4 REASONS YOUR HEALTH INSURANCE WILL INCREASE BY 50% IN THE COMING YEAR

I haven't seen much information that is helpful to aid employers in preparing for the impact of the implementation of Obamacare in 2014.  Today, I happened to read a great blog post which summarizes the real results that will come from the passage of the greatest change to our entitlement system since Social Security and Medicare.  My friend, the owner of Texas Health Design penned a great article that needs to be read and reposted and retweeted.  With his permission I've included it here in the Goatmug blog for your reading.  If you are in many of the southern states and need health insurance, make sure to go to his site and get a quote.  www.texashealthdesign.com

Also, I suggest that you add his blog to your blog visits.  He posts pretty infrequently, but when he does, it is worth the read.  http://texashealthdesign.com/thdblog/

BAD NEWS NOW IS BETTER THAN LATER
I hate to tell you the bad news, but it is best to get a dose of reality earlier than it is to have a shock when bad things hit. Despite the fact that our leaders told us that we could expect lower healthcare rates, you’ll be paying more for health insurance next year. Politicians have a funny way of doing things and often the name of their legislation is an indication of the coming irony. While the sweeping healthcare law that passed in 2009 became dubbed, “Obamacare”, the formal name for the legislation is the Patient Protection and Affordable Care Act. Washington insiders must have simply chuckled as they must have known that the law would do anything but make healthcare affordable!
The re-election of President Obama ushers in the notion that Obamacare is here to stay and while Republicans will gnash their teeth and complain and threaten to defund specific portions of the bill, they really cannot do anything to prevent the wholesale change to the healthcare distribution system in the United States. Don’t get me wrong, the medical and healthcare system is cracked, but I’m not sure the solution is to simply break it off entirely and throw it in the trash. Many of the anti-capitalists and socialists in our country proclaim that this “fix” is the ultimate deathblow to evil insurance companies and will usher in a one-payer system for the United States. Perhaps we’ll see this, but one thing about those insurance companies, they are pretty smart. In recent months we’ve seen them acquire large physician and medical practice specialty groups, purchase medical billing firms, and also electronic medical record firms in an attempt to own the entire process. In their eyes you may squeeze their profitability on the insurance side, so they’ll simply own everything.

Now the election has passed, insurance companies have about 13 months to prepare for all of the final steps of implementation required by January 1^st 2014. Because of this, every purchaser of health insurance (whether a mega corporation, small business, or individual policy buyer) will get a rude awakening over the next year. How is it possible that the Affordable Care Act could make health insurance unaffordable? It really is simple, there were provisions within the law that mandated specific changes to how health insurance premiums were calculated and also requirements that prescribed how much or little insurance and risk could be taken. In the following paragraphs I’ll highlight four reasons why your health insurance premiums will increase by 50% by your next one or two renewal cycles. These mainly focus on group plans, but the same metrics will affect individual policies too so we’ll see a convergence to higher prices in the coming year.

As you read this you might be inclined to interpret this as condemnation that the law’s application is wrong. I would argue that I’m not saying that at all. I am simply reporting what the impact will be on health insurance purchasers. The key change that is made through all of their adjustments is simply that there is a fundamental cost shift going on. In the past, sick and unhealthy people or folks that used the system or cost the system more paid more. In the new system, sick and unhealthy or statistically higher users actually pay less AND their portion is shifted over to the healthy non-users. That is the key, just because the sick people pay less doesn’t make the cost disappear, they end up being the cost of other people. I argue that this is fundamentally wrong.

GENDER NEUTRAL PRICING
Let’s face it, women consume more health and medical services than men on a typical basis. I know this because my wife visits the doctor once a year even if she isn’t feeling poorly. Men on the other hand don’t often use their preventative care benefits and won’t even visit a physician even if they are ill or know that they are in need of attention. While I’m making a broad generalization, it is true from an actuarial perspective as well and insurance companies created pricing for men and women based on their consumption of health services. As a result of this evidence, men received cheaper health insurance rates than women. Obamacare legislates that insurance companies can no longer do this. The effect of the law is that men and women will no longer receive prices that are different based on their gender. As a result, we may see some policies for women go down in price, but policies for men will go up significantly. This is the first example of cost-shifting.

AGE BASED PRICING
A sixty-four year old will go to the physician much more than a twenty year old typically. As a result of this, insurance companies were creative enough to create pricing metrics that essentially included eight pricing bands where as a policy holder aged their premiums would go up. To clarify, that meant that age based calculations could be a factor of eight to one where the older person could pay eight times the amount of a young teen. In the new system, the spread between an eighteen year old and a sixty four year old insured can only be three times higher, meaning that there is much less difference in available pricing for insurance companies to target. In this case the impact will mean that younger people that consume significantly less health services will pay much more for their coverage because insurance companies will tighten up their factors and raise the lowest premiums and slightly reduce the premiums for older folks. Again, just another example of how the new law passes someone’s actual cost to others.

INABILITY TO ADJUST BASED ON PRE-EXISTING CONDITIONS
The third blow to consumers in the legislation is that insurance providers cannot rate a policy based on a person’s health conditions. In other words, a fifty year old applicant with cancer and a history of four heart attacks will receive the same price as a fifty year old personal trainer with no medical history. As a result of this stipulation, healthy purchasers of insurance will absolutely pay more as the average premium that insurance companies receive must rise to absorb the new influx of sick people that will rush to obtain health insurance. In the past, individual insurance policies could be declined as a company would not want to insure a person with a history of cancer and four heart attacks. In 2014, the health insurance provider MUST insure them and therefore they will adjust pricing for everyone to make up for the higher costing sick applicants they will receive in the future.

MANDATED LOWER DEDUCTIBLES
I think many have discussed one or two of the pricing adjustments discussed above, but one other change that is required that will hurt many is simply not being discussed. A provision of the Affordable Care Act requires health insurance plans to have a minimum of $2000 deductible. As health costs and health insurance costs have risen over the years, employers have struggled to find a way to afford health plans to provide their employees coverage. As a result of increasing premiums, employers have decided to offer higher deductible plans in an effort to control their expenses. The Affordable Care Act simply attacks this coping mechanism by mandating that employers cannot offer plans with higher deductibles to their employees. I estimate that more than 50% of the small employers here in Texas use plans with a deductible that is greater than $2000. What this means is that employers must now purchase a lower deductible plan which will increase their monthly premium costs significantly.

I am currently working with a small general contractor that has two families on their health plan. In their situation I just quoted a $4000 deductible Blue Cross plan which cost $2683 per month to extend coverage. The same plan with a $2000 deductible plan would cost the firm $3216 per month or 20% more!

WHAT WILL EMPLOYERS DO?
If 50% of the employers are “under-insured” they will certainly take several actions in response to the realization they are facing significant price increases. Remember, not only will health insurance prices go up due to the deductible mandate, but they will go up for other reasons including the pre-existing pricing issue, gender neutral pricing, and age based pricing requirements. In response to the looming price hikes, what do we expect employers to do?

First, if the small business is subsidizing the amount employees pay for coverage, they will reduce the amount of financial help they are providing. By law, employers are required to pay at least 50% of the employee-only health insurance costs. If the employer is paying 100% or 75%, they will certainly drop their contribution to the minimum of 50%.

Many employers will stop paying a portion or all of family coverage for their employee’s dependents.

Many small employers will simply stop offering coverage.

Finally, employers that have at least 50 employees will begin cutting hours of existing employees to ensure that their employees work less than 30 hours per week. By reducing their hours, employers can avoid the requirement to offer and provide employer health programs. This move alone will have a dramatic impact on our overall economy.

BUSINESS KILLER
I think we’ve done a good job outlining the issues created by the Affordable Care Act. I recently visited with a company that is a retailer (alcoholic beverage industry) that has 500 employees. This successful business has been working and growing for thirty years and has expanded throughout a few states. The owners of the firm are some of the hardest working people I have ever met and they continue to work sixty and seventy hours a week despite the fact that they are extremely wealthy and sixty years old. As we visited about their business and the impact of the healthcare legislation they became very serious. They see this as an attack on their business that could kill it. Their business has razor thin margins and they simply cannot afford a 50% or even a 20% increase in their expenses. While our leaders express that the rich can pay their “fair-share” and that everyone deserves health care they really are saying that hard working people will pay everything for others. I asked what they planned to do in response to the coming changes in 2014 and I was shocked by the seriousness of their response.

First, they planned to reduce the hours of every employee that was not a manager to 29 hours a week.
Second, they would consider dropping their current health plan entirely and paying the penalty of up to $2000 per full-time employee if the increasing cost burden was too much to handle.
Third, they would close all but their most profitable stores as the margin compression they see might be too great to keep those average stores open.
In this example, the penalties this firm could face could be as much as $1 million per year (if all the current employees were full-time). Have you considered what you would do if someone came up to you and told you that because a law changed you would now need to pay an additional $1 million per year!?? In their minds, this is simply robbery. We will hear more stories like this as large and small employers grapple with the impact of the sweeping changes that will without a doubt increase health insurance premiums by 50% in the coming years.

INDIVIDUAL PLANS
If you are reading this post and wiping your brow saying, “whew, I have an individual plan, I’m glad this doesn’t impact me”, you are wrong. All of the pricing stipulations also apply to your policy so you will be soon paying significantly more for your policy. Essentially what I’ve been saying is that there will be a price convergence of individual policies to meet or match employer pricing. While we do have 13 months till the final implementation of the Affordable Care Act you can still review your options and attempt to lock in decent pricing before the health insurance carriers really begin to factor in all of these provisions.
If I can help you examine the impact of the law changes on your existing employer plan or your individual plan please let me know, I’d love to help you navigate this process to help you manage your benefits and costs.

Please contact us at info@texashealthdesign.com anytime!

GOATMUG WRAP UP -
There you have it, a great article and great perspective on the health insurance market that will really impact the US economy.  As Nancy Pelosi promised, we'll have to pass it to see what's in it..... she wasn't kidding was she?

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

11 THINGS THAT BLOW MY MIND.....

CAN YOU BELIEVE THIS IS TRUE?
I'm up at midnight on a Friday night and just am confounded with random thoughts about how crazy life is and what a screwed up world we live in.  We live in the most awesome country in the world where each and every day people work to try to make it unawesome or convince us that it isn't awesome.  We are blessed beyond the wildest imagination of any human civilization that has lived (even the entire world is healthier and wealthier than ever), yet the benefits of this blessing has made us desensitized, dependent, and frankly ignorant.

Here is simply a quick list of things I'm pondering that are just awe-inspiring in a very negative way.  Many are political, and perhaps that is because so many of these thoughts are just pent up frustrations.

1)  IS THIS OUR BEST?  We have two candidates that are battling for the position as President that are complete goofs.  Can't we do better?

Obama is an inexperienced dreamer who bases the implementation of policies on nothing more than utopian best-case hopes without real practical substance.  Without Hitler-like oratory skills and amazing superficial charm, he wouldn't have gotten elected to city council in an Illinois township.

Romney is a Wall-Street silver-spoon that may have wonderful pedigree, but he has a tremendous inability to attract people to him personally, has difficulty connecting to the 99%, and is just about as bad as Obama when speaking in an unscripted forum.  While his message is sometimes on point, he is simply brutal to listen to with that whispery voice.  I think he is a foreign policy noob just not as naive as Obama.

2)  FREAKING CUT THE DARN BUDGET
Do either one of them understand we are spending too much?  Romney's plan for spending reduction is to cut government spending in each year by 2016 by $500 Billion (if GDP is at 4%).  We are on track for a $1.2 Trillion deficit this year and there is no way you are going to get to 4% GDP if you are cutting government spending.  And there is no way he can repeal Obamacare, it is a lie.  I'm sick of it.

Obama is even worse, there are no cuts in sight for this guy, and his Senate hasn't even passed a budget in 3 years!  What makes us think he'd even submit a budget and have it approved after another election?

3)  IPHONE MANIA 
If I see another report of some stupid kid with the latest IPHONE 5 gleefully prancing around excited to have the newest electronic device that will be thrown away in 18 months, I'm going to puke.  When obtaining a new phone is the climatic personal achievement in one's life for a week, month, or year, you have a great indication that your generation and or your country is in total decline.

4)  THE FED WILL PRINT TILL WE REACH FULL EMPLOYMENT
HA!  This is probably one of the funniest jokes I've heard.  The Fed's actions pretty much assure us that we'll never reach full employment.   How's that record high September gas price on the lowest demand for fuel in 15 years treating you?  If the FED ever gets us to full employment we won't be able to afford to drive a car and fill it up to get to work.

5)  NFL REFS AREN'T BEGGING TO GET BACK ON THE FIELD
I think it will only be one more week and old NFL refs will agree to just about anything to get back on the field.  There have been a few minor screwups, but nothing major.  As long as the scabs don't blow a game this weekend, the old refs will sign any agreement the NFL owners put in front of them.  And rightly so, I'm so sick of unions.  The refs are not the focus of the game and as we've seen, we can do without the best of the best.  How an NFL referee deserves a pension is only an argument that a union could try to justify.

6)  WE BELIEVE ANYTHING THE ECB SAYS
How many times will it take investors to realize that the ECB says whatever it can to make the market happy and then it checks with its member states that actually have to approve it..  I'm tired of rallies based on unactionable promises without any substance.

7)  WE HAVE ALMOST 47 MILLION ON FOODSTAMPS
We have almost 15 percent of the US population obtaining free food from the government and we are questioning if our leadership in Congress and in the Oval office (or running against him) are the right people for the job.

8)  OUR ELECTION DEBATES ARE OVER WHO IS GOING TO BUY THE PILL FOR WOMEN
We have the stupidest media in the world.  Any viable candidate would answer every distraction like this simply by saying, "WHAT THE FOOK DOES THIS HAVE TO DO WITH GETTING AMERICA BACK TO WORK?  THIS IS A DIVERSION AND I WON'T EVEN DISCUSS IT".  If Chris Christi, Santa Claus, or Margaret Thatcher were running and said that, they'd have my vote in an instant.  Of course we don't have a candidate that can clearly focus on what matters, we have to discuss past tax returns and videos of Romney speaking about the 47% that would never vote for him.

9)  PENALTIES FOR OBAMACARE
I haven't heard anyone speaking about 2014 and the impact it will have on small and even large businesses.  Here is what I'm looking at with many of my clients.  How would you like it if you had this happen to you?

Here is an example of a 50 full-time employee company that doesn't offer health coverage AND has at least 1 that will use the health exchanges (which they all will).  (If you employ under 50 full-time employees you are not subject to a penalty.....yet).

The large employer does not offer coverage, and one or more full-time employees receive credits for exchange coverage. The annual penalty calculation is simply the number of full-time employees minus 30, times $2,000. In this example (i.e., 50 full-time employees), the penalty would not vary if only one employee or all 50 employees received the credit; the employer’s annual penalty in 2014 would be (50-30) x $2,000, or $40,000

Get that $40,000 just went POOF for this owner because he decided to own a business and have 50 employees!

Now before you give me the line that he is rich and making lots of money, think again, this is a small burger franchise that pays these people minimum wage.  Essentially, Justice Roberts just hammered this guy and raised his employee cost significantly.  Is it his responsibility to give health benefits to a guy he employs?  Why is it his responsibility?  Who came up with that?

Imagine you owned a liquor chain or clothing store or any other business.  Imagine employing 500 employees.  How would it feel to now have to pay $400,000 more in expenses just because Congress and the President make back-room deals and passed a law that we'd have to pass to know what was in it.

I'm guessing that every business owner with 50 employees might suddenly need to let one or two folks go due to the downturn of the economy.  I would, wouldn't you?  If that incremental one employee saves you $40,000 you'd be an idiot not to fire them or make them a part-time employee.

10)  CAN YOU TRUST EITHER SIDE OF THE CLIMATE CHANGE STORY
I have to admit it, I think there is an angle where someone is actually making big money on climate change and the green, earth-love religion.  Yes, I recycle like crazy, but I'm not a big believer in man made global warming or even "climate change".

First, when we have to change the name of the movement, errrr religion, you know we are missing the whole story.  We started with "Global Warming" and now we have "Climate Change".  I'd love to see a definitive study that rules out volcanoes and solar activity as the source of global warming.  I don't want to destroy economies based on the fact that "man has to be the cause."  Also, I am not sure if I want to sign up for anything that includes every bank and trading institution that suddenly is excited to trade carbon credits.  Clearly big money is at play if these guys are involved and it would make sense that global warming skeptics and supporters would throw gobs of cash to spin stories and propel governments to create regulations.

11)  THE ILLINOIS TEACHER'S UNION'S PENSION REDUCED THEIR RATE OF RETURN ASSUMPTION TO 8.0% DOWN FROM 8.5%.
Are these guys nuts?  Until we reduce the rate of return assumption for all pension plans to 3% or 4% there is no way that we'll ever be able to have a real conversation that will be based on sustainable math.  How is a pension going to ever make an annual rate of return of 8% and not take excess risk?  Wouldn't we want to build these plans with a cushion that builds in the ability to under-perform the 100 year average of the stock market?  Aren't pensions allocated a little differently than the stock market?

Yes, I know, if we changed the pension return assumptions to 4% it would require the plans to kick in significantly more and all of these unfunded liabilities would be immediately due and frankly unpayable, but are they payable now?  Isn't this just one of the many lies we all see plainly yet the entire system simply avoids discussing.  The pension system in the US is so much like the Madoff Ponzi scheme and our government and large companies are all participants.  Better hope your pension payments aren't greater than that US PENSION guarantee of $48,000 a year.

EXHAUSTED...
Ok, that is it.  I've been typing for about an hour and a half and I'm tired of sharing my inner rants.  Let me know if I missed any and if I offended any of you believers of the Green Religion please show a bit more restraint than the practitioners of the Religion of Peace and don't murder twenty or thirty people around you, torch cars, and foreign embassies, or leave nasty comments on the blog.  Have a great weekend.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

IMPACT OF HEALTHCARE REFORM -

I was asked to give a speech last week to some Christian Business Owners on the impact of Healthcare Reform. I've had some techincal difficulties posting the actual slideshow here on my blog, so I made a pdf available and Tim Knight at Slope of Hope posted it for me this weekend. As usual, please check out Tim's site if you are in any way interested in trading, it is great stuff. www.slopeofhope.com

The talk was well received however I discerned that there is so much frustration in people that they feel like they have no voice and they are angry. Each person that posed a question really needed an outlet to vent. In fact, the majority of the questions were rhetorical.

I've tried to position this presentation in an even handed fashion where we examine the good stuff about the bill and point out the things that need improvement. At the end of the day no one will argue that the current system doesn't really stink. Unfortunately I still have not heard anything that convinces me that we can come close to paying a portion of the future liability we are signing up for.

Face it, if I wasn't concerned about the future cost and long term fiscal solvency of my family I would drive new cars every year, live in a house that was 5 times larger, trade for a living, write a blog, and take two week vacations in Paris and blame it on a volcano. However, I am pragmatic and focused on reality therefore I weigh the risk and the cost of each purchase.

Our government's leadership does not possess the same value system that I do and this is why this program is doomed never to make financial sense. When we raise taxes and add a VAT it still will not be enough to meet the future obligations created in this plan.

Don't get me wrong, I want everyone to have insurance and be healthy, I just want someone to show me the money!

Download Goatmug-HealthReformActSummary-4.29

The presentation was divided into two parts. The first 18 slides were the subject matter in my talk, the remaining 40 slides provide details about the timeline of implementation and highlights the provisions as they are scheduled which I did not have time to cover. - I did not include the additional slides here, but I will attempt to make them available on along with the actual vocal commentary when I post it on You Tube.


Goatmug

Misdirection and Slight of Hand - Health Care Reform

Just a quick post to provide you information on the health care reform trends.Click below to read what United Health Care has summarized as what they believe will be the final version of the coming changes to health care over the next few years.

http://www.ezrespond.com/Healthflash.pdf

Specifically, in the next 6 months, insurers will need to adjust their treatment of the following;

1) Get rid of any waiting periods of greater than 90 days to begin insurance that is approved.
2) Stop rejecting children under 19 for pre-existing conditions.
3) Stop canceling insurance policies except in the case of fraud (this is overdone - in 7 years I have never seen a policy dropped for someone making valid claims.)
4) Provide preventative care (wellness visits) without cost sharing. - Many insurers only pay $300 or $400 a year, but require a client to pay 25% of the cost. For example they pay 75% of wellness visits up to $300 out of the insurance company's pocket.

All of these changes are good and right, however they will raise rates, so hold on to your hat!

UHC also highlights other changes they expect in 2011 and 2014 so read away.Here is my take on the entire deal.

STRUCTURE
You must know how the structure is set up to understand the fraud that is being put in place.
A) Taxes begin immediately.
B) Cuts in Medicare coverage begin (After mid-term elections)
C) In six months, the changes above are effective
D) 2014 - The big reform is schedule to hit - Individuals are required to have coverage or pay a penalty of the greater of $750 or .5% of their income if they don't purchase insurance.

IMPACT

HIGHER RATES
As I mentioned, the impact of these changes will be immediate. Insurers now are required to take children that have pre-existing conditions in the near term and these "sick" kids will be an immediate drain on profitability and an increase in cost. Is there any doubt that kids that are very sick will hurry to buy insurance? Is there any doubt that insurers will adjust rates on all new policies sold and also on all existing policies when they have a chance?

TIME LINE
Ok, so here is the real deal. The administration's efforts here are to begin paying for this plan with increased taxes today. In addition they begin cutting Medicare benefits, require insurance companies to make changes immediately add sick folks to the insured roles (read as decrease profits and increase costs - or simply put hurt their businesses significantly). Finally in 2014 we have everyone come on the plan. Kind of strange timing isn't it?

WHAT WILL REALLY HAPPEN
A) Oh yes, please look at the 2014 stipulations as well. Employers will ultimately drop their coverage and stop offering it if they employ more than 50 employees. Think about it, they will cut costs significantly in the form of premiums (they will have to pay a $750 fee per employee fee when not offering a plan) and will be able to tell their employees that they have health care available through the government exchange plan. -- You don't think they'll do it? Right now, most employers pay 1/2 of the health plan costs per employee, just assume that that is $200 a month of a total of $400 a month. The break-even is just at 4 months. Cash strapped employers will absolutely push their employees off into the new plan.

B) Over the course of the next 3 years, people will sue the federal government and it WILL be declared unconstitutional to require a person to enter into a contract with a third party to obtain insurance.B) In that 3 year period, private insurers will have had their business margins slashed and profitability will have been destroyed. With the high court ruling that the health reform act is unconstitutional, we will see a final destruction of these firms as the trend to buy insurance will be broken and good healthy clients will drop policies, while sick folks will retain them.

C) As a result of the court action, the federal government will step in with the only solution - a national health plan that is a one payer system (GOVERNMENT HEALTH PLAN). This will be the only fix as the collapse of private insurance plans will be complete.

It sounds ominous and sounds like a conspiracy doesn't it? The answer is clearly "YES" it does and guess what, it is all planned. Remember, the administration says they don't care what gets passed, just as long as it is passed. This is the gateway for the end goal of national health care. The first step is only a first step.

Do I think the system needs an overhaul? Yes, of course. I speak with people every single day that are declined by insurers.

Do I think this is the answer? No way.

Long term, you as a patient and consumer will pay more, have less choice, and ultimately wait much longer for medical services. Government is inefficient and is never the answer. In addition, all of the assumptions by the CBO and the administration don't account for the massive exodus from employer plans to the new government plan. This will be the major reason for massive cost overruns.

We have been told that the model for these plans are the VA system and Medicare.Remember two or three years ago when President Bush was blasted for the conditions and treatment of soldiers in the VA system during the Iraq conflict? Remember how the Democrats told us how terrible things were and how bad the hospitals were maintained? Ask a veteran that goes to the VA how quickly treatment is provided? This is the model?

Finally, if you think that government can run things well why is Medicare absolutely broke? Why would we model anything after this plan. The system is filled with fraud and costs are out of control. The government almost creates an environment where over billing is the norm because they reimburse providers at less than 50%. If you owned a practice wouldn't you do an extra procedure, lab, or other test simply to cover the cost of the haircut you'd receive?

Bookmark this post, I'm certain of only a few things in life, but I am sure this is a disaster waiting to happen. In the meantime, I'll rejoice as I'll sell a lot more policies and insure many of the kids that I've had declined previously. I better save my money though because the future is certainly dim over the long term unless the government allows for the sale of supplemental coverage to sit on top of the government run plan we are sure to have.

Goatmug

Give Us Something To Believe In

I wrote this article and submitteed it to Tim Knight's Slope of Hope. He usually will post my contributions only on the weekends because they are so long, so I will go ahead and publish it here in case it doesn't fit with his year-end line up. I will post a very quick (I know-I promise it will not be lengthy) updates on where I think the market is from a trading perspective and how to look at the positions we've mentioned in the past. Right now other than the last piece of my KSU that I exited this morning I have no positions.

I've documented the history of actions that caused our crisis and outlined the steps our government has taken to "bail us out". You may find the most recent post at Goatmug's Blog where we discuss The Best Cup of Coffee Ever and how it seemed wonderful and solved all of my problems, yet ended up bitter and disappointing. As I've mentioned, I believe many of the steps taken have either not worked at all, created other problems, or simply hidden the problems. Let's take a few of the items I pointed to in the last post and review the impact and results of their actions

A) The Federal Reserve and Treasury along with other world central banks stepped in and offered their fiscal support and immediately lowered rates again to near zero. Remember, these are front month rates and are the interest rates the government charges banks for overnight money. The Fed voted in recent weeks to keep rates stable at effectively zero percent interest. They voted to do so some 18 months since the beginning of the crisis and 9 months after the beginning of what we now know as one of the largest rebounds in stock market history. In spite of the rally we are still around the 10,500 level on the Dow which is where we traded in January of 2006 and well below the lofty 14,000 area of October of 2007. Am I saying that we cannot return to these areas? No, in fact if the Treasury department remains committed to devaluing the dollar, I can paint a scenario where that might be a real outcome. I doubt it seriously, but it could happen.

Timothy Geithner gave an interview last week on NPR that should put us all on notice. In his words, we will not have a retest or slowdown after this recession. Although many of his other predictions have been flat out wrong, I have a strange sense that he is committed to not letting that happen no matter what. http://www.npr.org/templates/story/story.php?storyId=121778778

Mr. Geithner is only speaking of a short term pull back that he'll help us avoid, for it is too obvious that the Fed and Treasury actions create bubbles and meltdowns and they are coming with increasing speed. I liken this to a drug addict. At first there is pleasure in the use of the substance. Next there is dependency, and then an increasing need for the larger portions of the drug in greater frequency. Think about friends, family members, and others that fit this drug addict description. It usually never has a happy ending does it? I think what we're about to experience is "tough love" provided by our investors. Our friends, (Chinese, British, folks in the Middle East), are about to hold a frightening intervention with the addict and therefore we will be told that we need to shape up and cut out our drug abuse. Unfortunately, I don't think the addict will listen. It is too tempting to let all of that debt go to waste and too hard to cut spending and cut promises and entitlements.

So what are the results of these actions? Interest rates are still low and creating asset bubbles. - Banks and other bank holding companies...er investment banks and insurance companies can now borrow at zero overnight and buy stocks, bonds, and commodities. Is there any wonder why all markets are screaming? What happens when that money is taken back? Remember, this money was intended to buttress balance sheets and also intended to be lent out to companies and consumers, not find their way to the casino!

Banks receive this money and will lend. - NOPE! This has not happened. This I believe is one of the greatest lies that has been made in this crisis. Why would any smart banker lend in the teeth of a nasty, jobless recession? Would you? If you looked at a firm that is asking for credit and he tells you that their business is slowing and they need a loan to make payroll, do you think they are a good risk? Asking bankers to lose money on bad loans is not a solution to the crisis. On a positive note, I am hearing some of my clients being contacted by banks that are desiring to lend on decent terms now. This may be an indication of some thawing.

B) The Fed also bought toxic securities outright from troubled financial institutions and traded those assets for treasuries. Our government offered the TARP funds to help institutions and even made outright purchases of banks and insurance companies. (AIG, Citbank, etc.) We even used these to buy and lend stakes to great car companies like GM! We keep reading that many of the banks and insurance companies that we lent TARP money to have repaid us and we (the US taxpayer) may have actually made some money on these loans. The reality is that we may have made some money on loans that have been repaid, but we have taken a bath on the loans that will never be repaid. Making AIG a government controlled entity makes certain that more losses are headed our way. The Treasury Department and Fed's lack of negotiation with AIG's creditors should be enough to convince anyone that the well connected firms like PIMCO, Goldman Sachs, and Blackrock were feasting on the carcasses of weakened and dying financial firms. In addition, these same favored companies have become the mechanism by which the FED and Treasury actually implement their policies. These companies are providing transaction support (spreads), participating in deals, and also offering consulting services

So what are the results of these actions?
AIG is a mess and still 85% owned by the US. Isn't it great we are in the insurance business?
GM - is still GM.
Goldman, Blackrock, and PIMCO are killing it .

Remember too big to fail? - As a result of the forced marriages between JPM and Washington Mutual, BAC and Merrill Lynch, Wells Fargo and Wachovia, we now have a greater concentration of larger institutions. Seems like the US government has now created larger risk pockets and concentrated more power in less hands. Finally, the repaid TARP money is being used like a slush fund now. The administration and Geithner said they had "extra TARP money" that they could use! Excuse me, just because it is appropriated doesn't mean we need to use it if everything is all fixed, right?
C) In concert with these actions our government also looked to perform direct support (cynics would call it manipulation) in the mortgage market and the treasury market. By guaranteeing and supporting the FHA the US taxpayer became the lender/insurer to 80% of the post-collapse mortgage market. With the announcement of quantitative easing by the Fed we began buying our own treasuries to try to keep prices low and contain rising interest rates.

While short-term manipulation has been successful, it is just that - short term. The bond market is bigger than any one central government and the bet made by Bernanke is going to be called. Once that happens interest rates will climb (and as I type this we are seeing 30 year mortgage rates 10bps higher in one day last week!). THIS IS A HUGE MOVE BY THE WAY! Who will step in to fill the void of the government in this volume at these rates? Stabilizing the home market is job #1 - The government has artificially lowered interest rates and become the dumping ground for all banks to offload their paper on the US taxpayer. Few banks are doing direct lending to residential borrowers without FHA backing. Home sales look to be moving up, but we must ask how long this will continue if rates jump substantially, cash for houses go away, the FED stops buying MBS (stops being the market), or banks actually release the huge backlog of foreclosures that they have kept on their books.

Don't get me wrong, the government is having an impact here and this is positive for the economy. I'm very concerned that this could change if any of the government "help" is removed or investors demand higher rates and push mortgages rates over 6%. For example, in November we were to have the final expiration of the first time home buyer credit. Sales were pulled forward and suddenly we have a reported drop in new home purchases in November. The following Bloomberg article demonstrates what the threat of pulling stimulus does. A mad rush of buyers that would have bought anyway step forward to take advantage of the taxpayer-paid windfall, and then demand dries up in the following months (Cash for Clunkers anyone?). http://www.bloomberg.com/apps/news?pid=newsarchive&sid=al3GTnIut0Ao

Obviously I'll have this prediction in my top predictions for 2010, but I'll suggest here and now that we have a dip in the sales trend in existing homes as much of the inventory that has been clearing has been foreclosures and investors (not occupants) have been swooping in to pick them up. Hopefully those investors have been buying smart and have deep pockets because I will predict that we'll see the new generation of home flippers that have emerged get sunk in 2010. They'll find that there won't be many buyers for these homes when mortgage rates hit 6% or 7% since we're all spoiled and believe that 4.75% is what we should expect! These investors will also get hit hard when banks like Wells Fargo and Bank of America actually release their piles of inventory instead of letting them trickle out. Look for these inventory clearances after 1st quarter reports come out.We were told that housing is the key to recovery - housing has not recovered yet, so I guess there is no recovery yet.

D) The Obama administration got in the act and began programs like the Housing Tax rebate for first time home buyers, Cash for Clunkers, and now Cash for Caulkers. In addition, the federal government has continued its payment of extended unemployment benefits. In addition, as a country we are now running a huge fiscal deficit (nothing new, just the magnitude of it is) and our government's expansion has required us to raise the debt ceiling (allowable debt of the country) to $1.8 Trillion Dollars! This doesn't even account for the addition of any new health care program or new stimulus. As I've mentioned several times, I believe that the Fed and Treasury must be cussing the administration for their interference. The Obama administration has kept to their strategy that they wouldn't waste any crisis and by goodness they haven't. In the hysteria they have continued to plunder the US taxpayer and add more programs and benefits to the entitlements for anyone that will take them.

We are now seeing that COBRA subsidy benefits are being extended to the unemployed (they have been offered for 9 months) and will be provided for another 6 month period. The program pays 65% of the premiums that someone that has been laid off of work must pay to keep their health insurance. It seems odd to me that the US Government and US taxpayer would pay for health plans at rates that are significantly higher than what can be obtained by families in the open market with individual policies. Of course we shouldn't be amazed at all about this, this is what happens when government makes decisions. This one example illustrates how the new health reform plan cannot and will not be an improvement or a cost savings for anyone.

While Obama has added his pork to the budget, the US treasury buyers will not tolerate the bloated debt of the USA. The market will require higher rates of interest and this will cause significant pain for all of us.
Crisis Management- Administrations have added pork laden projects and plans to the backs of taxpayers as an excuse to stimulate the economy. There are no plan for fiscal restraint or management of the budget. What simply blows me away is that I hear Obama speak about finding waste in government programs to pay for more stuff! Where is the idea that you cut costs and if necessary, benefits?

I'll comment more about the health care reform bill in another post, but you need to understand that the winner here is the health insurance industry (for now). As these bills are written they will have a captive audience of buyers. Many of you know that I own a health insurance brokerage and I saw a huge swing in commentary by insurance companies. If you don't think they are giddy, you are WRONG! Check out this email link I received from Aetna. These guys were hammering the Senators and then suddenly came out with this gem. Mind you, if this goes through I hope to sell everyone one of you a policy because I would hate to see you go to jail or pay stiff fines, but everything about this stinks and reeks of over promising and under delivering at a terrible cost to tax payers. A key provision in the plan is the elimination of pre-existing conditions as a basis for exclusion or rating up. Once this exclusion provision is removed we will witness the elimination of INSURANCE! Why would you obtain insurance till you have something serious now? GDP was revised downward and we are seeing that the government is responsible for most of the production for last quarter. I understand that

For all of these programs, what are the results? - We were told we need these programs to stimulate the economy- all have been short term and have done nothing to change the fundamental situation. We still have 10% unemployment and 17% U-6 unemployment. We were told that everything would begin to get better once housing is stabilized, we haven't seen housing stabilize and won't for a while. More appropriately we'll see things stabilize when people have jobs.

E) The accounting standards board (FASB) bowed to pressure from financial institutions and our government by suddenly recommending that accounting standards be thrown out the window. The accounting standards board have been complicit in this crime against investors as the boards were threatened and frightened into thinking that they would be responsible for imploding our economy. Where is the leadership in our country? I am afraid that the move to take a time out on reality simply makes it easier to do it again. The accounting standards board should have stood up and emphatically stated that accounting standards don't change or take a time out because the truth hurts! Future collapses will be much worse because the ponzi schemes the government and banks have set into motion were not stopped here. Clearly now that the banks are bigger and risk more concentrated similar meltdowns will be even more destructive. Accounting standards were thrown out resulting in a lack of understanding of true value of banks and insurance companies.

Where are we now? We still don't know what banks are worth and they are still raising capital and still lying about the risk on their balance sheets.

F) Finally, as we saw in the previous October post called Public Enemy #1-Deflation we see that the Fed and Treasury unleashed its last desperate weapon, Dollar Devaluation. The dollar devaluation trade is simply a move to destroy the value of the dollar relative to other currencies. This makes our dollars worth less and hence our debt worth less. We could also argue that it makes our goods cheaper as we hope to sell them abroad. The Fed has been true to its words that it would implement this strategy if faced with the prospect of deflation. When the government went to work in March the DXY was at $89.20 and they did not disappoint. They have moved the value down by as much at $15.00. The DXY is now trading at 77.64, well off its lows of $74.27 in late November and early December. So as the dollar has been pelted since March, EVERYTHING has gone up. Think about it, stocks, bonds, bread, gas, oil, gold, and the kitchen sink have all increased. http://www.marketwatch.com/investing/index/DXY/charts?chartType=interactive&countryCode=us So now, we've been told that everything is better and that we are recovering. In fact about 3 weeks ago, we had a surprisingly strong jobless claims report that stunned the market and boom, the dollar reversed course and interest rates began to rise. They rose because the strong jobless report indicated that things were stronger than expected and the Fed might need to remove stimulus (increase interest rates or as we know it, take the drugs away from the addict). Since that day there has been a resurgence of the dollar. Bernanke tried to tell the market that they would not raise rates because there were no indications of inflation in the market. Fed governors tried to tell us there was no evidence of inflation, and now Geithner has come out and told us that there is not a chance that we'll have a double dip.

So why are rates starting to rise and the dollar increase? How have we seen the dollar rise and the markets increase? First we have had some credit issues with Dubai, Greece, and Spain. All of those have reminded investors that there really is risk in the credit market and we aren't fully recovered. Scared investors tend to go to safety, and therefore we have seen a flight to safety in the dollar. Having said that, treasuries are a poor investment as the Fed has made sure to destroy any reality in that market (and value too). Therefore it is easy to see how liquidity could move to other dollar denominated assets allowing for the strengthening dollar AND rising equities and bonds (at least here in the last few weeks). Remember, this move up in interest rates and increase in the value of the dollar is contrary to what the Fed and Treasury desire (even though they say they want a strong dollar for the sake of our Chinese buddies). The increase in rates immediately translates to greater borrowing costs for the tax payers AND devalues the value of the treasury assets we already own. The government states that it wants to keep rates low to stimulate lending, but I can also see that we need to keep rates low to keep from blowing our own foot off since we have been purchasing our own debt through quantitative easing. Zerohedge has another good post that captures exactly what I've been saying and leading up to here.

What are the results? - So we have an administration that says they want a strong dollar, but we have a Fed Chief that has stated his strategy to save the economy would rely on a devaluation of the dollar. We have had an engineered rally in all asset classes and treasury rates that are way too low for the risk and duration of the trade. In essence we have a bubble in Treasuries!
My isn't it obvious, where ever we see the footsteps of the Fed, we see bubbles? So what is on the horizon for the Fed and Treasury? In 2010 we will see greater rates as buyers decide to wait it out and purchase their mis-priced treasuries at a better risk-reward. The greater rates will hurt bond holders and most of all the US tax payer. The bond market at some point will change the behavior of our current administration and the corrupt politicians that look to hand out entitlements and lack the idea of being representatives of the people.

We will see drastic cuts in city and state budgets and services before we see anything on the Federal side, but cuts will come at the national level.

If the Fed and Treasury want to keep the charade of low rates going then a fall in the equity markets will be the mechanism to deliver lower funding rates, unless they announce a new set of Q.E.

To wrap this up, we see that in each instance the failed efforts of the government to fix the situation have either simply done nothing or helped to kick the can down the road. As we've elaborated since our first post in August, the game of extend and pretend has been in full force. The problem is that at some point (2010, 2012, or 2015....) there will not be a way to extend it and a creditor will call our bluff and call in our debts. What I am really longing for is for a responsible leader to stand up and say NO, we won't offer this entitlement, no- we are actually going to cut services. Americans are going to be forced to live through these boom and bust cycles at an increasing level of speed and magnitude because our current leadership will not speak truth. The best result of all of this crisis is that average Americans are beginning to wake up and live a paradigm based on their needs and not their wants, based on their own ability and assets, not based on what their neighbor has. I am seeing a genuine reversion to true values of healthy financial management in peoples financial lives and in their businesses. Unfortunately, they had better be ready quickly because our government is saddling them with more debt and taxation to pay for promises and entitlements we can't afford. As an example of the crisis that consumers are facing check out this closing study.

Almost half (46%) of 2,148 consumers surveyed recently said they weren’t confident they could come up with $2,000 within a month in a crisis–from savings, family, friends, credit cards or other sources.Even among those earning $100,000 to $149,000 a year. almost 25% doubted they could raise it, according to the survey conducted by research firm TNS with academics from Harvard Business School and Dartmouth College. “We wanted to know if people could fix a broken car or furnace,” says Harvard finance professor Peter Tufano, who adds that most studies he has seen measure “how much cash people have… not how much they can access.” The survey results surprised him. “The ability to cope with emergencies is much less strong than we might have thought.”

I saw this in reality as people in the South dealt with Hurricane Ike. After 1 day people were cashless and without resources to make it through this terrible emergency. Americans need to wake up and save and communicate to their leaders that it is unacceptable to continue in this fashion. We had a final emergency and the US leadership chose to fake it till they made it rather than employ real fundamental solutions to problems of our own creation. At the end of the day I feel like the Bush Administration, Obama Administration, Treasury, and the Fed have just tried to spin whatever story we would fall for in order to get us to give them time. What they have figured out is that we just want them to give us something to believe in to quote a favorite from Poison (yes, I'm still into 80's hairbands). Guess what, they've given us a few tales, let's hope that no one actually figures out that what we've believed in isn't worth the trust we've placed with them.

Goatmug