Market show us the magic hand!

This early critique of the Republican Obamacare replacement by Dean Baker at the Center for Economic and Policy research takes a dim view of the outcome. That is looking to return to more than 50 million unisured before the Affordable Care Act. As we know, currently “only” 28 million Americans are without health insurance. Baker did not go into depth about the macro economic implications of this situation but stuck to the healthcare implications. He points out, and later reports support him that with the increase in the limit on contributions to the Medical Savings Account, more affluent people will be buying low premium, high deductible health insurance plans that will provide only catastrophic benefits. The market for such a plan will likely be among younger, “professional” types. On the other hand, as was revealed in this article published in the LA Times March 8, older poorer Americans will be the biggest losers in the overhaul. The article I read in the Arizona Daily Star this morning pointed out that the vast majority of counties that supported Pres. Trump in the election will lose big under the new plan. I cannot find a link because the tucson.com website is dreadfully loaded with pop ups in every click and a poor search engine.

Paul Ryan, in this interview on CBS laughed when he was asked how many people would lose the health insurance under the new GOP plan. “We don’t know”, he said. He wants the American people to be so relieved that people will not be insured under “some government mandate” that they won’t care if they are going without. He sees  the magic marketplace that will produce just the right plan for everybody and for some, none at all. Later in the same CBS Face the Nation segment, Sen. Bernie Sanders pointed out that the real thrust of this change is to relieve the very richest Americans of the taxes that were imposed upon them to fund the ACA in part. I am of the opinion that the enormous effort to drag Congress into a very mild private-insurance based, privately delivered healthcare plan was primarily due to the pressure brought to bear by this class of Americans upon the GOP in Congress.

The macro-economics of available healthcare is on display right here in Arizona. Mounting uncompensated care was causing great financial stress upon hospitals and clinics in Arizona; particularly rural Arizona. The GOP-led State Legislature did not heed the pleas and cries of the Arizona healthcare providers to help them recover some of that uncompensated care and accept the Medicaid expansion offered by the ACA. It was not until great pressure was brought to bear upon these Legislative “leaders” by the Gov. of Arizona, Jan Brewer. Brewer, a Republican was able to bring to the table a plan to fund the Arizona premium of the expansion through a levy worked out with the healthcare providers on patient-occupied beds. Brewer was able to gain media support for this plan, got it passed over GOP leadership dissention and that by 2015 had enrolled 1.6 million Arizonans, according to this Arizona Daily Star article.

“Somebody else’s baby” is how one GOP Congressman characterized his view of the people who are helped under the Affordable Care Act. This is not only inhumane and selfish but it betrays a fundamental mindset common among these GOP leaders, including Paul Ryan that people who struggle in our society; or any society for that matter should not be the burden of those who are more fortunate. This is anathema to civil, developed societies who understand that widespread disease and want among large numbers of their society weakens and makes vulnerable the entire society.

The magic hand of the marketplace was given its chance. It resulted in skyrocketing healthcare costs, millions dying needlessly, financial ruin for millions; bloated, topheavy insurance companies and a shrinking number of enrollees. It’s time to move on to universal coverage. And no, it will not come from the magic marketplace. It will have to be demanded.

The stated objectives and the consequences of a Fed increase

The Federal Reserve Board and members raised the Fed Funds rate by .25% recently prompting pushback by Dean Baker at the Center for Economic and Policy research. His article, “The Job Cremators” is a good argument for the Fed to dwell a little longer on its other mission; to keep the rate of unemployment as low as possible. Baker gives a good historical account of a 1994 meeting he had with (now) Chairwoman Janet Yellen and another Board member, Alan Blinder at a time when most economists believed that a 6% rate of unemployment was a good target for the Fed.

Baker recounts how the Fed did not heed his argument that lowering the unemployment rate target just one percentage point (to 5%) would have the greatest impact upon middle and lower income workers, that any inflation that resulted would be minimal, and that the Fed could always raise rates later in the event of an inflation spike. The Fed raised its rates from 4% all the way to 6% by the end of 1994. However, heedless of the financial industry’s concern about an “overly tight labor market”,  in 1995 then Chairman Alan Greenspan “pushed through lower interest rates” even though unemployment was still below the 6% target. Students of economic history know that an economic and market boom ensued. Baker tells of how this resulted in record low unemployment with the marginal workforce such as teenage black workers benefited greatly. Baker shows that by the year 2000, inflation was still less than 2% while unemployment rates were still averaging 4%. This experience served to lower the target unemployment rate by two full percentage points to 4%.

A casual observer might ask, if the cause and effect is so straightforward, and the public benefit so undeniable, why then, does the Fed worry so much about inflation? The answer lies in the very good description of the makeup of the Federal Reserve Board (seven members) and the Federal Reserve Bank’s 12 regional bank presidents, together making up the Federal Reserve Open Market Committee. Baker points out that “…The process by which the regional bank presidents are picked is complicated, but it is dominated by the banks in the region. Unsurprisingly, bank presidents tend to represent the interests of the financial industry.” Baker also points out that the interests of the industry are to keep the debt obligations to those banks as heavy as possible and that inflation reduces the buying power; hence the value of those debts owed to the banks.

So, the reader is faced with the conclusion that it is the dominance of the banks that, (excuse the pun) trumps the public good that comes with a “tighter labor market” the so-called harbinger of inflation. Is it possible to have a monetary reserve system that is not controlled by  banks that except on rare occasions ensures that banks are profitable and that millions of workers stand idle with want?

Lessons from Capital Market History

teeter-totterThis article from the CFA (Chartered Financial Analyst) Institute by Harry S. Marmer, CFA is chock full of graphs that quickly dispel some widely held views. One is that market “cycles” are really not cycles at all but are, rather random fits and starts that are characterized in the article as “episodic”. “Predicting the duration of the business cycle was aptly summarized by noted business-cycle analyst Victor Zanorowitz, who said, ‘Few business cycle peaks are successfully predicted, indeed, most are publicly recognized only with lengthy delays.'” So much for analyst humor.

The graph of 155 years of US business cycle history shows a “typical” average length of 4.7 years but with a standard deviation of 2.2 years. “In other words, the underlying length of the business cycle has broadly ranged anywhere from 2.5 years to 6.9 years 68% of the time.” The bar chart in the article looks like a silhouette of a major downtown city skyline. Because of this unpredictability in business cycles, investors “should avoid investment and policy decisions (based upon predicting market cycle turns).”

The shape of stock return distributions from the last 89 years resembles a fat rocket ship on a plain. The sharpness of the graph is called its “kurtosis”. “The kurtosis from this distribution is 9.7; a normal distribution has a kurtosis of 3”, that is like the “bell curve” we all heard about in high school.  The plain of the rocket ship is there to report a -30% on the one side and a 42% on the other side. The shape of the curve is due to “the fact that stock returns are characterized by jumps. More specifically, financial prices tend to “jump, skip, and leap” up and down rather than change in a continuous fashion.” How many of us have heard colleagues talk about “trends”, “price supports”, and “floors and ceilings”? These are empirically fictitious. Who among us could say with any accuracy what the Mean, Median, or Standard Deviation is of the monthly returns of the S&P 500? Here you have it. The Mean is .94%, the Median is 1.21% and, GET THIS: the Standard Deviation is a whopping 5.46%. That means that 68% of the time, the range is between 6.4% and -4.2%. The high is 42.98% and the low is -29.61. The probability of seeing the extremes of the distribution are about .1% judging by the graph.

“Why do markets behave in this fashion?” These are most likely caused by “traits in the world outside the markets or ‘exogenous’ effects”, says noted mathematician Benoit Mandelbrot. The lemming effect or “investor behavioral biases” is also cited as “a primary driver of the heavy or fat tails in asset class return distributions. That is a very high summit to scale. On the one hand we have “real world” events, both physical and financial to have to contend with and, on the other hand, irrational investors if we are to be successful in market timing. Indeed, as the article goes on to say, “Nobel prize winning economist Paul Samuelson described the challenges in market timing best: ‘Scores of documented statistical studies attest that not one in ten ‘timers’ ends up getting back into the market at bargain prices lower than what they sold at earlier.'” So much for market timing.

Indeed, the “Opportunity Costs of Missing Market Performance: $1,000 Invested” bar graph in the article shows that investors who bought and held their portfolios for the 10 year period ending July, 2016 in the S&P 500 gained an annual average of 7.4% or cumulatively $1,046 while those who missed just 10 of the best days saw a .3% or $33 cumulative gain. It gets worse as the hapless investor, trying to escape downturns buys and sells in and out of the market until the worst in the chart, 40 best days missing loses 10.3% on average annually or $664 cumulatively.

Marmer finishes the article by advocating “implementing a disciplined rebalancing policy back to the long-term policy mix (over market timing).” That is the investment strategy of Jim Hannley LLC because I exercise discipline and I look for rebalancing opportunities in my portfolios daily.

 

Infrastructure plan or…..scam?

hernando_de_soto_bridge_memphis
Hernando de Soto Bridge, Memphis

Paul Krugman, columnist for the New York Times questions the plan to use tax credits to incentivize corporations to build or repair US infrastructure. Krugman states that the plan is to allow the corporations to use up to 82% tax credits on the equity created and then to allow these corporations to charge the public for the use of these projects to recover the other 18%. Krugman rightly observes that with transportation projects the new corporate owners can apply toll charges to recoup the remainder of their investment but what of such needs as sewer replacements? He does not answer this question entirely but, imagine if your city allows a corporation to upgrade its sewer system. Under this proposed plan, that corporation could apply sewer fees above the city’s cost of normal maintenance. What about municipal water systems? Will Americans soon anticipate their water system to be privately owned? Krugman points out the very limited utility of this arrangement as being “back door” borrowing but with the catch that the public ownership would be lost.