Wednesday, April 28, 2010

The deciding factor?

If you want to know how soon and how bad the eventual economic collapse will be, I think it may come down to what kind of candidate the GOP fields against Obama in 2012. Another John "Reach-Across-the-Aisle" McCain or George "Prescription-Drug-Benefit" Bush - whether he wins or loses - won't change anything. We would continue down the current path and end up with either a bankrupt government that defaults on the debt, or hyper-inflation from monetization of the debt.

However, if Republicans can find a courageous voice like this one,

then we might have a fighting chance of slashing the Federal budget and paying down the debt sooner and with less pain. This assumes of course that the collapse doesn't happen before 2012, and I don't think we'll be lucky enough to get the candidate and beat the clock.

A possible preview of our future

A financial blog on the UK Guardian website is making live reports of Greece's financial crisis. This morning the yield on 2-year Greek bonds briefly spiked at 38% before settling down to 16% in the afternoon.

Bond yields increase when bond prices fall, so Greece's high yields are simply an expression of a severe drop in demand for them. Investors now fear that Greece won't be able to afford the interest payments to all of its bondholders - i.e., that it will default on its debt - so it takes a much higher interest rate (16% to 38% instead of the earlier 1% to 5%) to convince someone to take the risk of owning a Greek bond.

These higher bond yields spell doom for the budget of the Greek government, because they represent the interest rates that Greece will have to pay in order to borrow any new money through the sale of bonds. It's not difficult to picture a death spiral here, where interest rates go up, making it more difficult for the Greek government to pay off its older debt by issuing new debt, which reduces investor confidence in Greek bonds, which causes the bond yields to rise even higher ...

This is one possible outcome for the U.S. and every other indebted industrialized nation if we continue to borrow our way to financial oblivion. It will be bad enough when Social Security, Medicare, Medicaid, etc. suddenly stop making payments as our government runs out of money, but thanks to the Obamacare monstrosity, our entire health care system will soon rely on bond sales too. God help us all.

Tuesday, April 27, 2010

Probably a correction and not the beginning of a crash.

Sharp drops that occur after a long rally - like today's case - almost always precede moderate corrections of less than 10%. Bear markets and large crashes (>20%) usually start with something less dramatic. Ironically, today's dip probably means that the current bull market has further to go before it's over.

Sunday, April 25, 2010

Insolvency, Monetization, Redistribution, Nationalization

Barring the secession of states from the Union or a general civil uprising, the eventual outcome of our government's policies in dealing with current financial mess is pretty easy to predict. The Federal government is on course to take control of the economy, and to end the independence of state and local governments.


The simplest way to summarize the global economic crisis is this: We've been spending more money than we have and promising future payments that we can't afford, and we now find ourselves unable to pay off the debts and obligations that we've incurred. A couple of years ago in the U.S. the problem first surfaced with banks and financial/insurance companies being hit with more defaults and payout obligations than they were prepared to absorb. This was solved temporarily by taking out new trillion-dollar Federal loans and using the borrowed money to bail out or nationalize several large companies. (Fannie May and Freddie Mac, AIG, GM) This didn't solve the underlying problem, and today it has simply propagated to new areas: a growing number of delinquent home mortgages, states which are unable to meet unemployment, pension and bond obligations (California, etc.), and entire nations which suddenly find there are no more buyers for their bonds (Greece).

In a nutshell, private debt and state and local public debt is being transformed into national debt, with the main beneficiaries being homeowners who bought larger homes than they could afford, union and public employees whose generous benefit packages have bankrupted corporations and states, and certain favored Wall Street players.


When our Federal government has to pay more money than it collects in taxes, it has to either sell bonds to Americans or foreigners, or create new money through the Federal Reserve Bank. Given the financial mess that we're in, investors are understandably nervous about loaning even more money to the government by buying government bonds. Not only does it seem less likely that a $14 trillion debt can ever be paid off, but the average U.S. investor today has less money to invest in bonds anyways.

Thus our government, which insists on spending even more money on new and enlarged social programs, is left with no choice but to make up the difference in the short term by creating money and risking wealth-destroying inflation. However, in the longer term, since Congress and the White House can't convince people to willingly buy debt, they are proposing to raise tax rates and create new taxes to boot.


A significant majority of the Federal budget is now devoted to social programs; i.e., taking money from those who can "afford it," giving some of that money to people who "need it," and spending the rest on the cushy salaries and benefits for the bureaucratic middle-men who distribute it. Social Security, Medicare, Medicaid, Welfare and Unemployment insurance constituted approximately 60% of the total Federal budget before all of the trillion-dollar bailouts and buyouts. Given the trend towards monetization, higher taxes and more-and-larger social programs, the entire enterprise ends up being a simple redistribution of wealth from people who save money and produce goods and services to those who don't produce or don't save - or to those who are currently favored by the Democrats.


So far in the first 15 months of his Presidency, Obama's solution to every single economic issue has been to increase the size of government by creating a new program, increasing the size of an old program, or nationalizing a company or industry. In not one case have Obama or the Dems proposed shrinking, eliminating, or privatizing some part of the bloated Federal government. Quite simply, every corner of the American economy will eventually be nationalized/socialized if Obama and the Democrats are given enough time. Thus far, the largest car company, the largest insurer, and the vast majority of home mortgages have been handed over to government control. The 2000 page health care bill has set the stage for nationalizing every aspect of medicine, and now Obama and the Dems have set their sights on nationalizing the energy industry (cap and trade). In addition, the Federal government now seems willing to bail out states when they run out of funds for unemployment or public worker pensions, and this obviously opens the door to new Federal meddling in the state budget processes.

Given the ability of the Federal government to print money, there's no mathematical limit to how quickly it can buy up the entire private sector. The most important limit is a political one, and oddly enough the drive towards nationalization is helped by economic turmoil. Any time a state, corporation, or interest group reaches the financial brink, the government can step in, take over and be seen as a hero. Were the Dems to try nationalizing GM during good economic times, it would probably be seen as the frightening power grab that it is instead of a rescue mission.

If I didn't know any better, I'd be concerned that the Dems might purposefully harm the economy in order to speed their nationalization agenda to a rapid conclusion. It's a good thing I know better.

Regardless of the of the Dems' intentions, it's becoming preferable to be a member of the "poor half" of the country who can sit back on his couch in the house he can't afford, watch the big-screen TV that he can't pay for, and let Big Bro the government take care of all of his basic needs. Work too hard or live frugally and save, and you risk becoming a member of the vilified rich, only to see most of your income taken away so that those who deserve it can enjoy their less stressful lifestyles. Yes, the new world order increasingly rewards the grasshoppers and punishes the ants - but how many grasshoppers can we afford before the ants say "enough?"

Thursday, April 15, 2010

Stock market update: High optimism, low yield

I'm not the first person to point this out, but more than one key indicator is signaling that stock market optimism is near a multi-year high. This condition forecasts at least a price correction in the near future, if not an end to the current bull market rally. Combined with the frighteningly low yield of 1.8% and the aforementioned poor seasonal conditions, I have no plan to be invested in stocks any time in the foreseeable future. In fact, I'm waiting for an opportunity to bet against stocks in general.

Friday, April 09, 2010

Try not to get sick, or just take a pain pill.

(Updates follow below)

If Massachusetts really is a small-scale test of Demcare/Obamacare, then the era of modern medicine in America is undeniably drawing to a close.

The health care system here in Massachusetts is already starting to implode. Three out of the four largest health insurers in the sate lost money in 2009. Governor Deval Patrick - whose campaign David Axelrod ran in 2006 - has essentially imposed price controls in order to prevent cash-strapped insurers from raising rates to meet costs. As a result, these same insurance companies have now stopped selling any new policies in Massachusetts because they can't afford to insure any more people. That's right: at this moment in time, small businesses and individuals cannot buy health insurance in Massachusetts.

This setback may seem ironic given that the intention was to provide health care to more people rather than fewer, but it's actually perfectly predictable because it's pretty much what I wrote about when the Obamacare bill passed a couple of weeks ago.

It turns out that some people in Massachusetts have been scamming the system by only buying insurance before major medical expenses are anticipated, and then dropping the insurance once the emergency is over. Since insurers are required to offer insurance to anyone - just like they soon will be nationwide under Obamacare - such scamming makes financial sense as long as the total price of short-term coverage plus penalties is lower than the price of a full 12 months of health coverage.

The really scary thing is that the Massachusetts health insurance policy is only a light version of Obamacare. Massachusetts isn't (yet) punishing insurers, hospitals, or health-care companies with new fees and taxes.

Needless to say, Massachusetts is becoming a less desirable place to be an insurance company, and by extension a less desirable place to practice medicine. My own experience seems to back this up, as I'm waiting almost three months to get my first regular check-up with a brand new doctor at Harvard-Vanguard.

It's too late for us to learn from the lesson of Massachusetts because Obamacare has already become the law of the land. Doctors, patients and insurance companies in Massachusetts can always flee to one of the other 49 states, but when Obamacare kicks in for real, there will be nowhere left to run. The only escape for doctors will be to leave the field, the only option for insurance companies will be to stop doing business, and only the wealthiest Americans will be able to fly overseas for cutting-edge procedures - IF there are any other countries left with free-market medicine.

So my advice to most of my countrymen is simply to not get sick. And when mortality inevitably catches up with you, just take a pill to dull the pain. As a matter of fact, that's exactly what Obama smoothly advised last year:

p.s.: (April 11) The last of the small steps towards fully socialized medicine is now easy to see. Once the private insurance companies either stop taking new customers or go bankrupt from the double-whammy of scammers and price controls, the government will "save us" with mandatory national insurance for all.

Another option is for Massachusetts (and the Dems nationally) to make a show of stopping insurance scamming by increasing the non-insured penalty until it's higher than the price of an insurance policy. At that point, the penalty fees might as well be used to sign those people up to a national program, which will be seen as more humane than just punishing them.

Update: (April 12) The webpage in question is currently overwhelmed with traffic, but CNS News is reporting that 60 hospitals planned for construction will have to be canceled because the 2000-page Obamacare bill has essentially outlawed any new physician-owned hospitals from being built. After all, what could physicians possibly know about running a hospital?? Once again, a bill that was sold as a way to increase access to health care seems to be doing the opposite, exactly as its opponents warned it would from the beginning.
( – The new health care overhaul law, which promised increased access and efficiency in health care, will prevent doctor-owned hospitals from adding more rooms and more beds, says a group that advocates physician involvement in every aspect of health care delivery.

Physician-owned hospitals are advertised as less bureaucratic and more focused on doctor-patient decision making. However, larger corporate hospitals say doctor-owned facilities discriminate in favor of high-income patients and refer business to themselves.

The new health care rules single out such hospitals, making new physician-owned projects ineligible to receive payments for Medicare and Medicaid patients.

Existing doctor-owned hospitals will be grandfathered in to get government funds for patients but must seek permission from the Department of Health and Human Services to expand.

To get the department’s permission, a doctor-owned hospital must be in a county where population growth is 150 percent of the population growth of the state in the last five years; inpatient admissions must be equal to all hospitals located in the county; the bed-occupancy rate must not be greater than the state average, and the hospital must be located in a state where hospital bed capacity is less than the national average.

The rules fall under Title VI, Section 6001 of the Patient Protection and Affordable Care Act. The provision is titled “Physician Ownership and Other Transparency – Limitations on Medicare Exceptions to the Prohibition on Certain Physician Referral for Hospitals.”

More than 60 doctor-owned hospitals across the country that were in the development stage will be canceled, said Molly Sandvig, executive director of Physician Hospitals of America (PHA).

“That’s a lot of access to communities that will be denied,” Sandvig told “The existing hospitals are greatly affected. They can’t grow. They can’t add beds. They can’t add rooms. Basically, it stifles their ability to change and meet market needs. This is really an unfortunate thing as well, because we are talking about some of the best hospitals in the country.”

The organization says physician-owned hospitals have higher patient satisfaction, greater control over medical decisions for patients and doctor, better quality care and lower costs. Further, physician-owned hospitals have an average 4-1 patient-to-nurse ratio, compared to the national average of 8-1 for general hospitals.

Further, these 260 doctor-owned hospitals in 38 states provide 55,000 jobs, $2.4 billion in payroll and pay $509 million in federal taxes, according to the PHA.

In one ironic aspect, President Barack Obama’s two largest legislative achievements clashed. The Hammond Community Hospital in North Hammond, Ind., got $7 million in bond money from the federal stimulus act in 2009. It will likely be scrapped because of the new rules on physician-owned hospitals, according to the Post-Tribune newspaper in Merrillville, Ind.

Doctor-owned hospitals have long been a target of the American Hospital Association, which represents corporate-owned hospitals as well as non-profit hospitals.

An AHA study from 2008 says that physician-owned hospitals “lessen patient access to emergency and trauma care;” “damage the financial health of full-service hospitals and lead to cutbacks in service;” “are not more efficient than full service community hospitals;” “use physician-owners to steer patients;” “cherry pick the most profitable patients;” and “provide limited or no emergency services.”

One AHA fact sheet asserts that physician-owned orthopedic and surgical hospitals costs are 20-30 percent higher than average hospitals. Further, these hospitals lead to higher profits just for doctors, the AHA asserts.

“We don’t cherry pick patients, period, end of story. We take patients based on their need for care, not on their ability to pay,” Sandvig said. “It [the health care reform] puts control outside the hand of physicians and patients and into bureaucrats’ hands really.

The Association of American Physicians and Surgeons (AAPS) is one of many organizations suing to have the law declared unconstitutional on the grounds that the federal government cannot compel someone to buy a product.

While the provision on physician hospitals is not part of the lawsuit, it will affect it, said Dr. Jane Orient, AAPS executive director.

“If the law is declared unconstitutional, then the prohibition is part of the bill,” Orient told “There are vested interests in getting rid of physician-owned hospitals because they do a better job and are more affordable.”

The provision in the legislation and efforts opposing these hospitals can be simply explained from Sandvig’s view.

“It’s anti-competitive. I think it’s pretty clear,” Sandvig said. “We’re a model that makes sense that’s affecting innovation. We’re trying to do something better than it has been done. Anytime you do that, there’s going to be a clash between the existing and the new. Unfortunately, it’s a real David and Goliath battle.”