Tuesday, April 14, 2020

Can "Sickcare" Survive the Pandemic?

Like the rest of the financialization machine, sickcare was never sustainable.
What was once known as healthcare in the U.S. has largely been replaced by sickcare: healthcare was focused on restoring and maintaining health and was owned and managed by community-based non-profit hospitals.
Sickcare is focused on extracting the maximum revenues and profits from managing the chronically ill, and is owned by Corporate America. Sickcare, by its very nature, stripmines the entire nation to maximize its profits, and does so dishonestly, with obtuse billing, overbilling, prescriptions for costly medications whose side effects and efficacy have been gamed/obscured, and so on.
Since sickcare profits from chronic illness, America is now chronically ill. Since sickcare profits from over-medicating patients, America is now chronically over-medicated.
As Jim Kunstler observed, sickcare is a racket, which Jim defines: "By racket, I mean an enterprise organized explicitly to make money dishonestly." Ruin Nation.
There are still vestiges of healthcare in the U.S., but these are being undermined, marginalized or eliminated by the financialization machinery of sickcare. Financialization is the disease that has consumed America, hollowed it out and left it unable to discern the consequences of a financial system that has become neofeudal, parasitic and predatory. One such consequence has been the slow decay of healthcare and its transformation into sickcare.
A correspondent who is a physician recently explained the structure of sickcare.
1. Businessmen understand healthcare is the best industry to financialize:
A. it sells a product that generates its own demand
B. is run by no-nothing doctors who let their worldview get in the way of maximizing shareholder value
C. is a direct conduit to the holy grail--Federal dollars
2. Businessmen get on board
3. Businessmen begin applying business principles to healthcare
4. Businessmen kick cranky doctors off board who get in the way
5. Businessmen hollow out health system as they extract every nickel in value; compensation, no bid contracts, feather bedding
When the inevitable pandemic hits, their hollow organizations don't have the resources to cope, even though that is their core function--remember, this pandemic is NOT a 'black swan,' black swans come out of no where. This was perfectly predicable and there was plenty of warning.
6. The lack of credibility in leadership accelerates the pandemic effects. The doctors who could lead have been marginalized so they can only have impact on the tactical side, rather than in leadership.
Look for wholesale leadership changes with maximal visibility among major health systems as they bring in outsiders to try to re-assert their credibility.
Spoiler Alert: It won't work.
These hospitals are gaslighting their staff that previously recommended levels of PPE (personal protective equipment) was overkill and that the staff can do just as well with reduced levels of protection.
The staff smell the fire and are behaving accordingly.
No sign of leaders doing personal care in reduced PPE.
Do they not teach leadership in B-school anymore? If you don't share the risk with your troops (the more intimately, the better) you lose credibility. If there ever is an actual reckoning, the leaders are going to regret not emptying a few bedpans.
I have come to the conclusion that our nation and society is no longer nimble enough to survive.
That's sickcare in a nutshell. Like the rest of the financialization machine, sickcare was never sustainable. The pandemic is merely the catalyst that is stripping away the PR illusions that have cloaked the looting, the fraud, the racketeering and profiteering, and the betrayal of everything healthcare once stood for.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 11:10 AM

Sunday, April 12, 2020

There's No Going Back, We Can Only Go Forward

What I see is a global collapse of intangible capital that is invisible to most people.
It's only natural that the conventional expectation is a return to the pre-pandemic world is just a matter of time. Whether it's three months or six months or 18 months, "the good old days" will return just as if we turned back the clock.
I think the situation is much more akin to being injured. Since I worked for decades in construction, I've had numerous potentially serious injuries, including slipping off roofs, being perched on ladders that fell, my finger sliced open by a steel stud, high winds peeling a heavy sheet of plywood off a stack and sending it flying into me, etc.
Immediately after impact, your first instinct is to assess how badly you're injured. Of course we all hope we're not seriously hurt, but the initial adrenaline-fueled relief can be misleading: we might have suffered internal injuries that we can't feel.
That's the global situation: we want to assure ourselves the injury is minor and we'll be back on our feet in no time, but I think the financial-economic injuries are severe and to some branches of global capital and labor, fatal.
Those in power around the world crave one thing above all else: control. If you can't control the situation and key assets, then what good is your supposed power? If you can't control the situation and key assets, your power is illusory.
Those in power cannot completely control the forces unleashed by the pandemic. The tide has turned, and everyone trying to return their corner of the world to its pre-pandemic conditions is swimming against the tide--or shoveling sand against the tide, if you prefer that analogy. In either case, they will exhaust themselves and the tide will continue on, regardless of their titanic efforts to print money and maintain control of their populaces.
In my recent book, Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World, I focused on intangible capital, which includes all the forms of capital that cannot be commoditized and purchased for cash like goods and services. Intangible capital includes social capital, social stability, a diverse, resilient local economy and control of one's own capital.
What I see is a global collapse of intangible capital that is invisible to most people. This includes confidence, trust in institutions and a complacent sense that the tide is carrying us all to greater prosperity.
The tide has reversed, and the key dynamics are income, net worth and costs. As I explained in The New (Forced) Frugality (March 28, 2020), incomes are falling and will continue to fall. Since income is the foundation of asset valuations, asset values will also fall. This will reverse the "wealth effect" that supported the enormous increases in spending and borrowing globally.
When our net worth is rising, we feel wealthier and are more likely to borrow and spend more, confident that our rising wealth will support the debt and higher expenditures. When our assets are declining in value, we feel poorer and are less likely to borrow and spend.
Income is fragile and prone to instant decay, while costs are extremely resistant to declines.
Consider stock valuations: the core driver is profit, which is revenues minus costs. As revenues drop and costs rise, profits vanish literally overnight. That sudden erosion of profits is global, and it will affect companies previously perceived as bulletproof. Facebook and Google depend on advertising, and with the global economy in free-fall, what's the point in wasting scarce cash on marketing? Essentially no one needs a $1,000 iPhone or a $40,000 Tesla. Aspirational spending is as fragile as income.
Consider real estate: commercial real estate is based on the income generated by enterprises renting space. If businesses fold or stop paying rent, the value of the property falls accordingly.
Even residential real estate is intimately connected to income: as household incomes plummet, the number of potential buyers plummets, too. Institutional buyers of houses base the value on rental income, just like commercial property. As household income plummets, fewer people can afford sky-high rents, and so supply exceeds demand and rents will fall accordingly.
Consider bonds: the value of any bond, government or corporate, is based on the yield paid to the owner. While the general expectation is that yields will fall to zero because central banks are buying bonds, this may be less of a guarantee than generally assumed. The volume of bonds being issued may well exceed central bank buying, and yields (and interest rates) will rise despite central bank intervention.
The world depends on expanding debt to pay for government services and private-sector spending. Debt is also dependent on income; lenders who issue loans to households and enterprises with faltering income are very likely to lose money as these marginal borrowers default.
As income falls, lending dries up, as lenders cannot afford to risk making loans to people and businesses that are practically guaranteed to default. This is especially true for borrowers who are already burdened by existing debts.
As incomes decline, asset values decline and borrowing dries up. Once borrowing dries up, spending dries up, and enterprises and governments must cut payrolls by any means available: don't replace retiring employees, cut wages and benefits, and eliminate overtime and bonuses.
As stock values fall, so do the value of employee stock options--another example of the reverse wealth effect.
Meanwhile, costs will continue rising as cash-strapped governments eventually seek more tax revenues and supply-chain shocks lead to higher prices.
We cannot go back to the pre-pandemic side of the river of time, and it's dangerous to focus on returning to a time that has already been lost. We cannot go back, we can only go forward.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 4:06 PM

Friday, April 10, 2020

Buy The Tumor, Sell the News

The fictitious valuation of the stock market will eventually re-connect with reality in a violent decline.
No, buy the tumor, sell the news (tm) is not a typo: the stock market is a lethal tumor in our economy and society. Buy the rumor, sell the news encapsulates the old traders' wisdom that markets rise on the sizzle of hope, promises, projections, Federal Reserve pimping (see below), tax cuts, etc. etc. etc., not on the actual steak of sales and profits.
Buy the tumor, sell the news (tm) encapsulates the fatal sickness of the past 20 years of "buy the dip because the Fed has our back", the toxic certainty that the Fed will never let the stock market decline to fair value because that would reduce the wealth of the Fed's cronies: the banks, the parasitic corporate cartels, the wealthiest families that own much of the stock market, and all those profiteering from various rackets, skims and scams.
The system's total dependence on asset bubbles in stocks and housing to generate the "wealth effect" that drives consumption defines Fed policy, along with the need to keep stock-dependent pension funds and liquidity-dependent zombie corporations solvent.
That the Fed's pimping of asset bubbles and liquidity has created the greatest wealth inequality in a century is ignored by the self-serving, tone-deaf political/financial "leadership" because the wealth asymmetry has greatly enriched the "leaders," their cronies and the army of technocrat flunkies who do all the real work to keep the rackets functioning.
All this wealth wasn't earned via the creation of value; it was skimmed / embezzled from the bottom 95% via high costs, junk fees, penalties, interest rates and taxes, all set by monopolies and cartels unburdened by competition, accountability or transparency.
As analyst Simons Chase explains, a dependence on Fed/government bailouts / stimulus does not generate a healthy economy. (Longtime readers are familiar with Chase as the analyst who elucidated the critical concept of negative network effects: Corporate America Is an Anti-Social Black Plague: Negative Network Effects Run Amok November 14, 2019)
"It appears many investors have come to believe a truckload of cash will replace lost revenue until things return to 'normal.' I don't think investors have a clear understanding about the difference between private revenue and public revenue.
It's like the difference between junk food and real food. One is high in calories and the other high in nutrition. Once your economic metabolism gets adjusted to junk food, there is a loss of dynamism and vitality akin to those poor souls who are are greater risk to COVID-19 due to real metabolic disorders. There is the issue that government wastes and squanders most of the funds it touches.
For example, the dulled senses and immersive delusions perpetuated by a set of perfectly-coiffed GM executives who trafficked in the lamest pop-corporate dead-end cliches like 'strategic planning' and 'R&D' for decades while the company's market share fell from 52% in the 1960s to 22% in 2008, the year it filed for bankruptcy. In fact, the company had lost $100 billion in the five years leading up to its bankruptcy. The same executives then axle-greased their way into a politically engineered $50 billion government bailout hidden behind the moral smokescreen of 'jobs' and 'Made in America' and (most comical of all) 'electric vehicles.'
In the five years following its bankruptcy GM made $22.6 billion for shareholders. One fact that makes the irony so explicit: taxpayers still lost $11.2 billion on the bailout that saved the company.
My point is that there is a cost to all this 'free money.' Societies cannot thrive when 60% of the economy is derived from the government. Survive yes, not not thrive."
So management can run the company into the ground with stock buybacks funded by junk bonds, and the Fed and Uncle Sam will bail them out, no questions asked. This is moral hazard writ large: fraud, embezzlement, profiteering and cartel rackets have no consequences, so what's the message?
Go ahead and game the system to maximize your private gain, the Fed and Treasury will bail you out by transferring the losses to taxpayers and the bottomless pit of the Fed balance sheet.
Meanwhile, Fed-pimped stocks have completely disconnected from the real world of goods, services, revenues and real profits, as the three charts below illustrate.
The first is Apple's stock, which doubled on flat operating earnings due to Fed pimping.
The second chart is of Tesla's stock, with my commentary on the quasi-religious belief of the financial punditry in the omnipotence of the Fed.
The third chart depicts the extreme overvaluation of stocks and the lethal dependence of the entire financial system and economy on bubble valuations.
The fictitious valuation of the stock market will eventually re-connect with reality in a violent decline. The fiction that the Fed is all-powerful is the Emperor's new clothes; no one dares mention the emperor is buck-naked and the Fed cannot keep stocks separated from reality forever.
The day of reckoning approaches, and the true costs of moral hazard, Fed pimping and a systemic dependence on the lethal tumor of a stock "market" that is no longer a market will be exacted from the financial system and the economy.
Oh the wonder of Fed omnipotence: buy the tumor, sell the news (tm).
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 3:25 PM

Wednesday, April 08, 2020

The World Has Changed More Than We Know

Put another way: eras end.
While the mainstream media understandably focuses on the here and now of the pandemic, some commentators are looking at the long-term consequences. Here is a small sampling:
While each of these essays offers a different perspective, let's focus on the last two: Ugo Bardi's essay on Hyperspecialization and the technological responses described in the MIT Technology Review essay.
As readers of the blog know, I've been differentiating between first-order and second-order effects: First order effects: every action has a consequence. Second order effects: every consequence has its own consequences.
We can think of these as direct (first order) and indirect (second order) effects.
The MIT Technology Review article focuses on direct effects, i.e. how to deploy technology to identify people with the virus, track their recent movements and who they might have exposed to the disease, tech-driven regulations that would limit the movements of infected (such as we see in China now), etc.
Bardi's first-hand account from Northern Italy touches on an indirect effect: the profoundly negative impact of a hyperspecialized economy that is suddenly disrupted. In this case, the specialization is tourism, but there are other examples, many driven by hyper-globalization.
Specialization has long been central to capitalism's relentless drive to increase efficiencies and thus profits, and globalization has pushed specialization to extremes globally dominant corporations can arbitrage currencies, wages, political corruption and lax environmental standards in ways that localized competitors cannot.
The net result is increasing reliance on one globally competitive industry for jobs, tax revenues, etc.--in essence, the modern-day equivalent of a monoculture plantation or single-industry factory town.
When the plantation or factory closes, there's no economically diverse ecosystem to pick up the slack.
If tourism doesn't rebound very quickly, all the local economies that became hyperspecialized to serve global tourism (enabled by low-cost airfares and credit cards) will be gutted.
The second order effect of the pandemic will be the wrenching transformation of these local economies into a much broader economic ecosystem that will have to be moated from globalized competition. For example, grapes flown in from locales 3,000 miles away will be banned or heavily taxed so local grapes can compete.
A great many inefficiencies have been sustained by hidebound, self-serving institutions and cartels which have moated their industries from competition. These include higher education, healthcare, the defense sector and the recent crop of Big Tech monopolies (Facebook, Google, et al.).
A number of people have already noted that remote online classes have become the norm out of necessity, and this has revealed the incredible inefficiency of maintaining enormously costly campuses and bureaucracies for coursework that can be completed anywhere.
I wrote an entire book outlining how a superior education could be delivered for 10% of the current cost (roughly $120,000 for a four-year state college diploma). (The Nearly Free University and the Emerging Economy)
While the large research universities need students to physically be present to operate the machinery of experiments and research, the vast majority of undergraduate coursework does not require physical presence. In many lab settings, whatever physical presence is required could be drastically compressed in time or shifted to remote control of lab tools.
The same transition will occur in Corporate America as managers accept that there are few absolutely essential reasons to demand workers squander huge amounts of time and money transporting themselves to centralized workplaces.
The trend to remote work is not new, but it is now being accelerated past the point that hidebound managers will be able to demand a return to the inefficiencies of the former status quo.
This shift to decentralized, networked remote work will have a devastating impact on the commercial office sector. A very large percentage of the already-excessive supply of office space will be surplus, and it won't be cheap or easy to transform offices into residential living spaces.
(An entire floor of office space might have one set of bathrooms and a single utility kitchen; every living unit will of course require its own bathroom and kitchen.)
The financial fragilities and vulnerabilities that are now becoming apparent are not limited to hyperspecialization and globalized monoculture economies. The cost structure of most small enterprises was burdensome even in the best of times: rent, utilities, fees, taxes, regulatory compliance, insurance, labor overhead and so on are now crushingly costly, and once revenues decline by even modest amounts, the small businesses are no longer viable.
Costs such as rent, healthcare insurance, local fees and taxes are notoriously "sticky," meaning the default setting is to ratchet ever higher. These costs don't drop unless there is a full-blown crisis such as mass bankruptcies of commercial landlords and cities.
Thus we can anticipate a culling of all the marginal, struggling small businesses in the pandemic recession, and a weak or non-existent emergence of new businesses in the future to replace those lost, as revenues will remain weak while costs will only increase.
Few observers are pondering the psychological changes that the pandemic have unleashed. To take an obvious example, consumers will no longer be able to maintain confidence in their incomes or the market value of their labor and assets. This uncertainty will naturally encourage savings rather than frivolous spending and debt, and this change will depress consumption.
Status quo policies such as lowering interest rates will not change this psychological shift in the tides.
Lowering interest rates to zero won't mean credit cards, auto loans and mortgages will be interest free, and lower rates won't change the reality that incomes and asset prices may decline or remain uncertain for years to come.
The world has changed, and the only things we know with certainty are 1) a return to the pre-pandemic status quo is not possible and 2) this is a positive development.
Put another way: eras end. No matter how glorious or inglorious they may have been, eras end and a new era begins. Welcome to 2020.
This essay was drawn from Musings Report 12. The Musings Reports are emailed weekly to subscribers and patrons. To subscribe or become a patron, please visit how to subscribe/become a patron.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 3:41 PM
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