CHART OF THE DAY: U.S. Productivity At Generational Lows? Yup

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... The productivity point is one that one of the world’s largest asset managers made to us in recent meetings in California. The PM asked whether all this “Fed Watching” was distracting companies from investing in real things as opposed to the next frontier of rumors…


Even if you go Ex-Energy, Ex-GAAP-Earnings, Ex-GDP with your narrative that everything ZIRP, NIRP, TWIRP is good, you’ll still have a very hard time convincing a rational human being who isn’t bought and paid for by the system that US Productivity at generational lows is…"


CHART OF THE DAY: U.S. Productivity At Generational Lows? Yup - 08.23.16 chart

Study Risk Or Rumors?

“My life has been the study of risk.”

-Benoit Mandelbrot


God bless Benoit Mandelbrot’s soul. He died in 2010 at the age of 85. If you haven’t seen his last TED talk, I highly recommend it alongside one of my favorite risk management books, The (Mis)Behavior of Markets. That’s where the aforementioned quote comes from.


“As a scientist, all of my research has, in one way or another, veered between the two poles of human experience: deterministic systems or order and planning, and stochastic, or random, systems of irregularity and unpredictability.” (page 5)


Read that a few more times and think about it in the context of trying to understand macro markets. There is a community of people in the establishment who simply opine on how to order and centrally plan economic gravity; then there’s us – the humble servants of the market Gods who have come to realize, through losses and learning opportunities, that dynamic systems are non-linear and irregular.


Back to the Global Macro Grind


What do you spend more time on, deliberately studying markets and their risks… or chasing and/or reacting to rumors? In the short term, those aren’t mutually exclusive options. Since just about any central-market-planning voice can move markets, there’s risk in that too.


Study Risk Or Rumors? - Fed cartoon 08.22.2016


Yesterday’s “rumor” du jour came from a popular Federal Reserve voice by the name of Zervos. Not to be confused with a Greek god or the French writer, this Ph.D. is of the Old Wall banking system. As far as former Fed guys go, he’s quite creative in his macro musings.


He was floating the idea that Janet Yellen might take a flyer on her San Francisco Fed colleague John Williams’ idea to raise the Federal Reserve’s inflation target to 4%. Since Yellen speaks at Jackson Hole on Friday, this interrupted all of Old Wall Media’s headlines that Fed Vice Overlord Fischer was saying “we’re close to our targets”.


Rates Down (yesterday), Yield Chase Up on that…


So yes, in the short-term, rumorings and musings matter to markets; especially in the week of “the connected” @JacksonHole. Ever since Ben Bernanke used this central planning podium to move markets in the summer of 2010, we’ve had to deal with this market irregularity.


But, once you move beyond the short-term brokering of such rumors (there’s good money and a nice travel lifestyle in that)…  and you move into the intermediate and long-term, what do irregular policy actions (trying to bend and/or smooth gravity) deliver, economically?


  1. They certainly haven’t delivered sustainable, above TREND, real economic growth
  2. They’ve widened the divide between us and them, in real purchasing power terms
  3. They’ve crushed productivity, as we all live in perpetual fear of, god forbid, short selling… on fundamentals


The productivity point is one that one of the world’s largest asset managers made to us in recent meetings in California. The PM asked whether all this “Fed Watching” was distracting companies from investing in real things as opposed to the next frontier of rumors…


Even if you go Ex-Energy, Ex-GAAP-Earnings, Ex-GDP with your narrative that everything ZIRP, NIRP, TWIRP is good, you’ll still have a very hard time convincing a rational human being who isn’t bought and paid for by the system that US Productivity at generational lows is…


So getting back to work this morning, measuring and mapping real things (even if they’re really being distorted by rumors!) like the PRICE, VOLUME, and VOLATILITY of asset prices… maybe we should all just go back to day-trading Oil futures. Isn’t this productive?


  1. After failing @Hedgeye TAIL risk resistance of $52.11, WTI had its biggest down day in 3 weeks yesterday
  2. At $47/barrel, that puts Oil (WTI) at +2.9% in the last week but -1.5% in the last 3 months
  3. Oil Volatility (OVX), meanwhile, has oscillated between 35 and 45 for 3 months with some #WickedChop


Not to be confused with the perception of intellect required to bend/smooth economic gravity via moving goal post “targets” (i.e. Wicked Smaht), ironically it’s the wicked chop itself that is not only killing the banks/brokers who employ Fed people, but their active clients.


Total US Equity Market Volume (including dark pool) was down -18% yesterday vs. its 1yr average. On Friday, it was down -24%. Yeah, if you go Ex-Summer, it was due to it being the summer (year-over-year). But isn’t this really more about studying risks than rumors?


The risk of every centrally planned market bubble is that everyone is afraid to sell it. That’s right – at the very top, even the bears are reluctantly net long of it. Then boom! Something stochastic, random, and “unpredictable” happens.


Then we see the losses. Then they have another learning opportunity to realize some humility.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research view in brackets):


UST 10yr Yield 1.48-1.60% (bearish)

SPX 2165-2192 (bullish)
RUT 1 (neutral)

NASDAQ 5157-5263 (bullish)

XOP 34.53-37.95 (neutral)

RMZ 1 (bullish)

Nikkei 165 (bearish)

DAX 100 (bearish)

VIX 11.09-14.49 (bullish)
USD 93.92-96.25 (bullish)
EUR/USD 1.10--1.13 (bearish)
YEN 99.20-102.35 (bullish)
Oil (WTI) 41.11-49.80 (bearish)

Nat Gas 2.50-2.75 (neutral)

Gold 1 (bullish)
Copper 2.12-2.18 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Study Risk Or Rumors? - 08.23.16 chart

The Macro Show with Keith McCullough Replay | August 23, 2016

CLICK HERE to access the associated slides.

An audio-only replay of today's show is available here.




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JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2


“History and experience tell us that moral progress comes not in comfortable

and complacent times, but out of trial and confusion.”

 -   Gerald R. Ford


TO BE DETERMINED...: For 434 days Donald Trump has been consistent with his immigration message, and his spotlight on immigrants has been a mainstay on the campaign trail - from building a wall along the Mexican border to his call for banning Muslims from traveling to the U.S.. In an appeal to Hispanics, moderate Republicans and Independents, Trump and his campaign organized a meeting with a newly-established Hispanic advisory board with the aim of unveiling of a new immigration plan that offers solutions beyond deportation. A major speech on the topic has been delayed and the Trump camp says “TBD” for a shift on the issue, but call it like you see it - something has changed and he may be modifying the terms on which he’s run for so long.  


HILLARY’S HOPE FOR CHANGE: With Hillary Clinton’s growing lead and clearer path forward, the Clinton camp is beginning to refine policy plans - and Republicans are already expressing aversion to them. Though rumors are swirling that Clinton, Speaker Paul Ryan and wannabe Senate Majority Leader Chuck Schumer are open-minded to a package to build on infrastructure spending and reform corporate taxes, nothing is set in stone. Some Republicans say they could go along with it, while others keep their distance. But remember - even if Clinton wins the White House, and the Senate turns Democrat, the House is likely to stay in Republican hands, and is likely to become more conservative.


REPUBLICANS ON THE RISE: Trump has watched his poll standings in battleground states plummet in the past few weeks, but he can point to at least one glimmer of hope for a possible turnaround – Republicans are gaining ground in voter registration in FL, PA, NC, and IA. Sure, Clinton is ahead by an average of six points nationally, and Trump is losing ground with millennials, women, and minorities, but registration increases in eastern and midwestern battleground states are welcome news for Trump, who is coming off his first controversy-free week since the convention. The RNC has done a lot of the legwork on voter registration, and they’re stepping in to fill other voids within the Trump orbit as he’s almost completely ignored a ground operation instead relying on earned media and, of course, his rowdy rallies to win over supporters.


FUNDRAISING FRENZY: Last month, Trump looked to be even with Clinton’s fundraising efforts (mostly), but August isn’t shaping up to be as positive. To make matters worse, of the cash that was raised, he’s barely spent any of it, forcing the RNC to step up and step in (see above). The lack of staff, dearth of advertising, and frugal spending is worrisome for the RNC and can only get better. To add to that, Clinton is a campaigning machine – she’s recently reserved over $80 million in advertising for the fall season, while Trump has fallen short on future ad buys. Trump and his camp should be deeply concerned about the inequity and needs to prioritize outreach to pro-Trump groups, because without additional resources, Trump’s chances in November will not improve.


HENSARLING PREPARES: House Financial Services Committee Chair Jeb Hensarling is chomping at the bit to return to work next month as he plans to introduce his highly anticipated overhaul of the Dodd-Frank Act. Much of the plan has already drawn criticism from the big banks and Fed Chair Janet Yellen, and the bill has almost no chance of passing this year, but the measure still carries weight as it’s likely to serve as a template for Republican financial reform if Trump wins the White House. Trump hasn't endorsed the measure…yet, but does plan to reform Dodd-Frank and work with House Republicans on the subject.


NEW HOME HEALTH PAYMENT SYSTEM TO BE DISCUSSED AT CMS: Our Healthcare Policy Analyst Emily Evans highlighted a CMS call this afternoon that will serve as an open door forum on Home Health, Hospice and Durable Medical Equipment. You can find more information on the call here.


AET TAKES ITS BALL AND GOES HOME; GOVERNMENT SAYS SEE YA!: Our Healthcare Policy Analyst Emily Evans shared her insight on Aetna’s recent exit of many Affordable Care Act exchanges. You can read her piece here.


UNAPPETIZING TURKEY: In case you missed it, our Geopolitical Analyst Dan Christman shared his insight on last month's attempted military coup in Turkey and the worrisome aftermath. You can read his piece here.


New Home Health Payment System to be Discussed @CMS 2:00PM Tomorrow - AMED, LHCG, HLS, KND

Takeaway: Hard to know yet whether it will be good or bad for HHAs without more detail. Does reduce regulatory visibility for next several months

Tomorrow afternoon CMS will host an open door forum on Home Health, Hospice and Durable Medical Equipment. On the agenda is the possible switch from the Home Health PPS (HHPPS) reimbursement system to a Home Health Resource Group (HHRG) regimen. As we noted in our June 27 report, CMS had hinted at a new payment system in the FY 2016 annual update and then expanded on the idea in the FY 2017 rule. As we said in that June note, time is the most precious of commodities in government. If CMS is spending time on a new payment structure, you can be assured they mean to pursue its implementation.


With the announcement, CMS released a power point presentation from its Home Health payment contractor, Abt Associates. That presentation sheds a little more light on what they are considering.


Background. There are approximately 12,500 home health agencies in the U.S. serving about 3.5 million distinct beneficiaries. Home health patients must meet two major requirements to qualify for service; they must be home bound and they must require skilled care. Unlike other post-acute settings, home health stays need not be preceded by a hospital stay. Also, unlike other post-acute settings, home health beneficiaries are not required to make a copayment


Patients, when they are admitted to a home health agency, are assigned to a Home Health resource Group (HHRG). There are 153  HHRGs into which a patient is classified based on whether the episode is early (episodes one and two) or late (episodes three and higher); the patient’s clinical severity, functional status and level of resource needs. Table 1, illustrates a sample of HHRGs in use:


Table 1: Sample List of Home Health Resource Group Classifications

New Home Health Payment System to be Discussed @CMS 2:00PM Tomorrow - AMED, LHCG, HLS, KND - HHRG List1

Source: CMS


It is the use of therapy as part of the classification system that has long been criticized by policy makers. Since at least 2011, the Medicare Payment Advisory Commission (MedPAC) has recommended a change in payment policy that eliminates therapy visits as a criteria for reimbursement.


Linking therapy visits to payment also runs counter to post-acute reform that has long been the holy grail of policy efforts. The IMPACT Act of 2014 requires a post-acute reform recommendation in 2020. Those reform efforts are focused on payment that is driven by patient characteristics instead of the somewhat arbitrary determinants of therapy visits and the type of building housing the patient.

The Affordable Care Act mandated a report on home health utilization and access to care, particularly for vulnerable populations. That report was delivered to Congress in 2014. The report goes on to say that CMS could implement changes that addressed the findings of the report via a demonstration provided they proposed one no later than Jan. 1, 2015. CMS did deliver the report – several months late. CMS did not propose a demonstration as stipulated by the ACA.


In the FY 2016 reimbursement update released last summer, CMS cited the ACA-mandated report as the basis for considering changes to the home health reimbursement system. They disclosed three possibilities for changes to the payment system. These were:


  • Diagnosis on Top Model (DOT) – This payments system would combine diagnosis groups with a regression model to create separate weights for patients with different diagnosis. Under the DOT model, episodes would be first divided into different diagnosis groups, before determining the clinical and functional levels. Payment model regressions would be run separately for each diagnosis group.
  • Predicted Therapy Model – This payment model option would be similar to the current payment model in that actual therapy visits used in the current HHPPS model would be replaced with predicted therapy visits to develop case-mix weights and payment amounts on the predicted number of visits. The case-mix weights would be constructed via a two-part model. The first part would use a logistic regression to estimate whether or not the episode had any therapy visits. The second part of this predicted therapy model would use binomial regression to estimate the amount of therapy visits conditional on having any therapy visits.
  • Home Health Groupings Model -The premise of this model is that it starts with a clinical foundation and groups home health episodes by diagnosis and the expected types of home health interventions required. Using clinical judgement, each diagnosis code would be assigned to one of seven groups. Those seven groups include:
      •                Musculoskeletal Rehabilitation
      •                Neuro/Stroke Rehabilitations
      •                Skin/Nonsurgical Wound Care
      •                Post-Op Wound Aftercare
      •                Behavioral Health Care
      •                Complex Medical Care
      •                Medication management, Teaching and Assessment

The HHG Model would not include any therapy thresholds. It would take into consideration other items such as whether or not the patient was admitted from an acute or post-acute care settings. According to CMS, the HHG Model would group home health episodes in a way that mirrors how clinicians differentiate between different types of beneficiaries. After describing these possibilities for changes to the payment system, CMS indicated that they would be studying the issue more and would issue a technical report and provide other information in the future.


Throughout the rest of 2015 and early 2016, CMS provided little indication that they would move forward with a payment system change. Then, in the FY 2017 annual payment update proposed rule released in late June, CMS included a more detailed description of the HHG Model. While not offering any specific proposals, as we said in our June 27 note, CMS was clearly signaling plans to move forward with a change.


CMS’s expanded description of the HHG Model included the previously mentioned clinical groupings. Other payment considerations would be:


  • Timing- Episode would be placed into just two groups “early” and “late.” Currently, the first two 60-day episodes are classified as “early” and the third and subsequent episodes are “late.” In the proposed rule, CMS disclosed recent analysis that showed there is a substantial difference in the number of visits that occur during the first 30 days of a 60-day episode of care compared to the second 30 days.
  •  Referral Source – Episode would be classified into one of three referral source categories: acute, post-acute and community. According to CMS, patients admitted to home health from the community, an acute care setting or a post-acute provider had different observable patterns of resource use and would, under the HHGM, be paid differently.
  • Clinical Groups – Episode would be classified under a diagnosis group according to ICD-9 Codes. These groups are: Musculoskeletal Rehabilitation, Neuro/Stroke Rehabilitation; Wound Care; Medication Management, Teaching and Assessment; Behavioral Health Care; and Complex medical Care
  • Functional/Cognitive Level – Episodes would be grouped based on high, medium and low functional/cognitive level.
  • Comorbidities – Episodes would lastly be classified based on the presence of secondary diagnosis.

The result of this multitier classification system would be 324 case-mix groups into which an episode of care would fall.


The expressed purpose of the HHG Model would be to address the high degree of variability in Medicare margins that exist throughout the current HHPPS system.


CMS closed out this portion of the FY 2017 proposed payment update rule by indicating they would release a more detailed Technical Report in the future. They also indicated they would be releasing a list of ICD-9 and ICD-10 codes assigned to each of the clinical groups described above so the industry could provide feedback.


On Thursday evening, without much fanfare, CMS posted notice of an Home Health, Hospice and DME Open Door Forum and included in the agenda an update on changes to the Home Health payment system. They also, quite helpfully included a link to their consultant’s report that previews much of what will be discussed tomorrow.


HHG Model Under Consideration. The report released with the announcement of the Open Door forum represents the current thinking by CMS but is not a concrete proposal. Based on what has been released, CMS appears to be considering a classification system that results in 128 different payment groups, and is thus a more simplified version of what they were pondering in late June. Episodes would be classified using five considerations:

  • Timing; Early or Late
  • Referral Source: Community or Institutional
  • Clinical Grouping: Musculoskeletal Rehabilitation; Neuro/Stroke Rehabilitation; Wounds; Medical Management Teaching and Assessment; Behavioral Health or Complex Nursing Care
  • Function/Cognitive Level: For Musculoskeletal Rehabilitation and Behavioral Health episode would be classified as low or high. For other clinical groups, patient would be classified as low, medium and high
  • Comorbidity Adjustment: Yes or No depending on presence of secondary diagnosis.

Graphically, the classification system, of adopted, would look like this:

New Home Health Payment System to be Discussed @CMS 2:00PM Tomorrow - AMED, LHCG, HLS, KND - HHGM Graphic

Source: CMS and Abt Associates


Another big change to the Home Health payment system would be that episodes would have duration of 30 days instead of the current 60-days. CMS’s research indicates that most visits occur within 30 days of admission. The first 30-day episode would be classified as early and all subsequent episodes would be classified as late. As is the case today, there would be no limit on the number of episodes.


Possible Impacts. The purpose of the change under consideration is to discourage unnecessary therapy utilization and encouraged skilled nursing care especially for patients that:

  • Needed parenteral nutrition
  • Were admitted with traumatic wounds or ulcers
  • Required substantial assistance in bathing
  • Were admitted following an acute or post-acute stay
  • Had high HCC scores
  • Had poorly controlled clinical conditions
  • Were dual eligible

These motivations would suggest that Home Health Agencies whose episodes were more concentrated in those HHRGs with a high number of therapy visits would be negatively impacted by the change. LHC Group has long asserted that they were less dependent on therapy care than other agencies and the data appears to bear that out.


Table 2 below shows a breakdown of home health episodes by the major therapy categories for the largest publicly traded home health companies. Included is one private regional firm, Bayada as a point of reference. Please note that this table is derived from 2013 utilization data. In 2013, the ACA-mandated rebasing had not yet been implemented. For that reason, agency reaction to that payment change is not accounted for by these data.


Table 2: Home Health Episodes by Provider and Therapy Utilization.

 New Home Health Payment System to be Discussed @CMS 2:00PM Tomorrow - AMED, LHCG, HLS, KND - Episode Distribution by Therapy Visits

Source: CMS and Hedgeye


Another purpose for the change in the payment system is to reduce the level and variability of Medicare margins. As CMS and MedPAC have noted repeatedly, a case-mix system that properly accounts for resource use will exhibit uniform margins at levels CMS finds acceptable (i.e., not over 10 percent). According to the ACA-mandated report that looked at 2010 cost and payment data, all but two of the 153 HHRG had margins below 10 percent. Fifty-four of the HHRGs has margins in excess of 25 percent. (Note: Medicare margins are not financial margins. Medicare margins simply express the difference between the Medicare payments and the approved Medicare costs associated with that care.)


Table 3 below shows the distribution of home health episodes by HHRG that were reported to have margins that exceed 30 percent. Please note, these margin data are derived from 2010 cost and payment reports and do not account for case-mix adjustment in 2011 or rebasing in 2014, both of which may have affected admission and patient classification patterns. The episode data are derived from 2013 utilization reports.


Table 3; Home Health Episodes by Provider and High Margin Home Health Resource Group


New Home Health Payment System to be Discussed @CMS 2:00PM Tomorrow - AMED, LHCG, HLS, KND - High Margin HHRGs

Source CMS and Hedgeye


Of concern is the inclusion of a referral source in the new payment system under consideration. CMS and MedPAC have both noted that increasingly home health patients are admitted from the community instead of an institutional setting like a Skilled Nursing Facility or an Acute Care hospital. The report to be discussed tomorrow includes a finding that about 2/3 of home health episodes are accounted for by community referral. Both CMS and MedPAC assert that the resources needed to treat a patient admitted to home health from the community are less than those needed to treat a patient admitted from an acute or post-acute institution.


Alleviating our concern about the referral source and the stated objective to reduce and make margins uniform, is our belief that what CMS proposes will likely be budget neutral. Assuming that is the case, the new payment system should shift reimbursement from patients who need therapy like those recovering from major joint replacement to those that need more skilled nursing care for other post-surgical recoveries. The addition of behavioral health provides an interesting addition with possibilities we had not considered until recently.


We are also concerned that the payment system under consideration is a pretty significant change and includes a more nuanced approach. CMS has struggled with communicating to its Medicare Administraive Contractors and getting them to follow instructions on changes just like this one.


Finally, it is unclear how frequently CMS will require recertification under a 30-day episode system. Recertification and the physican's face-to-face requirement have been a barrier for many providers who struggle with physician cooperation.


On the plus side, this new payment system looks to use like one that will encourage more comprehensive nursing care in the home - the most desired place for most people to recieve care.


Details on the call:


Conference call is at 2:00 EDST tomorrow. To participate by phone: Dial: & Reference Conference ID: 42968600


Encore available two hours after call ends. Instructions for recording: Encore: ; Conference ID: 42968600


Call with questions.

Cartoon of the Day: The Fed Game

Cartoon of the Day: The Fed Game - Fed cartoon 08.22.2016


Year-to-date Fed policy:


Hawkish DEC

Dovish MAR

Hawkish MAY

Dovish JUNE

Hawkish JULY


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