Wednesday, March 31, 2010

Nice job reinventing the cosmic wheel without destroying all of us boys!

A tidbit for you

My opinion, as a professional investor, for what it's worth, is that health care is a scam.  Every single group involved in it, from top to bottom, has their hand in the till.  I've seen it at the levels of pharmaceuticals, medical devices, insurance companies, companies sponsoring healthcare plans, doctors, hospitals, etc ... In fact, I would say that this is the single most complicated corrupt industry I've ever seen, which is precisely what you would expect when, at every level, one guy gets the service, and another guy pays for it.  Mumble mumble Milton Friedman mumble mumble.  I know we're never going to, nor would we want to, have a true market in healthcare, a system which would leave grandma's corpse rotting in front of the hospital.  But this ridiculous hybrid system we've so recently enshrined anew is just going to get worse and worse if basic changes are not made to it.

This rant is brought to you by the following lines out of Emdeon's 10-K:

Healthcare expenditures are a significant component of the US economy, representing $2.3 trillion in 2008, or 16.2% of GDP, and are expected to grow at 6.2% per year to $4.4 trillion or 20% of GDP in 2018.

In addition, industry estimates indicate that between $68 billion and $226 billion in healthcare costs are attributable to fraud each year.

For the math challenged out there, that's between 3% and 10% of the entire amount of money spent on healthcare.  And that's just outright fraud.  That's not the institutionalized graft I was referring to at the start. 

Friday, March 26, 2010

Defeat fascism!

Do a J today!

But seriously.  There's lots of debate out there about about Chinese revaluation.  Normally, this would be just so much financial arcana, but even with some semblance of "recovery" underway in the developed economies, it's impossible to relegate these questions to the back page -- a weak renminbi is a form of trade subsidy and it could eventually become the initial shot in a trade war, especially given 10% unemployment and what I would almost call the beginnings of "political instability" in the US. 

The solution to all this is actually really obvious.  The Chinese need to rebalance their economy as much as we need to rebalance ours.  We spend less money and make more stuff, and vice versa for them. Normally, markets would tend to rebalace this stuff on their own (though potentially through a depression), but there's no way the political parasites are going to let this happen without extracting useless work out of the disequilibrium.  Obama-Jibao get my vote for Maxwell's Demon.  

Just as the left wing in the US is fond of pointing out (yes, correctly, in lots of ways) that our own culture has some structural factors that encourage consumption and discourage savings, we should also point out that the Chinese have the opposite problem.  The Chinese government massively subsidizes manufacturing and particularly export manufacturing.  Partly this is for economic reasons that were reasonable -- we were willing to go into hock to buy all their cheap plastic shit; you can develop really really fast with an export model because you only have to worry about the production half of the economy, etc ...  -- but partly it's just politics.  It's simply much harder to control an economy and a society that has a more open demand side.  The Chinese weren't never dumb, and they always knew this.  Which is what makes the otherwise very good Steven Roach not below a bit of a puff piece. 

To have a real sustainable economy, you have to have a feedback loop of production and consumption, a circular flow of goods where, ultimately, workers are getting paid enough to buy the shit they make.  This is just Marxism 101 -- slaves don't buy anything.  But if you flip this over ...

(and brief aside here on how thoroughly disgusting I find supposedly progressive intellectuals drooling at the chance to be mini-dictators of their own.  Remember in the 70's when anybody with 2 cents of liberal credentials was a convicted Maoist?   Or in the 60's when the Soviet Union was held up as the model?  Will the deep left ever quit implicitly lionizing benevolent dictatorship and get on the freedom train?)
... if you flip this phrase over, you realize that if you want to keep people slaves, you shouldn't let them buy anything.

This is precisely what China is doing.  Their "economic miracle" is built on the back of a fascist control, and not accidentally, but quite deliberately.  You see them now, with that famous Asian obsession with saving face, unwilling to back down.  They know at this point that they've built a totally unsustainable model.  And what have they done?  They've doubled down on it.  Economically it doesn't make any sense.  It risks blowing a huge bubble and creating a massive crash a few years down the line.  But it doesn't matter.  They've made their political choice, and they are stickin' with it. 

Red is Dead.

Posted via email from The Capitalist Axiomatic

Wednesday, March 24, 2010

Charlie don't surf

The curmudgeonly but remarkably accurate boys at GMO sock it to the reds.  I particularly liked this line, which is a phenomenon I find very amusing.

One of the wonders of modern China is that it has turned some of the world's most ardent capitalists into fervent admirers of an economy managed by communists.

I think investing is hard enough; I can't even imagine running an economy with 1.3 billion souls.

Tuesday, March 9, 2010

Super brilliant with a cherry on top

If I were much much smarter than I am, and a better writer to boot, I could with some legitimacy complain that he took the words right out of my mouth:

As, um, a proponent of root-and-branch reform, these are the questions that keep me up at night. For the record, I think we will end up with root-and-branch reform, but I fear we'll get it hard and painful following a much more serious crisis that we have already failed to avert. I think the Great Financial "Panic" of 2008 has shrunk into another LTCM or Enron, a moment we will someday look back upon and wonder why we failed to deal with problems that were so fucking obvious, but for now all we hear is "It worked!" I'm a middle-aged Jewish guy who thinks and writes about finance, makes much of his living as a speculator, and avoids honest work. The tail risk I worry about is that I'll get to see the sort of financial reform I advocate from a wonderful vantage high atop a lamppost.

And here's another random quote, just for good measure.
 It is impossible to design a system so perfect that no one needs to be good. 
--T. S. Eliot

Thursday, March 4, 2010

Politics is business as usual

... and war by other means.

This morning's journal has a couple of interesting articles for those of us who believe that the structure of institutions is more decisive than the individual clicks and grunts of the apes that compose them.

First, we have a distinction between a political and a market entrepreneur.

Market entrepreneurs like Rockefeller, Vanderbilt and Hill built businesses on product and price. Hill was the railroad magnate who finished his transcontinental line without a public land grant. Rockefeller took on and beat the world's dominant oil power at the time, Russia. Rockefeller innovated his way to energy primacy for the U.S.

Political entrepreneurs, by contrast, made money back then by gaming the political system. Steamship builder Robert Fulton acquired a 30-year monopoly on Hudson River steamship traffic from, no surprise, the New York legislature. Cornelius Vanderbilt, with the slogan "New Jersey must be free," broke Fulton's government-granted monopoly.

I don't actually know enough about the history of the era to agree or disagree with the classification of the individuals here, but I do think the distinction is worthwhile because I see it as similar to one I have been trying to make between different types of monopolies

Basically, it's a question of innovation.  I'm skeptical that Rockefeller was super innovative, but I don't really know.  I do know that the US has been uniquely fertile ground for things that are in some sense, "good monopolies", like Google and the early Microsoft or Oracle.  Certainly, these companies that invent a new industry and disrupt things so dramatically may later slide into merely defending their turf and manipulating the political process to this end.  But that should only make us more keen to see the next disruptor come along; it's perverse to try and strangle the innovator in the crib because you're worried that he'll be a bully later.

So while I find his smug recommendation that the little people should eat the cake off Larry Ellison's yacht disgusting (this guy's about as "grossed out" as Bukowski in a whorehouse) I do kinda agree that big government can be used as a big lever to replace the necessity of competing in the market.  We should applaud the winners when they won by competing to give us what we want.  Of course, we should continue to hold them to that standard.  They should have to keep winning, instead of being allowed to capture the rules of the game.  The game has to have clear rules or we just go around hitting each other on the head (or blowing up each other's oil fields, which is why I'm skeptical that Rockefeller qualifies as a market entrepreneur in a sense I'm willing to defend) but equally, the rules have to get written somehow and by someone, and the more complicated they are, the more you risk their becoming another piece of business strategy at the disposal of political entrepreneurs like ... Dick Cheney, for example.  More government almost inevitably gives the political entrepreneurs more leverage.

Which brings me to the second story of the day.  The eminent and execrable Karl Rove and his weekly soapbox that would make Machiavelli blush.  This week he opines about redistricting.  Remember, this is the guy who wrote Dick Cheney's business plan: 

First, target the emerging markets because that's where the growth is at:

Some 18 state legislatures could have an additional task. As many as 10 states will have to combine districts as they lose House seats. Eight states are expected to gain at least one seat each.

Seats will almost certainly move out of Democratic states (such as Michigan, New York and Massachusetts) and into Republican-leaning, faster-growing states (such as Arizona, Georgia, Texas and Utah). Battleground states such as Iowa and Ohio might also lose seats. This process will be marked by a historic event: For the first time since joining the union in 1850, California will probably not get any additional seat in Congress.

Next, use your first mover advantage in those markets as leverage to keep out competitors:

There are 18 state legislative chambers that have four or fewer seats separating the two parties that are important for redistricting. Seven of these are controlled by Republicans and the other 11 are controlled by Democrats, including the lower houses in Ohio, Wisconsin, Indiana and Pennsylvania.

Republican strategists are focused on 107 seats in 16 states. Winning these seats would give them control of drawing district lines for nearly 190 congressional seats. Six of these states are projected to pick up a total of nine seats, and five are expected to lose a combined six seats.

Finally, attempt to set in motion a feedback loop that gives you a permanent competitive advantage by enshrine your ability to change the rules at will so as to squash any new competition.

Control of redistricting also has huge financial implications. The average winner of a competitive House race in 2008 spent $2 million, while a noncompetitive seat can be defended for far less than half that amount. Moving, say, 20 districts from competitive to out-of-reach could save a party $100 million or more over the course of a decade.

It's a great strategy for becoming the permanently low cost outsourced political provider, allowing your clients to lobby at the lowest cost with the greatest effect, hence maximizing their return on investment.  It stacks one bottleneck on top of another in a structural way that makes them all line up.  This is the true meaning of the conservative movement -- resisting any change that the dominant powers disapprove of. 

But notice how when the final strategy is in place, it doesn't really matter how big the government is.  You can start with a big government that sticks its fingers into everything and continually tilts the playing field and then, as the winners emerge and reinforce themselves, you can throw this crutch away and claim that the "market" regulates itself.  The only real threats to the model are deep, disruptive technological changes that fall outside of the existing rules, and your only response to them is obvious -- regulate as much and as soon as possible, and corral these currents within the rule system you already control. 

Now you can see why I earlier qualified my stance on small government.  At any given point in time, you could have big corrupt government or small corrupt government that equally completed the feedback circuit where money buys rules.  Conversely, if this circuit doesn't close, it doesn't really matter whether the government is big or small.  Reasonable people could disagree on how it should be engineered.  Different circumstances (particularly the size of the country) would lend themselves to different rule regimes. 

The real argument against big government is a more subtle, evolutionary one.  Big government that stays clean and stable is very close to being an untenable argument at this point in human history.

PS.  Ignore the meta-meta-meta part about how Rove is using the WSJ to throw his little molotov in the face of democracy -- a fact which would make the unibomber's head spin.

Rhyming echoes

I have a follow up to this one about how our problem is we have nothing to devalue against any more.

It turns out the William White had a piece in the FT yesterday about how to devalue without devalueing.

If the repeated asymmetric use of macro policies has rendered them ineffective, what other policies might help deal with the debt problem?

One possibility would be to try to make existing debt levels more sustainable. Encouraging an orderly deleveraging of balance sheets, both household and financial, is one route. But as saving rates rise, multiplier and accelerator effects might interact to produce a much less orderly outcome than anticipated. Another way to raise debt service capacities would be to increase potential growth through structural reforms. Since a crisis commonly acts as a catalyst for such reforms, they should now be pursued vigorously. At best, however, both routes would seem likely to produce many years of very slow growth.

A second, faster, but initially much more painful way to make debt levels more sustainable is to reduce them. This could be done either through bankruptcies or negotiated workouts, with productive resources being freed for other uses. It might also require restructuring and recapitalisation of lending institutions. Again, there are many impediments, particularly in countries (such as the US) where the debt problem affects millions of households. In addition, justifiable concerns would be raised about the short-term costs of higher unemployment, moral hazard and property rights. Many countries also lack the legal framework to facilitate such measures, particularly for financial institutions. Policymakers should try much harder than they currently are to remove unnecessary impediments to an orderly writing down of debt.

Economics is often about hard choices. If the headwinds of debt have overwhelmed the capacity of macro policies to stimulate real growth, then other, more structural, measures must be turned to. Failing to muster the political will to do so would increase the likelihood of an inflationary solution to the debt problem. There are many historical examples to prove this can be done, though few that stopped short of hyperinflation. Why take this very dangerous path when there are other less dangerous paths to follow?