Wednesday, July 31, 2013

Goldman Sachs vs. GM, Morgan Stanley

Goldman Sachs (GS) is up 64% over the past year, but it hasn't kept pace with General Motors (GM) since its post-bailout IPO. 

From the November 19, 2010 weekly close to July 31, 2013, GM's (dubbed "Government Motors" in its initial rescue stage) stock performance has edged out that other government-allied firm, the infamous Goldman Sachs

Over that 2 1/2 year timeframe, GM has returned about 6% to GS' -1.5% (approximate figures from marking the right scale of the relative performance chart below).

GS managed to outperform Morgan Stanley (MS), the other remaining investment bank behemoth, since the current bull market began in March 2009. Over that 4 year period, GS has returned close to 80% compared to 40% for MS. MS did return a cool 100% in the past year, after a prolonged downtrend since late 2009. 

More TBTF fun: Motif Investing's Too Big to Fail portfolio lists 1-year returns (and weightings) for its component banks (index is up 53% over 1 year). Every bank listed is solidly in the green, with individual returns ranging from 15% - 100%. Screenshot  below. 

Urban Renewal -- The Big Government Way

Having spent the past four days wandering the neighborhoods of Washington DC, it is clear that this city is a prosperous, booming area.  Wonder what business enterprises are sparking this growth?  Big government.

Years ago, when I was a newbie intern for the US Treasury, walking a couple of blocks from One Washington Circle (where I lived back when it was an apartment complex) was a dangerous undertaking.  No More.  For miles around, there are now leafy suburbs with casually dressed joggers and dog walkers.  The homes are well maintained and coiffed and the comfortable residents seems at ease with their plush surroundings.

Who lives here?  The new "protected" class.

These are the people that work for the federal government or the numerous so-called private businesses that devote their endeavors to providing services to government or lobbying to gain a share of government largesse.  These are the folks that view people outside the beltway as moronic environment-destroyers and homophobes.  They are comfortable in the knowledge that they are doing God's work, protecting the environment and defending the minorities and the poor from the caprices of the evil private sector.  These are the regulators, the tax collectors and the righteous -- living high on the taxpayer.

Out in the hinterland, struggling Americans are laboring with massive unemployment and stagnant economies and providing the tax revenues to support this ruling class that lives in modern luxury in much of Washington DC.  No real products are produced here. Indeed, the primary function for most of these Washington upper income folks is to find ways to restrict the private sector and to increase the flow of resources into their own pockets.  This is the new "European prosperity" for the ruling classes.

You wonder how much longer this can continue.  A dwindling private sector carries this elite group on its backs.  Meanwhile the poor in DC are shunted off into ghettoes with some of the worst public schools in America.  But, those folks are out of the view of this elite.  This elite lives in safe neighborhoods with protected jobs.  Even folks who take the fifth amendment before Congress, when they are asked about what they are doing, continue to prosper at full pay with zero work responsibilities.  This is the liberal dream, right here in Washington DC.

Tuesday, July 30, 2013

On Au

Greg Mankiw has a cool New York Times article and blog post, "On Au" analyzing the case to be made for gold in a portfolio, including a cute problem set. (Picture at left from Greg's website. I need to get Sally painting some gold pictures!)

I think Greg made two basic mistakes in analysis.

First, he assumed that returns (gold, bonds, stocks) are independent over time, so that one-period mean-variance analysis is the appropriate way to look at investments. Such analysis already makes it hard to understand why people hold so many long-term bonds. They don't earn much more than short term bonds, and have a lot more variance. But long-term bonds have a magic property: When the price goes down -- bad return today -- the yield goes up -- better returns tomorrow. Thus, because of their dynamic property (negative autocorrelation), long term bonds are risk free to long term investors even though their short-term mean-variance properties look awful.

Gold likely has a similar profile. Gold prices go up and down in the short run. But relative prices mean-revert in the long run, so the long run risk and short run risk are likely quite different.

Second, deeper, Greg forgot the average investor theorem. The average investor holds the value-weighted portfolio of all assets. And all deviations from market weights are a zero sum game. I can only earn positive alpha if someone else earns negative alpha. That's not a theorem, it's an identity. You should only hold something different than market weights if you are identifiably different than the market average investor. If, for example, you are a tenured professor, then your income stream is less sensitive to stock market fluctuations than other people, and that might bias you toward more stocks.

So, how does Greg analyze the demand for gold, and decide if he should hold more or less than market average weights? With mean-variance analysis. That's an instance of the answer, "I diverge from market weights because I'm smarter and better informed than the average investor." Now Greg surely is smarter than the average investor. But everyone else thinks they're smarter than average, and half of them are deluded.

In any case, Greg isn't smarter because he knows mean-variance analysis. In fact, sadly, the opposite is true. The first problem set you do in any MBA class (well, mine!) makes clear that plugging historical means and variance into a mean-variance optimizer and implementing its portfolio advice is a terrible guide to investing. Practically anything does better. 1/N does better. Means and variances are poorly estimated (Greg, how about a standard error?) and the calculation is quite unstable to inputs.

In any case, Greg shouldn't have phrased the question, "how much gold should I hold according to mean variance analysis, presuming I'm smarter than everyone else and can profit at their expense by looking in this crystal ball?" He should have phrased the question, "how much more or less than the market average should I hold?" And "what makes me different from average to do it?"

That's especially true of a New York Times op-ed, which offers investment advice to everyone. By definition, we can't all hold more or less gold than average! If you offer advice that A should buy, and hold more than average, you need to offer advice that B should sell, and hold less than average.

I don't come down to a substantially different answer though. As Greg points out, gold is a tiny fraction of wealth. So it should be at most a tiny fraction of a portfolio.

There is all this bit about gold, guns, ammo and cans of beans. If you think about gold that way, you're thinking about gold as an out of the money put option on calamitous social disruption, including destruction of the entire financial and monetary system. That might justify a different answer. And it makes a bit of sense why gold prices are up while TIPS indicate little expected inflation. But you don't value such options by one-period means and variances. And you still have to think why this option is more valuable to you than it is to everyone else.

Friday, July 26, 2013

Nikkei, Dow, Russell 2000 lead Finviz futures gainers YTD

Year-to-date futures gainers (via Finviz), a quick update.


US indices near the top of the list include S&P 500 up 18.8%, DJIA up 18.9% and Russell 2000 up 23.6%. The Nikkei 225 tops all with a 32% gain YTD.

Gold and silver continue to under perform this year (after a decade-long bull move), while corn takes second-to-last place with a -29.5% YTD performance.

From Livestock to the Stock Exchange

From Livestock to the Stock Exchange. © Sally Cochrane All Rights Reserved

Artist's description: This is a brief visual history of trade, reading left to right. The first "money" was cattle, represented by the cheese. Ancient Mesopotamians kept track of their cattle exchanges on cuneiform tablets like receipts (we have some at the Oriental institute of Chicago!). The root of the word "pecuniary" comes from the root "pecu" meaning "cattle." Cowrie shells were another early form of currency for trade, and beaver fur, which was very valuable, was used in barter when Europeans discovered the New World. The coins and stock ticker tape represent the modern end of the history. July 2013. 8"x 16" oil on canvas.

Original here with many other sizes.

Sally says the beaver fur was inspired by a Russ Roberts EconTalk podcast, interviewing Timothy Brook on his book Vermeer's Hat. "Part of the book talked about how valuable beaver fur was for making hats that ended up in the Netherlands during Vermeer's lifetime." I don't know how many other artists listen to EconTalk while painting...

Guilty Until Proven Innocent

I carry no brief for people that break laws, but, in the securities industry, indictments destroy businesses and innocent shareholders are usually left picking up the tab.  That was the result when Drexel Burnham was indicted in 1988.  Many of Drexel employees who trudged silently in the back office found their retirement hopes and dreams destroyed when Rudolph Guliani's over-zealous indictment caused Drexel to go bankrupt overnight -- long before anyone produced any evidence to a judge or jury to peruse.  Most of the folks who lost their life savings by the indictment of Drexel were innocent and had no knowledge of any wrongdoing.  That's what happens when you indict corporations, as opposed to individuals.

This same theme plays out in the litigation and settlement arena.  Pension funds who trumpet their lawsuits against corporations are really only suing themselves and enriching the legal profession.  The wrongdoers go unscathed, while innocent shareholders get hammered.  This is what happened in the tobacco settlements, in the BP settlement, and on and on.  Shareholders, who often have no idea that they are really shareholders, find their own retirement hopes and dreams crushed by breast-beating righteous souls who run these pension funds involved in all of this litigation.  The lawyers love this as they salt away fortunes.  It's simply a transfer from working class people to wealthy lawyers, while pension executives proclaim that they are fulfilling their fiduciary duty.

In the SAC case, why doesn't the government indict individuals?  How can a corporation get inside information without an individual being involved?  Could it be, they can't prove their case.  By simply indicting SAC, they destroy the business and, presumably, a lot of Stevie Cohen's net worth.  But, what if Cohen is innocent (and I am not saying that he is).   We may never know.  What we do know is that SAC is done for, whether innocent or guilty.  The indictment will destroy SAC's future and much of Stevie Cohen's net worth, regardless of guilt or innocence..  At least in this case there are no public shareholders being looted -- just Mr. Cohen as far as I can tell.  But, still.

What happened to the rule of law?

Tuesday, July 23, 2013

The Value of Public Sector Pensions

The unfunded promises of public sector pensions are in the news, with the Detroit bankruptcy. Josh Rauh at Stanford and Hoover has a nice blog post on the subject titled "Public Sector Pensions are a National Issue''. (Josh and Robert Novy-Marx wrote a very influential paper (ssrn manuscript) alerting us to the size of the state and local pension bomb.)

Josh's baseline number for the value of underfunded pensions: $4 trillion. Why so big, and why is this a surprise? Because many governments calculate their funding by assuming they will earn 8% per year. Discounting a riskless liability (pensions) at a risky rate is a basic error in finance. It's made all the time. University presidents are notorious for demanding their endowments "reach for yield" in order to "make our rate of return targets."

Reading this piece sparks a few thoughts about the risks posed by pensions and other unfunded liabilities.

Let's report risks

How to make the error clearer? Perhaps focusing on present values and arguing about discount rates obfuscates the issue. Let's talk about risk. Maybe it would clear things up if pensions had to report a "shortfall probability" or "value at risk" calculation like banks do. OK, you are assuming an 8% discount rate because you're investing in stocks. What's the chance that your investments will not be enough?   Coincidentally, when I saw Josh's piece I was putting together a problem set for my fall class that illustrates the issue well.

Here is the distribution of how much money you will have in 1, 5, 10, and 50 years if you invest in stocks at 6% mean return, 20% standard deviation of return. I added the mean in black, the median (50% of the time you earn more, 50% less) and the results of a 2% risk free investment in green. (The geometric mean return is 4% in this example.)
(Note: there is a picture here. I've noticed this blog is getting reposted here and there in text-only form. Go to the original if you want the pictures)

The mean return looks pretty good. After 50 years, you get $20 for every dollar invested, or contrariwise an accountant discounting a promise to pay $20 of pensions in 50 years reports that the present value of the debt is only $1. But you can see that stock returns (these are just plots of lognormal distributions) are very skewed. The mean return reflects a small chance of a very large payoff.

In these graphs the chance of a shortfall is 54, 59, 62, and 76% respectively. As horizon increases, you are almost guaranteed not to make the projected (mean) return! The median returns -- with 50% probability of shortfall, in red -- are a good deal lower. And the modal "most likely" return is below the riskfree rate in each case.

How is it that people get this so wrong? Let's look at the distribution of annualized returns in each case. Remember, these are exactly the same situations, we're just reporting a different number.

In these pictures, the distribution of annualized returns is symmetric, the mean and median are the same, and the distributions get narrower and narrower for longer horizons.

Comparing the two graphs, you see that annualized returns are profoundly misleading about the risks you're taking. Annualized returns have a standard deviation that goes down at the square root of horizon. But the actual return has a standard deviation that goes up at the square root of horizon, and exponentiating makes it skewed with the larger and larger chance of underperformance. Money matters, not annualized returns.

So as usual, when arguments are getting nowhwere, perhaps we need to shift the question: please report your shortfall probabilities. And your plans for what you do with shortfalls.

In  many of those cases, the plan for shortfall  comes down to "the Federal Government bails us out" (or ERISA bails out private plans.) Well, if that's true, then we have a different and interesting discounting question. Maybe 8% is the right number if someone else pays the losses!

Finance also teaches us to think about "state contingent payoffs." What does the whole world look like in the bad events? If cities and states can't pay their pensions, this very likely because stocks have performed badly, and because we've had 20 years of sclerotic growth, no growth in tax revenues, to fund the pensions. Stock returns are not uncorrelated with other aspects of state, municipal, and corporate finance. Investing in stocks to fund pensions is like selling fire insurance on your house, rather than buying it. If the house burns down, then you pay the insurance company.

What debt really matters?

Even $4 trillion is not all that huge in the grander scheme of things.  The official Federal debt is $18 trillion. But if you add the present value of unfunded pensions, social security, medicare, Obamacare, and so on you can get numbers like $50 trillion or more. Which, it should be perfectly obvious, are not going to get paid, especially if we stay on the current slow growth trajectory.  But how important is this present-value observation?  Should we routinely add up all the unfunded promises, discount them properly using the Treasury yield curve, and report the grand total?

I worry most about runnable debt. Promises to pay people trillions in the far off future are a different thing than rolling over marketable debt every year. If it looks likely we won't be able to pay pensions in 20 years, there's not all that much pensioners can do about it. If it looks like we won't pay off formal short-term debt, markets can fail to roll over, leading to an immediate financial crisis.

So, much as I value Josh's calculation, and zinging those who want to minimize the necessity of ever paying off debt, it does seem there is a difference between marketable debt that needs to be rolled over every year and promises to pensioners and social security that may eventually be defaulted on, but can't cause an immediate crisis.

The cash flows do matter. If the government has promised to make pension and other payments that on a flow basis drain all its revenues, something has to give. As it has in Detroit.

A too-clever thought

A good response occurred to me, to those cited by Josh who want to argue that underfunding is a mere $1 trillion. OK, let's issue the extra $1 trillion of Federal debt. Put it in with the pension assets. Now, convert the pensions entirely to defined-contribution. Give the employees and pensioners their money now, in IRA or 401(k) form. If indeed the pensions are "funded," then the pensioners are just as well off as if they had the existing pensions. (This might even be a tricky way for states to legally cut the value of their pension promises)

I suspect the other side would not take this deal. Well, tell us how much money you think the pension promises really are worth -- how much money we have to give pensioners today, to invest just as the pension plans would, to make them whole. Hmm, I think we'll end up a lot closer to Josh's numbers.


I used a geometric Brownian process, dp/p = mu dt + sigma dt with mu = 0.06 (6%) and sigma = 0.20 (20%). The T year arithmetic return is then lognormally distributed R_T = exp( mu - 1/2sigma^2)T + sigma root T e) with e~N(0,1). It has mean E(R_T) = exp(mu*T)=exp(0.06*T), median exp[mu-1/2sigma^2)T] = exp(0.04*T) and mode exp[(mu-3/2*sigma^2)T] = exp(0)=1.

Julian Robertson talks hedge funds, Apple + Google

Tiger Mgmt. founder, Julian Robertson chats with Bloomberg TV about the changing landscape of the hedge fund industry, the impact of the SEC's case against SAC Capital and Steve Cohen, and his thoughts on Apple and Google. 

Last week, I tweeted a link back to our post, "Insights from Hedge Fund Legend, Julian Robertson" for his thoughts on the hedge fund industry and the changes that size and increased competition have brought. This latest Bloomberg interview is a worthwhile update to this discussion.

Here are the clips (part one: JR on hedge funds, part two: Julian on Apple, Google) and a few quotes below. 

Julian Robertson on the Steve Cohen case and info flow to hedge funds: "I think hedge funds are generally extremely careful that they adhere to rules [concerning inside info]." Doesn't think it will impact the industry much. Tiger cub Nehal Chopra of Tiger Ratan Capital agrees.

On Steve Jobs and Apple: "I read the book on Steve Jobs and developed a tremendous amount of respect for his intellect, but I came to the conclusion that he really was a maverick person and really couldn't establish a great long-term entity [without his leadership]." Julian now prefers Google for their leadership structure long-term.

JR on hedge fund performance:  "One of the things that has affected performance [since the growth of the industry from 1980s] is the increase in size of hedge funds. It was so much easier to compete with bank trust depts, individual investors and mutual funds than with other hedge funds... the competition is tougher.". 

How Robertson selects his Tiger cubs: "That's sort of secret to us, but one aspect that got us interested in Nehal... was her competitiveness in tennis (Davis Cup caliber). She's a vicious competitor. I find that people who compete well in one thing compete well in others".

Twitter: Tom Keene asks Robertson, "are you on Twitter?". Robertson: "No, sir".

Related posts:

1. Insights from hedge fund legend, Julian Robertson.

2. Julian Robertson on hedge fund strategy and competition (Bloomberg).

Monday, July 22, 2013

Are we prepared for the next financial crisis?

This is the title of a very well-prepared video made by Hal Weitzman, Dustin Whitehead and the Booth "Capital Ideas" team, based on interviews with many of our faculty. Direct link here (Youtube)

After A Long Leave Of Absence.

I have not been able to post anything for quite a while now.
It has been extremely busy and just keeping up with the weekly newsletter has been a challenge.
Let me quote from some of the newsletters that I had written in the last few months:

On June 5, I started to close all short positions and sent this email:
:Starting to close 50% of all positions (Except WEAT & CORN)

Then we long XIV around $20.50-$21 range.

On June 9, I wrote:
From a pattern standpoint, the pull back was corrective and with our short-term momentum work hitting oversold levels I have increasing evidence that Friday’s bullish reversal represents my anticipated June minor low. I would still see this as the basis for another bounce/rally into deeper June, anticipating a retest of the May high at 1670 to best case 1700.

XIV did well and continued to go higher. However, around June 19, the indices failed to clear 1650 and the correction resumed. Our resident troll started to send abusive emails but I said the following:
The stock market is ruled by fear and greed.
We are no exception.
We are mostly out of the market except for XIV and now that the indices have broken the earlier low, the momentum has shifted to the downside. However the downside is limited to SPX 1565-70 which will be enough to generate tons of short interest before the bounce.
I expect to see another bounce soon at which point we will close our XIV.
For now, do not give in to fear and panic.
Gold and silver has reached my downside price target but the cycles have not bottomed yet.
All in all, it is fishing time, and do not give in to fear or panic nor to greed.
Have a great weekend folks.

On June 30 I wrote the following:
  •    From a daily trade point of view, I think we have seen the bounce and the correction will continue till 1st half of July. If 1560 is taken out in SPX, the next stop is 1535 and then 1510. But I am not fully sure whether 1560 will be taken out or not and hence I am hesitant to take a short trade here.

  • From a weekly perspective, I am fairly certain that we will see another rally to new high of around 1710 by 1st half of August.

  • On July 11, I wrote:

    Yes, the low came in early.
    For those of us who cannot wait and must have something going, here are two items worth going long with:
    SLB:  with a sell stop at $ 74.00
    XOM: with a sell stop at $ 89.60

    The target for upside moved a little bit. SPX can go upto 1740.

    Now the XIV is at $25.78 (I had sold 50% of XIV at a loss of about a buck), SLB is at $84.80 and XOM is at $94.83 and I have advised subscribers to book profit.

    How is that for hitting the ball, Mr. Troll?

    We are still waiting for the cycle bottom of gold and silver and waiting to short treasuries. We are mostly in cash and I am asking readers to raise as much cash as possible and be patient.

    Do not be greedy like the Troll nor be a spineless snake.
    If you want to be on the right side of the market, you can join the readership and subscribe by donating $99 per month by clicking the "Donate" button.
    However, I do not trade very much and wait for the right opportunity with a very long term outlook. I am not a day trader nor do I care for the short term moves. I am looking forward to what is going to happen in few months, not in few days. So if you have a short term outlook, you will be wasting your time and money. If you do not have the patience and want to buy or sell always, the talking heads in TV will be a better bet. I am not looking to become a mass market newsletter writer nor am I looking to become rich by selling subscription.

    Thanks for reading this post and good luck investing everyone.

    Same Ole; Same Ole

    So what is the New York Times offering up this morning.

    First, European sovereign debt continues to skyrocket to new levels -- both in absolute terms and as a percentage of GDP.  Guess the bailout is working, if more debt is the goal.  Meanwhile the long running recession in the Eurozone continues unabated with no end in sight.

    What about the US?  Economists are now busily reloading their economic forecasts, according to the NY Times this morning, to accommodate much slower economic growth in the US than they anticipated previously.  The latest consensus forecast -- 1.5 percent.  That's barely a pulse.

    Meanwhile the same article puzzles over why this is such a jobless recovery.  They should be reading my blog.

    Here's what they are missing:  employers do the hiring.  The Times (and the Obama Administration) don't seem to get that.  Along with their main cheerleader, Paul Krugman, the Times believes that government borrowing and spending is all it takes to convince someone to hire employees.  After five years of this, you would think they would see the folly of their ways.

    The coup de grace this morning is, of course, the NY Times' coverage of Detroit.  Think of Detroit as a snapshot of the American future -- promises abandoned, hopes crushed, politicians running for cover, unions screaming for justice, and no money left in the till.  NY Times can't seem to figure out how Detroit came about (especially while the auto industry's profits are soaring).

    Same ole NY Times.

    Saturday, July 20, 2013

    Denial in Detroit

    Detroit's problems are not the fault of the decline of the auto industry -- an industry that is, in fact, on a bit of a roll these days.   Detroit's problems are the same problems that plague Illinois, California and the US Treasury -- promises paid for with ever increasing levels of promises and debts.

    Detroit's problems were compounded by corrupt and incompetent politicians, which are a staple of modern big city government in the US.  Citizens vote for these folks, so there is some justice in the fact that these cities are all collapsing fiscally.  The absurd notion that taxing a few rich people can solve a city's problems simply matches a similar absurd notion at the national level.  (Taxing a few rich people is mainly a way of having rich people move to friendlier places).

    No defined benefit pension plan is ever going to survive.  Social security is a defined benefit system .  It won't survive either.  Any system that makes future promises without any means of payment is not going to make it.  Detroit is just the beginning; Chicago can't be far behind.  And yes, Virginia, you will have your day in the bankruptcy court as well.

    All of those defenders of defined benefit systems forgot to ask what happens when there is no money to pay the benefits.  Is the great advantage of a professional investment process worth much when the system can't pay the benefits?  Even bad investments by individuals in defined contributions systems would have been way better for Detroit pensioners than the outcome that is headed their way.

    By the way, it is worth noting that it is not possible to be on a financial loss if you own a typical index fund.  Not possible.  How's that?  Well, as of Thursday's close, the stock market has never been higher. 

    For all of the villification of Wall Street by the Obama Administration and the media, it turns out that a simple buy-and-hold strategy by ordinary investors is a ticket to wealth that has been and is available to everyone.  I bet a lot of Detroiters now wish they had had the opportunity to opt out of the defined benefit system and invest their own money, their own way.

    Not to mention that if you have a defined contribution plan and you die, your children can inherit the assets, something that cannot happen with defined benefit and and its twin -- social security.

    Just like ObamaCare, promises are made that politicians have no intention of keeping.  But, the media pretends that these promises are true.  Detroit shows us the reality.

    Friday, July 19, 2013

    Health Insurance and Labor Supply

    I just ran across an interesting paper, "Public Health Insurance, Labor Supply, and Employment Lock" by  Craig Garthwaite,  Tal Gross and my Booth colleague Matthew Notowidigdo.

    They study an interesting event
    ... In 2005, Tennessee discontinued its expansion of TennCare, the state’s Medicaid system. ... Approximately 170,000 adults (roughly 4 percent of the state’s non-elderly, adult population) abruptly lost public health insurance coverage over a three-month period.
    The result was
    a large and immediate labor supply increase....we find an immediate increase in job search behavior and a steady rise in both employment and health insurance coverage. 

    They call the phenomenon "employment lock." This is different from "job lock," people with preexisting conditions who stay with jobs they didn't want in order to keep health insurance. "Employment lock" is the choice by healthy people to work at all in order to get  insurance, or put in academic prose, "strong work disincentives from public health insurance that are unrelated to strict income-based eligibility limits."

    The converse is a new danger for the ACA
    Additionally, our estimates may provide useful guidance regarding the likely labor supply impacts of the ACA...

    If such individuals could instead acquire affordable health insurance apart from their employer, many of them would exit the labor force entirely. As a result of employment lock, policies that expand access to health insurance apart from employers (such as the ACA) may have large labor market effects

    ... Using CPS data, we estimate that between 840,000 and 1.5 million childless adults in the US currently earn less than 200 percent of the poverty line, have employer-provided insurance, and are not eligible for public health insurance.Applying our labor supply estimates directly to this population, we predict a decline in employment of between 530,000 and 940,000 in response to this group of individuals being made newly eligible for free or heavily subsidized health insurance. 
    They are quick to point out that this is not necessarily a bad thing."the effects do not necessarily imply a welfare loss for individuals choosing to leave the labor force after receiving access to non-employer provided health insurance." If people only work at a job they hate in order to get health insurance, then people may be better off not working. The policy world often just assumes more employment is always a great thing, which isn't true.

    However, less employment is not necessarily a good thing either. These are childless adults. How are they supporting themselves if they don't work? Can it possibly be optimal for them to just sit around the house? We surely don't want to compare employer-provided health insurance with highly subsidized individual insurance for the unemployed-- that's a subsidy to leisure and obviously skewing the scales.

    Most of all, low-income single people face extraordinarily high marginal tax rates and other disincentives to work. So, an artificial incentive to work in order to get health insurance may offset some of the otherwise irresistible incentives not to work. (A good calculation for Casey Mulligan!)

    And whether the people are in the end better off working or staying home and receiving larger subsidies, the government and taxpayers are clearly worse off, as the people and their employers are not paying taxes any more.

    In sum, academic caution aside, inducing a million childless adults to leave legal employment doesn't look like a good thing to me.  

    The evidence is pretty cool. Here are some pictures lifted from the paper.

    Wednesday, July 17, 2013

    A Ray of Hope? Hospitals Post Prices

    I was intrigued by news stories of an Oklahoma hospital posting prices for surgery -- prices far below those offered by its competitors. Here is the article and the surprisingly low price list.  Several competitors felt the pressure to slash and post prices.

    A fascinating tidbit: "Surgery Center of Oklahoma does accept private insurance, but the center does not accept Medicaid or Medicare. Dr. Smith said federal Medicare regulation would not allow for their online price menu. They have avoided government regulation and control in that area by choosing not to accept Medicaid or Medicare payments."  Well, so much for the idea that regulations encourage competition and lower prices.

    This is a ray of hope -- that the sort of competitive free market health care I envisioned in "After the ACA" can emerge as people abandon the complete dysfunctionality of the highly regulated system.

    I had seen the emergence of "concierge medicine," and cash and carry doctors, who step off the highly regulated insurance and government treadmill. But if you get really sick, you need a hospital. And traveling abroad isn't always an option. So the emergence of US cash and carry hospitals is interesting and encouraging.

    This innovation clearly undermines the regulated system. A healthy young person knowing there are doctors who post reasonable prices and take cash, and now similarly reasonable cash and carry surgery, might be well advised to pay the Obamacare tax and skip out of the whole system. A bit of savings or a catastrophe only policy is enough. 

    But before you cheer that Obamacare will die of its own weight, look hard at the other side. The government needs everyone in the system, especially the relatively healthy and solvent customers of this hospital.  It also needs hospitals and doctors to take medicare patients. The emergence of a two-track system is a financial and political disaster. So, how long can it last before the government bans it? Other countries have banned private practice to support their government health systems.  Ours will likely go down fighting, and this is the obvious move. In addition, the hospitals that don't want to compete have strong political power to shut this down, and will make the same cherry-picking complaints that airlines and phone companies used to keep their protections in place. It will not survive easily. 

    Readers: I'm back from a short vacation (national gliding contest), sorry for the silence.

    The 1970s Without the Inflation

    We are now entering a long term period of economic stagnation that is reminiscent of the 1970s.  The only real difference is that inflation is subdued today.  The term "stagflation" came to prominence as a description of the 70s economy, as inflation soared toward the end of the the 1970s.  Ronald Reagan rescued us from all of that after his election in 1980.  How soon we forget.

    Inflation, of course, is only temporarily subdued.  The only way to retire our absurd debt levels is to inflate our way out of them.  That's coming.

    For now, we live in world of never-ending promises of things that cannot possibly come to pass -- medicare, social security, ObamaCare, state and local pension funds.  All of these things will run out of funding within the lifetime of those now reaching adulthood.  As politicians dream of even more things to promise the citizenry, the funding for the existing promises is rapidly drying up.

    Meanwhile, a dwindling percentage of Americans are actually working these days.  While records are being set every day in the percentage of Americans on welfare, on food stamps, on disability, the percentage of the economy devoted to the free market is shrinking. 

    The culture is following suit.  Think of the last time that you watched a television show where the bad guy wasn't a businessman or woman -- polluting the environment, stealing from unwitting investors, or fleecing someone in a novel way.  Who are the media heroes?  -- the government or the non-profit world (or media).

    Making a profit is viewed with suspicion in our modern American culture.  Unfortunately, that means creating wealth and hiring folks is tainted with the same brush.  There is a certain consistency here, since working for a living is losing its hold on the American lifestyle.

    Tuesday, July 16, 2013

    "We're Recovering"

    It is now mid-July of 2013, more than 4 1/2 years since the financial collapse and still we hear the phrase: "we're recovering."  How long are we going to hear that?

    Below 2 percent economic growth and almost 8 percent unemployment means that the US economy is paralyzed.  The Obama Administration seems to have thrown in the towel on the subject of growing the economy.  Right they should!  The Administration policies, piled on top of the policy history of the past fifty years, virtually guarantee that the vibrant economy of the Old USA is not in our future.

    There are bright spots -- autos, housing, energy -- but there are always bright spots.  What is missing is small business vitality.  That's gone and not coming back until folks figure out how to get around the mass of regulations and taxes that bedevil the American economy.  Other than outsourcing, it is not clear how to avoid the strangling effect of American regulatory policy.  As for employment, hiring anyone seems downright irrational, given current tax and regulatory policies.

    The Obama Administration has reduced the expectations of most Americans to the kind of future that Europeans now have -- stagnation, limited opportunity for the young, guarantees for the oldest demographic that are coming apart at the seams, and debts that no one has any intention of honoring.

    So the phrase "we're recovering" is getting tiresome.  We're not recovering, we're changing.  The quasi-socialism that has supplanted free enterprise is preventing a serious recovery like the one we had in the 1980s.  The "bad old days" were actually "good old days" as Americans are learning to their dismay.

    Friday, July 5, 2013

    The Real Message in Egypt

    The Egyptian economy has collapsed.  This was a process that began with the 'Arab Spring' and accelerated with the election of Morsi, deposed over the weekend by the Egyptian military.

    What this shows is that the average Egyptian, Islamist or not, prefers to have food, shelter and safety to political ideology.  Democracy doesn't mean much of anything if there are no free institutions.

    The US foreign policy is not helpful here, because the US government is busily dismantling free institutions as a cornerstone of its own domestic policy.  The US can hardly be expected to promote free institutions -- a free press, for example -- if it doesn't believe in free institutions on its own home turf.

    A rule of law would be helpful as well, but current American domestic policy -- witness, the recent suspension of the employer mandate in the Affordable Care Act until elections are safely over -- is mainly a retreat from the rule of law.    Actions speak louder than words and the world is plugged in these days.

    The right to start a business and provide for your family is all that the average Egyptian wants and the demonstrations that crushed the political power of Morsi were a testament to that desire.  Perhaps the Obama Administration should take notes.

    The Next New Thing

    Are you ready for this?  How about "unlimited vacations for all."  Paid for, of course. 

    Check out the NY Times editorial page today.  These folks have launched their latest job-killing, economy-crushing plan -- unlimited paid vacations.

    That should really entice employers to increase their work force.  The new idea from the left is to have employees on the payroll who, in reality, are always on vacation.

    Check out today's NYTimes editorial page if you think this is a mirage.

    Thursday, July 4, 2013

    Affordable Health Care?

    The truth on ObamaCare is gradually unfolding.  Two things are becoming increasingly clear: 1). Health care provision in the United States is going to deteriorate dramatically in the future because of the 'Affordable Care Act'; and 2). Health care costs in the US are going to escalate dramatically because of the 'Affordable Care Act.'.

    You would think that the above two facts are inconsistent, but they aren't.  There are a number of parts of the Act that are driving 1) and 2), but they can all be summarized by the following:  The "Affordable Health Care Act" promises services but provides no real means of payment.   Sound familiar?  The same truth is why medicare and social security (and public pension funds) are on a pathway to insolvency.

    The Obama Administration's decision to postpone enforcement on the 'large employer' part of the "Affordable Care Act" is an open admission that they don't want the public to see the true costs of the new laws and regulations.  Once the elections are past, then, they say, they will enforce the law.  The "Act" itself does not provide the Obama Administration with the wiggle room to postpone enforcement, but in the new Obama world of 'selective enforcement' of American law, the Obama Administration announced (in a blog message, no less) that they do not plan to enforce the large employer provisions until elections in 2014 are safely over.

    The best health care system is a free market health care system.  The insurance industry should be free to offer whatever health insurance plans they wish, to whoever they wish to offer them to.....period.

    Concern about the uninsurable can be dealt with in the same manner as is done with auto insurance for drivers that are not normally insurable.

    There is no reason for the government to take over the health care industry in the US.  Just as with public pension funds and social security, the government promises to take care of its citizens, but, in reality, has made no plans to honor those promises.  Ditto for the Affordable Care Act.

    Wednesday, July 3, 2013

    Political Unity Collapses in Portugal

    Enforcing austerity doesn't win much popular favor as the politicians in Portugal have discovered.  The center right government in Portugal has pretty much collapsed over the weekend.  Greece is also back in the news as it struggles to implement its own version of austerity.

    No European government backing austerity will survive.  Germany's Angela Merkel will be the most prominent casualty as she faces the electorate next year.  Gone already are the political leaders of Greece, Spain, Italy, and France.  It won't be long before their successors are under siege as well.

    The EU-ECB plan of increasing debt and forcing austerity on their populations has been a failure from day one.  The political unraveling of Europe was easy to predict and not at all surprising to watch.  The fear is that extremists of the far left will eventually assume power and Europe will become a different place.

    Monday, July 1, 2013

    Tesla hits new all-time high: Do Androids Dream of Electric Cars?

    After a recent consolidation along its 20 day moving average, Tesla (TSLA) closed at a new all-time high today. 

    As you can see from the daily and weekly charts, the runaway move started in April when TSLA broke out above the $40 level on large volume (over 7 times its daily avg. volume). TSLA soon consolidated that move and continued higher, amidst a stream of exciting announcements and a growing wave of "Elon mania" (see recent interviews, videos below), to its most recent prior peak in late May. 

    As of today, TSLA is up over 165% from its April 1 closing price.

    After noting some weakness in several leading stocks (including TSLA) on StockTwits + Twitter late last month, I soon realized that I was wrong on TSLA. What I mistook for topping action was actually just a pause before this latest, new high. The uptrend continues...

    Elon Musk discusses creativity, entrepreneurship and a new mode of travel (hyperloop) at Pando Monthly.


    TED chats with Elon Musk: The mind behind Tesla, SpaceX, and SolarCity. 


    Disclosure: as of this posting, I have no position in TSLA (and I have had no prior positions in TSLA) and am watching from the sidelines. This may change at any time. If any follow-up posts coincide with my holding a position (long or short) in the stock or in TSLA options, this will be noted within said posts. 

    China Slows

    Asia is beginning to weaken.  Given the stagnation in the western economies, this is not good news.  Unemployment in the Eurozone remains above 12 percent and US unemployment rates have fallen only because of the massive shift of workers out of the work force.  Growth in the West is so slight as to be within the margin of error for measuring the data.  The only real global economic strength has been Asia and that may be ending.

    Granted there are bright spots in the US -- fewer in Europe.  US housing is stabilized and there are pockets of feeding frenzy here and there in the residential market.  But, overall, there is still weakness.  Now with Obamacare looming and the unleashing of the EPA, things could easily deteriorate in the US.

    While everyone watches the Fed, the real story is a micro story.  The mass of regulation, rules and additional costs that businesses face, even if demand were to increase, will keep a lid on economic expansion.  Debt problems will also limit the future of Western economies.  Too many promises, too few resources to deliver on those promises.

    Fed activity is mainly important for inflationary expectations and pressures.  With a sick economy (made sick by federal policies since 2008), there isn't much inflation.  But there will be.  That's what the recent uptick in treasury rates is all about.