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A Fiasco Here, A Fiasco There

August 3, 2009


Cash for ClunkersGood morning. Another positive week for the market last week, but the rate of advance slowed markedly. The SPY was up from 98.06 to 98.81, or .8% on the week. This increase was a little unusual given that the VIX was actually up significantly on the week, from 23.09 to 25.92. This morning, early, the S&P Futures are up another 10 points after the good car sale numbers following the “Cash for Clunkers” week. We also had a slew of Economists come out over he weekend, most notably Alan Greenspan, saying the recession is over and growth will be better than expected. It is almost frenzied, if you are a prognosticator, to get on board with how good things are going to get very rapidly.

There is a satirical newspaper given away in Chicago (and maybe elsewhere) called “The Onion”, and I have to recollect a headline of theirs from several months ago “America desperately seeking another Bubble.” It is not as crazy as it sounds, and may actually be very on. As to market levels, I always try to not read so much into the current level or try to fight it too much. In my opinion, a very serious decline in real income and capacity in this country was masked by various asset bubbles, including housing and stocks. It did not matter if your wages were stagnant vs. inflation (or actually declining) because your house was going up in value, or your stocks were going up. The inflation associated with necessary things like health care and higher education, maybe throw in state and local taxes and fees, was astronomical compared to rises in median real wages. In my years at Notre Dame I was able to earn, at somewhat menial but interesting jobs (taxi driver, janitor at Chicago Public Schools, truck dock worker) roughly $1,500 –1,800 a summer plus Christmas break. That corresponded to roughly one half of my Notre Dame education at that time, which I recall was in the $3,500 range per year. Now it is a challenge for someone to exceed what I was able to make, but the tuition is nearing $50,000.

That is an amazing change, not only in the economics of the land, but in the social landscape as well. Everyone needs a huge loan, or a huge handout (scholarship). The more money people (in their largess) and governments pour into education to “help” those disadvantaged and unable to pay, the more every institution raises the number in an effort to really stick the few who can pay the totally unjustified number. The reality, from an economic standpoint, is that the huge amounts of money thrown in to “help” those unable to pay the absurd costs of higher education in essence insures that those costs will become more absurd, as the general availability of outside funds will never cause them to be addressed.

Why am I on this subject? I am on it because I am a real fan of simplicity in economic things. Higher education should not cost anywhere near what it does, and as hard of a concept as it is to grasp, the more good meaning people try to “help” in the manner they do it only collectively makes it worse. The same is true for the new health care reform. I know everyone sees me as this huge liberal, but that does not mean everyone is correct. There is a conundrum here, no one wants to pay for someone’s health care that does not act to take care of him or her self, but we really do not want to see people bleeding to death outside of emergency rooms either. So our current system is not unlike the fiasco in higher education. The people who pay at hospitals essentially pay for those who cannot pay, with the same sort of gifts, subsidies, and etc. by well meaning people and governments “helping” out. The jumble created makes it very difficult to control costs (notice I did not say control who gets what treatment), and to even know what costs really are. There is a mess of people paying too much because they can pay, people paying not much or the little available on Medicaid, a huge rip off of government (in some cases) called Medicare, insurance companies that have cut deals, etc. God help the person who actually walks in and wants to pay cash.

Now we have some sort of fix that some people (who seem to want to remain anonymous) have put on the table. Estimates range to over $1 trillion for this fix to take place. The funny thing is that the over-riding idea of the fix actually makes sense, that if you somehow cover those who are not now covered the costs to those paying should go down and the subsidies given to hospitals for care of the non-paying should go down. Just like President Johnson’s War on Poverty (where the story was that if you divided the amount of money spent/wasted by the amount of poor people and sent them a check you would have no poverty) this bill seemingly looks to reward/waste/ whatever its way to the same end. For example, I just did a little research on a health insurance website. That site says that a 27-year-old male who does not smoke can get a very solid plan ($2,500 deductible, 20% co-pay, and $30 Doc visit) for about $1,400 per year. Supposedly there are around 60 million uninsured in this country, certainly not all healthy 27-year-old males who do not smoke. But lets say that half are either children or people in their 20’s, if so we can insure over 35 million people for $50 billion a year, a fraction of what we paid some of the crooked financial firms. If we want to cover these people, let’s just cover them, not with some absurd plan that will waste everyone’s money (and reward anyone who ever sent a check to a lawmaker or lobbyist). With even half of those not now insured covered the financial stress on hospitals and state and local governments would surely decrease dramatically, federal subsidies to hospitals could go down, and those now covered should pay somewhat less. Instead, let’s conjure up some huge stew.

In regards to the markets, the recent very fast run-up has most of those in the PIP Program sitting with calls a little deeper in the money than we would like. Obviously a little “pause” would be nice, giving us a chance to catch up. Will we get the chance to catch up and eventually capture a lot of the rally? Not sure, but it does seem like we have moved up pretty quickly on a lot of federal induced good times. Does it bother anyone else that as soon as the government becomes an owner in the auto industry you and I start giving money to people to buy cars? Can the recovery be real, or is it just a much bigger mirage than the month George Bush sent everyone the $1,000 check? Time will tell, but I certainly do intend to roll our short calls up at any opportunity the market may provide.

We will be having a PIP seminar on August 29, 2009, here in the PTI offices. Our website will keep everyone informed. www.PTISecurities.com/Education.htm