Thursday, February 27, 2020

Could the Covid-19 Pandemic Collapse the U.S. Healthcare System?

Disregard these second-order effects at your own peril.
A great many systems that are assumed to be robust are actually fragile. Exhibit #1 is the global financial system, of course, but Exhibit #2 may well be the healthcare system globally and in the U.S.
Observers have noted that the number of available beds in U.S. hospitals is modest compared to the potential demands of a pandemic, and others have wondered who will pay the astronomical bills that will be presented to those who are treated for severe cases of Covid-19, as the U.S. system routinely generates bills of $100,000 and up for a few days in a hospital. Costs of $250,000 or more per patient for weeks of intensive care treating Covid-19 cannot be dismissed as "impossible."
Beyond the possibility that the logistics and costs of care will overwhelm the system, there are numerous and highly consequential second-order effects to consider. As you may recall from recent posts here: first order, every action has a consequence. Second order, every consequence has its own consequence.
Second-order effects of the pandemic colliding with America's dysfunctional healthcare system include:
1. People avoiding care because they can't afford it. Academic studies have shown that high deductibles make patients reluctant to seek care, even when they need it.
This second-order effect will exacerbate the contagion and endanger those suffering from severe symptoms.
2. Potential shortages of medications due to an over-reliance on supply chains in China. The number of unknowns far exceeds the number of knowns in this situation, so complacent assumptions may be misplaced.
3. U.S. healthcare's obsession with maximizing profits by any means available has transformed healthcare from a calling to just another burnout job in the Corporate America profit-maximizing grinder. A long time general practitioner (physician) recently explained the consequences of this transformation should the pandemic engulf the U.S.:
"The risk of wholesale healthcare system failure from a stress even a fraction of what is experienced in China is deeply, deeply under appreciated. The transition of medicine from calling to career is nearly complete-- as is the removal of any mentors who might teach otherwise.
If Corona hit my community 20 years ago, at a time where all the administrators and most of the staff of our 200 bed hospital lived in town, my partners and would've sucked it up and did our best, even at the risk of our life. I'm not boasting or saying we're heroes, it's just that that was the way we were trained. White coats were only for the broadest shoulders. And you were taught that the risks of taking care of sick people was part of the deal.
Our patients were our neighbors. They counted on us. Such respect as we were given was due to the fact that we were their healthcare resource. The leadership and medical staff of the hospital would have done what we could to make it work. And yet here were a number of independent pharmacies and health supplies we could rely on if things got tough.
Then a combination of secondary effects and political influence purchased by deep pocketed competitors put most of the independent clinicians in an untenable place and all left or were absorbed.
Today, though the same organization owns the hospital, none of the management lives in town. Like most health systems, the owners are more is more interested in data collection and foot traffic than healthcare--and it shows. The inpatient doctors are all hospitalists who live far out of town. All the other docs in town now work for the same organization, but they haven't been welcome in the hospital for years. Few of the nursing staff live nearby.
If a real pandemic hits, that hospital will well and truly fail--there's no other word for it. Docs and nurses won't show up. It's not their friends or family or kid's teacher or pastor at risk. While we wouldn't have liked it, we would've risked our health for our community. These professionals are not going to risk their life for a job. The senior management will try to keep it together for the sake of their careers, but the next tier will quickly bag it. Again, it's just a job. The corporate supply chain is so fragile and there are now so few community resources that the hospital as a care system will quickly break down.
As you have discussed, just because a thing is difficult to measure doesn't mean it's not important. The engagement of my partners and I with our community hospital was a critical loss--and that loss of 'robustness' won't be fully understood until the system is stressed.
In my community at least, it won't take much stress for the rot to be revealed."
Disregard these second-order effects at your own peril. Just as unsustainable speculative bubbles burst, unsustainable systems break down once systemic stresses rise above very low levels.
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Wednesday, February 26, 2020

The Economic Cataclysm Ahead

The economic storm hasn't passed; the false calm is only the eye of the financial hurricane.
To understand the economic cataclysm ahead, do the math. Those expecting the Covid-19 pandemic to leave the U.S. economy untouched are implicitly making these preposterously unlikely claims:
1. China will resume full pre-pandemic production and shipping within the next two weeks.
2. Chinese consumers will resume borrowing and spending at pre-pandemic rates in a few weeks.
3. Every factory and every worker in China will resume full pre-pandemic production without any permanent closures or disruptions.
4. Corporate America's just-in-time inventories will magically expand to cover weeks or months of supply chain disruption.
5. Not a single one of the thousands of people who flew direct from Wuhan to the U.S. in January is an asymptomatic carrier of the coronavirus who escaped detection at the airport.
6. Not a single one of the thousands of people who flew from China to the U.S. in February is an asymptomatic carrier of the coronavirus.
7. Not a single one of the thousands of people who are in self-quarantine broke the quarantine to go to Safeway for milk and eggs.
8. Not a single person who came down with Covid-19 after arriving in the U.S. feared being deported so they did not go to a hospital and are therefore unknown to authorities.
9. Even though U.S. officials have only tested a relative handful of the thousands of people who came from Covid-19 hotspots in China, they caught every single asymptomatic carrier.
10. Not a single asymptomatic carrier caught a flight from China to Southeast Asia and then promptly boarded a flight for the U.S.
I could go on but you get the picture: an extremely contagious pathogen that is spread by carriers who don't know they have the virus to people who then infect others in a rapidly expanding circle has been completely controlled by U.S. authorities who haven't tested or even tracked tens of thousands of potential carriers in the U.S.
These same authorities are quick to claim the risk of Covid-19 spreading in the U.S. is low even as the 14 infected people they put on a plane ended up infecting 25 passengers on the flight. These same authorities tried to transfer quarantined people to a rundown facility in Costa Mesa CA that was not suitable for quarantine, forcing the city to file a lawsuit to stop the transfer.
Do these actions instill unwavering confidence in the official U.S. response? You must be joking.
Do the math, people. The coronavirus is already in the U.S. but authorities have no way to track it due to its spread by asymptomatic carriers. People who don't even know they have the virus are flying to intermediate airports outside China and then catching flights to the U.S.
None of the known characteristics of the virus support the confidence being projected by authorities. The tests are not reliable, few are being tested, carriers can't be detected because they don't have any symptoms, the virus is highly contagious, thousands of potential carriers continue to arrive in the U.S., etc. etc. etc.
The network of global travel remains intact. Removing a few nodes (Wuhan, etc.) does not reduce the entire network's connectedness that enables the rapid and invisible spread of the virus.
Second, what authorities call over-reaction is simply prudent risk management. As I noted yesterday in How Many Cases of Covid-19 Will It Take For You to Decide Not to Frequent Public Places?, when an abstract pandemic becomes real, shelves are emptied and streets are deserted.
It doesn't take thousands of cases to trigger a dramatic reduction in the willingness to mix with crowds of strangers. A relative handful of cases is enough to be consequential.
Many of the new jobs created in the U.S. economy over the past decade are in the food and beverage services sector, the sector that is immediately impacted when people decide to lower their risk by staying home rather than going out to crowded restaurants, theaters, bars, etc.
Many of these establishments are hanging on by a thread due to soaring rents, taxes, fees, healthcare and wages. Many of the employees are also hanging on by a thread, only making rent if they collect big tips.
Central banks can borrow money into existence but they can't replace lost income. A significant percentage of America's food and beverage establishments are financially precarious, and their exhausted owners are burned out by the stresses of keeping their business afloat as costs continue rising. The initial financial hit as people reduce their public exposure will be more than enough to cause many to close their doors forever.
As small businesses fold, local tax revenues crater, triggering fiscal crises in local government budgets dependent on ever-higher tax and fee revenues.
A significant percentage of America's borrowers are financially precarious, one paycheck or unexpected expense away from defaulting on student loans, subprime auto loans, credit card payments, etc.
A significant percentage of America's corporations are financially precarious, dependent on expanding debt and rising cash flow to service their expanding debt load. Any hit to their revenues will trigger defaults that will then unleash second-order effects in the global financial system.
The global economy is so dependent on speculative euphoria, leverage and debt that any external shock will tip it over the cliff. The U.S. economy is far more precarious than advertised as well.
The economic storm hasn't passed; the false calm is only the eye of the financial hurricane.
My COVID-19 Pandemic Posts


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Tuesday, February 25, 2020

How Many Cases of Covid-19 Will It Take For You to Decide Not to Frequent Public Places?

As empty streets and shelves attest, people taking charge of risk has dire economic consequences.
How many cases of Covid-19 in your community will it take for you to decide not to frequent public places such as cafes, restaurants, theaters, concerts, etc? How many cases in your community will it take for you to decide not to take public transit, Uber/Lyft rides, etc.? How many cases in your community will it take for you to limit going to supermarkets and ask your boss to work at home?
One of the most unexamined aspect of the Covid-19 pandemic is the human psychology of risk assessment and fear. The default human response to novel threats such as the Covid-19 virus is denial and abstraction: it can't happen here, it won't happen to me, it's no big deal, etc.
This careless denial of danger and urgency characterized the official response in China before the epidemic exploded and it characterizes the lackadaisical sloppiness of official response in the U.S.: few facilities have test kits, thousands of people who arrived on U.S. soil on direct flights from Wuhan have not been tested, confirmed carriers have been placed on flights with uninfected people, and the city of Costa Mesa, CA had to file a lawsuit to stop federal agencies from transferring confirmed carriers to dilapidated facilities that are incompatible with thorough quarantine protocols.
This lackadaisical sloppiness didn't hinder the spread of the virus in China and it won't hinder it in the U.S. That means each of us will eventually have to make our own risk assessments and decide to modify our routines and behaviors or not.
Hence the question: what's your red line number? Do you stop going out to public places and gatherings when there's ten confirmed cases in your community, or is your red line number 50 cases? Or is it 100?
For many people, even a handful of cases will be a tremendous shock because they were unrealistically confident that it can't happen here. The realization that the virus is active locally and can be spread by people who don't have any symptoms shatters the comfortable complacency and introduces a chilling reality: what was an abstraction is now real.
Human psychology is exquisitely attuned to risk once it moves from abstraction to reality. Why take a chance unless absolutely necessary? For many people, the first handful of local cases will be enough to cancel all exposure to optional public gatherings: cafes, bistros, theaters, concerts, etc.
Many others will decide to forego public transit, taxis and Uber/Lyft rides because who knows if the previous fare was an asymptomatic carrier?
If you doubt this impulse to over-reaction once abstraction gives way to reality, look at how quickly market shelves are stripped in virus-affected areas. Once we understand what rationalists might declare over-reaction is merely prudence when faced with difficult-to-assess dangers, we realize that there's a bubble not just in the stock market and Big Tech but in complacency.
Once a consequential number of people decide to avoid public places and gatherings, streets become empty and all the businesses that depend on optional public mixing--cafes, bistros, restaurants, theaters, music venues, stadiums, etc. etc. etc.-- dry up and blow away, even if officials maintain their careless denial of danger and urgency.
All the jobs in this vast service sector will suddenly be at risk, along with the survival of thousands of small businesses, many of which do not have the resources to survive weeks, much less months, of a sharp decline in business.
All the official reassurances won't be worth a bucket of warm spit. After being assured the risk of the virus spreading in North America was "low," the arrival of the virus will destroy trust in official assurances. People will awaken to the need to control their own risk factors themselves. And as empty streets and shelves attest, people taking charge of risk has dire economic consequences.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Monday, February 24, 2020

No, The Fed Will Not "Save the Market"--Here's Why

The greater the excesses, speculative euphoria and moral hazard, the greater the reversal.
A very convenient conviction is rising in the panicked financial netherworld that the Federal Reserve and its fellow dark lords will "save the market" from COVID-19 collapse. They won't. I already explained why in The Fed Has Created a Monster Bubble It Can No Longer Control (February 16, 2020) but it bears repeating.
Contrary to naive expectations, the Fed's primary job isn't inflating stock market and housing bubbles, though punters are forgiven for assuming that, given the Fed has inflated three gargantuan bubbles in a row, each of which burst (1999-2000, 2007-08 and now 2019-2020).
The Fed's real job is protecting the banking/financial sector from a richly deserved and long overdue implosion. Blowing speculative asset bubbles is a two-fer, enabling rapacious, parasitic financiers and banks to profit from debt-serfs borrowing and gambling in rigged casinos (take your pick: student loan casino, housing casino, stock market casino, commodities casino, currency casino, etc.).
Blowing guaranteed-to-burst bubbles also generates a bogus PR cover, the Fed's beloved "wealth effect," an idiots' delight belief that the greater the speculative bubble, the more tax donkeys and debt serfs will spend, spend, spend on defective junk and low-value services they don't need--in essence, speeding up the global supply chain from China et al. to the local landfill, all in service of Corporate America profits.
The Fed's secondary interest is maintaining some measure of control over the financial sector and the real-world economy it ruthlessly exploits. Just as the Fed gets panicky if interest rates start getting away from its control, the Fed also gets nervous when its speculative bubbles get away from it via infinite moral hazard:
When punters no longer care whether the Fed actually intervenes or not, so powerful is their faith in eventual Fed "saves," the Fed has lost control and that's not what the Fed wants.
The Covid-19 pandemic is a godsend to the world's central bank, the Fed. Recall that the Fed has a dual mandate: protecting U.S. financiers and banks and global financiers and banks. The Fed thus has the equivalent of Triffin's Paradox, the dual role of the U.S. dollar as a domestic currency and as a global reserve currency.
The two roles are not always compatible and conflicts may arise, requiring sacrifices to keep the entire overheated machine from coming apart.
To re-establish the essential linkage between punters' speculative greed and its actual interventions, the Fed must let the current euphoric faith in its "guarantee" to rescue infinite greed crash to Earth. As noted earlier, the Fed lords are foolish but not stupid. They understand speculative bubbles always pop, and so the Covid-19 pandemic is just the excuse they needed to let the air out of the current grossly unsustainable bubble.
"Buy-the-dip" punters are placing bets on the belief the Fed can't possibly let the current bubble pop. Oh yes they can and yes they will. All bubbles pop. That leaves the Fed with an unsavory choice: either be viewed as responsible for the bubble bursting or engineer some fall-guy to take the blame and give the Fed cover for its self-serving incompetence.
It's also instructive to note, as many have, that the Fed enters this global recession with very little policy ammo. Interest rates are so near zero already that a couple of rate cuts will do very little good in the real economy. As for buying Treasury bonds, this is also overblown; at the rate U.S. Treasury debt is rising, all the Fed will be doing is sopping up fiscal-deficit debt nobody else wants.
For all the brave bleatings of Fed luminaries about negative-interest rates being the "cure" to all that ails the precarious global economy, Japan and Europe have effectively proven that negative interest rates only further cripple the banking sector while doing essentially nothing to boost spending in the landfill economy.
All negative-interest rates accomplished was further boosting speculative bubbles and wealth inequality, which threatens to destabilize the social order--something the Fed cannot control.
Panicky punters expect the Fed to blow its wad on saving their hides, but what would that leave the Fed for the real recession that's just getting underway? Nothing. Would the Fed lords be so short-sighted and stupid to blow their last ammo just to save speculatively-insane punters from the inevitable bursting of a moral hazard-driven bubble? In a word, no.
As I suggested last week, When Bubbles Pop, Only the First Sellers Escape Being Bagholders (February 21, 2020). There is a great deal of recent history on how bubbles arise and burst that's worth studying. The Covid-19 pandemic promises to be much more consequential than the run-of-the-mill financial excesses of the past 20 years, but we already know one important thing: All bubbles pop.
We also know this: the greater the excesses, speculative euphoria and moral hazard, the greater the reversal.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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