Do People That Have Health, Care?

The ACA is always at risk. At its baseline, it is at risk because of its gerry-rigged nature. (Try getting anything that requires just a tiny bit of sacrifice from Americans.) It would make  Rube Goldberg envious.

To keep most then-existing health insurers around it had to be cost inefficient and leave some of the skim for the health insurance industry. And the providers could not come out net negative.

And it is always at risk from "repeal and replace," one of the main planks of the republican party. But this recent foray in the House has showed that only repeal is possible. It cannot be "replaced"  because the nation cannot even decide if healthcare is a basic right or a commodity that some on the far right gleefully wish to deny others because the market cannot and never will provide supply at the demand (price level) that most Americans can afford.

 As economists, commentators, or cranks, we can fantasize about market solutions that will magically turn a very distorted and dysfunctional system into an Elysian Field complete with widgets that grow on trees and efficient market theorizers that pick up every loose penny as soon as it falls to the street. Maybe when more of Congress agree that healthcare is a right US healthcare will move much closer to universiality.

QALY’S (Quality-adjusted life year(s)) PROVIDE “OBJECTIVE” GUIDANCE.

This post takes the Author into dark and deep water. This post takes on healthcare economics straight on. Right between the eyes. The Author, as many readers know, was formerly a healthcare law and economics geek. He would have remained one, but grew ill watching the nation in the 1990s eschew healthcare cost containment.

QALY (quality-adjusted life years) is a formula for measuring the long-term effectiveness of a healthcare treatment or intervention. QALYs are often combined with a cost factor to assess and compare the relative value of a treatment or intervention. QALYs give healthcare economists and policy makers an important, if somewhat limited, method of valuing the cost and effectiveness of treatments across populations.

HERE’S HOW TO CALCULATE A QALY:

If a treatment or intervention provides one year of “good health”, it yields one QALY. Such a treatment could also yield more than one (or sometimes less than one), QALY(s).

As most of you know, the Author just underwent open-heart surgery. This intervention saved his life and he is now in “good health” again. Given an estimated life expectancy of 80, the Author has 30 more years of good health to expect (at least from the heart surgery), so the heart surgery can be assigned a QALY of 30.

QALYs can also be less than one, and many interventions yield less than perfect health. Death is assigned a factor of 0. Some health states are considered worse than death (consider Terry Schaivo). Below is a graph of QALY health state valuations using the EQ-5D weighting system:

Health state Description Valuation

11111 No problems 1.000

11221 No problems walking about; no problems with self-care; some problems with performing usual activities; some pain or discomfort; not anxious or depressed 0.760

22222 Some problems walking about; some problems washing or dressing self;
some problems with performing usual activities; moderate pain or discomfort;
moderately anxious or depressed 0.516

12321 No problems walking about; some problems washing or dressing self; unable to perform usual activities; some pain or discomfort; not anxious or depressed 0.329

21123 Some problems walking about; no problems with self-care; no problems
with performing usual activities; moderate pain or discomfort; extremely
anxious or depressed 0.222

23322 Some problems walking about, unable to wash or dress self, unable to perform usual activities, moderate pain or discomfort, moderately anxious or depressed 0.079

33332 Confined to bed; unable to wash or dress self; unable to perform usual
activities; extreme pain or discomfort; moderately anxious or depressed
-0.429

Note that the last condition yields a QALY of less than 0. Also remember that this scale is much generalized. This health state scale was taken from “What is a QALY”, published by Hayward Medical Communications.

LESS THAN ONE, LESS THAN A QALY?

Many interventions, as you can see from the health state scale above, yield QALY factors of less than one. For simplicity, let’s say that an intervention will provide someone with four years of health state .75. We then multiply 4 (life years) * .75 (health state) and get a QALY of 3. So this intervention (or treatment) provides 3 QALYs.

DARE TO COMPARE?

The intervention above yields 3 QALYs. If we know how many QALYs this intervention yields, we can compare it to other interventions for the same condition. A competing treatment for the same condition as above yields five years of health state .50. So we multiply 5 (life years) * .5 (health state) and get a QALY of 2.5. Ceteris paribus, the first treatment is a “better treatment” Or is it?

MORE YEARS OR BETTER YEARS?

The question above involves a topic close to the hearts’ of healthcare economists. (Or close to the spot where their hearts would otherwise be.) It is the Time-trade off. Below is a definition of the Time-trade off lifted from Wikipedia.

Time-Trade-Off (TTO) is a tool used in Health Economics to help determine the quality of life of a patient or group. The individual will be presented with a set of directions such as:

Imagine that you are told that you have 10 years left to live. In connection with this you are also told that you can choose to live these 10 years in your current health state or that you can choose to give up some life years to live for a shorter period in full health. Indicate with a cross on the line the number of years in full health that you think is of equal value to 10 years in your current health state.

The Time-Trade Off illustrates a problem with QALYs. They are only generalizations that do not account well for individual preferences. But as tools for economists and policy makers, they provide useful formulas to compare treatment efficacies. And when combined with cost-utility ratios, they allow cost-based efficacy comparisons to be made; turning health care decision making from the game of “whatever the doctor orders” to the science of what is most cost-effective.

MORE NEXT TIME…

In the next couple of posts we will discuss how to use QALYs to make cost-effectiveness determinations and how to address some well recognized problems with QALYs.

STAY HEALTHY OR HEAL FAST IN THE DESERT OF THE REAL!

posted by FOXP2 @ 3:13 PM   0 Comments

0 Com

QALYs AND COST-UTILITY RATIOS-COMPARING ORANGES TO ORANGES, ORANGES TO APPLES

Remember that a  QALY is a formula for measuring the long-term effectiveness of a healthcare treatment or intervention. QALYs are often combined with a cost factor to assess and compare the relative value of a treatment or intervention. QALYs give healthcare economists and policy makers an important, if somewhat limited, method of valuing the cost and effectiveness of treatments across populations.

KEEP YOUR EYES ON THE COIN

More examples. The cost of Treatment B for a disease is $50,000 and it yields 5 QALYs. The cost of Treatment A is $70,000 and it yields 6 QALYs. The calculation to compare the cost-utility ratios is:

Cost of Treatment A – Cost of Treatment B
__________________________________
No. of QALYs produced by Intervention A -
No. of QALYs produced by Intervention B

But before we run the calculation, let’s look at the cost of CALYs for each treatment. Treatment B yields 5 QALYs and costs $50,000. Five CALYs/ $50,000 = $10,000 per CALY.

Treatment A yields 6 QALYs but costs $70,000. Six CALYs/ $70,000 = $11,666 per CALY. So on its face, Treatment B is the more cost effective deal. But it should also be remembered that Treatment B yields 6 CALYs, one more year than Treatment A. Maybe that extra CALY is “worth it”. Let’s see what the cost-utility ratio is and then decide.

$70,000 (cost of treatment A) - $50,000 (cost of treatment B)
___________________________________________
6 QALYs (treatment A) – 5 QALY’s

$20,000
______
1

This means it costs $20,000 to yield 1 additional QALY. Cost effective? Who knows. But under current “QALY” cost-utility quidelines”, $20,000 per QALY is often seen as cost-effective. And for reasons we will look at in the next post, anything up to $50,000 per QALY is usually seen a “cost-effective”.

COST-UTILITY RATIOS DRIVE THE SUN AND WIND IN THE DESERT OF THE REAL!

ARE QALYs INHERENTLY BIASED IN FAVOR OF PREVENTION OVER CURE?

YES, WHEN YOU ARE TALKING ABOUT ZAMBIA AND BURKINA FASO*

An article in Slate Magazine, “Wrong Number: Is it Cost Effective to Treat the World’s Poor”, written by pediatric cardiologist Darshak Sanghavi, triggered the Author’s interest in revisiting QALYs. Sanghavi begins the Slate article with the story of one of his former students working in a remote Zambian clinic. A three-year old boy, weighing only 15 pounds, was admitted to the malnutrition clinic. When the student listened to the boy’s heart, the student determined that the boy had a serious heart malformation.

The student then emailed her former professor Sanghavi and asked it there were any inexpensive drugs that she could give the child. Sanghavi replied to the email stating that unfortunately, there were no drugs that could help the child. And without surgery, the child would almost certainly die.

THE ZAMBIAN MEDICAL SYSTEM DOES NOT HAVE THE RESOURCES TO HELP THE BOY

Sanghavi notes the seemingly obvious:

Pediatric heart surgery is fabulously expensive, often costing hundreds of thousands of dollars per case in the United States. Thus it would be foolhardy, goes the thinking, to offer surgery to poor African children who live on less than a few dollars per week. Isn't it better to invest in more cost-effective public-health measures, like mosquito netting to prevent malaria and vaccines against diarrhea? For decades, this kind of reasoning has been used to deny expensive but lifesaving treatments to the world's poor, most notably for HIV infection, in favor of more cost-effective measures focused on prevention. Dollar-for-dollar prevention is supposed to yield greater aggregate quality-of-life benefits than actual treatment.

Sanghavi then states that this argument, prevention buying lots cheap QALYs over expensive intervention, rigs the game so that the world’s poor will rarely receive expensive but effective medical care.

Know what? He is right. QALYs are economic calculations, not moral pronouncements. But unfortunately, money is a devilish limit upon otherwise salutary aims. And even the angels cannot manufacture more of it.

SO WHAT THEN IS TO BE DONE?

Most of the readers know that the author is an economic conservative and a social liberal. Nay, social radical. He believes that everyone on earth deserves a base level of support, food and health care. (Even uninsured Americans.)

To that end, he further believes that developed countries, and emerging developed nations such as Brazil and India, should be required to pay some percentage of their GNP, perhaps around 5%, to developing nations to eliminate hunger, provide medical care, alleviate poverty, and stimulate economic development. Of course the Author recognizes that the governments of some developing nations (and at least one large developed nation) are riddled with corruption. In all cases the funds drawn from developed nations should be provided both to the government and NGOs. This would require that they "compete" for efficiency and effectivenss. In cases where the governments are so corrupt that they cannot be trusted with the resources, the proceeds should go to NGOs.

If there are better solutions, the Author would like to hear them.

ESCHEWING THE CULT OF NATIONALISM SINCE 2001 IN THE DESERT OF THE REAL!


*Zambia and Burkina Faso are relatively poor, developing countries in Africa. The Author is confident that his loyal readers already know this, but offers this explanation for newcomers.

May 2017 Desert of the Real Economics Investment Newsletter

Desert of the Real Economic Analysis*

May 2017

JUST ONE MORE GREEK…FOR NOW…

Alpha.  All Good Things Start with Alpha

A POSTIVE ALPHA IS A FREE LUNCH**, WHILE THE NEGATIVE ALPHA INVESTOR GOES HUNGRY

Alpha can be a difficult concept to understand. The last newsletter took on the topic of Beta. Beta, as readers should recall, is the volatility of an investment when compared to the volatility of the S&P 500 Index.

Let’s start with the definition of Alpha:

Alpha is a risk-adjusted return on an investment. Alpha demonstrates whether your investment outperformed or underperformed a risk-related benchmark. If you outperformed the benchmark, then you got more reward for a given amount of risk. If the investment underperformed the benchmark, then you took on extra risk to get less reward. Alpha is measured in percent of overperformance or underperformance. (i.e., Alpha of 1, 2, or -.5 or –1)

The basic question that Alpha asks and answers is: did you get more reward or less reward for a given amount of risk? Let’s look at the concept of a “given amount of risk”. To do so, we will spin the Roulette Wheel.

Roulette is a mainstay at most casinos.[i] The Roulette Wheel is a spinning wheel with 64 numbers[ii]. The wheel is spun and then a ball is released. There are holes in the wheel that correspond to the numbers. There are two sets of numbers 1 through 32, with a set in red and a set in green. Your odds of hitting Red 1 or Green 32 are one in 64. 1:64. If you bet on Red 1 and win, you get $35 (Check). So 1 unit of risk gets you $35. But there are other ways to play. Lots of bets, but let’s focus on just as couple.

You can bet on the wheel hitting a Red number or a Green Number. One-half the numbers are Red and one-half are Green. You have a much better chance of winning betting on Red or Green, but your winnings are correspondingly smaller. You have a 1 in 2 chance of guessing Red or Green on each spin of the wheel and the payout is $1, 1:2. For a lower risk bet, you get a lower reward.

When people invest in riskier stocks or bonds, they demand a higher return. They demand a higher return because their chance of earning the expected return is less than it is with a safer investment. This is a logical approach, but it often breaks down. It breaks down for two reasons. First, it is often difficult to determine if you are exposing your investment to more risk than necessary for the expected return. Accurate information and projections are not always available to perform the risk/reward assessment. Second, most investors do not even engage in a thorough risk/reward assessment.

ALPHA GIVES MUTUAL FUND INVESTORS THE TOOLS TO ASSESS RISK AND REWARD

Let’s go back to the Roulette wheel. Remember the bet on a single colored number. One dollar, or one unit of risk, will get us a $64 (Check) reward. And one unit of risk will get us one additional dollar if we make a 1:2 bet on Red or Green. The same kind of risk/reward analysis, using historical data, is what Alpha can tell us. Alpha cannot guarantee future risk/reward, but it does give us historical data that we can use in making projections.

Let’s revisit the Alpha calculation we did in the earlier post. For this calculation we will use the Slow and Steady Value Mutual Fund. Last year, the Slow and Steady fund returned 10%. And in doing this calculation we will bring in a couple of other financial concepts. You won’t need a calculator Just follow the Bouncing Ball . . .:

1. Risk-free rate of return. One of the first things you need to know to calculate alpha is the risk free rate of return. This is not hard to calculate, however. The risk-free rate of return is the interest rate paid on a US treasury note. Why the Treasury Note? They are considered risk-free because they are guaranteed by the “Full Faith and Credit” of the US government. So let’s say that a 6-month Treasury note is paying 4%. So the risk-free rate of return is 4.

If we invested in any investment considered to be more risky than the US Treasury Note, like stocks, bonds, nearly anything else and earned less than 4%, we got less reward for taking more risk. But if we invested in nearly anything else and got more than 4%, we might have gotten more reward for less risk. But we won’t know until we do the Alpha calculation.

Let’s follow the analysis and work up the Alpha equation at each step. Slow and Steady returned 10% last year. The risk-free rate of return was 4%.

10 (Slow and Steady Return-4 (Risk free rate of return)) = 6. Slow and Steady exceeded the risk-free rate of return by 6%. Pretty good. But we still won’t know if Slow and Steady gave us a higher return or a lower return for the amount of risk we incurred until we complete the Alpha calculation.

2. Excess Return. In a good year for the stock market, many stocks and most indices will have a higher return than the risk-free rate of return, or the interest paid on a Treasury Note. Slow and Steady had an excess return of 6%. However, the excess return has to be considered in light of a benchmark for similar investments.

Slow and Steady is a value stock mutual fund. For a comparison with an index of comparable stocks, we will compare it with the Russell 1000 Value Index[iii]. This is an index of large capitalization value stocks. Last year this index returned 7%. So the benchmark excess return for large cap value stocks is:

7 (Large value stock benchmark)-4 (Risk free rate of return) = 3

3. Beta and Expected Excess Return. Remember Beta is a volatility measurement. We need this figure to compare our risks with our returns. The excess risk we would expect for a our large value fund is calculated as follows:

Beta * Excess Return for Benchmark = Expected risk-adjusted return

.8 (Beta for Slow and Steady) * 3 (Excess Return for large value index) = 2.4

So the expected excess return for Slow and Steady is 2.4%. This number is critical. This tells us the return we should have earned on a value stock mutual fund. If Slow and Steady mutual fund exceeded this 2.4% return, then the investor for more reward for less risk. But if our mutual fund lagged this 2.4%, then we got less reward for the risk we took by investing in a Slow and Steady.

4. Alpha. Whew. Finally. And as you have figured out by now, Slow and Steady placekicked the competition and earned us a lot of excess return for the risk we took.

6 (Slow and Steady’s Excess Return) – 2.4 (Expected Excess Return) = 3.6 Slow and Steady has an Alpha of 3.6%. This means you got a return of 3.6% above and beyond the return you should have expected given the risk that you took (as measured by Beta) for investing in Slow and Steady. You should send the Fund Manager a Christmas Card and a Chia pet.

HOW DO YOU FIND THE HIGH ALPHA FUNDS?

Morningstar is a common source of investment information. Many public libraries have Morningstar services. Your broker or investment planner may also have access to Morningstar services. Also, many mutual funds will post their Alphas and Betas on their websites. But remember, Alpha is only one measurement in the selection of a mutual fund. But it is an important one.

Stock Update 

Last month the Desert of the Real stock portfolio was much like Humphrey Bogart and Gloria Grahame in the 1950 Film Noir classic, “In a Lonely Place.  This month it feels like “The Asphalt Jungle,” the 1950 John Huston directed classic. Set in an urban wasteland that was Cincinatti,  Ohio, the film is littered with back schemes, double crosses and weird, almost trivial character glitches that collapse their worlds. 

There are several stocks we are still looking at for breakout moves. But the markets are in trading zone and we are not looking for movement, at least upward movement, in the near term.  The market can’t move forward and won’t move back. After we are done looking at option positions this month, we will take a crack at more stock screens and try to come up with some more ideas. And Author Julie will have more time over the summer to look at some biotechs ready for big breakouts or breakdowns. 

STOCK             SYMBOL                                  Price 5.12.17                  SIGNAL

Aeri Pharmaceuticals        AERI                           39.05                             Breakout at 52

Neuoraderm                     NDRM                         23.65                            Breakout at 29

Vanda Pharm                  VNDA                          14.50                            Breakout at 16

Kindred Bioscience             KIN                               7.00                           Breakout at 7.50

Essent Group                  ESNT                            36.72                           Breakout at 39

KNOW GREEK, KNOW GEEK, IN THE DESERT OF THE REAL!

*We wish to announce the launch of Feightner Consulting LLC. Feightner Consulting will research and develop white papers and other knowledge documents for industry and business. Julie Feightner is the President of Feightner Consulting LLC. You can visit us at feightner.consulting@gmail.com. Our website will be up soon. 

Desert of the Real Economics is now a member of the Feightner Consulting LLC family of companies and is an assumed business name of Feightner Consulting LLC. (This should keep our lawyers pacified.)

**Actually, the No Free Lunch debate has tied down mathematicians, economists and philosophers. It has several websites and is often considered in terms of lost opportunity costs. Every choice you make has a next, best alternative that you could have chosen but didn't. That is, the price you paid for doing whatever it is you did was the opportunity you can no longer enjoy. But if considered in the context that comes to mind when regular people hear the phrase is that someone cannot get something for nothing unless someone, somewhere, gets nothing for something.

The Author Rob’s take on the No Free Lunch debate is that we have one massive free lunch, brunch, dinner, supper and endless snack bar overhead every day. The sun makes the world run and only in a cosmic sense is it not a Free Lunch. Just like the beer at the Delta House Rush Party, it "don't cost nuthin'."So let’s leave it there.

[i] We will use a gambling analogy because it is a good demonstration of “risk and reward”. Gambling is not the same thing as investing, however.
[ii] Except at the casinos, where they add one or two zeroes. These zeroes lower your odds of winning and make sure that the house always wins. This is the best argument one can make against gambling at a casino. It is statistically a game you cannot win.
[iii] The symbol of the ETF for this index is IWD. http://finance.yahoo.com/q?s=IWD If we were looking at another type of mutual fund, such as the Afterburner Tech Stock fund, we would compare it with an index of tech stocks.

---

A Classic Post that Never Loses Relevance. From 2006.

THE INEVITABILITY (AND NECCESSITY) OF BEING WRONG LOTS OF TIMES 

CREATIVE DESTRUCTION IS THE FORCE OF RADIAL AIRCRAFT ENGINE IMPROVEMENT, ECONOMICS AND THE DRIVER OF EVOLUTION

One of the Author’s favorite writers is Kevin Cameron, the Technical Editor at Cycle World magazine[i]. Mr. Cameron writes a column called “TDC” (Top Dead Center). Mr. Cameron is likely an engineer and he knows a lot about engines and the mechanics and technical intricacies of motorcycles. And he is able to explain these concepts clearly and concisely in his column. He is the kind of guy you would like to have as a neighbor or a friend to talk with about motors, mechanics and motorcycles.

January’s TDC was about spark duration in engines and how changes in spark duration aided (or degraded) the performance of air-cooled radial aircraft engines, nitrous-burning dragsters and two-cycle engines[ii]. Particularly interesting to the Author was the discussion of radial aircraft engines. The performance curve of the radial aircraft engine peaked shortly after World War II[iii]. The jet engine replaced these workhorses in fighter aircraft by the time the Korean War began.

Engineers struggled to squeeze every ounce of horsepower from these huge radial engines before and during World War II. Lives and victory over the Axis powers depended, in part, upon the performance of these machines. So lots of solutions were tried. A few worked.

ORDER FROM APPARENT CHAOS

Mr. Cameron’s February article is entitled “Untying Knots”. Cameron reviewed documents circa 1920-1926 from the military’s aircraft development center. The documents were related to the testing of early rotary aircraft engines. The point of the article was how small changes to the interrelated elements of engine operation had large, and often fatal, effects upon other elements of engine operation. Change one thing and another thing fails. Tweak this and then that breaks. Yet it is only through these putative “mistakes” that success emerges. And over time with much experimentation, and almost countless failures, solutions emerge. Creative Destruction. Order from apparent chaos.

CREATIVE DESTRUCTION AND NATURAL SELECTION

“Creative Destruction” is a concept and a process originally developed by Joseph Schumpter in his 1942 book “Capitalism, Socialism and Democracy”[iv]. Creative Destruction is the process by which product and technological innovation challenge, overtake and eventually supplant existing firms, services and products. Examples are PCs that eliminated many mainframe and minicomputers, diesel locomotives that replaced steam engines, and the cassette that supplanted the eight-track. This Creative Destruction is the engine of innovation that creates new value even as it destroys the value of existing firms.

Evolution is a similar process. It of course operates without direction or design, but it has the same effect as creative destruction. Small mutations (putative “mistakes”) in organisms compete for resources with non-mutated organisms. Most fail, like nearly all of the radial aircraft engine experiments. But a few succeed and pass their genetic information on to the next generation. Over vast periods of time and nearly countless small experiments, different, and better, organisms move forward.

THE SAME THING HAPPENS WITH ENGINES AND EAGLES.
HATE WALMART OR MICROSOFT? WAIT A FEW DECADES.

Better performing radial engines resulted from multiple experiments. And they worked well. However, the radial engine was creatively destroyed when the jet engine came along. And the same fate will probably befall the jet engine.

Similar fates await living organisms. It is commonly stated that 99.99 percent of species that ever lived are now extinct. The Creative Destruction that is the process of evolution ensures that this will be the result. Just as Creative Destruction will probably knock out Microsoft, WalMart and yes, possibly even Ducati, at some point in the future. And probably the human species, felines, canines and cetaceans. [v]

But there is another way to conceive of Creative Destruction. Each improved iteration of an organism, idea, a product, or a service has a better chance of survival by avoiding subsequent failure. One can also think of these as the beneficial mutations that drive the evolutionary process.

Similarly, failed engine designs or noncompetitive companies are cast aside, like deleterious mutations. There elimination removes the probability of similar failures in the future.

FUEL INJECTION REFUTES IRRREDUCIBLE COMPLEXITY?

But just one final twist. What has failed in one iteration may yet comeback as a positive addition in the future. Sometimes changed conditions can later resurrect and idea or product feature that previously failed. Consider fuel injection.

Fuel injected engines were built at least as far back as the 1950s. These systems were mechanical and did not function well enough to receive broad acceptance. In the 1980s, however, computer technology took over the fuel metering functions of fuel injection and nearly all current vehicles have fuel-injected engines. So much for irreducible complexity!

MISTAKES MADE IN PURSUIT OF INNOVATION NARROW THE FIELD FOR SUCCESS IN THE DESERT OF THE REAL!


[i] www.cycleworld.com
[ii] Old school dirtbikers, streetbikers and snowmobilers will remember the frustration of two-stroke engine spark plug fouling. And the spare plugs that one bought by the dozen. I cannot count the number of spark plugs that I replaced in two-stroke engines. But the solution to this fouling is elegant.  In a two-cycle engine, the air-fuel mix contains a small amount of atomized oil. The oil has to be in the mix to lubricate the mechanical parts of the engine.  So occasionally when the spark plug fires there is a lot of engine oil surrounding it. When this happens, the oil will not burn like the fuel mixture and the plug fouls out. The solution was to increase the duration of the spark. So when the spark plug fires anda there is only oil around it it will spark long enough for the oil to pass and the fuel mixture to blow through the spark.
[iii] Radial engines are still used in some aircraft and power many of the antique aircraft so popular at air shows. And just as the descendants of the dinosaur soar overhead as our feathered friends (modern birds), the radial aircraft engine lives on as the air-cooled, pushrod activated, single-pin crank V-Twin that powers Harley-Davidson motorcycles.
[iv] http://en.wikipedia.org/wiki/Creative_destruction
[v] Forgive the Author if he is mixing Orders, Families and Species. He doesn’t know much about taxonomy.  That is what the Author Julie is for.

posted by FOXP2 @ 6:09 AM   0 Comments

WE WERE THE MEATMEN...AND YOU SUCK!!!* WELL, ACTUALLY YOU DON’T SUCK, BUT YOUR ECONOMIC FUTURE MIGHT SUCK.

In the last Desert of the Real Economics post, the fading future of “work” was addressed. Unless you live in Salt Lake City or a gated community in the Deep South, you are starting to  see the hints that AI and Robots really are coming for your jobs. (Hint: If you have a Confederate flag on your pickup and a Gadsden flag on the back of your bass boat, they already “done come for your job and took it.”) 

NANA AND GAMPS ARE SHREDDING THE MILLENNIALS. “WRITE US WHEN YOU GET WORK, SWEETIE. MAYBE WE CAN SEND YOU SOME COOKIES.”

Author Tyler Cowan has written a book called “The Complacent Class,” which posits that Americans no longer want an untamed and boundless frontier, but a well-fenced, and unfunded and unassailable flow of benefits.  Reviewer Edward Luce writes in the Financial Times:

In his new book, The Complacent Class, Cowen expands the scope of the argument to sociology. He believes America’s restlessness of spirit is giving way to a safety-first society. Instead of pushing on to the next frontier, Americans are busy gentrifying the neighborhood. They are also making it harder for others to move in.

We used to suffer from the Nimby syndrome – ‘not in my backyard’. Now we have graduated to Banana – ‘build absolutely nothing anywhere near anything’, says Cowen. Public life is stymied by Cave (‘citizens against virtually everything’) in which politicians fall back on Nimey (‘not in my election year’). Politics has reduced itself to a theatre of symbolic gestures in which pressing issues are left unaddressed. [Just recall the House of Representative's vote to "repeal and replace" the ACA with the AHCA. (Not very imaginative differentiation in the acronym department) The AHCA will die a merciful death in the Senate.] Behind all the electoral volatility lies stasis. Perhaps that is just as well. During the heyday of non-conformism in the 1960s, almost two-thirds of America’s federal budget was discretionary. Now almost 80 per cent of it is locked up. Donald Trump is unlikely to change that.

From a nation of risk takers to future fore-sakers in just three generations. The old Chinese proverb goes “clogs to clogs in three generations.”  Grandma and Grandpa start the business. Their sons and daughters get rich off of the business. And the grandchildren squander it.[i]  Luce continues:

Cowen views Trump as the ultimate expression of a country that wants to turn the clock back. America’s 45th president is an authoritarian nostalgist who won by promising to shield voters from the forces of change. People were voting for a return to the certainties of the 1950s. ‘What I find striking about contemporary America is how much we are slowing things down, how much we are digging ourselves in, and how much we are investing in stability,’ writes Cowen.

This complacency threatens our prosperity, reduces entrepreneurial spirit, and redistributes wealth upward.  American corporations are being strip mined after 20 years of regressive tax policies.  Since dividends and capital gains are taxed at a lower marginal rate than real work done by real humans.

The spirit of risk-aversion is also infecting corporate America. The once lavish budgets companies devoted to research and development are now spent on legal compliance and human resources. Corporate income is no longer invested in future growth. Earnings are instead returned to shareholders through dividends or share buybacks. The rate of US start-ups has also slowed to a historic low. In the 1980s, by one estimate, such businesses employed 12-13 per cent of Americans. That has now fallen to 7-8 per cent. [emphasis added]‘The complacent class itself has ceased to believe in the regenerative properties of the world we all inhabit,’ says Cowen. America is ageing and older societies take fewer risks. They also try to hold on to what they have. Perhaps unsurprisingly, the millennial generation is the least entrepreneurial of all, in Cowan’s view. They are ‘most committed ideological carriers’ of the new spirit of complacency.

The problem is that the tax favored treatment of capital return is higher than the amount that many corporations can generate. So rather than lock up spare cash (and corporations have lots of it) in corporate treasuries, it is returned to shareholders at tax-favored rates. This phenomena of "trickle down" economics, or as Archie Bunker called it in one of his cherished malaproprisms, "tinkle down" economics, should be finally put to rest when we observed what happens when marginal rates on capital returns are lowered. With high marginal rates, companies are incented to actually grow businesses. 

WHERE IS THE INVESTMENT ADVICE?

           

            Folks, the markets are tightening up like a toy airplane’s rubber band. Low volume days, staying well within moving averages. None of the stocks on the watch list have hit their buy points. So the Author’s are holding the RSP, the S&P 500 equal-weighted index. Historically, this equal-weighted index has outperformed the capitalization-weighted index. 

 The market will move downwards. We are just watching for when. May's edition of the Desert of the Real Economic Analysis** will return to addressing investment matters.

 

*The Meatmen are a post-punk band from the 1990s.
**Desert of the Real Economics is a member of the Feightner Consulting LLC family of companies. 

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[i] One reason that the Author Rob strongly favors reasonable Estate and Gift Taxes is the inefficient nature of the transfer of vast amounts of inherited wealth. Inheritance is a gift triggered upon death. Heirs do nothing to earn this wealth except managing to more favorably select their genes. Gifts, as economists and commercial law attorneys know, are the least favored, and least protected, economic transfers in capitalist economies. Bargained-for exchanges are efficient and produce growth, unlike gifts, which are inefficient. In fact, a promise of a gift is unenforceable.  In addition to creating oligarchies like the Walton Family, the Koch brothers, and the trumps, which can exert inordinate political power, forcing the sale of these assets to more productive owners and funding necessary government services is simply more economically efficient.

BY THE PRICKING OF MY THUMBS, SOMETHING WICKED THIS WAY COMES

By the Pricking of my Thumbs, Something Wicked this way Comes.*

Didn’t you just have to know that this Post would not start well, nor end well.

In January of 2015, the Author Rob posted about the rise of big data and the trillions of dollars of uncompensated content that enriches the server class. Facebook, YouTube, Google, people that talk in petabytes. The title of the post, borrowed from the title of the book of the same name, “Who Owns the Future?.

Some Quotes from this post:"Who Owns the Future?"

Every second, millions of [Facebook] members post billions of dollars worth of uncompensated content. Something as simple as a darn good recipe, instructions for changing a headlamp on a Ford Explorer, or pictures of a bygone era in a small Indiana town. Or it could be a newsworthy video or a song by the next U2.

What happens is this: The poster gives away value and Facebook skims value off the top in form of advertising revenue. And billions of dollars of this uncompensated value moves from Facebook users to Facebook shareholders. (The author’s are short Facebook, just as a disclosure. So we wish them all the worst. At least for now, and until we go long in the company.)  Remember, in the pre-Internet days, people would have gladly paid some amount of money for this information in the form of a cookbook, a mechanic or CD album. 

STANFORD AND MIT COURSES ARE ONLINE AND FREE

Lanier also makes the point that tech leaders have an ambivalent relationship with the university and the degree. On the one hand, there is prestige in a degree from a premier institution. But on the other hand, the tech industry will accept any college dropout with the next disruptive business concept. And the top tiers have such famous (but exceedingly rare) college dropouts as Zuckerberg, Gates, Wozniak and Jobs. And with the demise of second tier institutions comes the demise of thousands of middle class and upper middle class jobs.  Say hello to the life of the adjunct professor, the day laborers of the academic world.

ALGORITHMS, ALGORITHMS EVERYWHERE, AND NEVER THE NEED TO THINK

WHITHER THE INSTITUTION. OR UP THE ACADEMY.

Thousands of other jobs could be on the block as the information necessary to run them is reduced to an algorithm and software-controlled (or mediated).

TRY THIS ON FOR AN ALGORITHM.

Where UV = Uncompensated Value.

Bits x UV= Petazillions of Free Money for Facebook. Mark Zuckerberg can have a life-size 18k gold statute of himself. (Or for those really steeped in Baudrillard, a gold map like that of the Borges' Empire so detailed that it ends up covering the entire Borge Empire.)

OK, THAT TAKES CARE OF THE INFORMATION CLASS. NOW LET’S SWEEP UP THE FACTORY FLOOR

At every small town dive bar and VFW, it is the Chinese and the “mezcuns,” that’s “uh taken our jawbs.” Sorry cuz, there must be something funny in the AM Radio you listen to. It’s automation. Its here, and it is big. And hungry.

In the last decade or so, Mexico and China combined took about 1.7 million American manufacturing jobs. Sounds like a big number and it is:

That might sound high. But consider that last year alone, the U.S. added more jobs than those losses combined (1.7 million). Other research shows robots eat up a much bigger portion of the job-loss pie.

One study by two Ball State University professors found that between 2000 and 2010, about 87% of the manufacturing job losses stemmed from factories becoming more efficient. The chief driver of more efficiency in factories: automation and better technology. The other 13% of job losses were due to trade. [1]
 
OK. 100 YEARS AGO YOU COULD ALWAYS BE A DITCH DIGGER.

BUT IF ALL ELSE FAILS TODAY PEOPLE CAN WORK AT RETAIL OR FAST FOOD.

The last 35 years or so has seen the safety net rent unrelentlessly. (Wow. Was that alliterative.) At this point in America, the safety net is more of a swinging trapeze or a high wire. After all, there is no surer way to erode a man’s work ethic than providing him with assistance while he tries to get back to productive work.  Nothing motivates a man like an empty belly. So just say “Geronimo” when Yahoo lays you off.  

OR MAYBE NOT.

In a post from last May, "The Next IndustrialRevolution-Robots are Coming for even the Lowest of Jobs, or how I Learned toLove Software Disintermediation," the, the Author Rob addressed the inchoate robot revolution in fast food. An Article in Salon Magazine described a company, Momentum Machines, and its products:

San Francisco start-up company Momentum Machines, Inc., has set out to fully automate the  production of gourmet-quality hamburgers.  Whereas a fast food worker might toss a frozen patty onto the grill, Momentum Machines’ device shapes burgers from freshly ground meat and then grills them to order—including even the ability to add just the right amount of char while retaining all the juices. The machine, which is capable of producing about  360 hamburgers  per hour, also toasts the bun and then slices and adds fresh ingredients like tomatoes, onions, and pickles only after the order is placed. Burgers arrive assembled and ready to serve on a conveyer belt. 

Other articles warn of the sea change in greasy meat and fried sticks of starch. The CEO of Hardee’s and Carl’s, Jr., the fast food choice of fat boys, predicts automated restaurants in a few years. http://www.businessinsider.com/carls-jr-wants-open-automated-location-2016-3 Hardee's . Wendy’s predicts the same move toward machines. https://www.fool.com/investing/2017/02/27/is-the-end-near-for-fast-food-workers.aspx

Robotic burgers will come at a substantial social cost:

Those burgers might sound very inviting, but they would come at a considerable cost. Millions of people hold low-wage, often part-time, jobs in the fast food and beverage industries. McDonald’s alone employs about 1.8 million workers in 34,000 restaurants worldwide. Historically,  low wages, few benefits, and a high turnover  rate have helped to make fast food jobs relatively easy to find, and fast food jobs, together with other low-skill positions in retail, have provided a kind of private sector safety net for workers  with few other options: these jobs have traditionally offered an income of last resort when no better alternatives are available.

And as everyone that is paying attention knows, fast food workers are not the stereotypical high school kids looking to buy a car or save for college. 

 While fast food employment was once dominated by young people looking for a part-time income while in school, the industry now employs far more mature workers who rely on the jobs as their primary income. Nearly 90 percent of fast food workers are twenty or older, and the average age is thirty-five. Many of these older workers have to support families—a nearly impossible task at a median wage of just $8.69 per hour.

AND IF THAT WASN’T GLOOMY ENOUGH…

Retail stores have provided similar avenues of employment as fast food. Retail is not facing the same issues as fast food, although technology is helping the industry shed workers. American retail is facing the same class of crashes that the country periodically faces. A huge shift in overbuilt supply and dead-in-the-water demand. https://www.usatoday.com/story/money/2017/01/11/walmart-layoffs-just-latest-retail-cuts/96450196/ American retail is grossly overbuilt and the firms are being left to their economic fate. Government bailout is not in the cards, although one must wonder if retail employees were primarily white high school grads with daddies that worked in the mines or the mills, assistance would forthcoming.

But the broader point is that retail jobs will evaporate just as middle-level white/pink collar work, factory work, and fast-food employment. Currently unemployment is a low levels, but the way that unemployment is counted does not count people that have dropped out of the workforce. 

SO NOW SOMETHING GOOD COMES BACK OUR WAY

Like a lot of us that work with our brain and not the back, we must usually remain focused on tasks, leaving little time for day dreaming or pleasant revelries. When we have built and tweaked an obscure spreadsheet for the last hour, wouldn’t it be nice on a warm spring day to think back to a day on the campus green or picking morel mushrooms in the leaf-budding forest. 

Listening to music can ease the drudgery, but songs with vocals often break our concentration as we hear words over our work thoughts. A couple of alternatives are classical and jazz. The Author Rob does not particularly enjoy classical, but loves jazz. Jazz is available on Pandora and on internet sites, just as are other genres of music. 

But sometimes cool and smooth jazz can get a little slow just when you need to kick up the tempo. So here is an alternative. Surf Rock. 

Surf Rock was a hot genre in the mid-1960s[2]. We all think back to the Beach Boys, the Ventures and the Rivieras, who hail from South Bend, Indiana. But there is much more.

Much Surf Rock is instrumental and up-tempo. It draws upon blues progressions with hints of Arabic music. It has guitars rich in tremelo, Marshall Amps,  lots of whams on the whammy bar and picked riffs as opposed to hammer on’s and pull offs that dominate rock guitar. Surf Rock often has organs and alto or baritone sax. Occasionally trumpets.

The Pandora Surf Rock channel also plays a lot of early 1960s rock instrumentals on the Surf Rock channel. like Duane Eddy andLink Wray.[3]
 

SO...

As you read about the depressing future of work, consider two things. Can a culture accommodate millions of unneeded workers and provide them a decent standard of living (If only for the purposes of pacification)?  Can it, or will it, finance this system? And can the uneeded workers tolerate living without work and the purpose that work provides?

Listen to these Surf Rock classics and perhaps Wicked Things won’t Come your Way. 

https://www.youtube.com/watch?v=VXi3mCfv15k You will remember this from Pulp Fiction.

https://www.youtube.com/watch?v=-y3h9p_c5-M Dick Dale’s Misrlou, the Surf Rock Anthem.

COWABUNGA, DUDES, FROM THE DESERT OF THE REAL.

*Witch No. 2., The Scottish Play, Act IV, Scene I. (Don't say the name of the play. Don't even think about saying the name of the play. Don't even think of the name of the play.)

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[1] http://money.cnn.com/2017/01/30/news/economy/jobs-china-mexico-automation/

[2] These were the pre-Beatle and British Invasion Days.

[3] , Link Wray is the inventor of the Power Chord, or 5^th, a quasi-chord that only works because of the reverb and harmonics on an electric guitar.

APRIL NEWSLETTER

Desert of the Real Economic Analysis

APRIL 2017

ALPHA IS THE ALPHA AND OMEGA OF MUTUAL FUND SELECTION

BETA NOW, ALPHA LATER

The next two Desert of the Real Newsletters will look at two mutual fund “Greeks” Alpha and Beta.[1] This Newsletter will aid you in selecting better performing mutual funds.  Many individual investors, and nearly all 401(k) owners, have much of their money in mutual funds.

BETA IS A “SHORTHAND” MEASUREMENT OF VOLATILITY

Beta compares the volatility of a particular mutual fund (or stock) against the movements of the S&P 500 Index. Volatility, you will recall, is the fluctuation of the value of an investment, going up or down in value. Volatility is a whole subject in itself.

If the S&P 500 Index goes up 5% last year, and Acme Growth and Income Mutual Fund went up 5% in that same year, then Acme will have a Beta of 1.0. This is because the volatility of the S&P fund, its movement up or down in a given year or period of time, is assigned the value of 1. One is the mathematical baseline of Beta.

So in thinking about the Beta of the S&P 500 for last year, the value of 1 really means that the S&P 500 went up 5%. The Beta value of 1 just gives us a baseline measure of the S&P 500’s volatility that we can simply and quickly compare with other investments.

For this first example, we only looked at the Beta of the S&P 500 for one year. However, the S&P 500 Beta is based upon years of prior movement. Beta can be thought of as a moving average. And since the S&P 500 is a common index that tracks the movement of many stocks, it is considered a broad measure of the market as a whole. So the Beta of the S&P that is assigned the value of 1 equals a figure that reflects the percent that the S&P 500 fluctuates year to year.

BETA AS A COMPARISON TO OTHER INVESTMENTS

Let’s look at two hypothetical mutual funds. The Slow and Steady Value Fund and the Afterburner Tech Stock Fund. We wanted to look at the volatility of these funds. Here is what we found:

If Slow and Steady Value Stock Mutual Fund has a beta of .8, that means that the mutual fund is only 80% as volatile as the S&P 500. This fund only moves 80% in value in comparison to the S&P 500. So if the S&P was up 5% for the past year, Slow and Steady would have been up 4% (5 * 80% = 4). However, if the S&P were down 7.21%, then Slow and Steady would have only fallen by 5.77%.

Afterburner Tech Stock Fund has a beta of 1.25. This means that this mutual fund is 25% more volatile than the S& P 500. So if the S&P 500 rises by 9%, then Afterburner would be up by 11.25%. But if the S&P nosedives by 13.3%, then Afterburner will sink by 16.625%.

There is nothing intrinsically bad about either a high or a low beta. And either fund above, Slow and Steady and Afterburner, may have their place in a portfolio at certain times and/or under certain conditions. So which fund do we want and when?

WHEN THE STOCK MARKET IS GENERALLY FLAT OR FALLING, KEEP THE BETA LOWER.

In a flat market, with small gains and small rises, a low Beta investment is the preferred choice. In an environment when there are more losses than gains, we want to avoid big losses and eke out gains when we can. The low Beta Slow and Steady Fund will be our better choice. If the S&P 500 is more likely to go down than up, then a high Beta fund will magnify our losses, while a low Beta investment will minimize our losses. Let’s crunch some numbers:

Remember for the following example that Afterburner Tech Stock Fund has a Beta of 1.25. That means that it is 25% MORE volatile than the S&P 500. Slow and Steady Value Fund, by contrast, has a Beta of .8. That means it is only 80% as volatile as the S&P 500.

Year One. In Year One we put $1000 in each fund. The S&P 500 loses 12% in Year One. Since Afterburner has a Beta 1.25, it will fall 15% when the S&P 500 loses 12% (12% S&P Loss * Beta 1.25 = 15%) So Afterburner will fall to $850.

Slow and Steady will also fall, but it will only fall to $904. (12% S&P Loss * Beta .8 = 9.6%).

Year Two. In year two the S&P 500 slips another 4%. Afterburner will lose another 5% (4% S&P Loss * Beta 1.25= 5%) and Slow & Steady will lose 3.2% (4% S&P Loss * .8 Beta = 3.2%). So Afterburner slips to $807.25 and Slow and Steady goes to $875.

Year Three. In year three the S&P 500 is up 5%. Afterburner will rise to $857.70 (5% S&P Gain *1.25 Beta = 6.25%) and Slow and Steady will increase to $910. So Slow and Steady wins this race.

AFTERBURNER WINS THE BLOWOUT, HOWEVER.

If the trends of the S%P 500 moved in the other direction, with large gains most years and only a few years with small losses, Afterburner’s higher Beta would work to its advantage and make it the clear winner. So the logic of when to employ each fund is clear.

Of course an even better strategy is to hold investments that will rise in value when stocks fall, such as shorts, puts and inverse funds. But as an illustration of the effects of a mutual fund’s Beta, the foregoing stock comparison tells much of the story.

Problems with Beta

There are a few limits to keep in mind with Beta, however. First, Beta is a backwards looking metric. It does not reflect new information. Also, single stocks mover about in price, making Beta potentially unreliable. However, Beta is much more stable when examined within an index, ETF, or mutual fund.

We will look at Alpha in the future and see how Alpha in combination with Beta can help you select investments that will have lower Betas and Higher returns.

Stock Update 

Like Humphrey Bogart and Gloria Grahame in the 1950 Film Noir classic, the Desert of the Real's stockporfolio is “In a Lonely Place."  There are several stocks we are still looking at for breakout moves. But the markets are in a trading zone and we are not looking for movement, at least upward movement, in the near term.  All this while ignorant armies approach each other by night.

STOCK             SYMBOL                      3.29.17 Price                  SIGNAL

Aeri Pharmaceuticals AERI                                   45.25                             Breakout at 52

Neuoraderm                     NDRM                         26.90                            Breakout at 29

Vanda Pharm                  VNDA                          14.20                            Breakout at 16

Kindred Bioscience             KIN                               7.05                           Breakout at 7.50

Essent Group                  ESNT                            35.51                           Breakout at 39

FAR OUTSIDE THE DESERT OF THE REAL, ROUGH BEASTS SLOUCH TOWARD PYONYANG ON THE DAY FROM BETHLEHEM, ONE SEEKING SLAKELESS VALIDATION, THE OTHER SURVIVAL UNDER A CROWN OF BARBS.

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[1] If you like the “Greeks” you will love options. Commonly used Greeks in option trading are delta, gamma, theta and vega. And don’t forget the Ford Pinto.