While Bernanke May Not Understand Gold, It Seems Gold Certainly Understands Bernanke

"We see upside surprise risks on gold and silver in the years ahead," is how UBS commodity strategy team begins a deep dive into a multi-factor valuation perspective of the precious metals. The key to their expectation, intriguingly, that new regulation will put substantial pressure on banks to deleverage – raising the onus on the Fed to reflate much harder in 2014 than markets are pricing in. In this view UBS commodity team is also more cautious on US macro…


Via UBS,

In testimony in front of the Senate banking committee in July, Ben Bernanke made an unusual comment; 'nobody really understands gold prices and I don’t pretend to understand them either'. That's a surprising admission, because, as head of the central bank that controls the word's reserve currency, we think Bernanke should understand gold. Because gold, in our view, is a critical barometer of the state of global credit.

Many clients have asked us whether gold is an inflation hedge. The chart below suggests not.

But we believe that gold is in fact an inflation hedge – but the inflation it is hedging is not inflation as most people commonly understand it.

Friedrich Hayek said that inflation is not a change in the consumer price index, it is an increase in money and credit. To this he added near money – any asset that could be quickly and easily swapped for traditional money or credit. (For ease of writing – I'll refer to money, near money and credit combined as 'credit'). For Hayek, neutral inflation was when credit expanded in line with the productive potential of the economy.

Whether Hayek's inflation leads to traditional CPI inflation depends on the nature of the economy. If it is sclerotic – bound up by unions, capital controls and excessive state spending as it was in the 1970s – then you get CPI inflation. In a globalised world characterised by industrial overcapacity in China, a large global under-utilised workforce, and exceptionally low rates, the impact is asset price inflation.

Hayek had a lot to say about an environment where 'inflation' or credit expanded too fast and asset prices rose. He argued that it accelerated growth, because there was a large incentive for companies that service or build assets (from estate agents and investment banks, to property developers) to expand, to build, and to transact more asset sales.

Hayek's problem; this causes a major misallocation of capital – because the returns from servicing and building assets are available only when credit is expanding.

When credit stops accelerating (not even declining) asset prices start to fall.

Returns in these areas decline precipitously, and value is destroyed. When credit grows in line with the productive potential of the economy, a very different incentive structure emerges. Assets as a group tend to rise in line with incomes. So the incentive is to boost income and wealth through building businesses that create sustainable returns above the cost of capital.

So how does gold fit into this? In commodity strategy, we see gold as a barometer of global credit inflation. The best way to understand this is to highlight the Bretton Woods II system of global capital flows that drove gold through a 12 year bull market up to 2011.

We highlighted this mechanism in the note 'Reverse Bretton Woods' (3 September 2013) and depicted in Figure 3 below. It starts in the central oval with the Fed running easy money, and with the commercial banks expanding their balance sheets. In the 2000s and under QE1 and QE2, a key feature of this was the use of repo and the purchase of credit with CDS insurance. This balance sheet expansion neatly avoided raising risk weighted capital ratios – which allowed the banks to progress towards their Basle III targets. (More on the regulator backlash later).

This immediately suggests the first two things to track to measure the expansion of global money and credit – measure the change in the size of the Fed's balance sheet and the change in banks domestic lending. Those two neatly add up to M2 – notes and coins in circulation and deposits with commercial banks.

But that misses out 'near money' – assets that can be swapped for cash and used to buy more assets.

The Treasury borrowing advisory committee have estimated this – at US$43trn at the start of the year. But the data is very slow coming out. One way to proxy developments is to follow the amount of liquid assets that the US banks hold that can be used for collateral in repo transactions. That's shown in the chart below.

That's not perfect, as it doesn't take account of rehypothecation – the reuse of capital (which is like the velocity of money in the repo market). We are not aware how we track this in a timely manner – but any suggestions, please get in touch. What we do know is that new regulations – notably central clearing rules, are sharply reducing the reuse of collateral for repo and other trades.

But then there is the global aspect – the right side oval in figure 3 shows that when capital flows into emerging markets, central banks print their own currency to buy the incoming dollars. This sets off a chain reaction of credit growth – first deposits rise, then banks lend to consumers and corporates. That raises growth and inflation, lowering real rates and inducing more savings into the system (from consumers who need to save more to build a nest egg) and more demand for loans from corporates, and consumers who want to gear up speculate on property or fixed capital formation. Which causes even more credit expansion.

So the initial capital flows into the rest of the world are multiplied up first by the emerging market central banks, and then by the commercial banks, and by the incentives that a combination of strong liquidity growth, rising inflation and sticky nominal rates then induce.

Again, the data on this is slow and partial (as a chunk of emerging market lending occurs off balance sheet). So, out of expediency we take the change in foreign central bank treasury holdings held at the Fed, as a timely proxy, and we multiply it up five times – as a proxy of the impact of the fractional and shadow banking multiplier in emerging markets.

This gives us four metrics.

Of these – we believe that a necessary condition for gold to rally is the expectation that 1) capital will flow into emerging markets, 2) the combination of the fed's balance sheet and the banks marketable securities holdings rises.

The banks' vanilla lending at home in the US has little positive impact, and probably a negative impact on gold prices. Why? Because it doesn't deliver capital lows overseas, and it induces expectations of tightening monetary policy from the Fed.

So we have created a weighted indicator made up of foreign central bank treasury holdings with the Fed, Fed balance sheet expansion and the US banks liquid security

It is potentially more revealing to show the change in liquidity vs the gold price.

In commodity strategy, our view is that US combined central bank and commercial bank asset purchases are the key driver of yield compression – which makes gold a relatively more attractive asset to hold – and the global reach for yield, that induces flows into emerging markets. Those flows then start a very bullish gold dynamic;

  • The falling dollar raises dollar denominated gold prices. Rising FX reserves induce central banks to buy gold to maintain the gold ratio in reserves.
  • The liquidity boost in emerging markets raises income among consumers who tend to invest in gold. Rising commodity prices and commodity currencies raise dollar based gold costs, and reduce revenues in local currency terms – constraining supply.

But when the Fed started QE3 last October, the improving growth outlook and rising stock market had gold anticipating the threat of tapering (first mentioned by the Fed three months later on Jan 4th), anticipating capital outflows from emerging markets (which began in Jan/February and which accelerated in May). And anticipating commercial bank liquid asset sales – which also began in May. All considered negative for gold.

So while Bernanke may not understand gold, it would appear that gold certainly understands Bernanke.

Perhaps the most significant aspect of the tapering debate was that the Fed became increasingly hawkish on tapering in 1H13, despite the fact that growth was modest and inflation subdued. Our interpretation of this was that the Fed started to become highly concerned about credit market overheating.

Governer Jeremy Stein raised the issue in the December 2012 meeting, and his speech in February 2013 outlined research that showed not just tight spreads, but outsized low quality credit issuance – the classic signals of an overheated credit market, with the clear rider that this could lead to a bust. Soon after Stein presented his results, the tone from Bernanke et al became much more hawkish on QE.

The most revealing aspect of the market reaction to Bernanke in 2013 is that it was the diametric opposite to the market reaction to Greenspan in 2004, even though their communication appeared identical. Back in February 2004, Greenspan stated that, if growth continued along the lines the Fed anticipated, then it would start to remove accommodation gradually. Greenspan then started raising rates by 25bps a meeting from June. Capital flowed into emerging markets, banks bought liquid assets, and the Bretton woods 2 system of flows kicked in so powerfully that treasury yields actually fell while rates rose. Something Greenspan dubbed 'a conundrum'.

Then Bernanke repeated the same communication procedure in 2013, announcing in June that, providing growth met the Fed's expectations, it would, in due course, gradually remove accommodation. The market response; capital flowed out of emerging markets, banks sold their liquid assets, treasury yields blew out 100 points and mortgage yields blew out more.

In our view in commodity strategy, that is a clear expression of the fact that the global liquidity dynamic of the 2000s, and under QE1 & QE2 is now set to run in reverse.

It is worth noting that Fig 12 shows that foreign treasury holdings have bounced since the Fed announced a delay to its tapering programme in September. EM currencies & equities have also jumped. We expect these trends to reverse as bank deleveraging takes hold, and as bullish positioning in broader risk assets unwinds. Asset price developments indicate that the pool of available liquidity has narrowed dramatically. The majority of major asset classes are well off their tops. None are confirming the near high in the S&P.

Within the US market, banks have started to underperform.

And a narrowing group of stocks is driving the market – led by a group of growth/concept companies on largely triple digit multiples – Tesla, Netflix, Netsuite, 3D systems corp etc.. We have created a basket of these names in the chart below. We are using this index as an indicator for when a decline in liquidity reduces investors’ appetites for highly valued issues.

We've highlighted that regulation will now likely drive a new wave of deleveraging by the banks.

What we're worried about is the interaction of several simultaneous strands of legislation – all acting to reduce liquidity – on the amount of money or near money available to buy assets. And the ease with which financial players can trade those assets.

Before we go into the details, one of the main questions we get asked is why would the regulators continue with a process that seems to cause market dislocation?

In our view it is because they believe in the morality of their actions – that banks that are too big to fail should shed assets or raise equity to the point where it's much harder for them to fail, to prevent a repeat of the financial crisis and the heavy burden on taxpayers that ensued. Fed Governor Jeremy Stein’s speech last week (‘Lean or clean?), and Governor Tarullo’s speech from May (Evaluating Progress in Regulatory Reforms to Promote Financial Stability) highlight that desire.

That, in our view in commodity strategy, is a laudable aim. The difficulty, as the old joke has it, is that to get there, you don't want to start from here.

Second, to many regulators, the banks have raised their exposure levels, and raised counterparty risk in the system, in order to raise net interest margin and equity value. So while the systemic banks reduced risk weighted assets by a third from the financial crisis, total leverage has risen 10%. This is precisely the opposite of what the regulators intended when they negotiated the Basle III capital requirements with the banks. The regulators apparently believe that the banks acted in bad faith. The regulators are now fighting back. The clearest comments on this were from Thomas Hoenig, deputy Chairman of FDIC, the US regulator.

Third, the regulators believe that the fact that the markets have rallied for five years gives them scope to act without causing too much damage.

And finally, regulators don't follow an Austrian view of the world. They may not perceive the degree to which credit markets have become overheated. And they are unlikely to recognise that the credit boom of the past five years has induced a massive misallocation of capital globally, and has created the potential for Hayek's 'recessionary symptoms' to show up as liquidity is drained from the system.

So what are the key regulatory actions?

  • Central clearing house trading to replace OTC – the key issue is that this raises collateral requirements, making the trades more expensive, and it makes it impossible to rehypothecate the collateral – which reduces system liquidity. The Treasury Borrowing Advisory Committee estimated that there was around us$4.5trn of rehypothecated in the US assets at the start of 2013.
  • U
    S requirements for foreign owned banks to hold separate ring-fenced collateral to their parents. Oliver Wyman, the consultants, estimate that this will force foreign owned banks to reduce repo by US$300bn in the US.
  • Leverage ratios which do not allow the netting of repo, or credit against CDS – proposed at a minimum of 3% by the BIS, the US Comptroller of the currency has proposed 5-6%. European and UK regulators yet to decide
  • Capital requirements behind trading – including market risk capital changes, stressed value at risk, and incremental risk charges. Stephane Deo, UBS head of asset allocation, believes that these will reduce liquidity and raise volatility across several asset classes
  • Multiple additional measures under Dodd-Frank, etc

The problems with the regulation are fourfold.

  1. First, they make it much more expensive for banks to hold assets and carry out repo, or buy credit with a CDs insurance wrapper
  2. They tie up collateral, reducing the velocity of collateral.
  3. They make it less attractive for banks to originate credit, and to offer securities inventory holding/trade facilitation.
  4. They reduce liquidity and raise volatility across multiple asset classes.

And the problem with repo is that it is highly pro-cyclical. Rising values for high quality collateral used in repo reduce the amount of collateral you need to post to secure funding, and allow you to buy more assets. It can also reduce the haircuts for some lower quality collateral.

And a point Jeremy Stein highlighted in his speech on 'credit overheating' was that the more the cost of capital falls as a result of banks expanding their repo operations, the more financial institutions are induced to reach for yield – further accelerating the Bretton Woods II liquidity cycle.

But falling collateral values do the opposite. They reduce the capacity of firms to carry out repo and use the funds for credit transactions and for funding credit warehousing etc. and it reduces the tendency of financial companies to reach for yield. All this, in our view in commodity strategy, causes Bretton Woods II to go in reverse.

A key observation of the Bretton Woods II process of capital flows is that the risk free rate – the yield on 10-year treasuries – is no longer risk free. It is subject to a pro-cyclical and speculative expansion of leverage on the upside. The implication is that, when risk aversion rises, the normal safe haven bid for treasuries may be offset by selling from domestic commercial banks and foreign central banks. So yields may rise, or not fall as much as would be typical. This removes a natural stabilisation mechanism in markets. The higher cost of capital (than usual) may make the impact of risk aversion on markets and macro more severe than we are used to.

And just as the Bretton Woods process was highly reflationary and bullish for all assets, reverse Bretton Woods is considered bearish for everything, except gold and silver. And that's because of the capital misallocation generated during the credit inflation will unwind, destroying value and precipitating what Hayek called 'recessionary symptoms'. Hayek said all it took to start the unwind was a deceleration in credit expansion. Our description of the impact of QE on growth is shown in the following two charts

A rising cost of capital and shrinking liquidity, for any given rate of growth, does not only de-rate asset prices. It hurts growth in all the asset related businesses from financial services through to construction. And then it hurts growth via the reduced supply and higher cost of credit – which included from 2009-13 consumer spending (via mortgage refinancing, or cheap and plentiful car loans), or small companies (via tighter high yield spreads).

So far, this set up appears very similar to 1937. Back then the US was into a fourth year of recovery from the depression. The Roosevelt administration scaled back deficit spending and the Fed raised reserve requirements (not thought of as a problem at the time, due to bank’s excess reserves) and started sterilising gold inflows. Manufacturing declined 37% & the Dow halved. The difference, though, is that this time the Fed is likely to move earlier.

In our view in commodity strategy, as the private sector takes away leverage and reduces liquid asset holdings, the Fed will be forced into providing the heavy lifting to keep total asset purchases up. On that basis, the Fed will be doing much more QE in 2014 than the market anticipates.

And with gold and silver acting as a barometer of whether the Fed will be reflationary or deflating the global economy in 6-12 months time, we anticipate hem to rally as soon as the deflationary process becomes visible in a breakdown in the S&P or a breakdown in US macro surprises.

And in particular, with Yellen now all but certain to take Chair, the market will immediately assume that the Fed will reflate in response to any deterioration in broader markets or macro conditions. Something that we believe would be much more debatable had Summers taken the post.


via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4n4TCFcg3P8/story01.htm Tyler Durden

From the Front Lines of Chicago

(As I mentioned in my Anatomy of a Hate Mail post a few days ago, the vast majority of emails I get from Slopers are really nice. Below is a fine example, which I got last night. I received the author’s permission to publish it, with the provision that I remove the person’s name. It is an eye-opening first person account of what’s going on out there…….Tim)

Hi Tim,

I know you’re busy, so I’ll try to keep this short.  I just wanted to say:

1.) You are awesome.  I look forward to reading your posts every single day.

2.) Everything you say about the U.S. economy jibes with my experience as a real estate investor in Chicago.  The vast majority of my tenants are low-income (their rents are mostly subsidized by our fine government), but a couple make a decent living and reside in luxury condos downtown.  Based on what I’ve seen during the past 5 years that I have been doing this, I completely agree that our financial system is totally, utterly screwed.

No matter what their personal situations or how great their intentions are, all my tenants fall short in some way; they either pay late, not enough, or not at all.  And/or they don’t honor their obligations as tenants.  ALL of them.  You would be amazed by how many sob stories I hear on a daily basis.

Please keep in mind that my low-income tenants are not living in ramshackle buildings where they need to huddle in the corner for warmth; no, many live in homes with stainless steel appliances, granite countertops, and whirlpools (this is how investors attract renters in this area these days, after paying close to nothing for the properties themselves).  Mind you, some of these are people pay NOTHING in rent every month. 

They also pay almost nothing for food, utilities, and medical care.  Yet despite having pets, flat screen TVs, cable, and gas-guzzling cars, they somehow can’t afford the $395 move-in fee (I don’t require a security deposit in order to avoid a potential lawsuit, which would result from not following the Chicago Landlord/Tenant Ordinance precisely and which many shark lawyers would happily take on) or light bulbs or mousetraps or batteries for the smoke detectors. 

If they agree to maintain the yard, they expect you to provide a mower.  Signed leases mean nothing to them.  Nothing.  They don’t seem to care who provides the resources which allow them to stay home all day waiting for their government checks to arrive in the mail.  They don’t seem to think about the many, many, many people out there just like them, creating this unbelievably huge, unsustainable economic imbalance.   They have mastered the art of throwing tantrums and threats until they get what they want, and they seem perfectly content contributing nothing more than carbon dioxide and votes for their favorite democratic Presidential candidate on Election Day.  And of course, their favorite democratic Presidential candidate is happy to indulge them.

What I find so alarming is that these folks are multiplying like rabbits. (This is another way to pass their time while waiting for their government checks, which will now be bigger thanks to the imminent arrival of another CO2 producer.)  And that they are so incredibly…big.  They consume way beyond their means, like almost every other red-blooded American.  I personally don’t understand why anyone needs to debate the existence of “bubbles” when he needs to look no further than a rear end nearby (or in a 3-way mirror, as the case may be).  We literally have “ass(et) bubbles” e v e r y w h e r e.  If the U.S. is indeed headed toward another Depression, all I can say is:  the country could sure use a diet.

Oops.  I hadn’t planned on writing for so long or sounding this mean.  I guess I needed to vent.  The stock market is way too high, and I’m grumpy.

Anyway, hats off to you!  I felt compelled to write this after reading one of your posts yesterday (“Anatomy of a Hate Mail”), so I wanted to tell you that your more intelligent customers clearly adore you.  I also thought sharing my perspective may be at least marginally informative, since it’s somewhat unique. {personal information redacted}

{Name Redacted}

P.S. I do realize I enable the system by participating in this entitlement program.  This is one of the reasons why I am tormented.

P.P.S.  To be fair, my tenants are generally good-hearted people.  (That is, when they don’t act like Chucky-like 2 year olds.). If you do post my message, I would like to add that people don’t just spend beyond their means, but they also spend beyond the government’s means.  How the government can possibly justify this kind of spending is beyond me.  Totally bogus.


via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/m_9gT65LpSI/story01.htm Tim Knight from Slope of Hope

Administration Enforces Radiosilence On Obamacare Enrollment Numbers

During this morning’s Congressional hearing on the failure of Obamacare, one of the developer’s let slip a little too much truth:



While the self-proclaimed ‘most transparent’ administration fights off the French and the German over spying ‘lies’, and gags insurers from publicizing how many people have signed up for Obamacare, it seems the cover-up goes even further with everyone involved silenced (for now).



The CGI’s statement confirms more evidence of the administration hiding the truth as InForum noted recently:

Feds ask Blue Cross Blue Shield not to release exchange numbers


The Obama administration asked North Dakota’s largest health insurer not to publicize how many people have signed up for health insurance through a new online exchange, a company official says.


During a Monday forum in Fargo for people interested in signing up for coverage via the exchange, James Nichol of Blue Cross Blue Shield of North Dakota told the crowd his company received the request from the federal government earlier Monday. Nichol is a consumer sales manager for the company.


Still, a spokeswoman from Blue Cross Blue Shield says about 14 North Dakotans have signed up for coverage since the federal exchange went live Oct. 1. That brings total statewide enrollment to 20 – less than one a day.


via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/H9J7nKLZxhM/story01.htm Tyler Durden

Guest Post: Buying Stocks On Margin At The Top – They Never Learn

Submitted by Jim Quinn of The Burning Platform blog,

It’s like the movie Groundhog Day. Greed and hubris are the downfall of the mighty. Believing it is different this time is the mistake of the feeble minded. Watching the ensuing carnage will be a laugh riot. Seeing the blubbering of the bubble headed bimbos, pinhead pundits and Wall Street shysters when the inevitable collapse occurs will be worth the price of admission. If you think we're wrong, pony up to the trough, borrow some money and buy Twitter on IPO day. You can’t lose.



Of course, "this time is different…"


via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/2e4hvMGFgsk/story01.htm Tyler Durden

When "Offshore Drilling" Takes On A Whole New Meaning

Before Hercules Offshore collapsed into bankruptcy, they (like every other company in the USA it would seem, that faces falling revenues) were desperate to cut costs. Unfortunately for the offshore drillers that worked for the firm, Hercules chose to squeeze out the last drops of expense in a ‘different’ way


( h/t @Merimack1 )


and as a reminder from Monty Python…



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mLvXsNUR8uM/story01.htm Tyler Durden

When “Offshore Drilling” Takes On A Whole New Meaning

Before Hercules Offshore collapsed into bankruptcy, they (like every other company in the USA it would seem, that faces falling revenues) were desperate to cut costs. Unfortunately for the offshore drillers that worked for the firm, Hercules chose to squeeze out the last drops of expense in a ‘different’ way


( h/t @Merimack1 )


and as a reminder from Monty Python…



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mLvXsNUR8uM/story01.htm Tyler Durden

Amazon In Six Simple Charts

In the new normal, the following six charts (which simply track the transformation of a company from a
viable, if slower growing, cash flow generation model to the godfather
of the dot com 2.0 movement)…


… Are enough to generate the following stock reaction:




via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9RfTvDJnVhE/story01.htm Tyler Durden

Trannies On Best Run In 16 Months As Gold Hits 1-Month Highs

Homebuilders have surged to the best performing sector off the debt-ceiling-debacle lows now (up a stunning 8.3%) despite a mixed bag of performance today with Trannies once again (10th of the last 11 days) surging to new all-time highs (as Oil prices slide further south). This is the best 11-day run (+9.9%) for the Dow Transports since June of last year. Treasury yields rose modestly once again (despite SocGen's threat of moar QE next week) but remain 3-6bps lower on the week. Gold and Silver had another solid day (+2.3% and 3.6% respectively on the week). The USD flatlined (-0.5% on the week) with EUR strength continuing (and CAD and AUD weakness continuing).


Homebuilders take over the top spot in the last 10 day's rally exuberance…


The Dow Transports just continue to soar…


Treasuries continue to limp higher in yield amid very low volumes…


Gold and Silver continues to rise – now at one-month highs…


Overall the USD was flat but JPY crosses seemed to be the mean-revrting asset of choice today (again…


Oil prices continue to collapse…


making us wonder – what changed in the summer of 2012? 😉


Credit remains far less sanguine (and this afternoon's Fed comments sparked further weakness)…




Charts: Bloomberg


via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/DTlM_a8y2KI/story01.htm Tyler Durden

Guest Post: Obamacare Side Effect – Doctors Abandon The Health Care Insurance System Altogether

Submitted by Pater Tenebrarum of Acting-Man blog,

Free Market Alert!

Many medical practitioners have apparently simply had enough. Instead of continuing their never-ending struggle with the welfare state's red tape, they have decided to revert to a free market model without insurance. At first glance that seems to represent a barrier to obtaining medical care for poorer strata of the population. However, a second glance reveals that this might actually not be the case. No doubt to the great dismay of the sick-care cartel and the bureaucracy administering it, the refreshing breeze of the free market suddenly intruding upon the system shows what prices actually would be if the State were not involved in health care. According to a recent report on the spreading 'cash only' medical care phenomenon:

“Fed up with declining payments and rising red tape, a small but growing number of doctors are opting out of the insurance system completely. They’re expecting patients to pony up with cash. Some doctors who have gone that route love it, saying they can spend more time with and provide higher-quality care to their patients. Health advocates are skeptical, worrying that only the wealthy will benefit from this system.


In Wichita, Kansas, 32-year old family physician Doug Nunamaker switched to a cash-only basis in 2010 after taking insurance for five years. (“Cash-only” is a loose description. Nunamaker accepts payment by debit or credit card too.)




Under the traditional health insurance system, a large staff was required just to navigate all the paperwork, he said. That resulted in high overhead, forcing doctors like Nunamaker to take on more patients to cover costs. Plus, the amount insurance companies were willing to pay for procedures was declining, leading to a vicious cycle. “The paperwork, the hassles, it just got to be overwhelming,” Nunamaker said. “We knew that we had to find a better way to practice.”


So Nunamaker and his partner set up a membership-based practice called Atlas M.D. — a nod to free-market champion Ayn Rand’s book Atlas Shrugged. Under the membership plan — also known as “concierge” medicine — each patient pays a flat monthly fee to have unlimited access to the doctors and any service they can provide in the office, such as EKGs or stitches.


The fee varies depending on age. For kids, it’s $10 a month. For adults up to age 44, it’s $50 a month. Senior citizens pay $100.


The office has negotiated deals for services outside the office. By cutting out the middleman, Nunamaker said he can get a cholesterol test done for $3, versus the $90 the lab company he works with once billed to insurance carriers. An MRI can be had for $400, compared to a typical billed rate of $2,000 or more.




Kevin Petersen, a Las Vegas-based general surgeon, stopped taking insurance in 2005. Petersen named the same reasons as Nunamaker: too much paperwork and overhead, declining payments from insurance companies, and a general loss of control. “The insurance industry took over my practice,” he said. “They were telling me what procedures I could do, who I could treat — I basically became their employee.”


Now Petersen does hernia operations for $5,000 a pop, which includes anesthesia, operating room time and follow-up visits. He negotiates special rates for the anesthesiologist and the operating room, and is able to provide the service for about a third of what a patient might pay otherwise.


Many of his patients are early retirees who are not yet eligible for Medicare but can’t afford a full-fledged health insurance plan, he said, and business is booming. “My practice at this point is the best it’s been in my 26-year career,” he said. “By far.”


While the cash-only model may please doctors, some question whether it’s good for middle- and low-income people. Kathleen Stoll, director of health policy at the consumer advocacy group Families U.S.A., didn’t want to speak directly to either Petersen’s or Nunamaker’s practice, as she didn’t know the specifics of each.


But in general, she fears that doctors who switch to a cash-only model will drive away the patients who can’t afford a monthly membership fee or thousands of dollars for an operation. “They cherry-pick among their patient population to serve only the wealthier ones,” Stoll said. “It certainly creates a barrier to care.”

(emphasis added)

Obviously, both the named and unnamed 'health advocates' and worriers have it completely wrong. People who don't have to pay thousands of dollars
for health insurance actually can afford 'thousands of dollars for an operation' that costs only one third of what it would otherwise cost. It is not only the wealthy who can afford this free market care (besides, people who don't want it have the option to continue with the existing system).

Look at those prices! A cholesterol test for “$3 instead of $90” – that is more than 96% less! An MRI for $400 instead of “$2,000 or more” (usually will be 'or more')? Not to mention the fact that these doctors now have more time to actually care for their patients properly. What's not to like?


A Win-Win By Mistake?

Imagine for a moment what might happen if the government were to get out of healthcare altogether and there would be free competition between all health care service providers. What would happen to prices in that case? It is probably fair to assume that they would come down precipitously even from the low prices free market doctors are already able to obtain for their patients nowadays.

It is actually a good bet that the onerous red tape and the likely explosion in costs due to Obamacare will accelerate the move toward a free market in health care – unless the government explicitly forbids it, that is (unfortunately we cannot rule out completely that such tyrannical steps will eventually be taken – the government generally doesn't like it when its 'help' is refused). 

If so, the Obamacare Act could turn out to become a win-win by mistake so to speak, as more and more people decide to opt out of the system. It seems clear that the free market solution is preferable to the cartelized health care system imposed by government and the lobbyists that have co-written the laws. The doctors portrayed in the article above are leading by example, and we expect their ranks to swell in coming years.


via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/d122e29xbQ8/story01.htm Tyler Durden

Did The Fed Just Begin To "Pop" The Credit Bubble?

When Jeremy Stein warned in February of "froth" in the credit markets, it was much discussed but little action'ed. However, today we start to see some actions:


With cov-lite issuance at all-time record highs (as we explained here most recently and Moody's tried to ignore), Stein's bubble is even bigger and whether or not the Fed 'tapers' it is clear now by this signal that their concerns over bubbles are growing day by day.


Of course, as we warned here, this is Carl iCahn's worst nightmare…

…But we have seen this "credit cycle end, equities ramp" before – in 2007 – where leverage (both firm-wise (debt/EBITDA) and instrument-wise (CDOs)) provided the extra oomph to send stocks higher on the back of credit fueled extrapolation of earnings trends.

(charts: Barclays)

In the end we know this is unsustainable – the question is when (in 2007 it last 10 months or so…).

We already see 30Y Apple bonds trading at 5% yields – admittedly low still but notably higher than when they issued previously. The Verizon deal recently now trades at around 5.7% yield and is considerably worse financially pro forma. Of course, just as in 2007, things change very quickly once collateral chains start to shrink.

Perhaps this is why Carl iCahn said the Apple CFO/CEO shunned him – iCahn's worst nightmare is simply the inability to proxy-LBO each and every firm…

Given these charts – which market do you think is in a bubble – equity or credit? Bear in mind that the Fed's Jeremy Stein has already made his case that the latter is a bubble for sure… and the fragility that reaching for yield creates…


and here is Stein's most recent warning…

Stein 20130926 A


via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/PU3lsWMoTAA/story01.htm Tyler Durden