Financial topics

[mannfm11]

Some of this stuff is funny. Gordo seems to think that you can trade McDonalds hamburgers for autos and electronics. My point about medicine and education is they are the only growth industries year after year left in the US. I am as big a defender of the US as anyone, but only because I believe there isnt' a world economic dance without the US. The entire system has been set up to bleed the US dry of its capacity to create more credit so the rest of the world has a market. The issuance of credit in the US has been confused with productivity growth and has masked most of it. Medical costs have very little to do with people living longer and a lot to do with absolute breakdown in the market system for these services. If there was merely 1% real productivity in medicine, its costs would be much lower. If you took the average teachers pay, which is probably about $50K a year across the board in Texas, including benefit and figured 25 students a teacher, labor costs for 1000 students would be about $2 million. I doubt a 1000 student school district can be run for less than $25 million today, but even if it was half that amount, where is the other $10 million or so? What about $2500 for an MRI or Catscan? I paid that for one before discount. 10 minutes with a machine? Hookers could only be so lucky? So the machine costs $1 milion? This hospital probably uses it on every patient in the place at least once, so they get a million in a couple of weeks. The advent of an amazing piece of productivity isn't passed on, but instead used as one more medical scam. The oil industry is a pretty competitive and straight industry compared to medicine or education, yet people bitch about every penny a gallon, yet buy into throwing more and more money into the education and medical pits. The costs, of medicine, aren't soaring in other countries as they are here. In fact, these services, in nice hospitals in India and Thailand, expensive procedures can be purchased for what 3 or 4 MRI's or Catscans cost in an American emergency room. I just priced a bypass surgury in a Thai hospital for $14,174 (I don't need one, but thought I would look it up) while the US cost I could find was $45,000 in 1995. You can bet that price has doubled. In any case, if there was growing value as to what could be had in the US, medical and education costs would be more stable relative to the cost of other things.

In a sense, I don't know how you put store clerks, hamburger flippers, car wash guys and shoeshine boys into the category of GDP? I also don't know how you put the huge industry of flipping stocks and lending money in the GDP business. How do you put most of government into GDP? This might be why the relative costs of Education and Medical care have gone up so much. It eludes me how industries that are really nothing more then new ways to spend money end up being moved into the same category as producing actual products. There are tangibles in the education and medical business, but the system has evolved to the point these systems actually operate in some ways under extortion. Thus you need more and more education to stay even and the education makes sure it doesn't work so you need more and more of it to stay even. There cannot be enough said about the medical business of go or die, though I suspect dying is overstated in this regard. There are conditions that do merit looking into whether they are life threatening or not. There are clearly a lot fewer sick people today than there were 50 and 60 years ago due to more sanitary conditions eradicating polio and TB (which also benefitted from sulfa drugs), though I guess the AIDs epidemic might have replaced some of this care. The difference is a routine trip to the emergency room today for a healthy person can literally break you if you are middle class and uninsured. That was not the case 40 years ago when everything was done by hand. This is why I believe the relative economy has shrunk to a much larger degree than recognized. McDonalds only replaces what people were already doing for themselves.

[Higgenbotham]

McDonalds only replaces what people were already doing for themselves.

This is an interesting subject by itself because we know that in a boom people tend to hire out services instead of perfoming the services themselves, and that has happened to a greater extent during this boom than ever before. To see evidence of that, all we need to do is drive up and down the street. It didn't look that way in 1929, and a national chain of service shops can close up in a week. The shop owner on Main Street in 1933, on the other hand, toughed it out even if revenues fell 50% because that was all he had and there was very little overhead for the self-employed to pay. My grandfather, born in 1902, was one of them. And there was a loyalty to local business and members of the community that doesn't exist today. A national chain of service shops with 15% margins and a lot of overhead isn't as likely to be able to stay open, or as likely to need to, or as likely to want to.

It is my understanding, and please someone correct me if this is wrong, that services that are hired out are counted in GDP (and generate tax revenue for the government as a side effect) while those that are performed by oneself or family are not. If true, then the effect of increased use of services in this boom has likely caused GDP (and tax revenues) to increase to a greater extent than has happened during past booms. So if employed people use services like oil change shops, hair stylists, restaurants, child care, lawn serices and so on during the boom and a few (or many) of them lose their jobs and start changing their own oil, cutting their own hair, cooking their own meals, taking care of their own children (how utterly radical), cutting their own lawns and maybe even selling their own houses, that can have a negative impact on GDP (and tax revenues). As well, instead of spending time and money on entertainment, that time may be spent performing these services for oneself or family.

It is often stated that one manufacturing job supports multiple jobs in services, retail, and education, 3 to 7 depending on estimates, and it would depend on the ratio of the wage scale of the manufacturing jobs in question to the service jobs in that area, as well as the extent to which the particular workers use services. Some analysts have stated that, due to the fact that our economy is not as reliant on manufacturing as it was in the past, any recession or depression will not be as severe because manufacturing was affected to a greater extent than other parts of the economy during past downturns. My answer to that would be to not be so sure because the average family with both husband and wife working are much more heavily reliant on services than they were in past downturns and the loss of one job in any household will result in massive cutbacks in the use of services in that household. It will depend on how deep this downturn gets and if it gets deep enough to cut far enough into national service chain profits to force their bankrupcties, then this Depression is going to be a Double Or Triple Whopper, and not as in Burger King.

The Fed can feed easy credit into the system but they cannot force people to use services that are expendable if, and it is probably more a matter of when at some point, the population feels the need to cut back.

[mannfm11]

Hig, thanks for the expansion of what i was trying to say. I suspect that the relative cost of health and education have a lot to do with this factor. Of course, there might come a time when people stay married and this stuff moves back to the home. Funny that people build these fancy homes then don't fix their meals in them. Of course, not many people really know how to cook today. I think the people that know how to do without will do well in a deep recession or depression.

Before he became a tax protestor, Irwin Schiff wrote a book back in the 1970's called, "How the government is fleecing you". In it, he brought up the steady cost of health and education against the economy and it is he that described this as evidence that the rest of the economy was faltering, as this was a modern phenomenon and wasn't present prior to the 50's. When it finally becomes apparent what is being called GDP today, it becomes clear as to why constants now cost a fortune when they were affordable before. Now we are looking at a socialist taking over the government during a downturn, which means we will be paying even more people good money to do nothing. Maybe they will hire the debt creators, so it will be a wash.

[The Grey Badger]

The two groups of people who will still need hired-out services are the elderly and the disabled. I am already imagining how I would move furniture around to take in a boarder who would do work around the house in exchange for a place to live, if need be. OTH, the jobs that used to be done by teenagers - babysitting, shoveling snow after a blizzard, etc - are going undone or being done by the people who once hired them. My daughter said you simply can't get a sitter except a professional, and they are expensive and booked up tight. When we had the Big Snow in Albuquerque two years ago, I nibbled away at the walkways until I could get them cleared, and was grateful the snow was easier to handle than some.

So what are the teenagers doing? If they're not involved up to their back teeth in scheduled activities, they are working for business for free, aka internships, and in any event, have very heavy school schedules. Will the recession change any of that? It's bound to, but I'm not sure how.

[John]

From a web site reader:

> This is from the trader review guy. He writes something almost
> every day. Note the list of website links at the bottom of his
> email.

> S&P 500 Price to Book Ratio Since 1982

> As of October 17, the S&P 500 closed at 940.55. Today it is
> 876.77. That's a drop of 6.79%. That also means that the price to
> book of the S&P 500 is now 1.58. It was 2.5 earlier this year, the
> 20 year average.

> 1982 is a year that is commonly said to have been when the 20 year
> bull market began. The S&P 500 price to book ratio then was 1.0.

> So, therefore, there could be a further 30% drop in stock prices
> until the real bottom is reached. Anymore than 30%, and the S&P
> 500 average would be trading below book value, which would seem
> strange. Many stocks are already below book value. Only question
> is, even if they were bought to sell off the pieces for a profit,
> who's going to buy the pieces? ...

> Back in 2000 the S&P 500 price to book was 4.5. The highest it had
> ever been. This is probably the best ultra long term indicator
> there is.

> Once a real trend starts, it can just keep going and going. Either
> up or down. There are always major pullbacks in bull markets, and
> major snapbacks in bear markets, but at the top you can be sure
> everyone is saying things are "great" and at the bottom you can be
> sure almost every person, analyst, talking head on CNBC, and
> everyone else will say that stocks are finished. Being a
> contrarian can work, but only at extremes.
> [ From http://www.traderreview.com ]

This is a pretty good analysis, as far as it goes. The price to book
index is a valid long-term measure for determining investment
strategy.

Unfortunately, the writer makes some methodological errors. First, he
only looks at historical data back to 1982. The market has been in a
bull market almost every year since then, as he acknowledges, but then
he fails to draw the obvious conclusion that he should go back
farther, preferably to the 1800s.

Since he doesn't understand that, he therefore doesn't understand the
Law of Mean Reversion. If he had applied that law to the full range
of historical data, he would have been forced to conclude that we're
facing a stock market crash.

Instead, he makes the silly statement, "Any more than 30%, and the S&P
500 average would be trading below book value, which would seem
strange." Everything about the last 15 years or so has been
completely strange, so it's silly to say something else might seem
"strange."

Actually, by the Law of Mean Reversion, his analysis should show that
the S&P 500 average will trade well below book average, to compensate
for the long bubble period.

Still, this is a pretty thoughtful author, so on a scale of 1 to 10,
I would give this person a "5", where almost every other commentator
in the world is a "1".

> Do you think there's merit here in getting into the market at
> least for a short time? What is MACD? Moving average something
> Daily? This guy [see below] told everyone to get out of the market
> months ago. Now he believes the market has hit bottom based on
> this MACD factor. Is there merit to it? Perhaps all it takes is
> everyone believing there's merit to it, then everyone jumps back
> into the market. Most people believe the market will go back up.
> Won't that make it go up? Your humble student.

Here's a pretty good discussion of MACD:
http://stockcharts.com/school/doku.php? ... rage_conve

> This is an interim STREET SMART REPORT hotline update, Tuesday,
> October 28.

> Short-term MACD triggered a buy signal at the close today, which
> is the re-entry signal for our Seasonal Timing Strategy for its
> favorable season. ...

This discussion of short-term market indicators is mind-numbingly
moronic.

Perhaps the MACD might provide useful information during "normal"
times, but none of these short-term indicators is useful today.

Playing the stock market today is the equivalent of playing a
roulette wheel. For the last several weeks, the major characteristic
of the stock market is a huge movement at the end of the day, often
several hundreds points one way or the other on the Dow within a few
minutes. This huge movement is caused by panic buying, but more often
by panic selling by hedge funds and mutual funds to meet margin calls
and collateral calls.

In this environment, all short-term indicators are totally
meaningless. I'm not exaggerating in the least when I say that no
one knows what's going to happen in the last half hour of the trading
day, since it appears to be completely random.

So betting on stocks today is more likely than not to be a losing
proposition in the very short run, but that doesn't even include the
expectation of a stock market crash. The first newsletter you quoted
talked about a 30% correction -- this is expected by many people.

So my answer to your question is this: Unless you're addicted to
gambling -- in which case you should start going to Gamblers
Anonymous meetings -- do not under any circumstances get into the
market at this time, or in the foreseeable future.

Incidentally, on a scale of 1 to 10, your second author gets a "1".

Sincerely,

John

[Higgenbotham]

Hig, thanks for the expansion of what i was trying to say. I suspect that the relative cost of health and education have a lot to do with this factor. Of course, there might come a time when people stay married and this stuff moves back to the home. Funny that people build these fancy homes then don't fix their meals in them. Of course, not many people really know how to cook today. I think the people that know how to do without will do well in a deep recession or depression.

Before he became a tax protestor, Irwin Schiff wrote a book back in the 1970's called, "How the government is fleecing you". In it, he brought up the steady cost of health and education against the economy and it is he that described this as evidence that the rest of the economy was faltering, as this was a modern phenomenon and wasn't present prior to the 50's. When it finally becomes apparent what is being called GDP today, it becomes clear as to why constants now cost a fortune when they were affordable before. Now we are looking at a socialist taking over the government during a downturn, which means we will be paying even more people good money to do nothing. Maybe they will hire the debt creators, so it will be a wash.

I'm still thinking about what you are saying. I had always mostly accepted what could be called the "Peter Drucker thesis" which went something like (round numbers): agriculture used to be 50% or our economy and now it is 3%, then manufacturing was 50% and it is on its way to 3%, and we get and will get more out of the 3% that is agriculture (and will be manufacturing) than we got out of them when they were 50%. His thesis goes further to say that education and health care are the growth industries that are filling the vacuum.

We've probably all seen the old medical bills where the doctor made a house call to deliver a baby and was paid with 10 pounds of potatoes and $10 cash, and that might be equivalent to $200 today. And I think the cost to deliver a baby today is somewhere around $15,000. Why are we paying the extra $14,800? Are we receiving 75X the value? Probably not, but the "Drucker thesis" if I understand it correctly is that we are creating so much wealth so much more efficiently in other areas that we can afford it. That could be countered with an observation and a question. The observation being that if we really can afford all this, then the fact that we are so far in debt on every level does not make any sense. The question would be what would the procedure cost if insurance and lawyers weren't involved? I've tried to test that question twice over the years. I haven't needed much medical care, but every time I have gone to a doctor you know the first thing they want is your insurance card. I have told them that I have one but asked if they would like to forget about the insurance and have me pay them in cash. Both were happy to take me up on that offer. It evokes a very interesting response as the doctors recite a list of complaints regarding the insurance process and how it increases their costs. Based on what I heard them describe, the cost of medical care can drop about 3 to 5 fold if the insurance companies and lawyers can be cleared out of the picture and we can go back to paying the doctors directly. If I'm not mistaken, your estimate of the cost of a heart bypass operation in the US versus Thailand makes that ratio look reasonable. Carlos Slim, likely the richest man in the world at present, has announced that he will build a chain of hospitals along the southern US border and will contract with US insurance companies to deliver medical services at vastly decreased costs. I have also read that insurance companies are contracting with providers in Asia. I would guess, then, that his opinion is that we really can't afford it and that health care is really too high a percentage of US GDP. I will need to do more research, but it seems worth looking into.

[The Grey Badger]

So learning Spanish well can actually be a life-saving move! A dedicated ambulance lane between El Paso and Juarez, perhaps?

[Higgenbotham]

I don't know if Carlos Slim has made any progress on this idea, but here is one reference from last year:

"For example, he proposed that the United States transfer large amounts of Medicare patients to huge hospitals that could be built in northern Mexico, where health care costs would be lower."

http://www.cbsnews.com/stories/2007/03/ ... 3316.shtml

"Amounts" seems an odd way for a CBS News writer to put it. I wonder if he plans to make house calls.

[John]

From a web site reader:

> I must say that after years spending my time surfing the web,
> your site has been the most beneficial site for me.

> One question .... do you think a world war will ever result soon
> ( maybe in 10 years time).

> The reason I ask this is becos I am already 47.....I dont want to
> spend my golden years in misery. Just your opinion...
> thanks.

It's impossible to predict such things as the date that a war will
start, since it depends on chaotic events (in the sense of Chaos
Theory) which cannot be predicted. However, with the growing
financial crisis, it seems likely that many regions of the world are
going to be destabilized.

I just posted an article about how the financial crisis is
destabilizing China. This is an example of how war may come fairly
quickly (i.e., within a year).

** China's economy slowing down significantly
** http://www.generationaldynamics.com/cgi ... 02#e081102

In other words, it may well be that it's the financial crisis that
will drive the war crisis.

On the other hand, WW II didn't begin until a decade after the 1929
crash, so perhaps the various compromises and bailouts will manage to
postpone things for a while.

Sincerely,

John

[John]

From a web site reader:

> It is with a certain amount of trepidation, that I respond to the
> deflation and increase buying of the Dollar. For some time,
> June2009, I have been long the Dollar/British Pound, Dollar/Euro
> and Euro/Yen. I am not a genius, just aware that everyone were on
> the other side of the boat. So, against the odds a very working
> class kid made some dough. But where now, do I keep my money in US
> treasuries, ride the long and hope my counterparties can pay. Buy
> Gold, plant a safe in the garden, a strong box in Zug; just who do
> you trust with such highly articulate liars in "control"? Your
> comments are much welcomed.

As you can imagine, there are no simple answers to these questions,
and nothing is absolutely safe.

If you have enough money, it's generally a good strategy to diversify
-- keep some money in different currencies, for example, and keep
something buried in your basement.

Keep in mind that if a major international crisis occurs, then
domestic banks may (or may not) fail, and it may be difficult to
extract money from foreign banks, even if they don't fail.

I wish I could give you more specific advice. If you read through
this entire thread, you'll get other ideas. But unfortunately we're
entering a time when nothing is certain.

Sincerely,

John