Tragedy And Comedy

By: Michael Ashton | Mon, Mar 22, 2010
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Do you really want to read another comment that concerns healthcare and Greece? Really? Then read on.

The healthcare bill passed the House of Representatives on Sunday. Technically, two bills passed: the Senate bill, and a reconciliation bill that the Senate theoretically will now also pass (although the GOP is making it sound as if there are parliamentary reasons that bill may not pass, I am skeptical that the Democrats would go so far off on a limb only to have it sawed off).

Obama crowed, after the passage of the bill, "This is what change looks like!" The statement of course prompted the large majority of Americans who oppose the plan (54%-41% according to a Rasmussen tracking poll here) to enthusiastically support change, starting with da bums in Congress.

Whether you're a Republican or Democrat, if you're an American it must turn your stomach to read (See Bloomberg here) that the vote was won partly because some Democrats who have decided not to run for re-election switched sides after previously having voted "no" on a version of the bill in November. Those Democrats decided that, with no election to worry about, it wasn't so important to represent their constituents. If I was one of those constituents, I'd be upset...Congresspeople are starting to behave like star athletes. "Hey pal, I don't care if you are a free agent next year; right now you're still under contract."

But now, barring something odd happening in the Senate, this bill is the Law of the Land and we ought to brace for its ultimate impact (which I believe will be quite inflationary, which is the usual impact when the government gets more involved in a sector).

Stocks did well today, after being lower on Friday in anticipation of the bill and again overnight after its passage. I am a bit confounded as to why they should be higher today rather than significantly lower. I suppose I can understand how a giant bill like the healthcare bill can create winners and losers (although since it raises taxes right away without making sweeping changes for a number of years, it would seem that everyone is a loser in the short-run). But it doesn't make sense that there is a net gain that would help stocks broadly.

Suppose that Big Pharma somehow benefits, even though the government will push people to use generics. The Pharma bulls will say that such a benefit springs forth because the new health care system will bring them so many new clients. Those new clients will spend more money...except that the whole point of the health care bill is that it will somehow save money overall. If it does save money, then health care providers will provide more services for the same (or less) money. That doesn't sound good for the stocks. If the bill doesn't save money, then that might be good for health care providers, but that money is being taxed from someone or borrowed from someone or printed. That means it is spending that is being redirected to the health care companies from what would otherwise be spent on other things, stuff bought from companies that represent the rest of the market. In that case perhaps it is good for health care companies, but bad for the market generally. I sure as heck can't see how the bill can help both health care goods and services providers and the market, unless somehow the government correctly determined that the prior distribution of consumption, settled upon by billions upon billions of individual transactions, was "wrong" and that the new distribution of consumption represents a better use of societal resources.

Sure.

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Meanwhile, in Europe, the Bundesbank (which was the central bank of Germany when that meant something) suggested that IMF loans - which some had felt was the solution for Greece - should be restricted to countries with temporary needs. According to the story in the Wall Street Journal:

"According to its mandate, [the IMF] can only use the reserves at its disposal to overcome short-term balance of payments problems," the Bundesbank said in its monthly report for March. "By contrast, a financial contribution to the solution of structural problems that have no implicit need for foreign currency -- such as the direct financing of budget deficits or the financing of bank recapitalizations -- is not to be reconciled with [the fund's] monetary mandate."

That sounds like a big whoops, since if the ECB won't do it and the IMF can't do it, there aren't a lot of solutions for Greece if it can't sell enough of its debt. However, German Chancellor Merkel later in the day sounded as if she was still open to the idea. The point is, though, that the whole matter is far from being settled; it is most decidedly unsettled despite the brave pronouncements of the European finance ministers just a week or so ago. Possible outcomes still range from a smooth resolution to a punting of Greece out of the Euro and/or a withdrawal by Greece and a return to the drachma.

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As a quick aside, I want to thank the readers of this column who have brought to my attention the fact that several other analysts/journalists are now using the "core inflation ex-shelter" analytical tool (after I first wrote about it on October 16th of last year). I am told that the King Report quoted Jim Bianco's observation that "Core CPI less OER (owners' equivalent rent) and RPR (rent of primary residence)" is running near 12-year highs. Also, thanks to a friend for this March 18th reference in The Economist.

Of course, readers of this column will know that this insight is months and months old. And I thank all of you for noticing and giving me some credit! I think Dolly Parton sang something about this...I guess it's enough to drive you crazy if you let it.

On Tuesday, a skinny week of data kicks off with Existing Home Sales. If you like roller-coaster rides, Existing Home Sales has been a blast (see Chart, source Bloomberg. See? I cite my sources). After bottoming (maybe) at a 4.53mm unit pace in November 2008, sales skyrocketed to 6.49mm in Nov '09 before plunging again. The consensus guess is 4.98mm from 5.05mm last month, but if you think that's anything but a wild guess, think again. New Home Sales recently has been plumbing new lows, but Existing Home Sales depend a lot on how fast the bank repos are moving and whether the home buyer credit is having a second effect. Lower is still a decent guess (but emphasis on "guess").

Wheeee!

The economic data in my view right now are playing a back seat to the drama in Greece and in Congress. (Actually, I suppose that would be a tragedy in Greece and a comedy in Congress). Bonds, being generally traded by sober, risk-averse folks, are hesitant to make a meaningful move lower (higher yields) on the modest improvement in economic data and the promise of much more future supply until the chance of a blowup in Greece have fully receded. And perhaps that's the formula for bonds, since the risk of a blowup somewhere is likely to be with us, and nearby, for a long time. The 10y Note contract traded +9/32nds today, with 10-year yields at 3.66%.

Stocks, however, are mostly traded by frat boys and they'll tend to keep partying until the police come to break up the kegger. I am exaggerating, but the trading character of the two asset markets could hardly be more different even if some bond traders can be cowboys and some equity investors can be staid and sober. Stocks really do seem to ride on waves of sentiment that can have lives of their own, rolling along until being knocked down. Stocks have gotten near enough to completing their technical work on the upside. I don't think the reward outweighs the risk of being long.

 


 

Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA
E-Piphany

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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