The Portfolio at the End of July

This is our tracking portfolio. We saw the drop after the change in Administration and the rise has continued with an annualized gain of 33.4% without the dividends and with dividends it is 38.9%. This seems to show, along with the data on housing and to some degree on GDP and slight turning of the economy, and one could say a great turn. Yet the concern is that this was done without much input from the Stimulus. Summers was asked repeatedly today on the NBC Meet The Press, as friendly a venue as you could have for this Administration, if the turn is occurring without the Stimulus then why the Stimulus.

He was adamant that it continue no matter what. I guess that is the good Professor Summers, he seems in my opinion to fixate on his present position until he comes up with his next position. Perhaps this works in academia but this is all of our economic lives he is playing with!

CBO Report on the Budget and Health Care

On July 16th the CBO published a report on The Long-Term Budget Outlook and we review the results here. There is also a more detailed Report by the CBO on the same topic.

The first chart is their presentation of the percent of the GDP which will go to care of the aging and excess growth. This chart is purportedly to provide a basis for changing Social Security and Medicare/Medicaid. By 2079 almost 25% of the GDP will flow in this area.

The following chart details one scenario. It is the Extended Baseline Scenario. They state:

"The “extended-baseline scenario” adheres most closely to current law, following CBO’s 10-year baseline budget projections for the next decade and then extending the baseline concept beyond that 10-year window. The scenario’s assumption of current law implies that many policy adjustments that lawmakers have routinely made in the past will not occur."

























The second chart is for the second scenario. This is the Alternative Fiscal Scenario. They define it as:

"The “alternative fiscal scenario” represents one interpretation of what it would mean to continue today’s underlying fiscal policy. This scenario deviates from CBO’s baseline even during the next 10 years because it incorporates some policy changes that are widely expected to occur and that policymakers have regularly made in the past. Different analysts might perceive the underlying intention of current policy differently, however, and other interpretations are possible."
























The CBO continues to state:

"Long-term budget projections require a stable economic backdrop. For these projections, CBO assumed that even a large increase in federal debt would not affect economic growth or real rates of interest after the first 10 years..."

"Holding down the spiraling levels of debt projected under either scenario could therefore result in significant economic benefits. However, accomplishing that goal would require some combination of substantial revenue increases and substantial spending decreases relative to current law. Those changes would have their own economic and social costs."

" One policy that would prevent the increase in debt would be to raise revenues in line with the projected rise in spending. As evidenced by the estimated fiscal gap, the required increase in revenues under that approach would be large. If the increase occurred through higher marginal tax rates, incentives to work and save would be reduced and economic growth would slow. "

"An alternative policy would be to hold the growth of spending in line with the growth of the economy. That approach would require significant changes in the Medicare and Medicaid programs. Many experts believe that a substantial share of spending on health care contributes little, if anything, to the overall health of the nation, so changes in government policy have the potential to yield large reductions in federal spending without harming health. However, translating that potential into reality would require tough choices. It would ultimately depend on policymakers’ willingness to put ongoing pressure on the health sector to achieve efficiencies in the delivery of health care."

These recommendations are in effect (i) tax more to pay for the costs, and (ii) don't spend the money because the old will die anyway! I suggest that people who reach Medicare age by 2079 should begin worrying now. I also suggest that Congress understand, as we have documented in one of our White Papers, that the typical American will have contributed 65% more to Medicare than they will ever collect! The same and even more applies to Social Security! The issue is Congress spending the money on programs that was targeted for benefits already paid for.

As the columnist Mr. Krugman states in the NY Times:

"...It’s not just that many Americans don’t understand what President Obama is proposing; many people don’t understand the way American health care works right now. They don’t understand, in particular, that getting the government involved in health care wouldn’t be a radical step: the government is already deeply involved, even in private insurance.... And that government involvement is the only reason our system works at all.... The key thing you need to know about health care is that it depends crucially on insurance..."

The problem Mr Krugman seems to not recognize is that in Medicare the Government collects the money and then spends it elsewhere and when it agrees to pay is slow rolls the payments and sets the fees at excessively low rates. Imagine is Mr Krugman were paid say $0.05 per word as a stringer or perhaps $5 per student per lecture as dictated by the Government and then after mountains of paperwork got only 70% of the bills a year later! Perhaps that is a good idea for we could have the Government control the spiralling costs of college as they do Medicare costs. What is good for the goose is good for the gander!

The FED, Its Balance Sheet, the CPI, and Inflation

We have been looking at possible canaries in the mine shaft in light of our concern regarding inflation. As we have stated before we believe that based upon the recent FED actions that there is a portent for massive inflation. Somewhere in the back of Bernake's mind is the set of controls to fly thru this, akin to a Luke Skywalker feat, and one may dread, something that Summers could never do.

So here is another try. Consider the following. We have analyzed the FED BS and the CPI data and have looked at annualized percent changes average over a six month interval using monthly data.

We present three curves:

1. The Long Term Data: This is a telling chart since it clearly shows the spike in the FED BS as we have discussed at length. The spike is a clear anomaly so we really want to see if there is a cause and effect here that can be determined,



















2. The Recent Data: The chart below shows the data above but ends in July 2008 so we do not see the explosion. Again we ask is there some relationship. Namely if the inflation is IN(k) for some interval then do we have some relationship as:

IN(k+m)=a BS(k), where IN is inflation annualized change m units from time k and BS is the FED BS annualized change at time k. a is some constant. So does this make some sense?



















Frankly we do not see a great correlation but there may very well be something there.

3. A Look for a Correlation: We now take the above and plot the two data points in a scatter plot. This we have shown below.



















Again we may see something here but it is akin to hoping we can see something. Interesting but not definitive.

Another Letter to Senators on Health Care

July 31, 2009

Dear Senator .......,

I am writing your office again to comment on the current proposed health care plans. I have reviewed HR 3200 as the benchmark plan, and am pleased that Senator Baucus and more reasonable heads in the Senate will attempt to mitigate the extreme positions of the House. Having now spoken with well over a hundred physicians in the State, ....., I find that they are communicating their concern and distrust in the House Bill to their patients.

This means that there is a massive undercurrent of dislike and in many senses distrust of Congress that for reasons unknown the legislation as passed in the House will be a massive burden and penalty on Americans. This also means that HR 3200 as current structured is one of the worst pieces of legislation ever enacted. You and the Senate can do much to remedy this and create a bill to have pride in, and to satisfy the needs of your constituents.
Let me point out the main concerns and opposition.

A GOVERNMENT SPONSORED PLANMUST BE ABANDONED: Everyone sees that universal coverage and cost containment are essential yet they also see how Congress has taken the funds out of Social Security and Medicare to spend elsewhere. There is more a gross distrust of Congress that is of paramount concern before the fear of a Government Plan.

SMALL BUSINESS PENALTIES SHOULD BE ELIMINATED BY MANDATING UNIVERSAL PERSONAL COVERAGE: Small business and entrepreneurs see the 8% tax as extortionary. They rather pay for performance and let their employees seek out their own insurance. That is why private Exchanges are preferred and why also taxing benefits are agreed to.

CONGRESS SHOULD TAX MEDICAL BENEFITS, ESPECIALLY EXCESSIVE BENEFITS AND PLANS, AND CREATE A TRUE LEVEL PLAYING FIELD: The Democrats in Congress are seen as being in the pockets of the Unions and this is nowhere seen more clearly than in the structure of exorbitant Union benefit plans which have lifetime duration and costs extensive amounts and in turn drive up health care costs. issue to deal with. The Union workers are not just the GM type but more importantly the Government workers, Federal, State and Local. New Jersey has a dark history of gross excess compensation hidden in these plans. That is why taxing excess plans, say those costing more than $12,000 per year, is essential. It also will raise the money to fund those uninsured.

ELIMINATE FEDERALLY CONTROLLED MEDICAL HOMES: The Medical Home concept has great merit but the control of them by the Federal Government flies in the face of achieving results. The Government should avoid any contact in this area.

BUNDLING AND OTHER ONEROUS PAYMENT OPTIONS: We have all seen what HMO type controls had done in the 1990s and bundling and capitation are the same pig just put in a different dress, it is still a pig!..

TORT REFORM WILL REDUCE PROCEDURES AND CUT COSTS:We have argued again and again that the most significant driver of excess costs is the lack of tort reform. Given end of life costs, those with Medical Directives and DNRs will cost little if anything. The people with the demand to do whatever to maintain a suffering patient result in the physician and all other health care providers taking extreme measures not to be sued by the family when the ultimate end eventually comes. If Congress ever hopes to reduce costs the answer is in your hands and there are many fine options on the table.

THE IRS SHOULD NOT BE THE ENFORCER: HR 3200 has the IRS as the enforcer. I really suggest you seek an alternative. Such a choice will result in long term problems. I believe this is obvious.

LET THE MEDICAL PROFESSIONS HANDLE THE COMPARATIVE CLINICAL EFFECTIVENESS AS THEY DO NOW: The CCE issue is a complex issue. Medical professional societies and their publications as well as University Laboratories continue to do and publish and critique their own procedures. One need look no further than NEJM and JAMA which weekly assess new methods and procedures. Each physician takes CME hours each year to expand what they do as a normal part of their practice, and there is the re-certification process on top of that. Having a Government agency get into the fray will be highly counterproductive. The system works now, improve it, do not break it.

PATIENT RESPONSIBILITY AND MOTIVATION MUST BE MANDATED BY CONGRESS: 18% of the 2-4 year olds in New Jersey are obese! The CDC just published that this week. We are second only to Virginia in 2-4 year old obesity. That means they will grow to be obese and have all the health problems of the obese. Obesity we have calculated costs us 15-18% of our health care budget today and it is exploding. One could argue that the cost increases are almost totally driven by obesity. I see no other way than taxing it out of existence as we did with cigarettes. New Jersey should be ashamed of such a statistic. Yet 41% of black females in the South are obese! Thus we have a pandemic. This is clearly a call for Congress to do something and do it now.

This is my third letter on the same subject. My physician friends have asked me again and again to raise this issue since I seem to have become a point person. Yet you and your fellow Senators are at a singular point to make changes in HR 3200 and its relatives in a positive direction and achieve a long term success and not create a burden on all Americans. The above are my most recent comments and observations.

Very truly yours,

An Interesting Report

The Federal Housing Finance Agency has published an interesting report on previous downturns in housing and it shows some rather interesting cyclical data.

There are four charts of interest.

1. The overall housing price levels. This clearly shows the bubble and it should have been clear to all.


















2. Midland Texas and its collapse. This was two decades ago. It still has not recovered.




















3. The West Coast Collapse at Merced, California. This is the most recent of the problems and may follow Midland.



















4. The Cyclical New England Market. This shows the cycles in these types of markets akin to the business cycle.

The Economy: Good News and Bad News

Several weeks ago we said here that the recession was now problematic. Yesterday the Administration said so as well. Good to see they are paying attention to details. Yet today I want to review in a bit more detail the data from the GDP results and tie that into the inflation analysis we have been doing.

1. Total GDP Change: As the press has reported the total change is less negative than before. It shows a positive trend and one should have some feeling of relief from this. However we must look at the details deeper.



















2. Total Domestic Change: Here we have the change in domestic GDP investment. It is still quite negative and shows an improving trend but it is slow to recover.


















3. Total International Change: International imports and exports have improved and are in fact above Q4 of 2008. This is an indication that the global economy is recovering in other areas as well.


















4. Government Spending: The following chart depicts the change in Government Spending. This is anticipated but disturbing. It is the only one which is almost consistently high. The Federal Change is massive and it is this change which has moved everything up. The State change is also larger than many prior quarters and one would assume that the Stimulus is just pumping money here. Where the money is being spent is another matter.


















5. Personal Consumption: The following chart is the GDP change in the Personal Consumption area. Not that it is not improving but that it also going down. People are not buying for themselves. We were surprised at this because this tends to show a loss in confidence. This is a trend we believe tells a great deal about the individual sentiment.



















6. Inflation: As we have done before we have calculated inflation from its underlying components, namely changes in GDP, changes in money velocity and changes in M2. The interesting fact here is that inflation is starting to rise if ever so slowly. This is what we have been fearing all along. However the cause is debatable. The drop in personal expenditures and the explosion in Government expenditures seems to indicate it is from Government spending.