Sunday, October 27, 2013

Casualties of the Crisis...

The autopsies of the financial crisis are beginning to appear. One of the more thoughtful, albeit disturbing is from Justin Fox at the Harvard Business Review. He suggests three pillars of modern macroeconomic theory have taken big hits:

  1. Efficient market hypothesis (EMH): investors act rationally in the long-term and markets are informationally correct.
  2. Capital asset pricing model (CAPM): assets are priced by their risk
  3. Maximizing shareholder value
This critique pretty much undermines much of what we all believe about open markets - not a comforting thought.

In the early 1930s, policy errors by governments and central banks turned a financial crisis into a global economic disaster. In 2008 the financial shock was at least as big, but the reaction was smarter and the economic fallout less severe. We actually had learned something in the intervening three-quarters of a century about how the economy and the financial system fit together.
But we hadn’t learned everything—and we still haven’t. In fact, macroeconomists and finance scholars clearly forgot some important lessons along the way. And the seeming success (compared with the 1930s, at least) of the 2008 bailouts and subsequent government and central bank actions may actually dilute the lessons of the recent crisis. In the 1930s and 1940s, the financial system was essentially built anew, with tight regulation and drastically changed attitudes about risk and responsibility. That approach surely had its costs, but it ushered in a financial-crisis-free era in the United States and Europe that lasted for decades. This time around, the system has survived more or less intact. That seems like a good thing, on balance; but it may also mean we’ll be having more learning experiences soon. [More]
While unsettling, it also fits with my growing belief that markets evolve to elude participants. It's almost a predator-prey model. It also leads me to think that the growing complexity of our markets should send us warning signals about what to expect from efforts to master them.

Fox suggests more, not fewer, market shocks even as we build financial instruments to seemingly manage them. We may simply be shuffling risk and disguising it better and faster.

In such an environment, the low-velocity and rudimentary nature of farmland stands as a stark contrast. I think we could see a significant part of our land price be contributed by the relative lack of sophistication of the asset.  Which would give us a formula something like this:

P = IV + CV + SV, where 
       IV = intrinsic value of capitalized returns
       CV = control value (for farmers, primarily) for future generations
       SV = simplicity value for understandability and low maintenance (cash the rent checks annually)

Regardless, the macroeconomic community is in the throes of self-loathing, and are certainly not offering rosy pictures of the future.

Saturday, October 26, 2013

No good answer...

One of the manifold reasons why I haven't been posting much at all is trying to support a close friend with cancer treatments (esophageal). The outlook is problematic and I am deeply worried.

Suddenly as well, some information I had considered in abstract becomes more difficult to judge as well - for example, the cost of cancer drugs vs. their efficacy.
No one knew the price of Zaltrap at that point, but Leonard Saltz, who heads the gastrointestinal oncology group at Memorial Sloan-Kettering Cancer Center, had a sense of what was coming. Zaltrap’s effectiveness, in his opinion, was almost identical to that of Avastin, an FDA-approved cancer drug that had also been targeted at that same patient population. Several weeks earlier, Saltz had traveled to Chicago to inflict a little premonitory sticker shock on his medical colleagues. He reviewed the recent clinical results of both Zaltrap and Avastin when used as a “second line” treatment, after initial treatment had failed. As Saltz reminded the other oncologists, Avastin was modestly effective as a second-line treatment—it extended median overall survival by 42 days, the same as Zaltrap—but it cost about $5,000 a month and, like Zaltrap, would have to be taken for many months to achieve that modest clinical benefit. The overall cost was so high that Saltz devoted the end of his talk to a back-of-the-envelope calculation, delivered via PowerPoint, that recast the question in terms of health-care costs: If you extended the 42 days survival to a year, “what is the cost of Avastin for one year of human life saved?”
The answer was astounding, even to doctors who have grown inured to the zero-gravity economics of cancer pharmaceuticals. As Saltz worked his way through slide 73 of 78, he arrived at the bottom line: $303,000.
“Now, that’s essentially the cost of the bare-bones drug,” Saltz later explained to me in his office at Sloan-Kettering. “It’s parts, not labor. No money for doctors; no money for nurses; no money for pharmacists; no money for real estate, heat, and lights; no money for the needles, the IV tubing, the IV fluids, the anti-nausea medicines, the other chemotherapies that are given, because Avastin doesn’t do anything by itself. It has to be given with other drugs … I want to emphasize it’s not that we can have a year of life saved for $303,000. That’s probably less than half of what the actual cost would be when you factor in everything.” Zaltrap, he figured, was probably going to be in the same range.
Saltz’s message was not entirely unexpected. He has been warning about the danger of rising drug prices, to patients and to the health-care system in general, for the last decade. Having made this point to his colleagues, Saltz packed up his computer, took the next flight back to New York, and, after the FDA approved Zaltrap in early August, began to prepare—“not with great enthusiasm,” he conceded—the Zaltrap presentation he would deliver to the hospital committee responsible for approving any new drugs for Sloan-­Kettering’s pharmacy. [More well worth reading]
As we all get upset one way or another about Obamacare and the website issue, it is important to keep in mind that our status quo has some enormous problems - not the least of which is loss of consumer influence due to third-party payers. For example, my friend is looking at a second round of chemo, and I would almost bet he has no idea what it will cost - or the possible surgery either.

Say what you will about the ACA, but one thing I think is a step in the right direction is the introduction of consumer choices in how much they want to pay in premiums as well as out of pocket costs. Transparency will change consumer behavior, I think quickly. At the same time, many people insured by employers are finally getting some idea how expensive their medical coverage is.
Of course, this is not a discussion I would broach with my very sick friend, but it is clearly one of the biggest reasons we spend so much on medical care in the US compared to other countries.Cancer drugs have become a very big business, even though they serve what one expert has described as a “boutique” market. An estimated 1.7 million Americans will be diagnosed with cancer this year, according to the National Cancer Institute, and more than 580,000 people will die from some form of malignancy. In 2012, the overall market for “oncologics” reached nearly $26 billion a year in the U.S. alone, and annual global sales are projected to total $85 billion by 2016, according to the IMS Institute for Health Informatics.

What is sobering about this booming business is that, as a group of oncologists wrote earlier this year, “most anti-cancer drugs provide minor survival benefits, if at all.” They often (but not always) reduce the size of inoperable tumors, but they rarely eradicate the disease. For relatively uncommon malignancies like testicular cancer, some forms of leukemia, and lymphoma, drugs effectively cure the disease; for the common “solid tumor” cancers (lung, breast, colon, prostate, and so on), which account for the vast majority of annual cases, drugs buy some time—precious time, to be sure, but time usually measured in weeks and months rather than years. And even though many of the newer drugs are less toxic, they often still have to be given with older drugs whose side effects include nausea, hair loss, fatigue, and decreasing blood counts. One anti-cancer drug produces a skin rash so severe and disturbing, according to Saltz, that some patients have been asked by employers not to come to work. [Same]
We are rationing already of course, but informally, and generally by economics, rather than some measure of return on the dollar. The very thought is distasteful, but our squeamishness could direct our economy into one dominated by end-of-life health care. Good news for drug makers and caregivers, but not an optimal or even desired outcome in my view.

Regardless, I know I cannot think rationally about this right now, but wish I could. Grief mixed with protracted suffering makes it hard to think well. And then I get angry for feeling sorry for myself, instead of Dan.

We are exactly the same age as well. Funny how that coincidence rivets your attention as well.

Well, enough sniveling. What I need to do is figure out actions what might ease his struggle, not mine.

Monday, October 21, 2013

The answer is...

 Lobbyists!  I read some self-serving drivel before masquerading as opinion, but this one is remarkably upfront. about how to help agriculture achieve a successful trade agreement with the EU.
There is a need to engage seriously through government relations work instead of simply public affairs work to counter commonly held views across Europe. Past failures can also be attributed to an American lack of sensitivity about the Brussels lobbying scene. No European tries to lobby Senate or Cngress without the help of a DC lobbying firm. For good reasons. So why do some American companies still think they can handle themselves? While there is real money at stake. US companies should seek professional lobbying services on the TTIP issue, and especially lobby firms that understand the agricultural EU politics, process and rules of engagement in Brussels. They should rely on firms that understand sensitivities in Europe. Companies that will rely on specialized lobby firms, which will come up with the most convincing arguments by understanding the political and social realities on both sides of the Atlantic will have the best chance to change Brussels’ stance on GMOs now.
So while the differences in transatlantic approach towards GM foods pose a concrete threat to the conclusion of the trade agreement, the trade talks themselves provide the ultimate opportunity to enable the authorization and cultivation of GM crops in Europe. The TTIP would be the biggest free-trade deal in the world. According to the Centre for Economic Policy Research in London a trade agreement which eliminates tariffs and reduces non-tariff barriers could boost US and EU economic growth by more than $100 billion a year.
Geiger is managing partner of Alber & Geiger, a leading EU lobbying law firm. [More]

I'm sure mercenary soldiers used much the same pitch to medieval rulers back in ye olde day. 

Saturday, October 19, 2013

Junkbox, Episode MMXIII ⟐...

Close to overload this harvest.  Will explain in a post later, I hope.

Thanks for reading.

(Kevin - I'll answer your debt question after corn harvest)

Wednesday, October 16, 2013

Seriously, $70?...

 Gary Schnitkey has been churning out analyses from FBFM numbers. This one surprised me.
The "no insurance" farms had average net farm income per acre of $210 per tillable acre while with insurance" farms averaged $279 of net income per acre (see Table 1). The difference in income between the two groups was $69 per acre ($279 - $210), with this difference roughly accounted for in crop insurance payments.
Am I missing something here?  The worst drought in decades and crop insurance showed a whopping  $70 payback?  Wouldn't that just cover the last three years or so of premium?

What I think is happening is individual farmers don't have any way to look at the what-if scenario and only look at the huge insurance check.  If they had no insurance it seems like the higher prices make a kind of insurance for others.

Note also the caveat buried in the text of the report.
Factors other than yield also impact income distributions. One factor was timing of grain sales. In 2012, those farms with more pre-harvest sales tended to have lower incomes than farms with fewer sales. Obviously, timing of grain marketing will not have the same impact in different years.
I think it is hard to overestimate this factor.  But on average the results speak for  themselves.

Hey!  I posted from the field on my iPad!

Tuesday, October 08, 2013

Thoughts on Washington...

 While all bets are off in this historic event, let me lay our some information that is guiding my estimate of what could happen in the near future.

First, the unprecedented phenomenon of "The 80"

In short, these eighty members represent an America where the population is getting whiter, where there are few major cities, where Obama lost the last election in a landslide, and where the Republican Party is becoming more dominant and more popular. Meanwhile, in national politics, each of these trends is actually reversed.In one sense, these eighty members are acting rationally. They seem to be pushing policies that are representative of what their constituents back home want. But even within the broader Republican Party, they represent a minority view, at least at the level of tactics (almost all Republicans want to defund Obamacare, even if they disagree about using the issue to threaten a government shutdown).In previous eras, ideologically extreme minorities could be controlled by party leadership. What’s new about the current House of Representatives is that party discipline has broken down on the Republican side. On the most important policy questions, ones that most affect the national brand of the party, Boehner has lost his ability to control his caucus, and an ideological faction, aided by outside interest groups, can now set the national agenda. [More]
Now add in the Boehner problem. He's just not a very good or far-sighted Speaker.
Yes, Speaker John Boehner has a very hard job. He is leading a party riven by conflict. He is mistrusted by the Tea Party. He's found that he has to lead from behind lest he watch his initiatives fail on the floor of the House.But Boehner routinely makes his job harder than it needs to be. He didn't have to go around irresponsibly promising his members a "whale of a fight" on the debt ceiling. He could bring legislation to the floor with Democratic votes and, if that endangers his speakership, he could try to cut a deal to keep control with Democratic votes. He could also simply try and govern in a more responsible way and, if that means losing his position, so be it.
If Boehner wanted to, he could cut deals to pass comprehensive immigration reform, a grand bargain on the budget and the permanent end of the debt ceiling. All that might mean that is he's not speaker in 2015 and is, instead, a rich lobbyist, or a well-paid university professor, or a member of multiple corporate boards, or maybe even just a member of the House of Representatives. It's not such a horrible fate. [More of a really helpful analysis from Ezra]

One other factor I just ran across this morning. Compromise is not favored. At least, not yet.

Americans are perfectly, identically, symmetrically split on whether the GOP is justified in demanding major changes to Obamacare in exchange for funding the rest of the government, according to a new Pew Research poll. It's just another reason why this shutdown isn't likely to end any time soon.Asked whether Obama should agree to a shutdown deal that includes changes to his health care law, the "yes" responses among Republicans, Independents, and Democrats went 77 percent-40 percent-18 percent. Asked whether the GOP should agree to a deal to fund government without health care changes, the R-I-D responses were practically palindromic: 14 percent-43 percent-75 percent. [More]

Finally, I have come to believe the idea of sending the economy down the tubes is not all that abhorrent to Republicans as they feel it will be attached to Obama. lacking apparent economic savvy and dependent of simplistic economic analogies like comparing the government to a family, they have no idea how disastrous slipping back into recession would be, or how few arrows we would have to slay the bear again.

While I think the economy can take an considerable blow from Washington, should it truly lose all growth momentum, I am deeply concerned about the possibilities. Perversely, I find myself almost wishing the R's would rediscover in a hurry why Hoover was wrong so long ago should that awful outcome arrive and they assume full control of government. 

The ensuing recession will not be solved by slashing taxes and regulations, cutting entitlements, and balancing the budget. We may get to watch that happen, however.

While I still believe in powerful self-righting forces of our system, they unimagined political characteristics of today's Washington have negated many of those historic tools.