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“What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of postwar history, but the end of history as such…”
-Francis Fukuyama

It is impossible to separate a strong Macro process from having Edge on the state of the US Healthcare System. Here’s a look from Tom Tobin (Research Edge Healthcare Sector Head) as to how the two come together.

The disconnect between the politics of Washington D.C. and the economics of Wall St. are well known.  It is like a bad marriage of two co-dependent and borderline personalities.  On the one hand the banker identifies with the hand of God, He-eth who enables the creation of capital and the attending prosperity it brings to “the people.” Meanwhile politicians call bankers names like fat cats, and slander them with accusations of ripping tax payers off with free money government bailouts.  Politicians for themselves invoke the spirit of Jimmy Stewart’s Mr. Smith when they speak of their own role in the History of Man.  The banker remains silent in the argument at this point, at least publicly, and just tries to figure out who he has to pay to get favorable language in the next round of regulation.  All the while, the kids in the back seat are the American Public who rightly assumes they are getting taken for a ride by both.  Over the long term, the noise and bluster is just that, noise and bluster.

Politics is a process of seeking the advantage on the margin, the P&L consisting largely of intangibles, such as political capital and favors to call in.  But it leaves an outsider constantly grasping at their real motivation.  Personally, I hope the answer to the parlor game on the Left of “what Joe Lieberman got paid to kill the Public Plan” is more than a junket to play golf in Scotland.  At least on Wall St., your P&L is measured in dollars, the ultimate truth serum.  That is of course, you didn’t cheat to get there. 

For a time, President Obama held the mantle of renewal and rebirth for American politics.  Unfortunately, at least for the 45% of Americans currently registering their disapproval, that is no longer true.  There was a time when 80% of Americans approved of their newly elected President, so that must have included at least a few Republicans, and maybe a few who did not understand the question, or both.  When Americans loved him we were in a state of crisis, the next great Depression was upon us, and they were scared. 

Like Fukuyama’s End of History, President Obama promised an end of history in Washington D.C.  Transparency and Accountability would reign over the lobbyists, fat cat bankers, unjust wars, no-bid contracts, and tax cuts for the rich, putting the reins of power in the hands of the commoner.  But the bitter truth is Transparency and Accountability has been noticeably absent as the rhetoric has soared above the fray on high minded clouds, while the politics of the possible on the ground ended in school yard taunts.

Whether it is the Burning Buck and crisis-level Fed Fund rates, Swine Flu, Afghanistan, or Health Reform I, the speeches, while inspiring, have found their targets to be elusive.  The problems facing Healthcare are well known; Medicare will go broke in 2017 despite, or more likely because of, private market subsidization of the government who chronically underpays providers, uses a political process to set prices, and gets robbed daily.  The predictable outcome, which has been evolving over decades, has been spiraling healthcare inflation, and a swelling population of the uninsured.  With or without the subsidies outlined in Health Reform I, insurance premiums will be $20,000 per year for a family of four by the time Health Reform hits in 2014.   Either it was because nobody could ask the question, or wanted to hear the answer, but the most obvious question was never asked, which is “why is healthcare is so expensive?” The answer, of course, can be found where the costs are, at the hospital (31% of spending) and in physician offices (21% of spending).   

Now that the process is near complete, it seems the American taxpayer doesn’t have the right guy on speed-dial. The Obama team cut deals with the American Medical Association, who represent doctors and whose membership is dominated by high cost specialists (70%), and the American Hospital Association, even before the question of cost and quality were even discussed. This was an early sign that President Obama’s view of Transparency and Accountability were open to interpretation.

But things evolve and that is the key variable that Fukuyama forgot to contemplate in his end of history thesis.  Maybe if he had reviewed Darwin, or the modern updates of evolutionary theory, he would have found that evolution is a process that happens on the margin.  The end of communism was a triumph of western liberal democracy, but it did not happen the day the Berlin Wall came down, nor was the aftermath completely written.  Young men and women dying today in Afghanistan is our sad inheritance of that victory. 

Complex systems (markets and politics) and the organisms that populate them (bankers and politicians) have the power to passively and stably self organize.  This stability requires more than just one isolated event to define a new trend.  Joe Lieberman is not a lone gunman.  In this or any era, I don’t think “the people” particularly care about politics day to day.  Whether President Obama likes or not, a continuous state of crisis is unsustainable.  Even crisis can become commonplace.  The Marxist-Leninists saw themselves as “liberators” of the proletariat, and we know how that disconnect ended.

 
Tom Tobin
Managing Director
Healthcare Sector Head
 
 
LONG ETFS


VXX – iPath S&P500 Volatility For a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.

EWZ – iShares Brazil As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil’s commodity complex and believe the country’s management of its interest rate policy has promoted stimulus.

XLK – SPDR Technology We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

CYB – WisdomTree Dreyfus Chinese Yuan
The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

 
SHORT ETFS
 
EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30 and 12/2.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.