government; (B) appropriate organizational expenditures for comparative clinical effectiveness research by relevant Federal departments and agencies; and (C) opportunities to assure optimum coordination of comparative clinical effectiveness and related health services research conducted or supported by relevant Federal departments and agencies, with the goal of reducing duplicative efforts and encouraging coordinated and complementary use of resources.

(c) MEMBERSHIP.— (1) NUMBER AND APPOINTMENT.—The Council shall be composed of not more than 15 members, all of whom are senior Federal officers or employees with responsibility for health related programs, appointed by the President, acting through the Secretary of Health and Human Services (in this section referred to as the ‘‘Secretary’’). Members shall first be appointed to the Council not later than 30 days after the date of the enactment of this Act. (2) MEMBERS.— (A) IN GENERAL.—The members of the Council shall include one senior officer or employee from each of the following agencies: (i) The Agency for Healthcare Research and Quality. (ii) The Centers for Medicare and Medicaid Services. (iii) The National Institutes of Health. (iv) The Office of the National Coordinator for Health Information Technology. (v) The Food and Drug Administration. (vi) The Veterans Health Administration within the Department of Veterans Affairs. (vii) The office within the Department of Defense responsible for management of the Department of Defense Military Health Care System. (B) QUALIFICATIONS.—At least half of the members of the Council shall be physicians or other experts with clinical expertise. (3) CHAIRMAN; VICE CHAIRMAN.—The Secretary shall serve as Chairman of the Council and shall designate a member to serve as Vice Chairman.

(d) REPORTS.— (1) INITIAL REPORT.—Not later than June 30, 2009, the Council shall submit to the President and the Congress a report containing information describing Federal activities on comparative clinical effectiveness research and recommendations for additional investments in such research conducted or supported from funds made available for allotment by the Secretary for comparative clinical effectiveness research in this Act. (2) ANNUAL REPORT.—The Council shall submit to the President and Congress an annual report regarding its activities and recommendations concerning the infrastructure needs, appropriate organizational expenditures and opportunities for better co ordination of comparative clinical effectiveness research by relevant Federal departments and agencies.

(e) STAFFING; SUPPORT.—From funds made available for allotment by the Secretary for comparative clinical effectiveness research in this Act, the Secretary shall make available not more than 1 percent to the Council for staff and administrative support."

This creates two new Offices and expands one:

(1) The Agency for Healthcare Research and Quality.
(2) The Centers for Medicare and Medicaid Services.
(3) The Office of the National Coordinator for Health Information Technology.

These offices will create policies and procedures to select the most effective health care treatments to be mandated by the Federal Government. This is a very powerful creation and may very well change the way we see health care being delivered in the future. This is the first big step, it is the camel's nose in the tent.

Government Oversight of Medicine

There are provisions in the new Stimulus Bill to create a Government Oversight Board for ensuring that there is nationwide compliance with comparative clinical effectiveness, namely rating and ranking procedures, medications and the like for the treatment of various medical ailments.

Let us consider the colonoscopy. There already exists a "Centers for Medicare and Medicaid services" the "CMS" which has been performing that task for Medicare and Medicaid for years. Their most recent prognostication was that CT virtual colonoscopy had not met the level for acceptance so that it would not receive payment as an accepted procedure. This may very well be a valid conclusion. The reasons themselves may be varied and the procedure may still be performed unless the new Board as passed under this new Bill agrees with the CMS and then eliminates it.

But let us take another further look. A group of Canadian physicians performed a study that reached the conclusion as follows:

"Conclusion: In usual practice, colonoscopy is associated with fewer deaths from CRC. This association is primarily limited to deaths from cancer developing in the left side of the colon."

Namely they contend that based upon their study there is no benefit to screening for ascending colon lesions. The devil is in the details,however. First the Canadian system admits patients to colonoscopies at very late stages, it is truly a rationed system and in preventative medicing rationing means getting there too late.

Second, these are Canadian physicians in Canadian medicine which means that they permit less than fully qualified practioners to perform these tests which require true skill and care. Their results included the following Table demonstrate that almost anyone can perform this procedure which demands great experience. The procedures were performed by a mix of physicians, most, if not all, not certified as endoscopists.

As is well known, colonoscopies can nearly eliminate colon cancer if performed by a skilled endoscopist. Sessile lesions in the folds of the colon are generally the greatest threat. They get missed and they are the killer lesions. Thus the endoscopist must be skilled, must take care and time, and must be thorough. The result is that a procedure costing some $1,200-1,800 can save not only a life but hundreds of thousands in subsequent medical costs.

So how does the new Stimulus Bill, the existing CMS and the Canadian study all blend together? Simply, first we have a functioning Comparative Effectiveness system in place, it functions and already controls over 50% of healthcare. Thus Medicare and Medicaid will see no change, unless, and that is the big question, unless it is done for other purposes than patient care. However it is now possible that all other patients will see an impact, NO! will most likely become a common refrain.

Secondly, studies like the less than useful Canadian Study may become the hook to hang reduction of procedures on, especially as we see the new Board has a mix of Physicians and non-Physicians. Imagine Nancy Pelosi look-alikes on such a Board. There are even worse imaginantions!