The Economy, Capital Markets, Healthcare and Geopolitical Events

Morris Segall      2009 economy, Capital Markets, Cash for Clunkers, economics, Geopolitical, healthcare plan, trends, unemployment

Today the government released its third and final revision to the second quarter GDP numbers and shaved the 1% contraction to .7%. There were no major shifts in trends from the previous report but the positive direction of business fixed investment and consumer spending was aided by a surge in government spending, as expected. As we have stated previously, it appears the recession ended in the second quarter. Led by rising home and auto sales, positive trends in industrial production and retail sales continued through July.

The expectation was for these trends to continue through August and into September led by continued government stimulus and subsidy programs. However, August numbers for existing and new home sales declined in August from July levels and factory orders for durable goods in August were also unexpectedly down from July levels. This makes us uneasy about the underlying improvement in the economy. We have stated previously that government stimulus and subsidy programs, notably the “Cash for Clunkers” program and the tax credit for first time home buyers, were likely to spur positive GDP growth in the third and fourth quarters of this year. The question in our mind was what happens when those programs expire. Now we see that despite the positive demand stimulus from the government programs and the momentum of increased home sales and prices and auto sales in June and July, there was no follow through in August. And there should have been. The decline in factory orders is particularly disturbing because the positive trend in auto and home sales should be leading to a steady improvement in factory orders and production to replace goods sold.

The decline in many of the components of the factory orders report suggest that businesses are not ready to ready to begin a sustained capital spending uptrend. If they are not going to increase spending with government stimulus, what happens when that stimulus ends. It will be very important to see housing and business spending levels for September and the remainder of this year to gauge whether we are really in recovery or facing a downleg in the “W” shaped economic outlook we raised in our August 3rd blog entry, “Turning the Corner…“. While the “Clunker” program has expired we expect the current home buyer tax credit program to be extended into next year given the success of that program.

Today also marks the end of the third quarter and stock markets around the world concluded one of the most successful quarters in decades. The Dow Jones Industrial Average gained 15% in the quarter and overseas markets showed bigger increases including Europe and Japan as well as emerging markets. Fed by infusions of liquidity from central banks and the specter of worldwide economic recoveries, capital markets surged. In recent weeks, increased speculation and appetite for risk have reappeared in debt and banking transaction markets. Year to date the Dow is up 50% from its March lows. Overseas markets show comparable and greater gains. But at this point both bond and stock markets here and abroad are stretched and need further evidence of economic and corporate profit improvements to protect present gains and sustain additional appreciation. If the outlook for worldwide economic growth proves correct we believe worldwide debt markets are vulnerable to declines from higher interest rates next year from the current depressed levels. Here again, economic data over the remainder of this year will influence the direction of worldwide capital markets. If our concern over a “W” shaped economic outlook proves correct, expect a major correction in U.S. and overseas markets from current levels. We are watching developments closely.

In our blog entry, “Healthcare Reform and the Democrats…“, of August 6, we raised concerns over passage of the President’s healthcare proposal and the split in the Democratic Party that we felt would be the undoing of the President’s plan. Events since then have validated that concern and it now appears that for the same $1 trillion price tag Congress will pass a healthcare bill that omits a public option. This will leave the private healthcare and pharmaceutical industries intact and escaping significant third party competition. The political “fallout” is considerable. The President is wounded and his party is split. There is concern about Democratic Party losses in next year’s Congressional elections as the debate over healthcare reform has been framed as big government socialism versus libertarian, individual democracy. A perceived defeat of the President and a fractious Democratic Party will have international implications as both our allies and foes evaluate the strength of this President.

Speaking of geopolitics, this weekend’s victory of Angela Merkel in German elections lends further support to our contention that Europeans are turning to the political “right” (See our website article, “I am Mad as Hell…“, March 23, 2009). Running on a pro business, lower tax platform, Chancellor Merkel and a right of center, pro business party won nearly 50% of the popular vote. The long time Social Democratic Party garnered less than 25% of the popular vote, its worst defeat in postwar history. Angela Merkel joins Nicholas Sarkozy of France heading a center right European government and the victory of center right parties in this year’s European Parliament elections. Furthermore, it is widely believed Britons will elect a Conservative government in next year’s elections. The disillusionment of European voters with socialist governments is the direct result of the economic damage to those electorates from the recession and the increase in protectionist sentiments to protect domestic jobs and incomes.

Additionally, geopolitical events from Afghanistan to Honduras are hurting President Obama and his foreign policy agenda. The President is in danger of being viewed as impotent and more style than substance. While he remains very popular overseas, his policies and lack of forceful actions in the face of antagonistic behavior will erode his ability to lead a free world coalition against rising threats. We will publish on our website in the near future an in depth analysis of international events and the Obama foreign policy.

In summary, as we conclude the third quarter recent economic data is disquieting and if continued will threaten the outlook for economic recovery in the U.S. and the large gains in worldwide capital markets achieved to date. Overseas events also threaten to undermine the “honeymoon” in foreign affairs enjoyed by President Obama to date. We are not changing our intermediate and longer term positive economic and capital markets outlooks at this point but we are watching data and events over the next three months very carefully.

Morris R. Segall, CFA, CIC

Healthcare Reform and the Democrats: We have seen the enemy and they are us!

Morris Segall      Blue Dog Democrats, democrats, economics, economy, healthcare plan, healthcare reform, obama, republicans

As I feared from the beginning, the future of President Obama’s proposals were going to be in the hands of conservative or “Blue Dog” Democrats largely from the south, west and midwest. Their opposition to the high costs of the plan and a large federal presence in the system was going to be the defeat of the President’s program, rather than the expected “knee jerk” Republican opposition. The Republicans are now a marginal party lacking numbers and influence in the Congress to pass or defeat any legislation. It now appears the “Blue Dogs” will win out and “water down” the President’s plan to the point where it will be largely a failure in terms of progressive healthcare reform. It will eliminate a federal entity to offer insurance in competition to the private insurance industry. It will exempt thousands of so called small businesses, even those with payrolls of $500,000. It will also extract higher health insurance premiums on low-middle income wage earners. And most egregiously, push more of the increased Medicaid burden on the states who are already facing massive budget deficits and have no money to pay for anything. As a result of the “Blue Dog” opposition, in conjunction with the negative statements from the Republicans and the propaganda from the healthcare industry, popular support for the President’s program has been seriously eroded and the fact that Congress will adjourn for the month of August without passing healthcare reform legislation will give the President’s opponents an entire month to erode popular support further and “gut” the pending bills in committees even more.

I fear the final result will be little if any real healthcare reform; increased premiums for insured’s, particularly if private insurance firms have to accept less healthy members; and a continued increase in uninsured people as businesses are exempt from providing mandatory healthcare coverage. The winners will be the insurance and pharmaceutical industries who will have “dodged” a bullet for massive healthcare overhaul and reform. The costs to them will be a fraction of what the President’s program would have cost them and they will make it up by charging higher prices to the public. The losers will be the public who will continue to pay more for an unworkable system and doctors who will get paid less in an effort to control healthcare costs. By the way, the cost saving from the current compromise plan agreed to by the Democrats in the House is  $100 billion, the amount we sunk into General Motors and Chrysler in a futile attempt to save them from bankruptcy. As I said in my previous piece, it would appear we are more prone to spending billions saving corporate America than insuring the health of the American public.

The Democratic Party offered the American public comprehensive healthcare reform in the last two elections and the American public gave the Democratic Party the electoral majority they needed to get it done. It appears the Democrats decided that was a promise they are not willing to keep.

Morris R. Segall

Recommended reading:

Turning the Corner: GDP, Housing and Cash for Clunkers

An Open Letter to Congress

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An Open Letter to Congress

Morris Segall      government, healthcare, healthcare plan, insurance, medical insurance, Medicare, obama

Dear members of Congress,

I am writing to you regarding the current debate on President Obama’s national healthcare plan. As you may know I head an economic and capital markets research and consulting firm. My firm and our affiliate, Sage Policy Group, engage in economic and public policy analysis and ideas. Healthcare is one of several policy issues we have and are currently studying.

I have been involved in either administering or participating in private sector insurance programs for most of my 25 year corporate career. More recently, I have had to engage both the public insurance program of Medicare and the private hospital and insurance industry as a result of chronically ill parents who are both incapacitated. As a result, I have developed a keen understanding and awareness of the mortally broken and dysfunctional healthcare system currently in place in our country. After opposing the Clinton healthcare plan over 10 years ago I have come to the realization that comprehensive and affordable healthcare for most Americans must be built around a Federal entity.

The present system based on the private insurance and drug industries has not contained healthcare costs and has not increased the number of insured Americans. To the contrary, medical insurance costs are skyrocketing, even in the midst of this great recession. Many businesses report medical insurance plan increases in 2008 and 2009 well in excess of 20% and employees in those plans are facing higher deductibles and increased insurance premium and co-insurance payments, in some cases of nearly 50%. This at a time when American workers are facing historic unemployment and reduced “take home” pay from wage and salary reductions and fewer hours worked. Seniors on Medicare are now facing exorbitant costs for required drugs as they hit the “doughnut” hole in prescription drug coverage. While the costs of medical insurance and drugs go up, the reimbursements to doctors and hospitals are being reduced causing doctors to either leave practice or refuse to accept private insurance and Medicare patients. The increase in uninsured Americans forces them to seek medical treatment at hospital emergency rooms overwhelming those facilities. Likewise the increase in our aging population is now overwhelming acute care hospitals and nursing home facilities that are facing chronic shortages of trained personnel to care for an increasingly sick patient population. And the costs of hospitalization and nursing home care are crushing. Hospital and related services costs have increased nearly 8% in the six months ended this past May according to the Government’s CPI report.

So after decades of trying to fix America’s healthcare system and control escalating costs what is wrong? What’s wrong is we are asking FOR PROFIT companies that are primarily focused on increasing earnings and shareholder value and paying bonuses to its senior managers for doing so, to make less money by reducing its prices and accepting less than totally healthy insured’s that will “eat” into their profits. Critics of national healthcare raise the alarms of out of control costs, rationed and inefficient treatment in a federal system. Healthcare is already rationed if you are not on a corporate healthcare plan and if you have the misfortune of going to an emergency room and waiting for a physician for up to 12 hours, you will see firsthand the inefficiency of healthcare in today’s environment. This system is broken and will collapse entirely under the weight of the impending case load of the baby boomers. There are national crises that inure properly to the Federal government for solution.

It is now time to recognize the failures of the present system and move boldly toward a federal government health insurance program offering and administering, preferably under a single payor system, comprehensive, diagnostic and wellness programs to all Americans. It is also time to rectify the injustice in the Medicare prescription drug program and eliminate the so called “doughnut hole” in prescription drug coverage for seniors that forces many seniors to either skip their medications or have to choose between their medications and other necessities. But the cost of such a comprehensive federal program you say. How will we pay for it? What will it do to the federal deficit? How can it be run efficiently with some cost effectiveness?

No one is more cognizant of the erosion of U.S. finances than we. We have been warning our clients and audiences since last September when we first raised the specter of the long term cost to our currency and balance sheet from the huge bailout spending programs to resuscitate our economy. Now on top of that spending are ambitious spending programs of the President for energy independence, healthcare and education. The costs of huge federal deficits which we have projected in excess of $2 trillion this fiscal year and nearly that much in fiscal 2010 are already being felt in the currency and bond markets. The costs of such deficits will have to be borne by all of us, consumers and business, in the form of higher taxes and fees. We will also have to be creative in charging for increased government services on a means testing basis including higher co-payment terms for health insurance for those that can afford it. And don’t let the recent spate of propaganda from some medical authorities convince you there are no healthcare cost savings from wellness programs. You and I both know that just isn’t so.

We believe the American public has endorsed an increased federal presence in their lives with the election of a Democratic Congress in 2006 and the sweeping victory of President Obama in 2008 on a populist platform. We believe Americans are willing to pay higher taxes for increased government services and assistance in healthcare, education and energy which are draining middle class incomes and threaten our standard of living. If the U.S. government can spend billions on bailing out GM, AIG, credit card, banks, investment and insurance firms, what is our economic future and public health worth?  Therefore, I ask you to support the President’s proposal for a strong, comprehensive federal insurance program including a payor system. By the way, such a program would be an enormous help to the thousands of unemployed white collar managers, professionals, and administrators who have been especially hard hit in this recession. You might look at a federal health insurance program as the equivalent of the WPA program under President Roosevelt in terms of putting people back to work and helping to resuscitate the economy. Furthermore, this pool of highly experienced managers and professionals is one of the reasons I believe you can implement a large federal healthcare program successfully.

Sincerely,

Morris R. Segall

President

msegall@spgtrend.com