John Hussman's last three weekly emails have been outstanding. Let's take a look at a couple short snips from the first two articles and then a longer snip from his letter to the Fed.
Textbook Pre-Crash Bubble
November 11: Textbook Pre-Crash Bubble by John Hussman
Hussman: "The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak."
This is exactly how I have felt for two years running. It reminds me of 1999-2000 when tech stocks put on that last big rally. Avoiding a bubble is incredibly hard to do, and this one has been exceptional.
Here is a chart from the article with Hussman's comments.
Though I don’t believe that markets follow math, it’s striking how closely market action in recent years has followed a “log-periodic bubble” as described by Didier Sornette (see Increasingly Immediate Impulses to Buy the Dip).
A log periodic pattern is essentially one where troughs occur at increasingly frequent and increasingly shallow intervals. Frankly, I thought that this pattern was nearly exhausted in April or May of this year. But here we are. What’s important here is that the only way to extend that finite-time singularity is for the advance to become even more vertical and for periodic fluctuations to become even more closely spaced. That’s exactly what has happened, and the fidelity to the log-periodic pattern is almost creepy. At this point, the only way to extend the singularity beyond the present date is to envision a nearly vertical pre-crash blowoff.
At this horizon, even “buy-and-hold” strategies in stocks are inappropriate except for a small fraction of assets. In general, the appropriate rule for setting investment exposure for passive investors is to align the duration of the asset portfolio with the duration of expected liabilities. At a 2% dividend yield on the S&P 500, equities are effectively instruments with 50-year duration. That means that even stock holdings amounting to 10% of assets exhaust a 5-year duration. For most investors, a material exposure to equities requires a very long investment horizon and a wholly passive view about market prospects.
Hugh Hendry Throws In Towel
On November 22, InvestmentWeek reported long-time bear Hugh Hendry threw in the towel. 'I can't look at myself in the mirror': Hendry reveals why he has turned bullish
Speaking at Harrington Cooper's 2013 conference, Hendry said he is no longer fighting the "two-way feedback loop" which is continuing to boost risk assets.
"I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out. I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years' time."
"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."
Trend Is Your Friend Until It Changes
Hendry is now looking for ‘auto-correlations' that benefit from this feedback loop. "You have got to be in things that are trending," says Hendry.
The market has been trending ever since March 2009. There were a few pullbacks along the way, but every one was bought with vigor. Does that mean the next one will be bought?
Hardly. And why should it?
My friend Pater Tenebrarum at the Acting Man blog commented via email ...
"Hendry's change in stance is akin to Druckenmiller covering all his shorts in Internet stocks in November of 1999 and going long tech. The internet stock shorts he covered topped out two weeks later (they topped well before the Nasdaq did), the Nasdaq's final high came in early March, about 3 months later. Thereafter, an 85% decline in the index - and 3/4 of the internet stocks in which Druckenmiller covered shorts eventually went to ZERO, while the remainder fell between 90% to 99%."
Hendry is aware, but unconcerned about that possibility.
Said Hendry ... "I may be providing a public utility here, as the last bear to capitulate. You are well within your rights to say ‘sell'. The S&P 500 is up 30% over the past year: I wish I had thought this last year. Crashing is the least of my concerns. I can deal with that, but I cannot risk my reputation because we are in this virtuous loop where the market is trending."
Wow. Given valuations, crashing should be everyone's big concern. But if it was, prices would not have gotten this ridiculous in the first place.
Reflections on Not Chasing Bubbles
November 18: Chumps, Champs, and Bamboo by John Hussman
“The seed of a bamboo tree is planted, fertilized and watered. Nothing happens for the first year. There´s no sign of growth. Not even a hint. The same thing happens – or doesn´t happen – the second year. And then the third year. The tree is carefully watered and fertilized each year, but nothing shows. No growth. No anything. Then the bamboo tree suddenly sprouts and grows thirty feet in three months.” ? Zig Ziglar
This story is more than a quote about persistence – it’s actually a reasonable description of risk-managed investing.
At bull market peaks, it often seems that the market is simply headed higher with no end in sight, and “buy-and-hold” appears superior to every alternative. Meanwhile, the reputation of value-conscious investors and risk-managers goes from “champ” to “chump.” Then, the bamboo tree suddenly sprouts, and the entire lag is often replaced by outperformance in less than a year. Only after the fact does the reputation of risk-managed strategies surge from “chump” to “champ.” By then, it’s unfortunately too late to be of help to many investors who capitulated in frustration at the peak.
As Jeremy Grantham at GMO has observed, “we often arrive at the winning post with good long-term results and less absolute volatility than most, but not necessarily with the same clients that we started out with.”
Hussman's Open Letter to the Fed
November 25: An Open Letter to the FOMC: Recognizing the Valuation Bubble In Equities by John Hussman
The chart below is from one of the best tools that the Fed offers the public, the Federal Reserve Economic Database (FRED). The chart shows the ratio of corporate profits to GDP, which is presently at a record. The fact that profits as a share of GDP are more than 70% above their historical norm should immediately raise a question as to whether current year earnings or next year’s projected “forward earnings” should be used as a sufficient statistic for long-term cash flows and equity market valuation without any further reflection. Then again, more work is required to demonstrate that such an approach would be misleading. We’re just getting warmed up.
A simple way to see the implications of the present elevation of the profit share is to relate the level of profit margins to subsequent growth in profits over a reasonably “cyclical” horizon of several years. Remember, when one values equities, one is valuing a long-term stream, not just next year’s earnings. Investors taking current-year or forward-year profits as a sufficient statistic should be aware that high margins are reliably associated with weak profit growth over subsequent years.
The next relevant question is to ask why profit margins are presently so high. One might argue that the profitability of companies has achieved a permanently high plateau. Despite historical mean-reversion in profit margins (which tend to collapse over the full course of the business cycle), maybe this time is different. As it happens, we can relate the surfeit of corporate profits in recent years rather precisely to the extraordinary combined deficits of the household and government sectors during the same period. ....
Corporate profits as a share of GDP are nearly the mirror image of deficits in the household and government sectors. A simple way to think about this is that dissaving in both sectors helps to support corporate revenues and limit the need for competition, even when wages and salaries are depressed. It follows that most of the variability in corporate profits over time is driven by mirror image variations in the household and government sectors. ....
The fact is that valuation measures driven by single-period earnings (whether trailing earnings or forward operating earnings) are poorly correlated with subsequent market returns, mainly because they impose the counterfactual assumption that profit margins can be held constant over time.
Though Fed officials including Alan Greenspan and Janet Yellen seem attracted to the seemingly elegant simplicity of these “equity risk premium” models, they seem somehow oblivious to the fact that they don’t actually work.
Why is the historical record of these simple “equity risk premium” estimates such a cacophony of noise? The answer should be immediately apparent. It turns out that the error between these estimates and actual subsequent 10-year S&P 500 total returns (in excess of 10-year Treasury yields) has a correlation of 0.86 with – you guessed it – profit margins. With profit margins at the highest level in history, the record suggests that these models are grossly overestimating prospective equity returns at today's all-time stock market highs. Unfortunately, this evidence also suggests that the faith expressed in these “equity risk premium” estimates by Janet Yellen and others is likely to coincide with their most epic failure in history.
My strong disagreement should not be confused with disrespect, and none is intended, but wasn't it Janet Yellen who in October 2005, at the height of the housing bubble, delivered a speech effectively proposing that monetary policy could mitigate any negative economic consequences of a housing collapse, and arguing that the Fed had no role in preventing further housing distortions? Given the lack of concern with the present elevation of the equity markets, these remarks from 2005 have a rather ominous ring in hindsight:
“First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no.’”
The reason that the Fed does not see an “obvious” stock market bubble (to use a word regularly used by Governor Bullard, as if to imply that misvaluations cannot exist unless they smack their observers with a two-by-four) is because while price/earnings multiples appear only moderately elevated, those multiples themselves reflect earnings that embed record profit margins that stand about 70% above their historical norms.
We can demonstrate in a century of evidence that a) profit margins are mean-reverting and inversely related to subsequent earnings growth, b) margin fluctuations are largely driven by cyclical variations in the combined savings of households and government, and importantly, c) valuation measures that normalize or otherwise dampen cyclical variation in profit margins are dramatically better correlated with actual subsequent outcomes in the equity markets.
If one examines the stocks in the S&P 500 individually, the median price/revenue multiple is actually higher today than it was in 2000 (smaller stocks were more reasonably valued in 2000, compared with the present). This is a dangerous situation. In this context, the dismissive view of FOMC officials regarding equity overvaluation appears misplaced, and seems likely to be followed by disruptive financial adjustments.
One obtains a similar view, with equal historical reliability, from the ratio of nonfinancial equity capitalization to nominal GDP, using Federal Reserve Z.1 Flow of Funds data. On this measure, equities are already beyond their 2007 peak valuations, and are approaching the 2000 extreme. The associated 10-year expected nominal total return for the S&P 500 is negative.
Hussman concludes with a discussion on Fed policy ...
The policy of quantitative easing has run its course. It undermines planning, as every economic decision must be made in the context of what the Federal Reserve may or may not do next. It starves risk-averse savers, the elderly, and the disabled from interest income. It lowers the bar for speculative, unproductive, low-covenant lending (as it did during the housing bubble). It relaxes a constraint that is not binding – as there are already trillions of dollars in idle reserves at U.S. banks, on which the Federal Reserve pays interest both to keep them idle and to avoid disruptions in short-term money markets. It undermines price signals and misallocates scarce savings to speculative pursuits. It further skews the distribution of wealth, and while the extent of this skew has a scarce chance of persisting, the benefits of any spending from transiently elevated stock market wealth will accrue to primarily to higher-income individuals who are not as constrained as the millions of lower-income, low-asset families hoping for some “trickle-down” effect. We have seen numerous variants of this movie before, and we should have learned the ending by now.
Importantly, the magnitude of the “wealth effect” on employment is dismally small. Even if the entire relationship between stock market fluctuations and employment fluctuations was causal and one-directional, it would still take a roughly 40% advance in the stock market to draw the unemployment rate down by 1%. Unfortunately, price advances do not create the underlying cash flows to support them, so the strategy of manipulating stock prices higher also involves a piper that must be paid.
The intent of this letter is not to criticize, but hopefully to increase the mindfulness of the FOMC as to historical evidence, the strength of various financial and economic relationships, and the potentially grave consequences of further relaxing constraints that are not binding in the first place.
Integrity vs. Respect
In the opening paragraph, Hussman, stated (to the Fed) "I don’t question your motives or integrity."
I side solidly with Hussmanon this point although many believe this is all part of some "grand plan" for the Fed or big banks to take over the world.
Yet, I cannot offer Hussman's same sense of "no disrespect".
We are in this mess, precisely because the Fed blows bubbles of increasing magnitude over time. It happens time and time again, and every time banks are bailed out at the expense of the poor and middle class.
The Fed deserves no respect for what they have done and the problems they have caused. They deserve no respect for missing the dotcom bubble, for missing the housing bubble, and for missing this bubble.
John and Aretha can sing "Respect", but I sure can't.
One Hell of a Time To Become a Trend Follower
Everyone who believes in valuation metrics would do themselves a favor to click on the three links by Hussman that I presented, and read the articles in entirety.
As I stated upfront, avoiding bubbles is incredibly hard to do, and this one has been exceptional. But that is precisely the problem with bubbles.
Hussman points out (and I agree) "The associated 10-year expected nominal total return for the S&P 500 is negative."
Read that sentence again and again until it sinks in. Here is another way of putting it. "10 years from now, the S&P is likely to be lower than it is today". That is how over-valued equities now are.
Yes, Hussman sounds like a broken record. And so do I. But this is one hell of a time to become a trend follower.
Mike "Mish" Shedlock
Read more at http://globaleconomicanalysis.blogspot.com/2013/11/hussmans-open-letter-to-fed-problem.html#lSwFEwzTtgUYTpyr.99
The US post office was contemplating stopping Saturday delivery to reduce costs. Instead, the post office has gone the other way, at least for packages.
The LA Times reports U.S. Postal Service to deliver Amazon packages on Sundays.
Giant online retailer Amazon.com Inc. is turning up the heat on rivals this holiday season and beyond under a new deal with the U.S. Postal Service for delivering packages on Sundays.
Starting this week, the postal service will bring Amazon packages on Sundays to shoppers' doors in the Los Angeles and New York metropolitan areas at no extra charge. Next year, it plans to roll out year-round Sunday delivery to Dallas, New Orleans, Phoenix and other cities.
To pull off Sunday delivery for Amazon, the postal service plans to use its flexible scheduling of employees, Brennan said. It doesn't plan to add employees, she said.
Members of Amazon's Prime program have free two-day shipping and, under the new deal, can order items Friday and receive them Sunday. Customers without Prime will pay the standard shipping costs associated with business day delivery.
As consumers increasingly move online to shop, retailers are finding that their shipping policies can be a bellwether of customer loyalty. Though not necessarily offering Sunday delivery, many are testing same-day service.
Wal-Mart Stores Inc. is testing same-day delivery service in northern Virginia, Philadelphia, Minneapolis, Denver and the San Francisco and San Jose region. Last month, EBay Inc. agreed to acquire Shutl, a London start-up that uses a network of same-day couriers to deliver goods ordered online in hours, even minutes.
In March, Google Inc. said it would test a same-day delivery service called Google Shopping Express for online purchases in the Bay Area. Specialty sporting goods store Sport Chalet Inc. began offering a similar service in April.
But adding Sunday service takes the competition to a new level.
Why Go to the Mall?
Competition favors those with a vast array of merchandise and a way to deliver it quickly. Amazon and Walmart are in that class.
If you know what you want, or find what you want online, why go to the mall?
The answer seems to be tradition, or perhaps just to get out of the house. And for some, the walk in the mall is about the only exercise they get.
Same-Day Delivery Options
Why wait two days when you can get it in one?
SEJ reports Google and 6 Other Same-Day Delivery Services.
If you live in the Bay Area, you might be relaxing at home in your pajamas ordering all sorts of goodies and waiting until Google drops it off within the same day. If you haven’t heard, the tech giant is making life all that more instantly gratifying by expanding its same-day delivery service. Google is by no means the only company offering this kind of service, but it’s Google, so this makes it kind of a big deal.
For now, people in the Bay Area can order products from businesses like Walgreens, Nob Hill Foods, Staples, Blue Bottle Coffee, Target and Palo Alto Sport Shop and Toy World and have everything shipped by Google for $5. If this works out for Google, expect the following 6 companies to expand their same-day delivery service.
The behemoth launched its own same-day delivery service just in time to the holiday season in 2012. Costumers can order products from Wal-Mart and have them delivered to their home for between $7 and $10. The service is available in northern Virginia, Philadelphia, Minneapolis, Denver and the San Jose-San Francisco-area.
Shutl was a startup that originated in the UK and is similar to Google’s service, meaning you shop online and Shutl handles the delivery. The company claims that they’re “the world’s fastest, most convenient and best-loved same-day and same-hour delivery service.” Shutl is only available in Manhatten, but there are plans to expand to San Francisco, Atlanta, Boston, Denver, Detroit, Houston, Los Angeles, Miami, Minneapolis, Philadelphia, Phoenix, San Diego, Seattle, Washington, Montreal and Toronto.
The auction giant launched its delivery service, eBay Now, last year and charges $5 per store. What makes eBay’s service standout, besides the one-hour delivery time, is that the company focuses on local stores, however, you can still get stuff from major retailers. eBay Now is available in San Francisco and New York.
TaskRabbit was designed specifically for people who don’t have the time, or capability, to do their shopping. But, this service offers so much more than just having your groceries brought home. Businesses can use TaskRabbit to order and have supplies delivered to the office. There’s also the ability to find house-cleaners or handymen to do those things around the house that you just can’t get to.
Amazon are no strangers to same-day delivery service. The online shopping titan has offered Local Express Delivery Option since 2009 and can be found in Baltimore, Boston, Chicago, Indianapolis, Las Vegas, New York, Philadelphia, Phoenix, San Bernardino Area, Seattle and Washington, D.C. The service costs $8.99 plus plus 99 cents an item.
This startup takes the same-day delivery service to a whole new level. For example, after placing an order, you’re sent a photo and bio of your delivery person, aka you ‘Postmate’. Postmates also will inform you if a product is right around the corner, because that would be pointless for everyone, and they’ll also hook you up with all kinds of stores and restaurants in your neighborhood via Foursquare.
Is Same-Day Delivery What People Want?
In most cases it's not same-day delivery that people want, but rather, free-delivery and lower prices.
According to a study conducted by Boston Consulting Group, only 9% of the 1,500 U.S. consumers surveyed “cited same-day delivery as a top factor that would improve their online shopping experience, while 74% cited free delivery and 50% cited lower prices.” With the exception of some city dwellers with a little extra cash, same-day service isn’t a priority.
Who Is the Winner?
Competition is here, on multiple levels. Companies that offer the fastest deliveries at the lowest cost will have a huge advantage over their competition.
The winner is the consumer who gets faster service at cheaper prices. The loser is big-box retailers with huge shopping areas with little traffic.
Mike "Mish" Shedlock
Read more at http://globaleconomicanalysis.blogspot.com/#IeVDEWEa7AfpUFXM.99
Currency madness has spread to the Czech Republic. Central bank intervention triggered a record plunge in the Koruna vs. the Euro.
Bloomberg reports Czechs Play Koruna Hardball as Intervention Triggers Record Drop
The Czech central bank’s return to currency interventions after 11 years heralds a push for a weaker koruna to ward off deflation and kick-start the economy.
The koruna plunged 4.4 percent to 26.982 against the euro yesterday, its biggest-ever drop and the most in the world on the day, after the central bank sold the currency in the foreign-exchange market. Governor Miroslav Singer pledged to keep intervening “for as long as needed” to spur inflation, setting a target of “near” 27 per euro, a level the koruna last traded at in 2009.
“The central bank signaled willingness to play hardball in its foreign-exchange policy,” Luis Costa, an emerging-market strategist at Citigroup Inc., said by e-mail from London. “For the moment, I believe the ‘ideal level of 27’ will be met.”
Unlike interventions aimed at strengthening the exchange rate, which require sales of foreign currencies that can deplete foreign reserves, the Czech central bank is printing more koruna to drive down its value. The money supply increase may lead to the higher inflation rates that Singer is pursuing.
“The power is unlimited,” Guillaume Tresca, a Paris-based strategist at Credit Agricole SA, wrote by e-mail yesterday. “They can theoretically print as much koruna as they want.”
Hardball in Pictures - Koruna vs. Euro
It seems the "ideal" level of 27 was reached in a day. Of course it is preposterous to propose that anyone, especially central banks have any notion of what the "ideal" level is.
From a consumer standpoint, the more European goods Czech citizens can buy with the Koruna the better. But central banks will have none of that.
About That Eurozone Entry
Wikipedia comments on the Czech Republic Plans to Join the Eurozone.
The Czech Republic planned to adopt the euro in 2012, but its government suspended that plan in 2007. Although the country is economically well positioned to adopt the euro, there is considerable opposition to the move within the Czech Republic. According to a survey conducted in January 2011, only 22% of the Czech population was in favour of replacing the koruna with euro.
One alleged disadvantage of joining the eurozone is giving up the ability to do what the Czech Republic just did.
Of course the ECB is on its own currency debasement mission vs. the US dollar and Japanese Yen as noted in ECB Unexpectedly Cuts Rate to .25%; Draghi Promises Loose Policy for "Extended Period", "Ready to Consider All Instruments"; What Debasement is Next?
Where Does It End?
For years, I have been asking supporters of these competitive currency debasement schemes "where does it end"?
Recently, Ambrose Evans-Pritchard at the Telegraph proposed the ECB devalue the Euro to support growth and end deflation.
For further details, please consider Lunatic Howls for Competitive QE Debasement; Another Swan Dive Into Cesspool of Economic Silliness; Following Lemmings Over The Cliff; It's Madness!
How the hell can competitive devaluation work, when every country can "theoretically print as much currency as it wants" and every country wants a declining currency vs. every other currency to support growth?
Ambrose, I am still waiting for the answer to that question.
Given that Ambrose (and every other misguided monetarist on the planet) proposes a mathematical impossibility, I may be waiting for a long time.
Mike "Mish" Shedlock
Read more at http://globaleconomicanalysis.blogspot.com/#ghWDTwsYrlILTtTw.99
oday, I sing in glorious praise of unhappiness. Lest you think I lost my mind, first consider an Op-Ed in The Hill by life-long friend David Wise. He writes on Ending the Budget Wars.
For the second time in two years the U.S. has stepped back from the precipice of default.
In January, absent agreement to the contrary, a second sequestration will go in effect and on February 7, 2014 the nation would face yet another debt ceiling crisis. The inability of the so-called supercommittee to reach a compromise when given a similar task in 2011 is enough reason for pessimism.
A long-term solution requires that no one come into the talks with preconditions and that everything be on the table. One sign that a successful accord has been reached is that no one walk away from the table completely happy. It is necessary. The time has come.
Common and Uncommon Ground
I am not in complete agreement with everything my life-long friend says. For starters, I disagree with his stance that a default would have been catastrophic.
That's a moot point however, and cannot be proven either way because the precipice was essentially an illusion. We may have been on the edge, but there was approximately a zero percent chance of falling off.
Those small differences aside, I wholeheartedly agree with the three key ideas in Wise's article.
Compromise Misery Needed
In regards to point number 3, Wise did not go far enough. I propose what's needed is for Democrats and Republicans alike to both walk away from the table, not only unhappy, but downright miserable. Here are my proposals for mutual misery.
In return for the above much needed Democrat misery, I would be willing to accept a modest increase in taxes. Of course that would make Republicans unhappy. But unhappiness is not what we need, we need outright misery as follows.
Some issues are non-partisan. For example food crop supports are promoted by farm-state Republicans and Democrats. Drug imports fall along similar lines. Thus we need to spread the misery.
Food Stamp Misery
To get people off welfare and on to workfare, we need to reduce the incentives to collect welfare. This is what I suggested earlier.
My proposal would do something positive for food stamp recipients' health and the budget.
And what better way to make people miserable than to make them eat healthy? Hopefully, miserable enough to seek a job.
I am open to still more misery, as much as it takes, on each side, to balance the budget and lay a foundation for growth.
Make All the Politicians and Lobbyists Miserable
I nearly missed this key point: We need to make all of the politicians, public union advocates, and lobbyists on both sides of the aisle completely miserable. The way to do that is institute serious campaign finance reform.
Vote buying and political pandering on both sides of the aisle are key reasons we are in this fiscal mess in the first place.
To date, the word "compromise" means both sides get all the spending they want, deficit be damned. Worse yet, politicians are all too happy to let lobbyists write the legislation in return for donations. The result is the worst legislation money can buy.
I revised the ending paragraphs with some small changes regarding food stamps, and more importantly to include campaign finance reform, vote buying, and the current meaning of compromise.
Mike "Mish" Shedlock
Read more at http://globaleconomicanalysis.blogspot.com/2013/11/in-praise-of-pronounced-unhappiness.html#LyDLiZXHYoI6g8XV.99
There is little to no incentive in the healthcare industry to hold down costs. Worse yet, the rewards for performing unnecessary surgeries is huge, while the risks of doing them are essentially nonexistent. Here are a couple of articles that show what I mean.
Prostate Cancer Radiation Therapy Rises as Doctors Profit
Bloomberg reports Prostate Cancer Radiation Therapy Rises as Doctors Profit.
Urologists who buy their own equipment to provide expensive radiation treatment are more likely to use it to treat prostate cancer even when the benefit for patients is unclear, research shows.
Prostate cancer is the most common tumor diagnosed in the U.S., where an estimated 238,590 men were told they had the disease this year. While only about 12 percent, or 29,270 men, will die from it this year, all will have to decide how, and whether, they want to treat the cancer.
A study published in the New England Journal of Medicine suggests that profits urologists make from referring patients to their own radiation facilities play an outsized role in the treatment decisions. One third of men whose doctors own radiation equipment get the therapy at a cost of about $35,000 per treatment course. The same doctors prescribed the therapy for just 13 percent of their patients before they had their own equipment and could profit directly.
“The results are striking,” said Jean Mitchell, the author of the report and a professor of public policy at Georgetown University in Washington, D.C. “It does appear that what’s driving this is financial incentives linked to ownership. Their behavior changes dramatically.”
Using claims data from the U.S. government’s Medicare insurance program for the elderly, Mitchell found that urologists who didn’t own the equipment prescribed IMRT for 15.6 percent of their patients in 2010, compared with 14.3 percent five years earlier. Its use among the NCCN doctors stayed constant at about 8 percent, while it soared to 44 percent among a matched-group of doctors who started to refer patients to their own radiation treatment facilities.
“It’s crazy the way the system is set up,” Mitchell said in a telephone interview. “The patients are going to do what their physician tells them to do. The patient becomes almost like an ATM machine, with the doctor extracting as much revenue as they can.”
Physicians in general aren’t allowed to refer their patients for treatment in facilities that they also own, because of the financial conflict of interest. However, radiation, as well as in-office ancillary services, such as doing blood work and x-rays, are exempted under U.S. law.
The analysis found that doctors who owned the IMRT therapy were treating men ages 80 and older just as aggressively as younger men with early stage prostate cancer. Since the cancer is generally slow-growing, and radiation can carry immediate side effects, including erection problems and urinary symptoms, the older patients may experience only the harms and no benefits.
The study bolsters similar findings with other forms of self-referral. In fact, some urologists have incorporated pathology labs into their practices, boosting the number of biopsies they perform, Mitchell said. Research has found similar results in other areas, including advanced imaging and surgery at physician-owned specialty hospitals.
Spinal Fusion Cash Cow
The Washington Post reports Spinal fusions serve as case study for debate over when certain surgeries are necessary.
By some measures, Federico C. Vinas was a star surgeon. He performed three or four surgeries on a typical weekday at the Daytona Beach, Fla., hospital that employed him, and a review showed him to be nearly five times as busy as other neurosurgeons. The hospital paid him hundreds of thousands in incentive pay. In all, he earned as much as $1.9 million a year.
Yet given his productivity, some hospital auditors wondered: Was all of the surgery really necessary?
To answer that question, the hospital in early 2010 paid for an independent review of cases in which Vinas and two other neurosurgeons had performed a common procedure known as a spinal fusion. The review was conducted by board-certified neurosurgeons working for AllMed, a company accredited to audit health-care businesses.
Of 10 spinal fusions by Vinas that were selected, nine were deemed not medically necessary, according to a summary of the report.
More than 465,000 spinal fusions were performed in the United States in 2011, according to government data, and some experts say that a portion of them — perhaps as many as half — were performed without good reason.
The rate of spinal fusion surgery has risen sixfold in the United States over the past 20 years, according to federal figures, and the expensive procedure, which involves the joining of two or more vertebrae, has become even more common than hip replacement.
Washington Post analysis of 125,000 patient records also shows that roughly half the tremendous rise in spinal fusions in Florida has been on patients with diagnoses that experts and professional societies say should not routinely be treated with spinal fusion.
In 2009, a former compliance official at the hospital filed a whistleblower lawsuit alleging illegal financial incentives for doctors. The court filings make available an array of documents — e-mails, testimony, audits. These and other sources allow a fuller depiction of the financial rewards and relationships that depended on treatment decisions. They also show how hospital administrators responded when suspicions arose that a doctor, who was generating millions in profits, may have been performing unnecessary surgery.
Vinas and his colleagues in neurosurgery earned as much as thousands of dollars extra — above their base salaries — for each procedure after a certain threshold. The vast majority of Vinas’s earnings came from such incentive pay, according to legal filings.
According to government estimates, each neurosurgeon at Halifax Health was generating more than $2 million a year in hospital profits. The hospital charged fusion patients an average of about $80,000, according to Florida records on Halifax Health analyzed by The Post, ranking the procedure as one of the more expensive.
Baklid-Kunz detected Vinas’s rapid pace of work in an audit and asked for further review of his surgeries, documents show.
But she was discouraged from investigating further, she said.
“Hospital administrators didn’t want to touch Dr. Vinas,” she said in an interview.
Instead, they referred to Vinas and the hospital’s two other neurosurgeons as “our high rollers,” she said, and told her that rather than cracking down on their billing that “we need to make them happy.”
Medicare In the Spotlight
Medicare, the nation’s health-care system for people older than 65, is at the center of the debate.
The agency estimated the amount of money spent improperly on spinal fusions was more than $200 million in 2011, for example, and most of that was because the treatment was deemed unnecessary, often because a more conservative course hadn’t been tried, officials said.
How could this happen?
The answer, in part, is that the Medicare system is not designed to discourage doctors from performing it, according to past and present Medicare officials.
At a very practical level, the bureaucracy offers little incentive to weed out unnecessary treatment: Medicare hires contractors to issue payments to doctors, and those contractors are paid based not on how many claims they reject but on how many they approve.
above emphasis mine
US Healthcare System Greased for Fraud
Medicare pays contractors based on how many claims they approve. Good grief!
Very expensive prostate radiation therapy is conveniently exempt from self-referral laws.
Although physicians in general aren’t allowed to refer their patients for treatment in facilities that they also own (with the exception of radiation therapies), the problem of incentives is universal, across the board.
Physicians paid on an incentive model, like spinal fusion star surgeon Federico C. Vinas, have every financial incentive to perform needless operations.
Every step of the way, the US medical system is greased to perpetuate fraud against taxpayers, against patients, against insurers.
US Healthcare System Explained in Six Succinct Points
It would have been nice if Obamacare fixed some of the above problems. Unfortunately, Obamacare did not fix any of them.
Fraud, ridiculous amounts of paperwork, and incentives to do the wrong thing were everywhere you looked before Obamacare. The same problems exist now.
Worse yet, Obamacare added to the mess by over-charging millennials and their kids, and undercharging smokers and others with unhealthy lifestyles. Except for those below certain wage thresholds, insurance costs are likely to increase.
Mike "Mish" Shedlock
Inquiring minds are monitoring the Fed's Balance Sheet.
click on chart for sharper image
One more week like this and the FED balance sheet will be $1 trillion more than last year at this time. Currently now at $980 billion with this past week adding $20 billion.
Breakdown From Year Ago
Of US treasuries, the Fed added (and holds) precisely $0 in short-term bills.
Of US Treasuries, the Fed added 16 Billion in Inflation Indexed notes
Obviously inflation is not a concern to the Fed. Bank profits are.
The Fed is pumping money into the economy at at rate of $85 billion a month. Banks cannot use the money and are not lending it. The money piles up as excess reserves and the Fed (taxpayers) pays interest on excess reserves.
Nonetheless, the Fed has a clever idea! It proposes a new tool to pay banks even more interest on money banks don't lend and cannot use (as an alternative to shrinking money supply).
With little fanfare or analysis by mainstream media as to what is really happening,Bloomberg reports Fed Gets Bigger in Markets as QE Prompts New Tools.
The Federal Reserve is getting more involved in debt markets as it tries to compensate for the impact of its almost $4 trillion balance sheet on short-term interest rates.
Policy makers are testing a new tool intended to improve their control of near-term borrowing costs. The facility would allow banks, broker-dealers, money-market funds and some government-sponsored enterprises to lend the Fed unlimited amounts of cash overnight at a fixed rate in exchange for borrowing Treasuries in so-called reverse repo transactions.
The facility is the latest innovation from a central bank that has participated on an unprecedented scale in U.S. debt markets since the credit crisis began in 2007. It’s designed to help policy makers -- buying $85 billion of bonds a month -- siphon off excess cash in the banking system when they begin to tighten policy. Three rounds of so-called quantitative easing have enlarged the Fed’s balance sheet to almost $3.8 trillion.
The new tool -- called the fixed-rate, full-allotment overnight reverse repo facility -- also is aimed at helping Fed officials address distortions in the market caused by their securities purchases.
“It will serve to put whatever floor they want under rates,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “You’re providing pretty broad-based access to Fed balances as an investment option.”
While the Fed gained the ability in 2008 to pay interest on cash it holds in the form of excess bank reserves, that tool has limited effect in anchoring borrowing costs because only banks could park their funds at the central bank, Crandall said. By now offering to pay a fixed rate to a wider range of counterparties for their cash overnight, policy makers should be able to improve their control of near-term rates, he said.
“By offering a new, essentially risk-free investment, one would expect that anyone with access to such a facility would generally be unwilling to lend instead to someone else” at a lower rate, New York Fed President William C. Dudley said in a speech in New York Sept. 23.
Where Does It End?
From the Bloomberg article, one person sees things correctly. ...
With “the amount of bonds that have been piling up on the Fed’s System Open Market Account” there “has been a collateral shortage,” said Jim Bianco, president of Bianco Research LLC in Chicago. “What worries me about the Fed is that in reacting to the fact that their actions have created an unintended consequence in a free market, instead of saying ‘Oh, maybe we ought to re-think these actions,’ their answer is ‘No, we’ll go manipulate that problem now.’ Where does this end?”
Mike "Mish" Shedlock
Read more at http://globaleconomicanalysis.blogspot.com/2013/10/new-tools-more-pure-bank-profit.html#Up6c6j3apsJxWRWB.99
NEIL CAVUTO: What do you make [of Obamacare]? Obviously, a lot of people have been focusing on the law but not really cognizant of the privacy part of the law, and how hackers could have a field day with it. Is it that bad?
JOHN McAFEE: Oh, it is seriously bad. Somebody made a grave error, not in designing the program but in simply implementing the web aspect of it. I mean, for example, anybody can put up a web page and claim to be a broker for this system. There is no central place where I can go and say, 'Okay, here are all the legitimate brokers, the examiners for all of the states and pick and choose one.'
Instead, any hacker can put a website up, make it look extremely competitive, and because of the nature of the system, and this is health care, after all, they can ask you the most intimate questions, and you’re freely going to answer them. What’s my Social Security number? My birth date? What are my health issues?
McAFEE: Well, here's the problem -- it's not something software can solve. I mean, what idiot put this system out there and did not create a central depository? There should be one website, run by the government, you go to that website and then you can click on all of the agencies. This is insane. So, I will predict that the loss of income for the millions of Americans who are going to lose their identities -- I mean, you can imagine some retired lady in Utah, who has $75,000 dollars in the bank, saving her whole life, having it wiped out one day because she signed up for Obamacare. And believe me, this is going to happen millions of times. This is a hacker's wet dream. I cannot believe that they did this.
McAfee is now a subsidiary of Intel. Click on the first link above for the history.
This story on Real Clear Politics came out a couple weeks ago, but I just saw it. I believe the risks described by McAfee are very real.
His estimate "this is going to happen millions of times" does seem a bit far-fetched.
Mike "Mish" Shedlock
Read more at http://globaleconomicanalysis.blogspot.com/#4ZkPemF74Ur8301U.99
The establishment survey showed a gain of 148,000 jobs. July was revised lower, from +104,000 to +89,000. August was revised higher, from +169,000 to +193,000. The net effect was +9,000 more than previously reported.
This was the third straight month of revisions. The previous two revisions were significantly lower. Perhaps the BLS has numbers they are happy with now.
The unemployment rate dropped 0.1 to 7.2%. It's the household survey that determines the unemployment rate, not the establishment survey. So let's take a look at the factors.
Explaining the Unemployment Rate Drop
Employment rose more than the labor force, so the unemployment rate declined.
September BLS Jobs Statistics at a Glance
Quick Notes About the Unemployment Rate
September 2013 Jobs Report
Please consider the Bureau of Labor Statistics (BLS) September 2013 Employment Report.
Total nonfarm payroll employment rose by 148,000 in September, and the unemployment rate was little changed at 7.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in construction, wholesale trade, and transportation and warehousing.
Click on Any Chart in this Report to See a Sharper Image
Unemployment Rate - Seasonally Adjusted
Employment History Since January 2009
click on chart for sharper image
Change from Previous Month by Job Type
Hours and Wages
Average weekly hours of all private employees remained at 34.5 hours. Average weekly hours of all private service-providing employees was flat at 33.3 hours. Average hourly earnings of all private workers rose $0.04 to $20.24. Average hourly earnings of private service-providing employees rose $0.05 to $20.02.
Real wages have been declining. Add in increases in state taxes and the average Joe has been hammered pretty badly. For 2013, one needs to factor in the increase in payroll taxes for Social Security.
For further discussion of income distribution, please see What's "Really" Behind Gross Inequalities In Income Distribution?
BLS Birth-Death Model Black Box
The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.
The Birth-Death numbers are not seasonally adjusted, while the reported headline number is. In the black box the BLS combines the two, coming up with a total.
The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.
Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.
Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.
Birth Death Model Adjustments For 2012
Birth Death Model Adjustments For 2013
Once again: Do NOT subtract the Birth-Death number from the reported headline number. That approach is statistically invalid.
In general, analysts attribute much more to birth-death numbers than they should. Except at economic turns, BLS Birth/Death errors are reasonably small.
For a discussion of how little birth-death numbers affect actual monthly reporting, please see BLS Birth/Death Model Yet Again.
Table 15 BLS Alternate Measures of Unemployment
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Table A-15 is where one can find a better approximation of what the unemployment rate really is.
Notice I said "better" approximation not to be confused with "good" approximation.
The official unemployment rate is 7.2%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.
U-6 is much higher at 13.6%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.
Labor Force Factors
Were it not for people dropping out of the labor force, the unemployment rate would be over 9%. In addition, there are 7,926,000 people who are working part-time but want full-time work.
Grossly Distorted Statistics
Digging under the surface, much of the drop in the unemployment rate over the past two years is nothing but a statistical mirage coupled with a massive increase in part-time jobs starting in October 2012 as a result of Obamacare legislation.
Mike "Mish" Shedlock
Read more at http://globaleconomicanalysis.blogspot.com/2013/10/establishment-survey-148k-jobs.html#aZJDelT4Pvr6wIaS.99
Want to complain about the shutdown to your Senator? Make a suggestion? Tell him or her you approve of the shutdown?
Mish reader Keith did.
Here is the response Keith received:
Subject: Reply from Senator Dianne Feinstein
As a result of the Government shutdown, my office is currently unable to respond to your email. I will respond to your concerns as soon as possible.
"Free" Taxpayer-Sponsored Vacations
Feel sorry for the displaced government workers temporarily out of a job? Don't be.
House votes to approve back pay for furloughed workers
As the fifth day of the federal government shutdown began, members of the House came together in a moment of rare bipartisanship to pass a bill, by a vote of 407 to 0, approving back pay for furloughed government workers.
President Obama has expressed his support for the measure.
Senate Majority Leader Harry M. Reid supports the measure, but said Saturday that if furloughed workers are guaranteed back pay, there’s no reason to keep them out of work.
“It’s really cruel to tell workers they’ll receive back pay once the government opens and then refuse to open the government,” Reid said on the Senate floor, suggesting that House Republicans have authorized a “paid vacation” for furloughed workers.
Furlough Pay Would Negate Shutdown Savings
The Boston Globe reports Furlough pay would negate shutdown savings
The conservatives who propelled the first federal shutdown in 17 years have argued they are fighting for smaller, less costly, less-intrusive government. But a vote over the weekend to grant back pay to furloughed federal workers would negate any savings from a government shutdown and is more likely to raise net costs to taxpayers, according to government and outside estimates.
The move highlights another peculiarity of shutting down the government: under Washington’s political calculus, sending employees home for an indefinite period does not save money.
Instead, if the Senate agrees and President Obama signs the legislation as expected, it will mean hundreds of thousands of workers will get what amounts to extra paid holidays — which they didn’t want — even as millions of Americans are unable to visit national monuments, process loans, or obtain other services.
But the act of shutting things down has resulted in a number of head-scratching scenarios, particularly in the nation’s capital, which is heavily dependant on federal funds.
Law enforcement officials were guarding one entrance to the National Zoo last week, because employees were not supposed to be working there and visitors were not allowed inside. Yet just a few feet away, contractors were hard at work rebuilding a second entrance.
There was also a symbolic barricade placed in the middle of a major bicycle path that did nothing but force riders to weave momentarily before resuming their unauthorized rides. Such scenes were playing out across the country.
Want to Complain?
Care to issue a complaint about this blatant stupidity?
If so, Email Senator Dianne Feinstein
You may also wish to Email House Speaker John Boehner.
Contacting Boehner is more difficult because he makes you go through a form verifying your mailing address to make sure that you live in his district.
With a little playing around, I found a couple of zipcodes that work: Springfield Ohio 45502-1307 or Springfield Ohio 45502-1311.
In any case, don't expect an intelligent answer from Feinstein or Boehner (or from anyone else in Congress).
Mike "Mish" Shedlock
Read more at http://globaleconomicanalysis.blogspot.com/2013/10/government-shutdown-ironies-of-day-no.html#FUtS08ZHDAx4jyHp.99