26 May 2015

Not A Dry Eye in Sight

In the mid 2000's, while at CSC, there came an announcement that the internal data centers (aka, "cloud" before that meme was invented) would be consolidated in Australia. I was aghast. For those who don't follow the Science Channel and such like, the island/continent of Australia is by far and away the most arid populated place on the planet. Moving anything there is silly. Not only that, but Australia was then in the midst of an historic drought, making a dry land virtually desert.

Sound like California? Rather a bit. This piece today consolidates much of the history and response to drought in both places. Or, as I like to call it, "19th century stupidity, meet 21st century reality". Or, as it's been written here more than once, "what would the world be like if everybody behaved like you?" The USofA is no longer a place of infinite resources, to be squandered for fun.

24 May 2015

Bill Gross Is An Idiot

Really.

He pontificates in today's NYT Magazine interview.
So what's the average person supposed to do? Save more. An investor could also take on more risk. I wouldn't recommend that, but that is something investors are doing, which suggests there's a bubble.

This from an avowed guru. The Dot Bomb happened because the Giant Pool of Money had already appeared, but unnoticed; a time of fiduciary investing (software involves nearly no physical capital and still doesn't, and thus has the pros in thrall). Coming out of the Dot Bomb, The Masters of The World still couldn't find ways to invest in real assets (plant and equipment) to generate real value and earn real interest. So they looked around for some other form of low risk (preferably risk free) instruments. They went after US residential housing, historically without risk enough to notice.

As Your Good Mother said, "what would the world be like if everybody behaved like you?" What happened was predicted, but not by the pros, since their incomes depended on continuing the merry go-round. People like Bill Gross.

Remember all that spewing: "The Damn Gummint drives out private investment"? Now, the likes of Gross want the Damn Gummint to pay them 10% for their idle moolah for nothing. Talk about perverse! There are multiple $$$ trillions sitting around idle on balance sheets and sequestered overseas in corporations alone. One might ask why The Masters of The World aren't creating new capacity to a faretheewell? Of course, there's still no increase in demand, since median income still sits in the toilet. The 1%/.1%/.01% continue to accumulate moolah, leaving yet more of it idle. The likes of Gross want a Terminal Depression, since the resulting price deflation turns into 10% or 20% increase in wealth, all for doing nothing but continuing to stuff mattresses.

The fact remains: only real investment generates real value and real earnings, thus the real interest rate. Demanding that the Damn Gummint pay higher than The Masters of The World can generate organically (i.e., not including M&A, buybacks, etc.) is evil. For some time, They haven't been smart enough to do that. Bill Gross is just Gross.

While I haven't a cite, it's clear that Bernanke figured out that The Masters of The World's refusal to make real investment was the underlying problem. QE tried to push the string by removing the spiked punch bowl. Hopefully, Yellen won't capitulate.

12 May 2015

Water World

Even the most ardent hermit knows, by now, that the USofA west of the Mississippi is in some level of drought, and that central California is about worst off. It is widely reported that about 80% of the managed water in the state goes to agriculture, and that a disproportionate amount of that goes to grow almonds. About 80% of the globe's total almonds are Californian. How could such a dry, hard nut squander so much water? No idea.

In the news recently were the water restrictions from Sacramento, and government generally, and the flouting of such measures in places like Beverly Hills. The 1% must have their emerald cities.

As proposed here much of the time: data is useful in predicting the future when the process under study follows God's (or Nature's, as you prefer) laws. Such laws are immutable and play no favorites. We just don't always know the full and exact state of those laws. There may no longer be any meaningful ignorance of Mother Nature's rules in our macro-world. Nothing new to learn, in terms of laws themselves. Our understanding of climate change or global warming or kiss you ass goodbye, is not due to finding new natural law, but rather of having sufficient data to track thermodynamics on a global scale at ever finer granularity.

Processes which follow Man's laws are a different matter entirely. Some of us, our betters, get to change the laws when their enforcement limits our betters' behaviour. We see this in the very upscale parts of the LA basin, where those brilliant green lawns and such continue to be husbanded with lots of H2O. Fines seem to be ineffective. Shaming appears to be the next step. Good luck with that.

But let's think about the issue. Water, whether in a stream, river, lake or aquifer, doesn't exist within Man's artificial boundaries. If I drill a well on my 1 square foot of land, the water I draw doesn't come from just that 1 square footprint projected into the earth. It is drained from any contiguous groundwater in all directions at any distance which gravity makes available. It is a common resource. The same for natural streams and rivers and for natural or man-made (generally, dammed flows) lakes/reservoirs. All that Poland Spring bottled water you use is drained by Nestle` from community resource in central Maine. Some citizens are none too happy about turning a community resource into private profit.

Those that squander a common resource should, by rights, pay more for the resource. Pay more, in fact, such that the rest of the community can replenish the wastage. In California, these days, that would be one hell of a bill: bringing train loads of water from Canada or New England (though my part of it hasn't seen rain for a few weeks; knock on wood) will cost a pretty penny. The 1%, of course, won't abide such horrible treatment. Since most of them, by legend of course, are think-workers who don't need to be in California to be rich, if they're made to pay for their self-absorbed squandering will just pull up stakes and go someplace that has lots of water. The 19th century approach: if you don't like it here, get the hell out and move on. There's not much virgin territory left in the USofA.

But, what if the states made a pact? Since water, in every state (and across them, too), is a common resource, why not ban water squanderers from moving into some other state? NIMBY, but with a purpose. Group homes for the mentally challenged are routinely blocked from neighborhoods, due to threats of violence (perceived) or low level disruption. Why not change the incentive, which now permits the few to impoverish the many with respect to water? We're doing that, sort of, with air; although those laws are aimed at sovereigns and industry for the most part.

"You're a convicted water waster. You may not own, live in, or occupy property in this state." Now, that's incentive.

06 May 2015

You Don't Deserve It, But I Do [update]

Regular reader will recall those musings derived from the notion that, if the 1% get their way in killing Obamacare, soon enough even they won't be able to afford healthcare. They'll have to have Obamacare. With the 99% paying for it, of course.

The motivation for the deduction is simply average cost. In the Olden Days, of individual craftsmen serving the liege, production happened with little to no capital cost. It made sense, in a macro way of thinking, to put the serfs to work making bling for the elite. Today's a bit different. On two points. As labor diminishes as percent of production cost, killing off employees has diminishing effect on cost/price. A 10% reduction in 80% of total cost makes a bigger difference than a 1% reduction in 10% of total cost. The other side of that coin is that average cost is now more driven by capital amortization than before, and thus more dependent on total shipment. Lose money on each widget, but make it up on volume. Again, if amortization is 80% of cost, the more widgets shipped the lower total average cost.

Which brings us to an object lesson from today's news. Turns out we have a parable of rising price driven by capital amortization. Forgive my chuckling at the fact the widget is mostly in Rural Red States. Hehe.
Air ambulance companies, which indisputably save lives, often in dramatic circumstances, have consistently raised their rates and aggressively expanded their networks, adding scores of expensive new helicopters.

Here's the punch line:
Asked about the increase, Michael D. Allen, president of domestic air medical services at Air Methods, said charges had risen in part to offset the decline in insurance payments.

Not to mention silly amounts of helicopter buying, leading to amortization heavy production.
The numbers provide some support for that view. In 2013, there were an average of 469 flight hours per helicopter, a nearly 20 percent decline from 2006, and the lowest number since at least 1980, according to research by Dr. Ira J. Blumen, a professor of medicine at the University of Chicago and an expert in emergency medical transport.

The effect is exactly the same as what happens if the number of "buyers" of healthcare are sharply cut with some fixed capacity. The arithmetic works out the same: over capacity which is capital driven.
Mr. Hildenbrand [,executive director of Life Star of Kansas, a nonprofit air ambulance organization in Topeka, Kan.] calculated that each flight cost his operation $7,400 last year, counting all costs involved. Two other operators said their costs were close to that figure.

Even that number, to my way of thinking, is still way too high. Were there a free market in air ambulance, then price would be equal to marginal cost, which is just fuel, pilot, and EMTs (if any). A few hundred bucks. Of course, amortization per flight goes down linearly with the number of flights.
In 2013, there were an average of 469 flight hours per helicopter, a nearly 20 percent decline from 2006, and the lowest number since at least 1980, according to research by Dr. Ira J. Blumen, a professor of medicine at the University of Chicago and an expert in emergency medical transport.

So, to all you 1%-ers out there: be careful what you wish for; since you just might get it.

Greg Hildenbrand:
"There are not enough flights to support the helicopters that are in the market right now."

Or, there aren't enough patients to pay for the existing PCPs, specialists, and hospitals. Even the 1% can't afford to get sick.

[update]
It slipped my mind, but Adam Feuerstein recently noted the following:
Amgen relies on regular price hikes to maintain sales growth of its older drugs, which are being used by fewer patients. As I reported last month, Enbrel sales grew 13% to just over $1.1 billion in the first quarter, but only because Amgen raised the price of the drug 19% to offset a 2% drop in prescription volume.

Just can't avoid the tyranny of average cost.

05 May 2015

Bubble Bath

There's an editorial in today's NYT on drug prices, and I didn't have to wait for my dead-trees copy and coffee to find out about it. Saw it on Adam Feuerstein's Twitter feed. No, as I've said, I'm not a twit, but AF side-posts a feed on some of his regular posts.

What's being missed in all this is calling bubbles, which aren't there. Bubbles happen when moolah is sent to a sector for bad reasons, from other sectors. What's been happening since the Dot Bomb is different. The Housing Boom, and now the Market Boom, are the result of a secular decline in the return to real investment. When The Masters of The World can't conjure up ways to spend profits on plant and equipment in their companies, at any return, they look to The Damn Gummint to provide them with Treasuries at hefty risk-free interest. The problem is that Treasury doesn't do that. The bonds are auctioned, with a nominal interest rate (coupon), but the (monetary) demand for the instruments determines the actual return. This is the global opportunity cost of real investment in the private sector. When all that retained earnings (and global savings excess, to boot) chases Treasuries, the interest rate plummets, and the Masters look elsewhere for 10% risk-free. That's how they found US residential mortgages. Stable returns over decades, nearly risk free. The problem, of course, was that not enough working Americans (qualified for enough mortgages) existed to soak up the moolah. Unlike Treasury, Americans (on their own) couldn't create instruments out of thin air; they didn't walk into CountryWide and tell the brokers how to make a sub-prime Alt-A and such. The mortgage companies, thence banks, did that in order to do their patriotic duty by creating mortgages out of thin air. Well, with the help of fictitious incomes and such.

The justification of the QE was to send a tsunami of moolah at Treasuries, and thus hold down the opportunity cost of real investment to such a low level that The Masters of The World would have no choice but to buy plant and equipment, increase supply of output, thus employing loyal Americans. And a virtuous cycle would ensue. Classic supply side, or pump priming as it was once called, economics. Pushing a string.

Didn't happen because The Masters of The World refused to take the bait. They can't, or won't, make real investment. With home mortgages off the table, mostly, Mr. Market looks the best of a bad lot. And there's the advantage of getting the return in the form of capital gains. Less tax for the 1%. Everybody wins.