Health Cooperatives

One of my favorite college professors has an opinion piece on health cooperatives in the Christian Science Monitor. Here's the money quote:

The solution is to abolish Medicare and Medicaid, abolish the favorable tax treatment of employer-provided insurance, impose a one-price rule on procedures, and issue a voucher to every single American citizen. The creation of a voucher program would certainly take less than 1,990 pages of legislative language. This will solve the problem of the uninsured completely, immediately, and permanently in a transparent way that works with, rather than against, competition. The big losers will be special interest groups because a transparent voucher system will rob them of their ability to manipulate the system. They know this all too well, which is why they oppose it.

And this article further explains his voucher-based solution.

Fiscal Haiku

After sharing one of my favorite haikus:

Haikus are easy,
but sometimes they don't make sense.
Refrigerator.

with a friend, he pointed me to fiscalhaiku.com. This prompted me to create my very own fiscal haiku, but I decided to post it here rather than on their site. It's based on the writings attributed to Alexander Tyler.

Vote the treasury
and destroy fiscal restraint.
Vote the nation's fall.

Mixed Freight Indicators

Over the past few weeks, Calculated Risk has several posts on freight activity, here, here, and here. The highlights:

• Container shipping is at an all-time low.
• ATA truck tonnage ticked up in March.
• LA port traffic took at 35% year-over-year nosedive in February.

The charts below show three ETFs - the iShares Dow Jones Transportation Index (IYT) and the Claymore/Delta Global Shipping Index (SEA), respectively. They both have rebounded off recent lows but IYT - which has more significant volume - has shown declining volume as the rally has progressed.

The ETFs seem to be responding to the recent news, not discounting the future continued/likely declines in transportation companies.

The Cap-and-Trade Tax

John Mauldin raises an interesting point about President Obama's cap-and-trade proposal. I'm not convinced the proposal would cause utility companies to raise prices though - mainly because most have government-regulated prices.

If the costs aren't borne via higher prices to consumers, John's conclusions won't follow. That said, the increased costs will have to be dealt with somehow.

And I definitely agree that GDP is going to be *way* below the 4% forecast. The economy has been above the natural rate of growth for many years and tends to revert to the natural rate, which means we should anticipate years of sub-3% real GDP growth.

Obama wants to create a cap-and-trade program for carbon emissions. This is expected to generate $79 billion in 2012, $237 billion by 2014, and grow to $646 billion by 2019. These will be payments by energy (primarily utility) companies to the government. That will cause utilities to have to raise the prices they charge customers for energy. Such a level of taxation is eventually 4-5% of total US GDP. That is not small potatoes. And since the wealthy do not use all that much more power than the rest of us, it will affect the lower incomes disproportionately.

It will take money out of consumers' pockets and transfer it to the government. You can call it cap-and-trade, but it is a tax. And a huge one. Anything that will take 4% of GDP away from consumer spending is not business friendly. And by driving the cost of energy up, it will drive high-energy-using businesses away from the US to developing countries where energy is cheaper. It will make it even harder for people to save money and drive up costs for the elderly and retired. But it will make the environmental lobby happy.

Further, Obama's accounting magicians assume that the US economy is going to grow by 1.2% this year and 3.2% next year and at a blistering 4% pace after that. Since that is not likely to happen, the deficits will be far worse than projected. Since large taxpayers can see the tax increase coming, it is likely that they will shift behavior, and tax revenues will be less than projected.

Source:
Buy and Hope Investing
John Mauldin
Thoughts from the Frontline Weekly Newsletter, 2/27/2009

Tracking the Recession

The Saint Louis Fed recently created a brief report that tracks the current recession via the behavior of GDP components and four economic indicators: industrial production, real income, employment, and real retail sales.

The report graphs multiple business cycles, by aligning the months in which each business cycle peaked. This allows you to compare the months leading up to, and following, peaks in the business cycle. In addition to the current series values, the average, highest, and lowest series values are displayed.

During this recession, the US has experienced the worst declines in industrial production and real retail sales, and is close to showing the worst decline in employment.

The GDP numbers do not appear quite as dire. Personal consumption expenditures are showing a historically severe decline, which aligns with the real retail sales data. Real imports have also shown a significant decline during this recession.

Botched Bailouts

I've been following the government's many recent financial bailouts (Fannie and Freddie, AIG) and interventions (Term Lending and Auction Facilities, short selling rules, RTCII) fairly closely.

There has been much discussion of how deregulation of the financial industry lead to this crisis - especially in the case of the (former) five firms that 'enjoyed' net capital exemptions from the SEC - and how the government's recent actions smack of socialist policies.

Until Friday, I had not read anything about how these actions may have exacerbated the financial crisis. Jim Jubak does a superb job of outlining how these rescues have actually made some things worse. The whole article is worth reading, but the highlights are below.

[I]n the name of creating an orderly liquidation of a company such as Lehman Bros., they create a mad scramble to get paid before the bankruptcy court can act.

By wiping out the Fannie Mae and Freddie Mac preferred stock, the Fed and Treasury killed off any possibility that some other financial institution in need of capital could raise cash by selling these dividend-paying shares.

[T]he Treasury and Fed have ensured that no conservative, income-seeking investor in his or her right mind would buy preferred stock from a troubled financial company looking for capital.

After drawing a line in the sand and saying no more bailouts, the Fed and Treasury ponied up $85 billion in taxpayer cash to go into the insurance business. Their excuse for the about-face: Though the Fed had planned for a Lehman bankruptcy, it hadn't modeled a failure at AIG and couldn't predict the consequences of letting the company go into bankruptcy. That's not reassuring.

Source:
Botched rescues are killing markets
Jubak's Journal 9/19/2008 12:01 AM ET

January Inflation Reports

The inflation numbers for another month are in, and the results do not look very good. The charts and brief commentary below summarize the changes.

Today Calculated Risk noted that, "inflation expectation have surged recently." They cite a Bloomberg article that charts the spread between the 5-year TIPS and the 5-year Treasury. You can find an interactive chart of the spread between those two rates on the Cleveland Fed's website.

At this point, I think it's safe to say that - contrary to what the FOMC has to say - both inflation and inflation expectations are not well contained.

---

Annual core PPI inflation has moved from its 2006 lows near 1% to hovering above 2% in the second half of 2007.

Core PCE inflation has jumped back above 2% and trimmed-mean PCE inflation is nearing 2.5%.

CPI inflation is worst of all; core is near 2.75%, 16% trimmed-mean is approaching 3%, and the median CPI is closing on 3.25%.

Surprise!

The Fed's inter-meeting 75 bps cut yesterday came as a complete surprise (at least to me). I've previously noted that Fed Funds expectations were for a 50-75 bps cut at the next meeting on January, 29-30.

The statement cited a weakening economic outlook, increasing downside risks to growth, continued deterioration in broader financial markets, tightening credit for some businesses and households, and a deepening housing correction as the reasons for the target rate change.

That said, what's the point of cutting rates inter-meeting a week early? One week will hardly make a difference, given the lag of monetary policy. My only hypothesis is that the FOMC had already been discussing the action - which was mostly based on economic conditions - and they released the statement early, in response to overseas and overnight US futures trading. However, that begs the question of why the FOMC was swayed by equity market conditions.

In addition, and possibly more interestingly, Fed Fund futures still assign a 40% probability of the FOMC cutting another 25 bps next week...

Monetary and Fiscal Stimulus

There was plenty of talk about fiscal stimulus packages last week. The White House wants tax cuts to help a wide range of individuals and businesses. Privately, it has floated a plan that focuses on rebates of up to $800 for individuals and $1,600 for married couples.

In addition to tax cuts, congressional Democrats say they also want spending targeted at specific groups such as the unemployed. They have also discussed denying rebates to taxpayers who earn more than $85,000 and offering them to those who don't pay income taxes at all.

Despite the market's disappointment, the plan President Bush announced Friday, which is equivalent to about 1% of gross domestic product, came in at the high end of expectations in Washington.

In addition, Fed Funds futures and options show a 40% probability of 50 and 75 bps cuts, and almost a 20% probability of a 1% cut. The jump in the odds of a 75 bps cut was near Bernanke's speech on 1/11 and the wholesale trade and retail sales reports. The probability of a 1% cut increased near the consumer sentiment report and Bernanke's Congressional Testimony.

None of this will ward off a recession in the United States. The slowdown in growth isn't purely a liquidity problem. It's a confidence problem causing a lack of liquidity. Banks won't start lending to one another again until they have a better idea of who owes what. Until then they're going to continue to horde cash to shore up their balance sheets to prepare for the worst.

Further, this isn't just a subprime or even a mortgage problem (we have yet to even reach the pinnacle of the option ARM wave). Issues are beginning to surface in the commercial real estate, auto loan, and credit card secondary markets. Who knows what other credit products will follow?

The actions of the Fed and Washington won't stop the stock market's decline, or the oncoming/current recession, since this current slowdown is a confidence problem, not a liquidity/stimulus problem. And, unfortunately, the problem is likely to get worse before it gets better.

I expect the market to slowly work its way up - with a few relief/short-squeeze rallies - over the next week or two, sending major indices near their August lows (about a 5-6% gain from Friday's close). I will enter a short position in the NASDAQ 100 and/or Russell 2000 near the August lows if they are attained before the Fed meeting next week, since I expect the catalyst to the next major move down to be the outcome of the meeting.

Predicting Recessions

John Mauldin's Outside the Box newsletter released last Monday discussed many of the current issues facing the stock market. One paragraph in particular stood out to me, since I had read a portion of it elsewhere.

Last week's poor ISM and employment reports add further confirmation to this expectation, particularly given that total non-farm employment has grown by less than 1% over the past year, less than 0.5% over the past 6 months, and the unemployment rate has spiked 0.6% from its 12-month low (all of which have historically indicated oncoming recessions). The ECRI Weekly Leading Index is now clearly contracting as well. The expectation of oncoming recession may be gaining some amount of sponsorship, but it is still far from the consensus view, and is therefore most probably far from being fully discounted in stock prices.

I had read before that a reliable indicator of oncoming recession is when the unemployment rate rises 0.5% from its recent trough. I had not seen the other two predictors of recession, although they are probably true by virtue of being correlated with one another.

These measures are good indicators because they proxy future consumer spending. They would be less reliable when predicting recessions caused by decreases in investment. Your thoughts?

Source:
Minding the Hinges on Pandora's Box
By John P. Hussman, Ph.D.
John Mauldin's Outside the Box, 1/7/2008

Non-Farm Payrolls: 12-07-2007

To quickly recapitulate the press release:

• The unemployment rate remained unchanged at 4.7%
• Employment increased 94,000 to 138,467
• Hourly earnings rose $0.08 to $17.63
  

Judging from the economic calendar on CNN Money (please advise if there's a better calendar) and the reaction of S&P 500 futures, the unemployment rate - which was expected to increase - and employment were better than expectations.

However, average hourly earnings came in quite a bit above expectations (0.46% MOM versus an expected 0.30%). That doesn't bode well for inflation expectations...

Will today's stronger-than-expected employment situation change market expectations of Tuesday's Fed action? I'll update with the information from the Cleveland Fed after the market closes.

UPDATE:
Estimates of a 50 bps reduction in the Fed Funds Rate declined using either December of January options. Expectations of a 25 bps cut now stand near 60% and 70% for December and January options, respectively (in each case the remainder represents the probability of a 50 bps cut).