Wednesday, July 30, 2008

The Health Care House of Cards

I recently saw an estimate that health care costs are expected to rise at a rate of 10% per year for at least the next two years. The reason is simple. We have decided that everyone should have a right to health care. When a new technology, drug, treatment or aid comes out that can help people, they should have it, regardless of the cost. Of course prices are going to continue to rise. This only accelerates the push to have the government cover people who can't afford insurance. That number should grow exponentially under the current system.

At a 10% per year increase, 20 years from now, family insurance coverage would cost something in the neighborhood of $80,000 per year. Obviously this is not sustainable. Something has to give. You can cap prices and thereby halt innovation and invention, or you can change the system to where the receiver of the service pays at least a high enough percentage of the cost that they have some incentive to seek value. Right now, the incentive is to spend as much as you can. Otherwise you feel like a chump for paying all those premiums for other people's health care.

One way or another, the clock is ticking on our health care system. For better or for worse it's going to look very different in 2028.

Tuesday, July 22, 2008

The Upside of Foreign Oil

Our dependence on foreign oil has been pointed to as a national security concern, and correctly so. Our economy is dangerously vulnerable to policy decisions of other governments.

T. Boone Pickens pointed out that our purchase of foreign oil at these prices represents the biggest transfer of wealth in the planet's history. That's true, but not all bad. It's not something we want to perpetuate, but there are positives. While some are spending oil money on weapons and thugs, many are building resorts, theme parks and diversifying their economies. What they are going to wind up with is quite a bit to lose.

Kuwait, Jordan, Bahrain, UAE, Saudi and others in the region don't want to see their new found gems blown up by a madman on a mission. Tolerance for terrorism is inversely proportional to an area's wealth and the extent to which the average Joe (or Omar) benefits from it.

Fundamentally, a highly regulated market, controlled by state cartels and a group of companies kept exclusive through various barriers to entry is a bad situation and we should seek to inject free market forces into energy. But middle eastern countries acquiring wealth, in and of itself, is not necessarily dangerous. If the wealth is put to productive use it could actually help stabilize the region and save us a bundle in the long term.

AlGore's 10 year proclamation may be naive to say the least, but oil does have a limited shelf life. Not necessarily because we'll run out, but because the masses want something else and eventually the market's going to give it to them. The wiser governments in the middle east recognize that and are working toward reducing their own dependence on oil revenues. Those who do not are fools, and you know what they say about a fool and his money.

Government Action on the Economy

There's a lot of hand wringing and finger pointing going on over the state of the economy. Housing is still in trouble as is the banking sector, and business is generally slow across the board.

While it is time for the powers that be to take a good look at what they do and how it effects the markets, they should take some cues from history.

It will be a while before the events of the last few years and the coming couple of years will be carefully and more objectively analyzed. There are still aspects of the 1929 crash and the Great Depression that are vigorously debated today. Still there are a few things to remember.

You seldom see an analysis that says, the thing that pulled us out of the downturn was increased government regulation, or higher taxation, or restricting trade. There's a problem, maybe several, but I'll bet a dollar it has to do with the government trying to control too much, not too little.

I hope government officials can resist the temptation to grab headlines by offering more controls. Freedom is what fuels this train. What we need now is more fuel.

Friday, July 18, 2008

Salmonela Tomato Scare - An abundance of government

About 1200 people across the country reported getting sick due to the recent salmonela outbreak. The Food and Drug Administration, out of an "abundance of caution" approach, pointed the finger at tomatos. Not surprisingly, tomato sales plummeted. So far, it's estimated that the tomato industry is out 100 million dollars. That does not include others in the supply chain; truckers, retailers, restaraunt owners.

The estimate of small businesses that will close due to the scare is already in the hundreds and may end up in the thousands. The FDA later said that maybe it wasn't the tomatos. It might be jalepeno peppers or avacados. I guess they figured that misery would like a little company.

Today the FDA has cleared tomatos and has admitted they have no idea where the outbreak came from. The "abundance of caution" approach is really a "cover your butt" approach. It exists in any large organization where it's better to take a wild guess than to admit that you don't know.

If the FDA had simply been honest and said "There's been a salmonela outbreak. We're still unsure of the cause. We'll keep you posted." There would not have been a single additional illness, since they were giving erroneous advice in the first place, and at least hundreds of small businesses would not have been financially destroyed.

Americans want quick and decisive reaction to problems that are the legitimate concern of the government. They also want competence. That includes the wisdom to know that you don't have enough information to take a particular action, no matter how it will play with the public. When action is taken based on deliberate application of logic and reason to established facts, that's competence. When action is taken because one feels it's time to take an action, any action, that's panic.

Wednesday, July 16, 2008

It's bumpy at the bottom

I wont make a call that the economy or the stock market is ready to surge tomorrow, but the current atmosphere looks like a bottom. The bottom is not a flat line however. Look for stocks to trade wildly from one end of a range to another, as well as commodities, with stocks making higher highs and lower lows while commodities do the reverse.

What's different now from last month? Earnings are coming in stronger than expected. Oil use is dropping in the world's biggest market. The president lifted the executive order banning offshore drilling, the public is overwhelmingly in favor of more drilling in addition to alternatives, T. Boone Pickens even put forward his own energy plan.

The fed reacted quickly and decisively to the current downturn. While you may debate the actions taken, the problem was quickly acknowledged and dealt with. Stimulus checks were approved early on. Again, even if you don't agree with the method, the fact that the government was able to react so quickly to a downturn is a notable achievement. The government managed to largely stay out of the housing market. They did put systems in place for borrowers and lenders to communicate and negotiate more directly and efficiently, but did not take control.

Good news broke out. In Iraq, we may be ready to bring home as many as 100,000 troops by Spring (although 30,000 may wind up in Afghanistan, still a good net draw-down). Iran has been rattling its sabre, but behind the scenes, seems ready to deal. Oil inventories are up, consumption is down, new fields have been discovered and new technology is bringing new options online. We may not all agree on what specific action we take from here, but one thing is clear: Americans are tired of being sick, and sick of being tired. We will not sit still and simply let the world "happen" to us.

The US is poised to recover much more quickly than other parts of the world. It seems that Europe and Asia are only now beginning to feel the pain. Transparency makes all the difference. The US took its medicine at the first sign of symptoms. Interest rates came down, despite a weak dollar, banks wrote off bad debt and tightened credit requirements. In other countries, mistakes and short-comings are often covered up. Bad debt may remain on the books for years. If you don't acknowledge a problem, you can't adapt for it.

The pain may not be over, but I think the hemorraging has been contained. A lot of people lost a lot of wealth and assets, but this is America. We dust ourselves off and do it again. Hopefully a bit better prepared for the next, inevitable bumpy patch.

Tuesday, July 8, 2008

Remaking the Housing Market

The housing market is in the tank. But it's not due to lack of demand. In fact, the number of homes sold on an annual basis has fallen below the growth in the number of households. Something's gotta give.

Lenders, in general, are not in a position to loosen up just yet and most home buyers aren't walking around with $200K in their pocket. So how do you get the deal done?

First, look at what it is the home buyer is really shopping for. Why do people buy as opposed to rent? The number one reason is predictability. It's not "ownership", since, as many have discovered, if you have a mortgage, you don't own it. However, buying can give you a fixed monthly payment for a long time and as long as you make your payments, nobody can tell you to leave.

What if you worked those features into a rental or lease deal? Forget about what's standard and think about giving the shopper what they're looking for while generating good cash flow for yourself. Don't wait for the banks to get healthy. Get on with business.

Here's an example. I have a house that would normally result in a 30 year fixed rate payment or monthly rental rate of about $1000. For many would-be home buyers, making the payment is not the issue at the moment. Getting the loan is. They don't want to rent, because they don't like the prospect of renewing a lease every 3-5 years. What if they had an open-ended lease option at a fixed rate? You offer to rent them the property at $1100/month for as long as they'd like. The lease could only be terminated on your end for lack of payment or some kind of criminal behavior. In any case, as long as the customer continued to make payments in full and on time, the rate remains the same and they can't be asked to leave.

A minimum term would be in order. Say 12 months, with 60 day notification of intent to move. Details could vary (non-transferrable, no sub-letting, etc), but the general idea is giving the renter predictability and security, while still having the ability to move if/when it suits them as opposed to when their lease is up. This may seem like a big risk on the part of the owner, but in reality, people tend to move every 5-7 years anyway, so you wont necessarily be locked into a below market deal for an extended period of time. Having several rental properties dilutes that risk even more.

It's similar to "rent controlled" properties except that because it's not a government program, you could tailor it to make sense from your perspective as well as the renters, and tweak it from deal to deal. One thing you've gotta notice about rent controlled properties: they're never empty.

There is housing available. There is demand for housing. When the institutionalized, generally accepted practices aren't doing the job of putting the two together, think of another way.

Friday, July 4, 2008

Happy Birthday America

Tis the season to reflect on what it means to be an American. What is it we’re so proud of? What makes this country unique in the world?

Is it our “shared values”? That hardly seems possible since we so often and so vehemently disagree on so many of them. Is it capitalism, democracy? No, those are great things, but not unique to America.

So what can we point to and say “That’s what being an American is all about.” I would submit that America’s greatest asset is not its capacity to induce conformity to a common way of thinking, but its capacity to enable hundreds of millions of individuals with a wide variety of opinions, viewpoints, perspectives and values to live, work and play together in relative peace. Our uniquely American common value is the recognition that so long as we agree to a few fundamentals rules of engagement among individuals, we don’t need to all have the same values.

When I see political opponents going at it tooth and nail one minute and making fun of themselves and each other the next, that’s America. When I look around the grocery store and see whites, blacks, hispanics, asians, and arabs browsing and greeting each other and nobody’s throwing rocks or blowing anything up, that’s America. When I’m at a social gathering and an openly gay person is debating a fundamentalist Christian about gay rights and they agree to disagree just before moving on to discussion of the Bronco’s prospects for next year, that’s America.

In other countries around the world discontent and dissent are expressed with violence and a seeming urgency that if one group’s view doesn’t win out over the other group’s view, life as we know it will come to an end. The emphasis is on the group, whether it be a political party, a religion an ethnicity or some other entitity that has been raised above the individual.

What has made the American experiment a success is the recognition that the core of independence, the foundation of freedom, is the individual. That doesn’t mean we all agree with each other. It doesn’t mean we all accept the validity of other’s choices. In fact the word “tolerance” has become widely misused and misunderstood. If you agree with or accept something, you’re not tolerating it. When you disagree with something or someone, but allow them to be as wrong as they want to be so long as they do you no harm, that’s tolerance.

It’s an odd dynamic. We are a diverse group held together by the will to preserve our individuality. That’s what makes us strong. That’s America. That’s what our men and women in uniform put themselves in harm’s way to protect and preserve every day.

I hope we never lose sight of that. Happy Independence Day!