As many know I have had a bad fight on my hands over the past few years and while the prognosis is now good the war has taken its toll on my body. I have severe chronic pain which makes even this tough guy come to tears every once in awhile and this pain has prevented me from regular work of any kind anymore. Of course with my extensive insurance background I was prepared with disability riders on my life insurance policies and a top of the line disability insurance policy.

Everyone knows that insurance carriers do not make money by paying out claims but some claims are so obvious they have no choice, such as mine. I have medical files thicker than the Holy Bible written in brail so proving my disability was easy, at first. I breezed through the short-term policy of 12 weeks rather easily, which pays you nothing I might add, and hit my long-term policy back in November of 2010. At first there were no problems as the first 3 checks went out on time with no further information needed. However, that changed when I called in to verify my 4th months check and it was not approved.

I had read the prospectus and understood it and by their definitions I could not perform, at a minimum, my job that I was trained for which triggered a benefit payout. Well, I told the nice service person that I wanted to talk with a supervisor for the real reason why my benefit was not being paid, OK, I was yelling at her, but she got me through to a manager. After I politely explained to him that I understand how the denial system worked as I was, at one point, a Director of Insurance Markets and that according to this policy there was no reason for a denial of benefits and my attorney agreed with me the manager said he was just going to approve the claim and more paperwork will be on the way. That was an honest to God true story that I would swear my good leg on and that should tell you something, if you don’t know anything they will deny you right off the bat. Read the prospectus or get a lawyer to read it for you and be prepared.

Now, I got my benefit and the work is all over with, right? Wrong. All long-term disability insurers want you to apply for social security disability because if you win whatever the government sends you will be deducted from the benefit the insurance company sends you. The disability insurance company will provide you with an attorney to help you win, do not take that attorney, go get your own so they are not collecting evidence to deny you benefits either now or at the 24 month review period. There will be a fee for hiring a private lawyer, but so what better safe than sorry. You are also better off going with a local guy who talks to you versus a national firm where you will never see an attorney until your hearing date some 18 to 24 months away.

The social security offset is what really angered me today because I learned that my private insurance carrier will offset any benefit my wife and kids will receive from social security, which they do receive, typically. I was thinking why would the benefit my kids get offset the benefit I get from my insurance company? The check from social security comes in their name and I will need the money to live on so the insurance company is forcing me to break the custodian law by cashing it to by food for the family. I paid premiums based on my income, not my wife’s or my children’s so why would their benefit be reduced from my disability insurance checks? I asked the insurance company that question and their answer was that since my family was pushing my income over 60%, what my disability benefit was, of my previous income it is considered my additional income because they are getting because of my disability.

That is simply outrageous considering that SSDI, social security disability income, family payments were designed to make sure your kids can go to college and have savings not so insurance companies can offset benefit payments. Well, maybe I am wrong since insurance companies contribute more money to Congress than disability recipients, who knows.

I am upset over this because it reduces the value of the policy I paid good money for throughout all those years. I am mad because people who are in a worse position than me will have to deal with the same thing and not have the knowledge, resources or desire to fight the system and it will hurt them. I do and plan on fighting this; I will let you know how I make out I am confident I can win 2 years worth of exemptions, but after that I do not know.

Why do you need to know any of this? Because like me you have a greater chance of becoming disabled at a younger age than dying, look at me, and you might have to go through this mess. I can assure you that I am giving you the very abridged version of everything, but all the information I have given is 100% accurate. Oh, the insurance company I use… Lincoln Financial Group who had no problem taking TARP Funds while it scrambled to dump its toxic assets and was, shall we say, encouraged to sell Delaware Investments among other things because they run such a great operation.

How anyone is really surprised by the possibility of a further decline in economic activity is puzzling to me. Perhaps it is all the distortions in the data that is coming from the government supporting the economy. Maybe it is because their vested interest is to have you invest in their funds. Perhaps they just drank the Kool-Aid. No matter what it is almost a certainty, in terms of forecasting, that the economy will either stagnant here or decline.

The main indicator that has been telling us there were problems for some time now is the initial claims data and the lack of private payroll growth. Sure, we saw a bump up in payrolls with the 5%+ GDP print, thanks to inventory restocking, but 1Q10 GDP shows signs of significant weakness. What has held true is initial claims, first they got better with the big GDP print, but now they are soft with the constant downward revisions to 1Q10 GDP. The ECRI data also points to weakness in the economy as well which correlates with initial claims data. From my lens, employment is not a lagging indicator, I have been pounding the table on this for a year now, it is a leading indicator in a post credit collapse scenario.

Friday’s employment report is now being telegraphed by Bloomberg to be weak, -110K is the forecast, especially since the Census hiring is done and they are now laying off workers. All of this is not surprising if you track initial claims and use it as a leading indicator. To put the monthly initial claims data into perspective 1,850,000 are filing claims for the first time and that means there needs to be about 2M jobs created every month to offset the ones just lost and we also have to contend with population growth as well. To be blunt, full employment is a figment of one’s imagination at this point for at least the next 5-8 years. Unemployment will be our greatest problem for a long, long time and there is little the government can do since end demand is the issue.

There is simply no way the Fed can raise rates for the foreseeable future either since one of their mandates is full employment. Yes, I know they said they would raise rates before employment recovered, but they won’t for political reasons. Obviously, that might change depending on what happens in the future, but for right now there simply is no reason to raise interest rates, at all, from their perspective. Worse is the fact that the Senate did not extend unemployment insurance last week which means a million plus people will lose benefits very soon. After their drunken spending binge to bailout the banks after they created this it is beyond me how they would let a million people just wither and die. There are 6 people for every job opening out there so it is not like these people are actively NOT trying to find work, so enough with that whole theatrical display of utter idiocy. Keep in mind I am a deficit hawk, but there is a difference between government wasting money and government helping those who cannot find work.

The loss of those benefits will have a huge impact on the economy as a whole since that money will not be spent. Retail sales will continue to slide and foreclosures will continue to rise, how many of those million plus people are barely hanging on? I am not sure how so many people can claim that the unemployed are simply freeloaders looking to live the highlife on such a meager government stipend which is what you hear often on other blogs or by the ultra rightwing. Considering that there are so many people looking for work the competition for a job, any job, is extremely high which reduces the odds of a person actually getting a new job anytime soon. Not to mention that unemployment benefits are usually around $300 – $500 a week I find it hard to believe that anyone is living the highlife on such a low amount, but that is the case. I am sure that there are abuses, but this is one of those give me a break moments and I am definitely right of center.

The other reason many believe a double dip is out of the question is that companies have extraordinary amount f cash on their balance sheets. Well, all I have to say is how long has that cash been on their balance sheet and it has not gone to work yet? This is like the temporary employment is a bullish indicator, if it is not happened yet the odds of it happening anytime soon are dwindling. The cash on the balance sheet is also part of the deleveraging cycle as companies pay down debt and hoard cash. Perhaps the main reason that companies have so much cash on hand is they think that business is going to get very tough in the near future. After all, many of our best companies have roots going back beyond the Depression and they know the value of having cash on hand to make it through the storms. Of course, they could spend it all tomorrow, but I ask again, what are they waiting for and why hasn’t it happened yet?

The bottom line is that it is really shocking to see so many smart people caught off guard about a potential double dip recession. All of the signs have been around for a longtime that the thought should have entered their mind at some point in time in recent months. There is a chance that we could avoid it, but I do not see how. I should point out the fact that I never bought the idea that we actually made it out of the first one, other than a statistical recovery that is. Time will tell on this one, but if Friday’s report is worse than expectations we will be well on our way to S&P 900.

Quotes from The Great Depression: A Diary (click to buy). If I left the dates out you might think I am quoting a modern day book, but I am not. Only a fool thinks history does not repeat itself.

“It is also interesting to note that the effort to create credit by having the Federal Reserve Bank buy U.S. bonds in the open market has failed. Huge reservoirs of credit are available but banks won’t make loans because business is too uncertain. It seems to prove that when business starts moving credit will expand automatically but the artificial creation of credit will not expand business.” November 18, 1933

“The U.S. Treasury will face the task in a few weeks of paying out huge amount for bond interest and maturities. Where will the money come from – greenbacks (printing press)?” November 18, 1933

“Industry continues to boom and the entire public seems to be speculating in the stock market. Almost as bad as 1929. Last Friday was a record day of the year with 9 million shares changing hands. The whole recovery has been so spectacular as to almost be unbelievable. Because so much of it is based on inflation theories I have doubted its permanency. The next few months should tell the story. In the meantime lawyers and professional groups have failed so far to share in the boom.” July 3,1933 – sound familiar? The Depression was just getting going and the boom was because of FDR confiscating the gold and adjusting the price, effectively taking U.S. citizens off of the gold standard, but the U.S. still honored international settlements in gold.

“For the 12th consecutive day stocks have been drifting lower. Congress starts an investigation of short selling.” April 13, 1932

“During the boom years it became popular to buy real estate at inflated prices on a shoestring. This was done by encumbering it with a 1st, 2nd and 3rd mortgage. Second mortgage companies were formed to buy 2nd mortgages at a discount of 10% to 25% per year. It has proven to be a bad investment because at each sheriff sale the 2nd is wiped out. Most of these companies have frozen assets and seem to be heading for bankruptcies.” About June 5, 1931

“Magazines and newspapers are full of articles telling people to buy stocks, real estate, etc. at present bargain prices. They say that times are sure to get better and that many fortunes have been built this way. The trouble is that nobody has money.” July 30, 1931 – He further went on to say in 5/16/32; “This advice was premature. Here a year later prices are 1/3 of what they were in 1931.”

The point of this is that we may very well be in one of the peaks and valleys that were fairly common during the 1930’s. If you look at the economic policies of Hoover, which FDR took over and expanded, they are very similar to what we see the present government doing. As it turns out these policies actually extend the problems because banks cannot purge the troubled loans and assets, sound familiar, which created zombie banks. Eventually banks began to get states to pass laws restricting withdrawals, they did this with life insurance loans as well, and that still did not stop banks from failing. Bad mortgage debt is what caused the banks to fail, sound familiar?

The assets of depositors ended up frozen and shareholders were wiped out when a bank closed, they had double liability back then which means shareholders could lose more than they invest in bank stocks if the bank failed, they would get sued basically. Many of these banks did reopen thanks to Hoover’s Reconstruction Finance Corporation, but the savings accounts or passbooks were frozen. These passbooks were used as currency as people would sell them for pennies on the dollar, in hopes the institution would allow withdrawals at full face value. It is interesting to see how this al played out and what the average person was thinking during those times. I have to tell you, this book is all one needs to read about the Depression. I am sure Ben Bernanke learned a lot about the technical’s of the Depression, but unless he read this book he does not know squat.

The real killer, according to Benjamin, was the Smoot-Hawley Act, which placed high tariffs on imports to prevent dumping. Europe had devalued their currency so the tariff was put in place to make sure people bought American. It did not work and made things worse. Does this sound familiar with the rhetoric coming out of Washington about China’s currency value? The interesting thing is that, just like now, all countries were devaluing their currency in order to remain competitive and export in order to improve their own economies, it failed. When every country is devaluing and trying to export, as Benjamin points out, who is left to buy anything?

I will post more quotes from this book, but I urge everyone to read it. The similarity between the 1930’s and today is amazing to say the least. They tried to create inflation and failed, just like Ben is trying, and they tried the NRA, like the stimulus bill but they made the NRA much more strict and imposed higher pay and shorter hours so they had to hire. The NRA put unions in a position of power and several times Benjamin pointed out that labor troubles would come and they did. The current administration also wants more union jobs and activity, I fear that will fail to as unions strike often and are the primary reason the U.S. is not competitive in manufacturing, among other reasons.

History repeats itself and if we forget that basic rule we will always be doomed to repeat it. People who claim this is nothing like the 1930’s are insane. Sure, it is not as severe, maybe it will be if we relapse, but we are showing many of the same symptoms as were present in 1931, 1932 and 1933. Even the market action is somewhat similar. The one difference I foresee in the future is inflation, which only materialized in the 1930’s through price controls and increasing the price of gold, but overall inflation was very tame in the Depression as there was no money velocity, again, sound familiar?

We are slightly more creative in 2010 so I expect money velocity or a full blown currency crisis in the near future. In 1933 we really could not destroy our currency because of the gold standard, we did float the dollar though, but in today’s world we have nothing backing our money so it could really go to zero. It’s scary if you think about it.

Since the meltdown last year much attention has been paid to how rating agencies determine the difference between AAA and junk paper. In a nutshell, and as you already know, the agencies gave AAA ratings to paper that was literally worthless and according to several books I have just read it is clear that the agencies had no idea how these debt instruments actually worked, I am referring to CDO and asset backed paper. Therefore, I humbly submit this new, simplified, rating system to the SEC and the ratings agencies.

My rating system will clear up any confusion as to the safety of the bonds you buy and investors will be fully aware of the risks. I am confident my recommendations will be turned down because the last thing Wall Street wants is transparency or to give the average (or institutional for that matter) investor a shot of actually understanding the risk they are assuming when they buy fixed income. I mean, what kind of fun could we have if AAA rated paper was actually safe? I am assuming Wall Street likes the fact that they can game the system and make total junk into AAA, which is exactly what they did with ABS. The last thing they want is for investors to make money because that would mean there is less money for them to make, right Goldman?

So, here is my proposed rating system:

AAA – Will now will be called “we think you will get your money back”

AA – Will now be called “we are somewhat confident you will get your money back”

A – Will now be called “you probably will not get your money back”

BBB – Will now be called “crappier”

BB – Will now be called “total crap”

B – Will now be called “are you freaking serious?”

CCC – Will now be called “what, do you hate your money?”

Unrated – Will now be called “there is a sucker born every minute, congratulations you are the sucker”

After reading so many stories about the financial crisis there is one thing that is consistent, regardless of who is telling the story or what context that story is being told, the ratings agencies had no idea what they were doing. In fact, in The Big Short, I highly recommend that book, there were several accounts of money managers talking to the ratings agencies and they said they were totally clueless. They went on to say that their models could not even calculate negative returns, how is that possible? No one at the biggest agencies had any idea how CDO’s or asset backed securities were created. They had no interest in looking at the makeup of what was sub-prime and what was not. They never looked at individual loans and instead used an “average FICO score,” how could you give a AAA rating when you did not look at the instruments backing the bond? These agencies are clueless and they still have no clue.

Sure, they are now downgrading this junk paper, 2 years later, but where were they when defaults were at 4-5%? This is why I am confident that the U.S. and the U.K. will keep their AAA rating right up until the day these countries are in receivership. After all, past actions do dictate future results. For example, Did AIG keep their AAA rating pretty much right up until they were acquired by the government? How about Freddie and Fannie, by the way there was never a government guarantee to this debt, it was merely implied, read a prospectus if you don’t believe me, did they not keep a AAA rating until the end? Then there is Executive Life, an insurer in the early 1990’s that collapsed with the help of Michael Milken’s junk bonds, which kept their AAA rating right until they were in receivership. Executive Life was downgraded only after receivership.

These firms cannot foresee risk or rate risk properly. After lawsuits were filed these firms defenses revolved around “free speech” and not around actually rating risk. Seriously? They now admit that one needs to do their own research and not trust their ratings alone. This must be news to all the insurance companies or pension funds that can only invest in A to AAA paper only. What they are telling you is that their ratings are not real and must have been always been fake. So, how can you trust their ratings on such things as sovereign debt? One simple question, do you think the U.S. will ever actually pay off its debt, all $12T worth of their debt? Not a chance, but they keep the U.S. at AAA and that is why their ratings are a joke.

P.S. – Sorry for the bad attempt at humor, come on, I am a geek, what do you expect?

The privatization of any social program always brings a hot debate between conservatives, liberals and, well, anyone in the middle. Many free market minded individuals think Social Security should be privatized while liberals say no way. Who is right and is it even possible to privatize such a huge chunk of the Federal pie?

First, let’s answer whether or not Social Security could be privatized. The answer is simple, it cannot be and privatization will never, ever happen. Why? Anyone who has been alive for more than 15 years knows that the federal government takes a nice chunk of your paycheck for FICA, basically Social Security and Medicare/Medicaid, but what they do not know, usually, is that the Social Security portion does not go where you might think. There is no actual account for your Social Security benefits instead you build up credits and your payout is determined by what age you retire. The size of your check will vary some depending how long you have worked and who much you put into the system. This is a very 30,000 foot view.

You receive credits into your Social Security account and not a “cash balance” report because there is no cash actually in your account. Believe it or not the government borrows against Social Security assets all the time and gives you an I.O.U. instead – the Social Security Administration is now cashing in some of those I.O.U.’s because they are now broke. You should know this because it means that if the cash flow into Social Security was ever stopped the whole house of cards would come crashing down. In effect, your entitlement program is the largest Ponzi Scheme in the history of scams. It is for that very reason Social Security will never be privatized because all of the lies would be exposed. But, what if we could privatize it?

Is it a good idea to privatize Social Security? That is a complex question and I am inclined to say yes, but with severe limitations. I do not think it is a great idea to put it into an account with only equities because people do dumb things when equities are involved. In my opinion I believe that using a deferred income annuity product would be the best option or some other type of account that has guarantees attached to it. An income Annuity would give the investor much higher lifetime income than you might think. I am also inclined to believe that insurance companies would create a product that would create a greater stream of lifetime income than what Social Security could ever provide.

However, I think some products should never be considered as an investment option. On my list I believe products that involve higher fees should be excluded such as equity index annuities and variable annuities. I am a believer in Variable annuities, but I feel that the current product fees are too prohibitive to make them a suitable option, a new one would have to be created. I am not a believer in equity index annuities, call me crazy but monthly or daily averaging which intentionally lower the rate of return is not a good idea and then throw on caps, yields or spreads and you have a product that is just not good. I am sure someone will disagree with me about indexed annuities, but that is their opinion and I have not seen a product I actually like. Plus when you exclude the dividends for these products it will drastically underperform the market rate of return. In short, these types of insurance products, which I am sure are valuable, are just too complex for a self directed Social Security account and I do not have faith in the government to choose the best products if they were allowed.

I think a hybrid product with a living benefit, which would payout 5% for as long as the owner lives regardless of account value, might be a decent option. They have a lower cost compared to a variable annuity, but provide similar lifetime income guarantees. These accounts also would mandate an asset allocation model that would have to be adhered to or all guarantees are off. Contrary to belief, asset allocation did work throughout the market crisis. Yes, you took a loss even in a diversified portfolio, but a balanced fund only lost 19% and has a standard deviation of 12.7, not bad.

If this were to happen, privatization of Social Security, it would lead to bad products being created since the government has no sense of what is and what is not a good investment for people. It would also lead to great confusion by investors since many have no idea how any type of guaranteed products work or their drawbacks. There is also the possibility that if/when we have another meltdown in the markets the losses incurred by investors would bankrupt insurance companies or whoever is offering guarantees. It is clear that traditional pension funds have not worked, the taxpayer is already making good on those guarantees, which leads me to believe that any type of equity investment options are simply a bad idea.

The only feasible option for privatizing Social Security would be using a traditional income annuity. The risk is manageable and the returns are predictable as well. However, this is all a moot point because it will never, ever, happen simply because if the government did not receive that income from your paycheck they would fold. While I think some investors would benefit from this the larger population would not and the only real winner would be Wall Street, as usual.

Look, I know there is rhetoric on both side and we all fall for the one liner, me included. We all want something done about health care, but when you learn about how this thing was put together, you will think differently about this, maybe.

I was watching C-SPAN last night and saw this very informative video from MIT professor Jonathan Gruber, who co-wrote both the Massachusetts program and the current Federal bill being voted on. He was a paid participant and openly admits he is biased towards the bill, but I appreciate the honesty. What I found striking is that he openly admits that 90% of this bill is designed for coverage and only 10% is geared for cost controls. He also admits they are trying a “spaghetti approach” to controlling costs, meaning they are throwing 37 different pilot programs against the wall to “see what sticks.”

If you listen to what he is saying it is clear that the government will become the biggest premium payer to insurance companies through subsidies. The implications of this can lead to the government having the ability to start dictating what gets covered and what is not covered, in my opinion. The MA plan is the benchmark for the national plan and that should be of some concern to us all. Why? The cost of insurance did not come down with a mandate to everyone to be insured and competition never increased, there are 4 carriers in MA. Currently, according to the MA treasurer, 52% of all spending in MA is going directly to this insurance program or Medicaid, again showing that costs were not controlled. Of course, the MA bill was all about coverage and not about reducing costs, Mr. Gruber admits that.

If we look at the MA program there are problems with it, like most people have to go to community hospitals and those hospitals are only getting 60-70% of the reimbursement rate and 7 MA community hospitals are currently suing the state because they are going bankrupt. In order for everyone to get covered and for rates to not go through the roof insurers will have to pay doctors less, Mr. Gruber dances around that topic in his speech saying “surgeons used to be middle class people, but now they live in the Hamptons with investment bankers.” I have said that doctors do charge too much, $150 for a 2 minute office visit is nuts, but if private insurers have to adopt Medicare rates we will have less doctors, that is a fact.

Mr. Gruber is an economist, not a health care professional or insurance executive, which goes back to my point that no insurance person was ever involved in this process, but economists and lawyers are? I am sorry, but I do not like this approach because people often get left out of the equation in economists and lawyers models. He pointed towards the fact that doctors over test, which may be true, and that things like genetic testing is “too expensive.” He brings up some great points and says we will never have socialized or Canadian style health care in the US, I disagree with that as this bill will subsidize premiums up to, I think $80K in income.

This bill will do some great things, do not kid yourself, like the preexisting condition repeal and you cannot be dropped from coverage if you get sick, but those items could have been taken care of in straight up or down votes a year ago January. Regardless, Americans are furious over the process of what is happening and not being listened to. I want a straight up and down vote on the issue and I want to know for a fact that my Congressman read the bill, any Congress person saying this bill controls costs is not being truthful as the author tells you they are not sure this will control costs.

Mr. Gruber admits that when MA hit its financial trouble in 2008 they had to cut the program in MA. What does that mean on the Federal level where this thing is a trillion dollars? He says that by spending $950B to cover people now will save $30T over the next decade, I think he misspoke big time there as that is impossible. I also do not believe that the taxes collected over the next 4 years will not be spent, we are broke after all borrowing $200B a month remember, and the program will start in the red right off the bat in 2014. I also do not believe that the new taxes will only be on the top 5% of US taxpayers, like the AMT (alternative minimum tax) it started out on high net worth individuals and now it hits people below the $100K mark, unless Congress passes the AMT fix every year. Just like the AMT these new taxes will creep down because wealthy individuals got wealthy because they know how to avoid taxes.

CBO estimates, I hate CBO estimates, why? If you give the CBO the numbers you want to run you will get the results you want, it is that simple. They make little assumption on how these numbers will change over time, like people buying less income securities or dividend paying stocks so taxes drop or wealthy people decide to make $199,000 instead of $200K a year. They assume today’s numbers will stretch from here into infinity which is a joke. Look at Medicare projections back in the 1960’s, or the 1980’s or the 1990’s, you have to project the worst case scenario, not the best, and I can assure you that if they did that the numbers would be ugly. Basically, feed the CBO the data you want to get and bingo! Deficit reduction.

Mr. Gruber also wants to get rid of the tax break on health care premiums, the Cadillac Tax as it is called. Basically it is getting rid of the tax subsidy, or tax deduction, on plans that cost over $23K a year. This is not going to raise the money they think as most of the people with Cadillac plans are unions or a small portion of executive, a very small portion. There is no way that this tax deduction will stay at this level and plans that cost less than $23K will, eventually, lose their tax break as well, especially as the Cadillac Tax kicks in and those plans are dropped. Most of you have health insurance because, A) Your employer wants to remain competitive in the workplace; and B) Because they get a tax deduction for providing that benefit, why do you think they pay so much of the premium? You get rid of that and people will be left on their own, so it may be a good thing for employers, time will tell.

Oh, for all those who think we have the 37^th worst health care in the world, think again. Over 240K people come to America to get some form of treatment and only 12,000 Americans leave for treatment abroad. Mr. Gruber explains that it is social economics is the problem, essentially, and, in his example, a black baby in Washington DC has the same chance of reaching their first birthday as a baby in Jamaica, that is horrible. However, what he says is what I have been saying, this is because we have an access problem.

He also states that we are like the Roman Empire if we do not get health care under control. The issue is that health care is one leg of the three legged problem. The other two legs are Social Security and our national debt. This bill currently only might fix health care, but based on MA it probably will not and based on what we know about our elected officials the other 2 legs are not going anywhere. However, as Mr. Gruber pointed out earlier in his speech, this bill really might not control costs at all. This bill also does not control prescription drug costs, at all, and Mr. Gruber says we must pay more so the rest of the world can pay less, unreal.

There was a better way of getting to a middle ground and trust me I want a middle ground. I just do not believe that this bill is legal, the Federal government cannot force you to buy anything, in my opinion, and I do believe that deem and pass should be banned, look what happens and I have heard enough of “well, they did it too,” two wrongs do make a right.  I highly recommend watching this 1 hour 23 minute video to cut through the rhetoric. However, listen to what he says and what he kind of says. Listen to it without your own bias as you will hear some things that might not sit well with you. Sometimes what a person does not say means more than what they would actually say.

Oh, no illegal immigrants will get coverage, just an FYI.

I could not embed the video, below is the link.

The Real Health Care Information You Need to Know

http://www.c-spanarchives.org/program/ID/220887

I just read a Time Magazine article today about the U.S. debt and how it is no big deal the U.S. has so much debt. In fact, Zachary Karabell actually believes that our debt is a good thing. I have actually met Mr. Karabell last year at a conference we both spoke at, although he was paid and I was merely on a panel, but it is unlikely he would remember me. Regardless, I have to humbly disagree with the conclusions he came up with in his article.

Debt can be a good thing, but only in small amounts and for productive reasons. For example, a business that takes out a loan to hire a new employee to expand their business would be productive debt as it contributes to society, hopefully. However, taking out a loan to buy a 50” high definition TV is, in my opinion, a terrible reason to add debt to ones balance sheet. The U.S. government borrows money, recently, to hire people and encourage spending, but the government is not creating productive jobs because it creates nothing and it must tax the people in order to pay off the debt for the job it created. The government actually destroys wealth through taxation and wasteful spending. Basically, the government is borrowing money to buy big screen TV’s, bad debt.

The U.S. government does need to carry debt because we are the reserve currency and carry trade deficits. Debt for a government could be a good thing if that country is the reserve currency, but there is a point where too much debt is the ultimate problem. The impact of too much debt over time during strong economic times may not be a major problem because a growing GDP means more tax revenue is being collected and should increase over time as long as conditions are good. However, any economy has cycles where there are good and bad times, we are currently experiencing bad times, and when times get bad that large debt load becomes a problem and is no longer good, Greece is a good example of this, kind of.

Excess debt during poor economic times means tax revenues decline and the government will have to run deficits to pay for its spending, I am way over simplifying this. Generally, a government will spend much more during these bad times to spur the economy, known as the Keynesian Theory, but this spending, in my opinion, is not the way to spur the economy. As the debt builds and the central bank cuts interest rates the debt during these bad times might not seem so bad because the country has artificially lowered the cost of borrowing, again to spur growth. The key word is “artificially” lowered interest rates and the current interest rate may not actually reflect the current economic conditions or the risk of holding said countries government debt. The reason people ignore deficits more during lower interest rate periods is because the cost to carry the debt is so low, like now.

The U.S. currently has over $12T in debt, heading much higher rapidly, but the carrying costs of that debt is about $500B a year. Keep in mind this is because the Fed Funds Rate is at .25% which means yields on the U.S. government debt is very low, artificially low. The government can currently borrow money for 30 years, for those crazy enough to buy it, for less than 5%, not a bad deal, right? However, what happens if the bulls are right and the economy is recovering and rates have to increase? A 1% increase in Fed Funds would mean the aggregate increase on our debt would be roughly .70%, most of our debt matures in less than 10 years, not good I might add. That means our debt servicing costs, the interest we pay, would increase to about $600B a year, still not bad.

The problems start to get real bad when the Fed increases rates to say 3% or so. The cost to borrow on the 30 year treasury would go up dramatically to about 6%, on the conservative side, and even out short-term interest rates on our bills and notes would go substantially, everything is relative, higher. Before I go further you have to remember that debt is a deadly circular beast because the more you borrow the more you have to pay back and during rising interest rates in order to make all of your payments you either have to tax the people or have more deficit spending, guess which will win in the U.S.? If rates go to 3% because of a hot economy the interest on our debt servicing costs will quickly rise to about $800-$900B, depending. It will take no time at all for the interest payments to reach $1T and considering our debt mostly matures 10 years or less you cannot forget the refunding that must take place. The CBO just did an estimate on a lot of this in the past few days, I did not read the report, but I know the final numbers without a lot of obvious assumptions end up close to what I just said.

Karabell makes the argument that the U.S. would use the borrowed money to retrain our workforce and rebuild our infrastructure. That may be the case, but to fully upgrade our infrastructure, not including pie in the sky green energy items, would cost about $2T. I believe the last stimulus only applied a small portion of what is needed, so the infrastructure idea Karabell had does not pan out in my book. Plus, there is no return on infrastructure immediately, over time yes because it makes commerce easier, but that takes time. He also made the case that China and India are flush with cash and building their infrastructure now and, I think, was indicating that since the U.S. is so stable that excess cash will end up here, which is reasonable to assume, for now.

What he failed to address is the fact that the money they are flush with is ours from them exporting goods to us. Because they have such huge exports to the U.S. we have a trade deficit with them and they need to buy our debt to balance it out. It is a case of vendor financing and all vendor financing ends up with someone getting hurt, guess who in our case? The point I am making is that the Chinese and Indians will buy our debt now because treasuries are going up in value, thank you deflation, but how long will that continue for? Not only that, but if China un-pegs their currency from ours it will appreciate and their treasury holding, in RMB terms, will decline. Why would one invest in treasuries if your currency is rising and the country you are loaning money to as a declining currency, you wouldn’t do that.

Essentially, all gravy trains end and there is a limit to how much a country can borrow. Consider the U.S. has implicit guarantees on not only our debt, but also on banks, insurance companies and the mother of all bad investments the GSE’s. Oh, and if you ever expect to see GM pay back the money they got, well, I wouldn’t hold my breath on that one. All of those guarantees are about $23T, not including the national debt and the entitlement guarantees we have. Again, my point is the limit to what the market will allow a country to borrow cannot be far off. At the very least we will need to pay a greater risk premium on our debt which means the interest rates on our government bonds will detach from where the Fed sets them at and go through the roof.

I get what Karabell is saying, but he is speaking in the here and now which is suicide when talking about so much money. You must look forward in order to see the real problems and it is kind of crazy to think that all this borrowing will go towards retraining the people and vastly improving our infrastructure. The government is the worst at spending money efficiently and much of that money goes to wasteful projects like DNA research on bears in Montana, no offense to bears, but I just do not care about their DNA. On top of all that, who knows if we will actually emerge from this downturn, sorry I do not buy an inventory rebuild as a real economic recovery. If we do not exit this thing in the next10 months our problems will be bigger than we think.

On top of all of this there is the whole impact to our currency, which is not good. The more debt we issue the more we dilute our currency and at some point the world will demand some type of other reserve currency, it is being talked about now. If we lose our reserve currency status we are in a heap of trouble, I know that could ‘never happen.’ All of these problems or these potential problems leave me a couple of conclusions, besides the fact that bulls will spin even really dangerous debt problems positively, that; 1) Precious metals are cheap and 2) The Fed will never raise the Funds rate to a reasonable level again.

There is good news and bad news to this mess. The good news is it is almost over and the bad news is that is it is almost over. No matter what side of the fence you are on the one thing I can assure you of is that it is going to pass tomorrow morning. Even though I can also assure you that it is a budget buster, see the Republican CBO inquiry today for proof, and you should all know by now that the CBO is garbage in, garbage out group. What I mean is that if you feed it the sequence of data you want results for you are certain to get the desired results you want.

The real unbiased results were from the actuary that submitted his results a couple weeks ago, sorry, but actuaries know insurance and are key to determining costs, risks and results. His report shows that the costs for premiums will go sky high, I guarantee that to be the case as well, I know a thing or two about insurance as well. Basically, we have lawyers writing a bill that is math intensive and that is a major mistake, for proof look at Medicare deficits, Social Security, National Flood Insurance or any other government run program. For those who think this bill will reduce health insurance premiums ask yourself this one question, how can it is they did not take out the federal anti-trust exemption for insurance companies?

Seriously, without taking out that one exemption it is next to impossible to lower insurance premiums because it restricts citizens from buying policies across state lines. That means that insurers who have a lock on some states will still have a lock on those states, give me a break. Not only that, but now these same insurers must add millions of sick people to the roles and cannot charge them higher premiums, specifically, so that means all of our premiums will go up. This bill is the greatest gift to the insurance industry ever created. The only government gift to the private industry that was better, and it was not even close, was the no bid contracts to Halliburton under Bush. If this thing passes, buy insurance companies because for the first time in history the Federal government will mandate that citizens will be forced to buy a product from private companies to the tune of a trillion dollars over the next 10 years, give or take a few billion.

Because premiums will go sky high and our brilliant elected officials are incapable of doing simple math the subsidized premiums we will have to pay will blow those sweet deficit reducing estimates right out of the water within 3 to 4 years. If the administration and Congress decided to work with the industry, people like me who are truly impartial, they could have built a real reform bill, but since they think they know everything they have just put the final nail in the coffin of the US, from a fiscal point of view. Medicare will be insolvent or eliminated much faster than currently projected and the budget deficits will be through the roof by 2016 as the new taxes make people rethink how much money they want to earn. Oh, I am also assuming that we are actually in a recovery I might add, but if we are not in a real recovery, which the housing numbers today shows that without government help we are still in trouble, then the trouble comes much earlier.

What is that you say, AARP and the AMA support this bill so it must be OK? Let me tell you something about those organizations, in my opinion, they would sell their grand kids for an extra dollar and I am not kidding. AARP had a Medicare Advantage plan that they endorsed pulled from the market because it was so bad. They endorsed the product, it got pulled from the market and I can assure you that Medicare Advantage contract was a lot shorter than 2,100 pages long so it is highly unlikely they even know what is in the health care reform bill, but they know they can profit from it somehow. They hate variable annuity contracts, but love immediate annuity contracts because they have a GA contract with NY Life. Basically, if they can profit from it they will endorse it, period.

The AMA, who knows what they see in it except that they probably think they will get a permanent Doc Fix Bill passed or they like the idea of mandatory private insurance much better than a public option. Let’s face it, $26 per office visit from Medicare must stink versus the $50 or $90 per visit from private insurance. If you combine that an additional 30M new patients, or 40M depending who you listen to or where you get your uninsured number from, that equals some major money for the AMA and its members.

Clearly, this whole bill revolves around money for everyone. Everyone who loves it is getting paid big time to endorse it or vote for it. However, you, the person who pays for everything, is not in favor of this bill according to every poll conducted. I wonder why you are not in favor of it? Maybe because you know your Congress person is receiving tons of money from special interest groups to push things through, check opensecrets.org to see, or that Bernie Sanders, a socialist, sold out for $10B, way to be a socialist, Ben Nelson sold out for less, and of course we have the Louisiana Purchase take II. However, you have to pay your taxes plus the health insurance premiums and Congress wonders why you don’t want this thing, incredible.

What I find interesting is that New York, who is on the verge of bankruptcy, should have held out against this thing. Where was Schumer and Gillibrand on this? Why didn’t they say no way on this bill and get out Medicaid paid for? It work for Ben Nelson and Bernie I am sure it would have worked for NY. Oh yeah, Chuck was busy making the media rounds and calling flight attendants “bitch” instead of doing is fiduciary responsibility to his home state. I dislike the Republicans, I mean abortion that is the best defense against this thing you can come up with, however I agree with them that this bill is the train wreck of the century. Why is China moving towards capitalism, but the US appears to be moving towards socialism?

Clearly socialism did not and does not work, but here we are. For those who want the socialist lifestyle I urge you to seek out the countries that live under those types of regimes. I admit the US has problems, nothing is perfect, but here is the thing most countries want what we have, not the other way around. We could fix health care the right way if we took our time and did things in the open, as Obama promised he would do, but that never happened. Instead we decided to use a sledge hammer to itch our nose and it is not going to end well. Unfortunately it will take 4 years for me to be proven correct.

First, let us clear something up, health care reform is totally different from the monstrosity that is currently in front of the Senate at this moment. Health care reform would mean that the government would be telling insurers that they could no longer discriminate against preexisting conditions, annual and lifetime caps would be removed and insurers would lose their federal exemption from anti-trust laws. Health care reform has nothing to do with a public option, period. The current mess in congress does reform some of those issues I mentioned, but not all of them and it creates far more damage to the system than it will solve.

Now, this is an issue near and dear to my heart as someone with cancer and who desperately needs his health coverage that I currently have. I am not the only one in this position, as I am sure you can imagine, and there are millions like me out there who are waiting to see how Congress will screw this issue up for us. Here is what I foresee happening in the near-term and how a death sentence will be issued to many people like me.

Congress will pass this budget busting, horrible health care package that will help the most destitute of Americans, who already qualify for Medicaid or similar programs I might add, and will immediately drive up the cost of existing plans to people like me who already pay through the nose for health care coverage. Once this thing passes my monthly premiums will jump from $1,200 a month to $2,000 or more a month because insurance companies will be out of business starting in 2014 when the public option, i.e. socialized health care, begins. This will make health insurance unreachable for most Americans and small businesses putting people like me at risk of dying because I will not be able to afford health insurance, the irony.

Let’s not forget that I will have a “Cadillac” plan, because that is what NY makes you have, so add another 40% tax to my premium and if I make $250K a year add another tax to my income tax, on top of my already high taxes, and how am I supposed to pay my other bills? It will make very little sense for me to put any effort into anything or to make any money at all if this thing passes. In fact the cross over point is somewhere close to about a third of what I make now so I will literally not have to work in a couple of years and I will end up netting the exact same amount of money and pay less in taxes. I am not the only one figuring this out either, so guess what will happen? All the bad people, i.e. “rich” people, will decide to make less because it is easier and less of a headache which means all those estimates the Senate is coming up with are going to be shot to hell.

The real fun will begin after 2014 when the supposed 31 million Americans, mostly illegal’s from what I can tell, will then flood the doctors’ offices. This is when the fun really begins. We will then have to get used to extremely long waits at doctors’ offices because we have more people with insurance and we will have less doctors because they will be reimbursed less, since it will probably be a Medicare like reimbursement system. Doctors will not stay in this business for the $25-$40 they get reimbursed for government health plans, would you? That means the polls showing that doctors will quite if this nationalized health care plan is approved are probably accurate or at the very least doctors will flock to specialties so you can forget about preventative care or GP doctors.

At this point in time innovation will have stopped because there are going to be taxes on biotech companies and other pharmaceutical companies, read the bill. We will have a health care system exactly like Canada or the UK which by all accounts is great, f you are not sick. If you are sick in those countries you get out and come to, guess where, America, but that will be long gone by 2015. We, Americans, will be flocking to China, India or somewhere else in South East Asia for health care because there will be no waiting, it will be cheaper, the service and survival rates will be better. For the life of me I have no idea why we, the country where other citizens flock to for medical treatment, would revert to a socialized system that is failing other countries not only in terms of their health, but also in terms of their national financial health.

If you think about it who goes to the UK or France to get cured of cancer? I didn’t I went to Boston along with many people from the UK and France. Who goes to Canada for surgery? They come here. The only people who venture to those countries are those who do not have insurance and refuse to pay for anything on their own, which I get that this is an issue, but it does not warrant the US going to socialized health care for 10% of the population. Also, the UK, France, Germany, Switzerland and any other country that offers socialized health care has a debt to GDP ratio that is horrible, worse that ours, but our actual number is that largest of all, so why would we do this at all? We can’t afford this and to think we can is absurd.

We currently owe $12.03T (TreasuryDirect.gov) which is 81% of out GDP and some $3T comes due of the $12T next year. That means we have to fund about $5T in US debt in 2010, depending on how much this wonderful government decides to spend next year, which will be a record, think about that for a minute. We have never done that before and even Moody’s is beginning to doubt the solvency of the US government and now the government wants to add socialized health care to this mess? How in the world can we pay for this? We cannot. Even the Chinese are saying, um, how are you going to pay for this? They, the Chinese, will not show up at some point in time to buy our government paper because they know we will not be able to pay off our debt.

We have yet to even raise our debt ceiling yet from the $12.1T to the $14T we need to raise it to for next year’s deficit spending. Yet our Senators will pass this monstrosity of a bill for the “greater good” of 10% of the population who already qualify for Medicaid, but are too good to apply for it! Then they will wonder why people like me end up losing their insurance next year and rates go through the roof, surely it will because of the big bad insurance company who, by the way, paid for more $10,000 procedures for me than I would care to admit to. This bill not only impacts the insurance industry, but it impacts every American in ways that you cannot imagine from your insurance coverage next year to the very solvency of the country in the next 10 years. This government needs to be stopped before they destroy this country and kill people like me.

Even though most of the failure of the last few years belongs right on the shoulders of the man orchestrating the financial reform bill, Barney Frank and his blind eye to the GSE’s, and other key Democrats who applauded the repeal of Glass-Steagall they are now going to pass financial reform. Worst of all they are putting more trust in the ultimate of failed institutions, the Federal Reserve and the FDIC, with even more power to regulate financial firms.

Essentially, anyone who encouraged, allowed and missed all the events that led up to the credit collapse of last year is now getting more power to make sure it doesn’t happen again. So much for ever going long equities in my lifetime again. The systemic risk bill would grant vast powers to a new systemic risk regulatory council, the Federal Reserve and the Federal Deposit Insurance Corp to monitor and address risks to economic stability posed by shaky financial holding companies.

Those deemed severely undercapitalized by the council could be restructured or even shut down by regulators. Managers could be dismissed, credit exposures limited, pay and bonuses restricted, acquisitions and new ventures blocked. Capitalism is now official dead and no one has been able to locate its body, but there is a toll free number to call with any tips, 1-888-ASK-4KEN.

We now know where the FDIC will get its funding from all the potential failures from in the near future as banks and other institutions are now forced to fund it themselves.  Here is what the article says: “It also attempts to shift the cost of future financial stabilization efforts toward industry and away from taxpayers by forcing financial firms with more than $10 billion in assets to foot the bill for any losses from Federal Deposit Insurance Corp actions to resolve the problems of failing firms.”

Who knows what that officially means as no details are available yet as the bill just made it out of committee, I am sure more details will be available soon. Frankly, I think it is a good thing that the taxpayer will be off the hook, but I will believe it when I see it since it has been known for decades that the government will bailout banks if they get into trouble, and proven twice now. I am also pretty sure the taxpayer never asked to bailout the banks anyhow, all the people with the signs in front of Wall Street and Congress last fall should have tipped off lawmakers, but Congress did it anyhow.

What scares me the most is that Geithner is actually in favor of this reform. Why does that scare me? Geithner is not exactly the smartest guy in the room and has never been in the private sector and is a little too cozy with Wall Street. Plus, he could not figure out his own taxes, the IRS is under his direct control, so ponder that for a bit.

The really good news is that the one part of our system that was not broken, hedge funds and private equity funds, will now be forced to register with the government. These are the smartest guys in the room who actually made money last year and while they are not perfect, they did nothing wrong. What risk do they bring to the table? They had nothing to do with bringing the system to its knees unless they wrote mortgages and levered up 60-to-1 with CDO’s. It is the Lehman’s, Bear, Sterns, Merrill Lynch’s, Citi’s, Wachovia’s and the Fed that messed up, not hedge funds, but make them pay that makes sense.

Along with this bill Frank is also voting on a credit rating agency bill, consumer watch dog agency bill and bringing in the head of the CFTC apparently to tie everything together. Who knows where everything will end up as these things change a lot between committee and the actual vote in Congress. Also, Republicans and lobbyists are pushing back, but they will surely get shut out quickly. This bill will likely weigh on the markets on Wednesday as when the news hit the wires the futures went negative.