Saturday, July 18, 2009

Dollar And Yen Fall On Risk Seeking Trend

Recent news coming out indicates that investors are buying the indications from earnings reports, housing data and other tepid macro news releases - of course the resulting dollar and yen weakness is not ultimately surprising, no matter what our views on the "safe haven" theory.

The implication of a strong dollar/yen rebound in the event of another crash has been pretty well documented by various outlets but the more interesting story is any further downside risk to the dollar/yen. It's pretty clear that the somewhat linear relationship between say, EUR/USD and any number of bullish indicators (SPY, HG, the Big Mac index), until now is somewhat untenable going forward and is likely to at least slow down. If the bullish sentiment is ultimately right and we have returned to "normal", the ridiculously strong macro linkages we have been seeing until now are likely to break. However, if we see a bounce back south any gains posted can vaporize as quickly as they came.

On net, the risk/reward for further weakness in the dollar/yen is pretty unattractive going forward. We may eventually get back to the FX levels (1.6 EUR anyone?) that we know and love but for now, there are more attractive things to do than to short the dollar.

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Relative Central Bank Balance Sheets And Currency Races To The Bottom

Zero Hedge posts a weekly update of the Federal Reserve's bloated balance sheet as we believe it is critical to visualize the spiraling debt burden at our "central bank" especially since any day now the Fed will begin purchasing treasury securities outright in defiance of Geithner's lies to the contrary (China can't sell its planned Bills: at 0.925 Bid-To-Cover does anyone honestly think they will instead prefer to buy dollar denominated toiler paper and not roll out their own QE version momentarily?). As Cornelius pointed out earlier the dollar can't find a floor these days: rerisking is rampant the argument goes and that kills the greenback. However, the circular logic also holds: create dollar pain (by whatever means possible) and thus stimulate the market, Larry Summer's all time wet dream (would anyone like to wager that when hedge fund positional disclosure become mandatory DE Shaw will fight until the bitter end). And in this simplistic trilateral world (have fun gaming the yuan), the strength of any one of the trio in the dollar-yen-euro triangle results in implicit weakness of the other two. And vice versa. Yet aside from major broker-dealers who are axed in a given equity direction and thus have all the incentive to impact underlying currencies, is it possible that specific governments may manipulate currency strength via central bank positioning? Why yes.

Comparing the balance sheets of the Federal Reserve, the Bank of England and the ECB indicates that certain shanningans by the former two (and particularly massive agency purchasing specifically by the former former) may be responsible for persistent weakness of their respective currencies to the detriment of a (hyper)inflation allergic Europe (America's brush with the Weimar Republic was luckily offset by 3,000 miles of salt water, and even the UK had the Chunnel to thank). The bottom line is that while the Fed and the BE's balance sheets continue expanding, that of the ECB has been in shrinkage mode for a while now. Behold:

Federal Reserve:

Bank of England:

European Central Bank:

The most curious thing is that the absent the half a trillion reduction in foreign bank liquidity swaps the Fed's balance sheet would be in the stratosphere. But the premise is Europe is stable so Bernanke can rein those in. Ironically the more pressured Europe is to take up America's and Britain's economic slack, the more pronounced will be the pressure on Europe, both fiscally and monetarily, resulting in yet another eventual round of liquidity swap bail outs (and that is without even mentioning the "Eastern European Question"). But for now America is happy (the dollar is getting pillaged) and a disorganized Eurozone is dropping deeper into deflationary chaos (has anyone heard a peep out of Raiffeisen Bank lately? - speaking of RZB, it is enough to note that a Google search of the bank results in the first two hits being its Czech and Russian subsidiaries). How long can this persist? For a direct answer, the best proxy may, ironically, be the S&P500 yet again. Keep a close eye: the unwind of the central bank balance sheet game theory defection race (as well as every other unwind) will manifest itself there first.

Hat tip Andy Dufresne who seems to have found a good internet connection in Zihuatanejo

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State Street On Liquidity Black Holes

Liquidity, as frequent readers know, is a fascinating topic to Zero Hedge. Liquidity black holes, as one would imagine, is doubly so. However, when a firm like State Street, which is at the heart of the multi-trillion dollar stock lending skeleton of the market discusses both of these concepts, one must pay attention. The below report is a State Street presentation from 2003 discussing what happens in those episodes when liquidity disappears and how that impairs all other axes of proper market function.

Of notable attention is the following section of the report:

The presence of liquidity problems in the largest of markets suggests that liquidity is not about size, but diversity.

In an illiquid market the same size of sell order will push the market down further than in a liquid market. Imagine a market where there is a large number of market participants, using the exact same information set, in the exact same way, to trade the exact same financial instruments. When one buys they all do and vice versa. Market participants would face volatility and illiquidity when they came to buy or sell. This would not be reduced by having more players, only by increasing the amount of diversity in their actions. (Indeed, on these assumptions it is possible to show that the bigger the market was, the less liquid it would be). Now imagine a market with just two players but with opposite objectives or opposite ways of defining value. When one wants to buy the other wants to sell. This market is small, but the price impact of trading would be low and liquidity would be high.

The referenced diversity is a crucial concept in today's market where an unprecedented amount of market trades occurs in undiverse dark and HFT pools. As Goldman is becoming the primary conduit of trading (whether principal or agency) in virtually all markets, the risk of a massive liquidity drain becomes exponentially larger, and the risk of an exogenous event approaches LTCM and Lehman levels. It is this key risk driver that regulators should be focusing on, instead of chasing and attempting to punish the perpetrators of the most recent market crash (we are not saying they should not, but they should prioritize and now should focus on what is most critical to maintaining a functioning market topology). The Too Big To Fail is a psychological construct which however does not have parallels in the market. Once Goldman reaches a tipping point of eliminating liquidity diversity, the potential fallout escalates. This is precisely the realm in which any x sigma events will occur in the future. And nobody seems to care.

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Saturday Readings

  • A fitting end to the Porsche soap opera: Volkswagen buys the company for €8 Billion, Wiedeking out (Reuters, WSJ)
  • CIT limps into weekend, seeking lifeline (NYT, WSJ and Bloomberg)
  • California's budget gap won't close for long (Reuters)
  • Shake up at Fortress: Fannie's Mudd to replace Edens (Bloomberg)
  • The great bank earnings that weren't (Motley Fool, h/t Robert)
  • Charlie's story - a pugnacious pundit Wall Street can't ignore (FT, h/t Janet)
  • Boeing engineer passed secrets to China (Guardian)
  • Orwellian moment of the day: Amazon erases Orwell books from Kindle (NYT)
  • A modest proposal: make banker bonuses payable in electric cars (Daily Finance)
  • Larry Summers cites Google search as progress (Politico, h/t Vaughan)
  • Two more banks added to FDIC closure list, hundreds more to go (MarketWatch)
  • How to be a day trader (Telegraph)
  • Day trading: "I lost £200,000 in a day" (Telegraph)
  • Unemployment map of England (Guardian)

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Modern Banking Explained Or The Importance Of Saving Money

Missed this the first time around, but it explains pretty well what sophisticated banking means for the retail investor.

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The Internet Sells No Hope... Yet

No downward inflection points on the horizon in this set of primary data (here and here). Then again, we did not yet run it through the CNBC filter.

hat tip Evan

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Dark Pools And Karl Denninger

No direct correlation between the two, but a couple of good videos to start off your morning: Denninger on Kudlow - ever wondered what a bear in a Pamplona stampede looks like, here is your chance - this proves again why the Brady Bunch talking head box format is the most useless medium to convey any sort of informative message (but works miracles for those Mercedes commercial CPMs). And also a much more informative piece on Dark Pools and the NYSE's SLP program (and, surprise, Goldman).

hat tip Stock Hustler Sphere: Related Content

Radio Zero: DMCA Fridays

And you thought they were done. Nope! Zero Hedge has gotten two more takedown notices. No, we aren't kidding. This just means more Radio Zero for you.

11:30 eastern. 15 minutes prior for URL details (as usual). I'll be fashionably late (as usual).

The URL: (Our new test server!)

Radio Zero is EXPENSIVE. Consider donating to Zero Hedge.

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Friday, July 17, 2009

Guest Post: The Past Week From A Lindsay Model Perspective

Submitted by John Bougearel of Structural Logic

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Weekly Credit Summary: July 17

Spreads were significantly tighter this week with HY dramatically outperforming IG as tighteners outpaced wideners by over twelve-to-one. LCDX appeared to be the long credit vehicle of choice though as investors moved into the most senior part of the capital structure systemically. High-beta underperformed low-beta names (in large part due to CIT's impact on the tail risk names) as we saw IG, HVOL, and ExHVOL indices considerably outperform intrinsics and widening the skew almost 10bps in IG12.

While IG12's curve was largely flat (moving tighter in parallel) this week, intrinsics flattened (inverted) considerably with 7Y the outperformer. This was in stark contracts ti the dramatic rise and steepening in TSY yields this week which seemed to go unnoticed by many as 30Y mortgage rates also rose 30bps this week (back above 4.5%). The CIT action kept series 9 index active and HVOL9 was a dramatic outperformer in the face of an 800bps rise in CIT (smells like correlation book hedging en masse) which helps to explain the skew performance on the week also.

Financials are significantly tighter on the week as earnings appeared astronomical. Interestingly, GS and MS underperformed the 'real' banks with BAC and JPM best performers. Builders had a huge week with stocks up over 17% (across the names that have active CDS) and spreads tighter on average 8%. The lower beta builders outperformed significantly in CDS land notably while the exact opposite was seen in stocks (e.g. HOV +15bps on the week but stock +32% - you decide!).

LCDX outperformed HY by around 60bps on the week with the latter seeing new contract highs over $85. Interestingly XOver11 outperformed HY12 this week and Main modestly outperformed IG as European financials underperformed US financials (with Subs breaking below 200bps in the former). We note that CDX and SPY have converged this week as our macro CSA trade has outperformed with the relationship getting close to fair now in the short-term (despite a significant drop in VIX during this OPEX week as OTM vols rose signficantly and the vol term structure steepened considerably).

Sovereign risk fell considerably this week as CDR's GRI dropped over 6bps (>10%) as we saw USA drop back to 35bps (near its tights) and European sovereigns helped by the news from AIG of the extension of the reg capital deals (European banks underperformed US banks on the week as systemic risk shifted back to the banks from the state modestly).

IG is holding at that recent 128bps swing tight but we reiterate the 118bps level as significant support on the tightening side and if investors are long then lightening into that level if we rally more makes more sense than momo following currently to us. HY-IG compressed almost 50bps this week back to around 800bps and we think has a decent risk-reward for decompression at these levels (3.5x ratio).

Commentary compliments of

Index/Intrinsics Changes on the Week

CDR LQD 50 NAIG091 -15.09bps to 162.26 (1 wider - 48 tighter <> 35 steeper - 14 flatter).

CDX12 IG -14.25bps to 130.5 ($0.61 to $98.73) (FV -5.89bps to 154.19) (7 wider - 117 tighter <> 88 steeper - 37 flatter) - Trend Tighter.

CDX12 HVOL -10.06bps to 325 (FV +3.6bps to 421.85) (4 wider - 25 tighter <> 23 steeper - 7 flatter) - Trend Tighter.

CDX12 ExHVOL -15.57bps to 69.08 (FV -8.73bps to 81.15) (2 wider - 93 tighter <> 29 steeper - 66 flatter).

CDX11 XO -15.1bps to 365 (FV -24.19bps to 445.64) (1 wider - 33 tighter <> 23 steeper - 11 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+1.75 to $85.13 / -60.6bps to 936.5 (FV -66.04bps to 867.02) (10 wider - 84 tighter <> 75 steeper - 19 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+2.57 to $86.5 / -118.64bps to 696.99 - Trend Tighter.

MCDX12 -18bps to 190bps. - Trend Tighter.

CDR Counterparty Risk Index fell 16.62bps (-10.65%) to 139.41bps (0 wider - 14 tighter).

CDR Government Risk Index fell 6.37bps (-10.21%) to 56.07bps..

DXY weakened 0.89% to 79.52.

Oil rose $3.46 to $63.35.

Gold rose $24.23 to $937.28.

VIX fell 4.68pts to 24.34%.

10Y US Treasury yields rose 34.9bps to 3.66%.

S&P500 Futures gained 7.21% to 937.3.

Market Summary (from last Friday's close)
Spreads were tighter in the US this week as all the indices improved. Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.

Only 32% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by -7.75% to -10.83%. IG's vol is around 9.79% per week, which leaves 98 names higher vol and 27 lower vol than the index.

The names having the largest impact on IG are Dow Chemical Company (-47.17bps) pushing IG 0.36bps tighter, and CIT Group Inc (+757.22bps) adding 2.85bps to IG. HVOL is more sensitive with Dow Chemical Company pushing it 1.65bps tighter, and CIT Group Inc contributing 12.87bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Time Warner Cable Inc. (-44.5bps) pushing the index 0.46bps tighter, and National Rural Utilities Cooperative Finance Corporation (+37.59bps) adding 0.37bps to ExHVOL.

The price of investment grade credit rose 0.61% to around 98.73% of par, while the price of high yield credits rose 1.75% to around 85.13% of par. ABX market prices are higher (improving) by 0.8% of par or in absolute terms, 2.24%. Broadly speaking, CMBX market prices are higher (improving) by 0.03% of par or in absolute terms, 0.01%. Volatility (VIX) is down 4.68pts to 24.34%, with 10Y TSY selling off (yield rising) 34.9bps to 3.66% and the 2s10s curve steepened by 26.2bps, as the cost of protection on US Treasuries fell 5bps to 35bps. 2Y swap spreads widened 8.5bps to 47.5bps, as the TED Spread widened by 0.4bps to 0.34% and Libor-OIS deteriorated 0.3bps to 31.4bps.

The Dollar weakened with DXY falling 0.89% to 79.517, Oil rising $3.46 to $63.35 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 3.04% today (a 4.89% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $24.23 to $937.28 as the S&P rallies (937.3 7.21%) outperforming IG credits (130.5bps 0.62%) while IG, which opened tighter at 130.5bps, underperforms HY credits. IG11 and XOver11 are -4.75bps and -72.96bps respectively while ITRX11 is -16.45bps to 107.25bps.

The majority of credit curves steepened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.

Dispersion rose +59.2bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected this week indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

89% of IG credits are shifting by more than 3bps and 51% of the CDX universe are also shifting significantly (less than the 5 day average of 51%). The number of names wider than the index decreased by 5 to 42 as the week's range fell to 20bps (one-month average 26bps), between low bid at 128.5 and high offer at 148.5 and higher beta credits (-5.45%) underperformed lower beta credits (-9.87%).

In IG, wideners were dramatically outpaced by tighteners by around 14-to-1, with only 7 credits notably wider. By sector, CONS saw 0% names wider, ENRGs 6% names wider, FINLs 14% names wider, INDUs 11% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 107.63bps and the latter at 114.38bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 235.46bps from 223.06bps, and remains above the short-term average of 225.73bps, with the HY/XOver ratio rising to 1.34x, above its 5-day mean of 1.31x. The IG-Main spread decompressed to 23.25bps from 21.05bps, but remains above the short-term average of 20.3bps, with the IG/Main ratio rising to 1.22x, above its 5-day mean of 1.18x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 10.8bps to 114.4bps, with 100 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 16.62bps to 139.41bps, with Finance names (worst) wider by 134.08bps to 914.94bps, Banks (best) tighter by 29.18bps to 183.26bps, and Brokers tighter by 24.06bps to 152.51bps. Monolines are trading tighter on average by -66.66bps (1.55%) to 2857.5bps.

In IG, FINLs (ex CIT) outperformed non-FINLs (11% tighter to 8.63% tighter respectively), with the former (IG FINLs) wider by 20.5bps to 367.8bps, with 17 of the 21 names tighter. The IG CDS market (as per CDX) is 31.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (99.14bps), with the bond ETFs outperforming the IG CDS market by around 5.78bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 17.62bps to 107.63bps (with ITRX FINLs -trending tighter- better by 11.75 to 105.75bps) and is currently trading tight to its week's range at 0%, between 125.25 to 107.63bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 0.01%, between 89.67 to 76.38bps. ExHVOL outperformed LoVOL as the differential compressed to -7.3bps from -4.87bps, but remains above the short-term average of -8.62bps. The Main exFINLS to IG ExHVOL differential compressed to 38.55bps from 40.6bps, but remains below the short-term average of 41.92bps.

The Emerging Market index is 6.2% less risky (25.7bps tighter) to 389.2bps. EM10 (Trend Tighter) is currently trading tight to its week's range at 0.16%, between 414.9 to 389.2bps. The HY-EM spread compressed to 547.22bps from 582.12bps, and remains below the short-term average of 562.91bps, with the HY/EM ratio rising to 2.41x, below its 5-day mean of 2.41x.

IG Sector Moves and Betas
In IG, FINL (the worst sector - including CIT) under-performed IG, moving (on average) 43.2bps (1.91%) wider to an average of 464.6bps. ENRG (the second weakest sector) under-performed IG, moving (on average) 8.3bps (7.82%) tighter to an average of 109.5bps. INDU (the median sector) under-performed IG, moving (on average) 8.4bps (7.91%) tighter to an average of 147.3bps. CONS (the second best sector) under-performed IG, moving (on average) 10.4bps (9.65%) tighter to an average of 100.5bps. TMT (the best sector) out-performed IG, moving (on average) 16.5bps (13.33%) tighter to an average of 115.7bps.

From the top-down, index capital structure changes improved with credit outpacing equity. The sectors were mixed with CONS (improving with credit outpacing equity), ENRG (improving with credit outpacing equity), FINL (equity outperformed credit as they both strengthened), INDU (equity outperformed credit as they both strengthened), and TMT (improving with credit outpacing equity).

CDX-based regression betas indicate that FINL (1.98x) have the highest beta and CONS (0.72x) the lowest, with INDU (1.2x), TMT (0.86x), and ENRG (0.75x) in between. Comparing the regression betas to current level betas we see that INDU (0.32x rich) is the richest sector, while FINL (-1.5x cheap) is the cheapest, with CONS (0.31x rich), TMT (0.3x rich), and ENRG (0.26x rich) trading more in line.

Focusing on intra-sector movements within IG, we notice dispersion increasing the most in FINL which shifted 29.48% to 668.5bps, and the least in CONS which shifted -8.87% to 82.9bps.

Our pivot point analysis suggests intraday resistance at 134.54bps in IG, and breaking support at 124.23bps or resistance at 132.23bps as significant, with the index trend very bullish (based on pivot point moving average changes), shifting tighter by 3.41bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 134.5bps as a critical pivot point with 140bps, 153.5bps, and 167bps as important resistance levels, and 121bps, 115.5bps, and 102bps as important support levels. The short-term 'protection' relative strength indicator on IG moved even more oversold at 0%.

Our pivot point analysis suggests intraday resistance at 951.96bps in HY, and breaking support at 892.4bps or resistance at 952.48bps as significant, with the index trend very bullish (based on pivot point moving average changes), shifting tighter by 15.98bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 953.34bps as a critical pivot point for HY with 999.4bps, 1065.3bps, and 1131.2bps as important resistance levels, and 887.44bps, 841.38bps, and 775.48bps as important support levels.On a short-term basis (based on the last 5 days trading), we see 953.34bps as a critical pivot point for HY with 999.4bps, 1065.3bps, and 1131.2bps as important resistance levels, and 887.44bps, 841.38bps, and 775.48bps as important support levels.

Single-Name Movers (weekly changes)
This week's biggest absolute movers in IG were CIT Group Inc (+757.22bps), International Lease Finance Corp. (+409.7bps), and Textron Financial Corp (+84.3bps) in the wideners, and Dow Chemical Company (-47.17bps), Time Warner Cable Inc. (-44.5bps), and Alcoa Inc. (-42.52bps) in the tighteners. The week's biggest percentage movers in IG were International Lease Finance Corp. (+44.67%), CIT Group Inc (+37.41%), and National Rural Utilities Cooperative Finance Corporation (+16.9%) in the wideners, and Kraft Foods Inc. (-26.51%), Time Warner Cable Inc. (-25.07%), and FirstEnergy Corp (-21.9%) in the tighteners.

In the more financial-heavy CDR NAIG LQD 50 index, sentiment is bullish with 1 wider to 48 tighter, and 35 steeper to 14 flatter as 38 of the 50 credits have inverted curves. The biggest absolute movers were National Rural Utilities Cooperative Finance Corporation (+40.59bps), Wachovia Corp. (0bps), and Devon Energy Corporation (-1.5bps) in the wideners, and Citigroup Inc (-50bps), Merrill Lynch & Co., Inc. (-43.75bps), and Bank of America Corp. (-42.23bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were National Rural Utilities Cooperative Finance Corporation (+18.25%), Wachovia Corp. (0%), and Financial Security Assurance Inc. (-1.92%) in the wideners, and Kraft Foods Inc. (-26.51%), JP Morgan Chase & Co. (-21.89%), and Bank of America Corp. (-20.38%) in the tighteners.

In XO11, this week's biggest percentage movers were Bombardier Inc. (+1.25%), Chemtura Corporation (0%), and EL Paso Corp (-0.86%) in the wideners, and CA, Inc. (-16.92%), Flextronics International Ltd. (-16.65%), and Temple-Inland Inc. (-12.73%) in the tighteners. The largest absolute movers in XO11 were Bombardier Inc. (+8.83bps), Chemtura Corporation (0bps), and Gap Inc (-2.79bps) in the wideners, and Belo Corp (-118.35bps), Flextronics International Ltd. (-112.06bps), and Smithfield Foods Inc (-75.53bps) in the tighteners.

In the names of the HY index, this week's biggest percentage movers were Radian Group Inc (+7.52%), Lear Corp (+4.1%), and Realogy Corporation (+2.65%) in the wideners, and Gannett Co., Inc. (-26.26%), ArvinMeritor Inc (-20.4%), and Level 3 Communications Inc. (-19.52%) in the tighteners. The largest absolute movers in HY were Lear Corp (+143.34bps), Radian Group Inc (+119.78bps), and Realogy Corporation (+109.1bps) in the wideners, and AMR Corp (-845.91bps), American Axle & Manufacturing Inc (-416.09bps), and ArvinMeritor Inc (-413.04bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -16.48bps (or -10.56%) to 139.54bps. Deutsche Bank AG (-0.38bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Deutsche Bank AG (-0.32%) is the worst (relative) performer. Citigroup Inc (-50bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and JP Morgan Chase & Co. (-21.89%) is the best (relative) performer.

The CDR Aussie Index fell -8.05bps (or -5.33%) to 142.77bps. Lend Lease Corporation Limited (16.45bps) is the worst (absolute) performer, whilst Lend Lease Corporation Limited (5.2%) is the worst (relative) performer. BHP Billiton Ltd (-24.58bps) is the best (absolute) performer, and BHP Billiton Ltd (-18.57%) is the best (relative) performer.

The CDR Asian Index rose 40.66bps (or 10.66%) to 422.16bps. Takefuji Corp (1556.09bps) is the worst (absolute) performer, whilst Takefuji Corp (53.83%) is the worst (relative) performer. Tata Motors Ltd. (-146.7bps) is the best (absolute) performer, and Tata Motors Ltd. (-14.91%) is the best (relative) performer.

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Interactive Brokers Having A Really Tough Day With Locates, Meg_C Wishes It Was Tomorrow

"Based upon information available through 14:30 today, we remain unable to locate and borrow / re-borrow the shares necessary to meet delivery obligations on certain short stock positions in your account. As current SEC regulations now strictly enforce delivery obligations, these short stock positions will be subject to forced buy-in by IB should our continued efforts to borrow or re-borrow the necessary shares today be unsuccessful.

A list of stocks in your account UXXXXXX that may be at risk to a forced buy-in, based on current settlement information is provided below. You may wish to consider repurchasing your position(s) in these stocks in order to control your portfolio/risk at any time prior to the end of the current regular trading session (16:00 EST). Transactions occurring after 16:00 cannot be considered against the delivery obligation.

ACWI (XYZ shares)

As noted above, we will continue to make every effort to locate and borrow the shares necessary to allow you to maintain these short positions, however, given the limited time available in the current trading session we will be unable to provide any further updates as to your account status until delivery of your daily activity statement.

Now the oddest thing is that according to the below screen capture, IB had quite a few shares available at any given moment during the day, and definitely at 14:30.

So which was it IB - recall or available?

Also, in a separate issue, Zero Hedge is starting to feel bad for Megan_C?

Megan C: Hello, this is 'meganc'. How may I help you?
traderxxx:I'd like a thourough explanation of why a fully funded cash postion was liquidated, namely AMSC
Megan C: alright
Megan C: your account was in margin violation
Megan C: and our system is automatic
Megan C: andliquidates a position to free up your margin
traderxxx: there were no margin postioins how is that possible
traderxxx: no margin should have been required for any postions in my account
traderxxx: hello??
Megan C: yes I am still here
Megan C: I am looking at your account information
traderxxx: ok
Megan C: alright
Megan C: you were charged a fee of -.01
Megan C: which caused you to have a negative cash balance
Megan C: and whenever there is a negative cash balance
Megan C: the account is immediatley liquidated to make up for that
traderxxx: gee, what did you charge me a penny for?
traderxxx: and this implies my cahs balance was zero
Megan C: I understandyour frustration
Megan C: I'm looking at your account statement from last night
traderxxx: I'm not frustrated
Megan C: and there was a charge for settle cash
traderxxx: what's that
Megan C: well I apologize for saying that then, but the charge is shown on your daily statement for yesterady
Megan C: your starting cash yesterday was .19
Megan C: there was an interest charge of 20 cents
Megan C: which caused you to go negative
traderxxx: I'm looking at yesterdays statement and seeing that I was
charged 20 cents interest against a 19 cent balance, whay was I charged
Megan C: and that is where the -.01 comes from
traderxxx: when did I ever have debit balance to charge interst for?
traderxxx: you stillthere?
Megan C: yes I am still here
Megan C: you were charge interest on the cash that you had
Megan C: .19
Megan C: it is a monthly charge
traderxxx: you chrged me interest on a positive balance??
traderxxx: what is this charge called and where is diclosed?
Megan C: i am getting that information to you righ tnow
Megan C: IB collects interest on a daily basis, and charges them at the end of the month. Cash in the account is charged interest on a daily basis for holding it over night etc. Megan C:and then the charges are all done at the end of the month
Megan C: if you go to
Megan C: and under fees
Megan C: go to interest and financing
Megan C: there is a breakdown of these fees
Megan C: and it shows you how it allots for these charges each day and tehn each
traderxxx: still I don't understand how apositive balance could
charged interest?
Megan C: cash balances are charged intrest
traderxxx: what? that is insane it is supposed to work the other way! HELLO? are we on the same planet?
traderxxx: can you please cite exactly where in theuser agreement, or exactly where n your website it states that actually charge interest for a oistive balance?
Megan C: on the website
Megan C: go to fees
Megan C: and then interest and financing
traderxxx: I'm there and I can't find it
Megan C: what are you seeing?
traderxxx: interest is typically charged on negative balances not on positive balances!!!
traderxxx: I'm seeing a very long page with lots of example and I want to
know where i ever agreed to pay interest on a postivie balance
Megan C: alright
MeganC: there is interest charged in ending settled cash
Megan C: it is all right there on this page for you
Megan C: you were charge a monthly fee for your cash balance
traderxxx: where exactly on that page are you referring to? section, line number paragraph heading
Megan C: then go toexamples on how we calculate intereset
Megan C: click on that link
Megan C: and the information is there
traderxxx: whcih one there are many
Megan C: well look at the calulations sections
Megan C: and then the final
Megan C: the final posting information I think is what you would
be most interested in
Megan C: can i help you with anything else today?
traderxxx: I'll have to hire an accountant to figure that one out. Well if you take a look at my permissions you'll I just updated and broadened them with the intent increasing my balance with company and increasing my trading with your firm, but until I figure out what sort bamboozelment you folks are pulling here. I've had many trading accounts over the years and never ever been charged interest ona positive balance
traderxxx: this is ludicrous!!
Megan C: if you need any additional clarification please let us know
Megan C: have a nice evening
traderxxx: yes ineed additional clarifiaction, I jsut don't understand it

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Goldman Sachs Principal Transactions Update: Humming Nicely

Goldman principal PT shares transacted increased by over 40% from the prior week: 550 million to 765 million, clocking at near 50% of total NYSE principal volume - about par for the course. Out of the top 15 most active NYSE traders, 5 have completely given up trading for principal accounts. More interestingly, 8 did no trades for customer facilitation purposes, while agency trades have surprisingly picked up steam, with Morgan Stanley claiming the throne in that category. Total PT was at 33.6%, 7% higher than the 52 week average: also little surprise there.

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Inflation And VWAP Rule

VWAP algos back to ruling the day.

In the meantime the 2s10s has left the building.

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Stop Trading

One trader's (to be named as XXX) attempts to understand why his money has to go straight to the big banks' top line following a DDRX buy in courtesy of Interactive Brokers. The following is the record of the chat session that transpired minutes ago.

ChatSys: This chat is associated with ticket #809621. Please record this number for use in future inquiries. You are currently in room 'General '.
Aimee: Hello, this is Aimee, how can I help you?
XXX: Hello, I am going to get a buy in on my account of ddrx shares, on 90 mins notice
XXX: I am going to take a big loss on this forced buy in and i am not happy about it
Aimee: Please let me transfer you to our trade group
ChatSys: Transferring ChatSession from 'General ' to 'Trade Problems'
ChatSys: Megan C has joined the chat.
Megan C: Hello, this is 'meganc'. How may I help you?
XXX: I am getting abuy in on ddrx at a nice loss
Megan C: I apologize for the transfer. Unfortunately, we have no further details about the potential buy-in other than what is already stated in the notification you were sent.
Megan C: Remember that when you short stock, you are at risk for being bought in at any time, with or without notice.
XXX: Where is that notice?
Megan C: the notice you received warning you of the potential buy-in.
Megan C: NOTICE OF POSSIBLE BUY-IN Based upon information available through 14:30 today, we remain unable to locate and borrow / re-borrow the shares necessary to meet delivery obligations on certain short stock positions in your account. As current SEC regulations now strictly enforce delivery obligations, these short stock positions will be subject to forced buy-in by IB should our continued efforts to borrow or re-borrow the necessary shares today be unsuccessful. A list of stocks in your account UXXXXXX that may be at risk to a forced buy-in, based on current settlement information is provided below. You may wish to consider repurchasing your position(s) in these stocks in order to control your portfolio/risk at any time prior to the end of the current regular trading session (16:00 EST). Transactions occurring after 16:00 cannot be considered against the delivery obligation. DDRX (500 shares) As noted above, we will continue to make every effort to locate and borrow the shares necessary to allow you to maintain these short positions, however, given the limited time available in the current trading session we will be unable to provide any further updates as to your account status until delivery of your daily activity statement. Please refer to the following web page and the related tabs detailing various operational details for additional information: Interactive Brokers Risk Management
Megan C: that notice.
XXX: You were not able to locate the borrow for two weeks????
XXX: Were you selling shares that you did not have a chance of borrowing?
Megan C: Sir, please review our buy-in procedures and policies located on our website>trading--->shortable stocks. I understand your frustration, however, when you short stock you are at risk for being bought in at anytime. We are having difficulty locating the stock to borrow today and that is why you received this notice. Our policy is outlined in detail on the link above
XXX: I am not talking about today. The rules are very specific about stock lending.
XXX: Lending a stock that you do not have is naked short selling
XXX: And I am not the one who should be taking this loss if you are selling stocks that you do not have.
Megan C: If you have a compliant about our buy in procedures or our lending practices, feel free to voice those through a problem ticket from account management--->message center. In regards to the notice, that does stand at this time so please manage any risk you have with this potential buy in as you see fit.
XXX: The settlement rules are promulgated by the SEC, not account management. You do not have an unlimited amount of time to locate a borrow.
XXX: The stock has been run up in the time that had sold it.
XXX: And because you lent shares that you did not have a chance to borrow, in violation of SEC rules, I am taking a loss.
Megan C: Yes, I am aware of where the rules are determined. I stated that if you have a complaint regarding how IB handles the buy-in procedures, the best venue to voice that would be through a ticket from account management.
XXX: I have one hour before you give me a nice trading loss. I do not have time to go to account management tickets.
XXX: Correct htat, I have 34 minutes.
Megan C: The buy-in notice stands, that is not something that will be rescinded and you need to manage the risk associated with that as you see fit.

XXX: I will contact the SEC, as well as Chris Dodd at Senate Banking and the office of Barnery Frank at the House. Ok?
XXX: You lent shares that you did not have and that you did not have a resonable chance to borrow. That is naked short selling.
Megan C: Once again, this notice still stands and you need to manage any risk associated with that as you see fit. If you want to file a complaint regarding this feel free to do so through a problem ticket. Our buy in procedure and lending practices are outlined in DETAIL on the link provided in the notification as well as in the link I provided above. The practices and buy in procedures are all in line with the SEC rules regarding delivery put in place in 2008. If you have any additional questions or complaints, feel free to send in a problem ticket. Please manage the risk as you see fit
ChatSys: This chat session is being terminated by the CSR

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Goldman's $4 Billion High Frequency Trading Wildcard

A recent story in Advanced Trading goes after some of the minutae of High Frequency Trading and provides a glimpse of the total value that HFT may provide to behemoth PT powerhouses such as Goldman Sachs. The article presents a very valuable perspective on just why HFT is so critical these days, especially when cash traders go for 6 hour Starbucks breaks between 10 am and 3:30 pm: "high frequency trading firms, which represent approximately 2% of the 20,000 or so trading firms operating in the US markets today, account for 73% of all US equity trading volume. These companies include proprietary trading desks for a small number of major investment banks, less than 100 of the most sophisticated hedge funds and hundreds of the most secretive prop shops, all of which operate with one thing in mind—capture profit opportunities by being smarter and faster than the closest competition." And as the market keeps going up day in and day out, regardless of the deteriorating economic conditions, it is just these HFT's that determine the overall market direction, usually without fundamental or technical reason. And based on a few lines of code, retail investors get suckered into a rising market that has nothing to do with green shoots or some Chinese firms buying a few hundred extra Intel servers: HFTs are merely perpetuating the same ponzi market mythology last seen in the Madoff case, but on a massively larger scale. When it all blows up, the question is whether the SEC will go after the perpetrators of this pyramid with the same zeal that it pursued Madoff himself. We think not.

The reason for this, as the AT article points out, is that HFT has become the biggest cash cow for Wall Street: "The incredible capabilities offered by technology have given meteoric rise to a relatively few high frequency proprietary trading firms that now wield far greater influence on the markets today than most people recognize." How big of a cash cow:

"Proprietary trading takes in a number of unique strategies, including market making, arbitrage (ETFs, futures, options), pairs trading and others based on the linked trading of more than one asset class, e.g., futures index and cash equities. In fact, TABB Group estimates that annual aggregate profits of low latency arbitrage strategies exceed $21 billion, spread out among the few hundred firms that deploy them."

The $21 billion estimate is smack in the middle of the FIXProtocol estimated $15-$25 billion in revenue that HFT generates. So let's do a back of the envelope calculation: Goldman controls roughly 50-60% of principal program trading on the NYSE, which in turn accounts for 30% of all global program trading. Throw in Goldman's domination of dark pool trading through Sigma X, and one can come up to quite a sizable number - It would not be a stretch to conclude that, through various conduits, Goldman is directly responsible for over 20% of global HFT trading. 20% of $21 billion is over $4 billion a year. As margins on HFT are sky high (it doesn't cost all that much to tweak a few hundred lines of code - and if Sergey Aleynikov is any indication, $400,000/year for VPs in the program is peanuts for a firm like Goldman), this $4 billion likely drops to the bottom line almost dollar for dollar. Let's recall that Goldman's Q2 earnings were $3.44 billion. Does this mean that HFT/PT accounts for roughly 25% of earnings for the firm that is a hedge fund in all but FDIC backing? Zero Hedge would in fact take the over, especially in this environment where M&A fees are a distant memory. We leave this question open, but even if we are off, it would not be by order of magnitude, and would explain why Goldman has thrown the kitchen sink into dominating such NYSE programs as the SLP, and is expending so much energy to dominate dark pools as well.

Going back to the AT article, which provides some additional critical observations, especially with regard to the Aleynikov arrest and his ludicrous $750,000 bail which surpasses that of indicted Ponzier Sir Allen Stanford:

First, strategies that optimize the value of high frequency algorithmic trading are highly dependent on ultra-low latency. The right decisions are based on flowing information into your algorithm microseconds sooner than your competitors. To realize any real benefit from implementing these strategies, a trading firm must have a real-time, colocated, high-frequency trading platform—one where data is collected, and orders are created and routed to execution venues in sub-millisecond times.

Next, since many of these strategies require transacting in more than one asset class and across multiple exchanges often located hundreds of miles apart, i.e., NY to Chicago, that infrastructure will often require roundtrip long haul connectivity between the data centers. [TD:Any real estate professionals out there who can determine just how easy it is to set up a colocated station within millisecond distance of the NYSE, and whether or not Goldman has any rights of first refusal on this real estate optionality? Nothing like a little derivative monopoly to keep potential SLP vendors at bay]

Lastly and most importantly, this code has a limited shelf life, whose competitive advantage is diluted with each second it is outstanding. While a prop desk's high level trading strategy may be consistent over time, the micro-level strategies are constantly altered—growing stale after a few days if not sooner—for two important reasons. Firstly, because high frequency trading depends on ridiculously precise interaction of markets and mathematical correlations between securities, traders need to regularly adjust code—sometimes slightly, sometimes more—to reflect the subtle changes in the dynamic market. The speed and volatility of today's markets is such that the relationships forming the core of our algorithm strategies often change within seconds of our ability to implement the very strategies that exploit them. Secondly, competitive intelligence is so good across all rival trading firms that each is exposed to the increasing susceptibility of their strategies being reverse engineered, turning their most profitable ideas into their most risky. As a result, any firm acquiring the "stolen" code would gain benefit from it for no more than a few days before that firm would need to adjust the code to the dynamic conditions. Since these changes build on themselves, in a matter of weeks that code would look quite different from that which was originally "stolen."

And the conclusion:

There's no doubt that Goldman Sachs, or any other proprietary trading firm, could indeed lose tens of millions of dollars from its proprietary trading if their strategies are stolen—and that is very serious. The competitors that obtain access to these trading secrets could (and would) use it to front run or trade against it, ruining even the most well-planned tactics. This news story contains many very important sub-plots: trading espionage, the necessity for a trading firm to have sophisticated security systems built around its technology, the requirements for risk management, and even the potential for proprietary trading software to be targeted on a wider scale for terrorist activity; but more than anything else it highlights the critical role played by high frequency prop trading in this new market.

This is indeed, a conclusion that Zero Hedge has been pounding the table on for months. It is imperative that Wall Street firms shed much more light into this astronomically profitable yet highly misunderstood and under the radar concept. In the absence of more information, the likelihood that Wall Street firms who dominate order flow and have material unfair advantages over virtually everyone else, should be isolated from trading up to the point where they provide sufficient information to make the market a fair and equal playing field for all investors. Until that moment, investing, trading and speculating is doomed to have the same outcome for the majority of market participants as playing roulette with 35 instances of 00, a much lower fun coefficient and no ability to be comped for your room in light of significant trading losses.

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CIT To Be Bailed Out By Goldman And JP Morgan

Developing Story: I am the great vampire squid's total lack of surprise. So the government and FDIC will not touch CIT, but Goldman and JPM which have tens of billion in dollars owed to the FDIC via the TLGP can bail them out and make it seem like a private bail out? Are all conversations between 85 Broad and Tim Geithner/Sheila Bair over the past 48 hours FOIAble? Red pill please. Also explains the two banks' recent commingled dinning patterns. Sphere: Related Content

Market Plunge Prevention: Friday Lunch Edition

Rolling buy-ins compliments of our favorite TARP recipients and other are back in full force. If you are short, you are screwed. Get out of the market right now. From a reader:

Yesterday I received an email from ThinkOrSwim Canada stating that my shorted AAP shares would need to be returned by the end of the day because they had been declared as Hard To Borrow. I'm relatively new to investing and have never encountered something like that so I assumed it was a rare, isolated occurrence.

Today, I received this email:

We have received notice from our clearing firm, Penson Financial Services Canada, advising that two of the stocks (CAR and EW) in your account is now hard to borrow. Because this security is not available to borrow, it may need to be bought-in, with a deadline of 3pm central time today, July 17th. If you do not buy the stock, we may be required to do it for you to cover this short position.

So that's three of my short positions getting recalled. I don't know if this is noteworthy or not. Is this normal or is this more market manipulation designed to sustain and prolong the current rally? Is this akin to BAC becoming hard to borrow because the big banks were restricting the ability to borrow them?

Will other readers whose short books are being forcibly bought in please contact me immediately at Sphere: Related Content

Goldman Sachs Full Frontal

The full scale media war against Goldman Sachs is now on and Mssrs. Canaday and Van Pragg can't hardly wait for the weekend to come already. The most recent exposure comes courtesy of Time Magazine and CBC Radio. The interesting thing here is not the exposure - everyone who is anyone knows all this stuff, and as for Joe Sixpack knowing the facts, well: absent a pitchfork billion man march on Wall Street, nothing will really come out of it. But the key thing to keep track of is whether Goldman will do a placating PR media campaign or merely stay shut in their shell. At this point the mediaavalanche is in full onslaught mode, and the insightful thing is whether Blankfein thinks it makes sense to preemptively approach the situation. The CEO of GS knows full well that the "full market support mode" will last only so long, and once it breaks and the floor out of the 666 S&P drops, the public will again demand blood (or Trueblood for all you vampire squid fans out there).

However, unlike before when the rating agencies were the most easy and direct populist target for the next round of rancor, Goldman is edging perilously close to becoming the strawman for the upcoming Congressional lynching campaign, and depending on the depth of the market collapse, the repercussions for Goldman could well be far more dire than a wrist slap on C-SPAN. This is especially true as everyone realizes that both Citi and BofA are merely puppet banks of the state, and while JPM is probably as much as symbol of Wall Street as Goldman, JPM is also much more of a real bank, while Goldman is simply the biggest state-backstopped hedge fund in the world (and thus, by implications, speculator) and thus, expendable in the grand scheme of things (at least from the administration's point of view if push really came to shove).

Which is why keep a close eye out on Goldman Sachs Press Releases and 8-K's: any releases (or even a silence) would speak volumes more about Goldman's perception of the future than Goldman's Conviction Buy or Sell list.

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A "Criminally Insane" Cliff Asness Takes On Health Care Mythology And Pretty Much Everything Else

AQR's Cliff Asness, a hedge fund manager (and ex-Goldmanite) who recently achieved public acclaim by lashing out quite vocally against some of the administration's tyrannical practices, yet stands to lose some of that new found populist credibility by being one of the first "scholars" supporting the petition to limit oversight and visibility of the "independent" Goldman-enhanced Federal Reserve, has just hit the road with another piece of a Hunter S. Thompson-esque Op-Ed. The whole piece, captured below, is a must read, and while Asness astutely provides the following legal disclaimer

"AQR's legal department would like me to add that I am criminally insane and barred by an order of rhetoric protection from speaking on AQR's behalf. Anyone trading on my advice, or a client, consultant, employee or Iraqi insurgent thinking he has been wronged by my attitudes or opinions can have a $250 out-of-court settlement right now if you'll sign a waiver, otherwise we'll break you. Oh, and we lied about the $250, but seriously, we will break you. Please note, nobody can predict where markets will go in the short-run and sometimes even the long-run. When I point out individual things in the marketplace that I think are strange, or wrong, it doesn't mean I have the perfect answer or can easily make money from it for my clients, for myself, or certainly for you reading this essay! Furthermore, if you read one guy's opinion and do anything based solely on that, you are an idiot. Next, as the legalese above alludes to, the actual funds and accounts AQR manages are run using models that may or may not agree with what I'm writing herein, particularly as our models will generally have a shorter time horizon than the things I'll be writing about. Listen to me at your own risk! "

his writing style is certain to not make him many new friends in high places (Zero Hedge sympathizes).

In a sweeping invective that leaves not one human being uninsulted (and brings a tear of joy and pride to the eye of this author), Cliff takes on:

Google: "We all know the Google guy with one eye-brow would crush your larynx for creating a competing search engine."

NASA: "Those twisted fascist bastards ignored me and we still have not visited the Crab Nebula."

Michael Moore and Al Gore: " Step two is kicking their asses back to Cuba where they can get in line with Michael Moore and Al Gore for their free gastric bypasses."

Canadians: " I’m a big fan of Canadians in general (particularly Wayne Gretzky and Mario Lemieux, who if healthy probably would have eclipsed Gretzky – but I digress), but when it comes to pharmaceuticals they are lucky parasitic hosers. "

Scandinavia: "The temporary success of (comparatively speaking) twelve herring-eating homogenous people is not an example that applies to anything outside of perhaps Minnesota, and they elected Stuart Smalley, so under any system they need serious free anti-psychotic medication immediately. "

The New York Times: " The New York Times still thinks Stalin was a pretty decent Joe."

Congress: "A bureaucracy run by Congressional committee whose members, like the Russian commissars, will, I guarantee you, still get the best health care the gulag hospitaligo can provide."

Hungarian billionaires: "The one guaranteed to get me yelled at or perhaps picketed by a mob waving signs printed up with George Soros’s money."

And of course Obama himself: "I think Barney Frank, and Chris Dodd and Rahm Emanuel (and his boss), and the rest of the K-street gang are smarter than that. I think they understand what they will lose if freedom wins."

Must read:

Health Care Mythology


Clifford S. Asness, Ph.D.
Managing and Founding Principal
AQR Capital Management, LLC

Comments welcome:

What We Know That Ain’t So

Will Rogers famously said, “It isn't what we don't know that gives us trouble, it's what we know that ain't so.” So it is with the health care debate in this country. Quite a few “facts” offered to the public as truth are simply wrong and often intentionally misleading. It seems clear that no truly productive solution will emerge when these false facts represent our common starting point. So, this essay takes on the modest task of simply disabusing its readers of some untrue notions about health care.

I do not take on the harder task of proscribing how we should (and if we should) reform health care. Important work must be done here by those who understand, far better than I, the details of health care provision. However, no details are necessary for this essay, and no animals (though perhaps some egos) were harmed in its creation. The fallacies I present are basic and it takes only a rational economic framework to expose them.

There are large groups of people in this country who want socialized medicine and they sense that the stars are aligning, and now is their time to succeed. They rarely call it socialized medicine, but instead “single payer health care” or “universal coverage” or something that their public relations people have told them sounds better. Whatever they call it, they believe (or pretend to believe) a lot of wrong‑headed things, and they must be stopped. Step one is understanding how and why they are wrong. Step two is kicking their asses back to Cuba where they can get in line with Michael Moore and Al Gore for their free gastric bypasses.

Finally, please read my standard disclosure (though it’s more designed for something that might be construed as financial advice, it can’t hurt) and my admission of non-originality.[i],[ii]

Myth #1 Health Care Costs are Soaring

No, they are not. The amount we spend on health care has indeed risen, in absolute terms, after inflation, and as a percentage of our incomes and GDP. That does not mean costs are soaring.

You cannot judge the “cost” of something by simply what you spend. You must also judge what you get. I’m reasonably certain the cost of 1950’s level health care has dropped in real terms over the last 60 years (and you can probably have a barber from the year 1500 bleed you for almost nothing nowadays). Of course, with 1950’s health care, lots of things will kill you that 2009 health care could prevent. Also, your quality of life, in many instances, would be far worse, but you will have a little bit more change in your pocket as the cost will be lower. Want to take the deal? In fact, nobody in the US really wants 1950’s health care (or even 1990’s health care). They just want to pay 1950 prices for 2009 health care. They want the latest pills, techniques, therapies, general genius discoveries, and highly skilled labor that would make today’s healthcare seem like science fiction a few years ago. But alas, successful science fiction costs a lot.

In the case of health care, the fact that we spend so much more on it now is largely a positive. The negative part is if some, or a lot, of that spending is wasteful. Of course, that is mostly the government’s fault and is not the part on which the socialists want you to focus. We spend so much more on health care, even relative to other advances, mostly because it is worth so much more to us. Similarly, we spend so much more on computers, compact discs, HDTV, and those wonderful one shot espresso makers that make it like having a barista in your own home. Interestingly, we also spend a ton more on these other items now than we did in 1950 because none of these existed in 1950 (well, you could have hired a skilled Italian man to live with you and make you coffee twice a day, so I guess that existed and the price has in fact come down; my bad, analogy shot). OK, you get the point. Health care today is a combination of stuff that has existed for a while and a set of entirely new things that look like (and really are) miracles from the lens of even a few years ago. We spend more on health care because it’s better. Say it with me again, slowly – this is a good thing, not a bad thing.

In summary, if one more person cites soaring health care costs as an indictment of the free market, when it is in fact a staggering achievement of the free market, I’m going to rupture their appendix and send them to a queue in the UK to get it fixed. Last we’ll see of them.[1]

Myth #2 The Canadian Drug Story

Ah … one of the holy myths of the “US health care sucks” crowd. This should be fun.

The general story is how you can buy many drugs in Canada cheaper than you can buy them in the US. This story is often, without specifically tying the logic together, taken as an obvious indictment of the US’s (relatively) free market system. This is grossly misguided.

Here’s what happens. We have a (relatively) free market in the US where drug companies spend a ton to develop new wonder drugs, a non-trivial amount of which is spent to satisfy regulatory requirements. The cost of this development is called a “fixed cost.” Once it’s developed it does not cost that much to make each pill. That’s called a “variable cost.” If people only paid the variable cost (or a bit more) for each pill the whole thing would not work. You see, the company would never get back the massive fixed cost of creating the drug in the first place, and so no company would try to develop one. Thus, companies have to, and do, charge more than the variable cost of making each pill.[2] Some look at this system and say to the drug companies “gee, it doesn’t cost you much to make one more pill, so it’s unfair that you charge much more than your cost.” They are completely wrong and not looking at all the costs.

So, let’s bring this back to our good natured friends to the North (good natured barring hockey when they’ll kill you as soon as look at you[3]). They have socialized medicine and they bargain as the only Canadian buyer for drugs, paying well below normal costs. Drug companies that spent the enormous fixed costs to create new miracles are charging a relatively high cost in the free and still largely competitive world (the US) to recoup their fixed cost and to make a profit. But socialist societies like Canada limit the price they are allowed to charge. The US-based company is then faced with a dilemma. What Canada will pay is not enough to ever have justified creating the miracle pill. But, once created, perhaps Canada is paying more than the variable cost of each pill. Thus, the company can make some money by also selling to Canada at a lower price as it’s still more than it costs them to make that last pill.

However, this is an accident of Canada being a less-free country than the US, able to bargain as one nation, much smaller, and next door. If we all tried to be Canada it’s a non-working perpetual motion machine and no miracle pills ever get made because there will be nobody to pay the fixed costs. I’m a big fan of Canadians in general (particularly Wayne Gretzky and Mario Lemieux, who if healthy probably would have eclipsed Gretzky – but I digress), but when it comes to pharmaceuticals they are lucky parasitic hosers. Drug companies in general sell their products to Canada at low prices, making a little profit, and reducing slightly the amount they need to charge other North Americans. This does create the silly illusion that the Canadian system is somehow better than ours because our own drugs are cheaper there. They are only cheaper to the extent we are subsidizing them by paying their portion of drug development costs and, unfortunately, we cannot subsidize ourselves (or we go blind).[4]

So, what is the purpose behind those who tell tales of these cheap Canadian drugs? Obviously they seek to ridicule our freer system by putting the parasitic and socialist system on a pedestal. They seek to imply that our system is broken, and delivers only expensive drugs, when the socialist Canadian system delivers the goods for its people. Thus, they implicitly argue that we need to have socialism here. It’s not complicated.

So, repeat after me. We could go with the Canadian system and have super cheap drugs, if only we can find a much bigger, much more medically advanced, much freer country right next to us to make miracle drugs for themselves, and then we insist that we pay them only a bit above their variable cost for our share, and then they in turn agree to let us be their parasite. Mexico, would you mind helping us out?

Myth #3 Socialized Medicine Works In Some Places

This is a corollary to the “Canada as parasite” parable above. The funny part is socialized medicine has never been truly tested. Those touting socialism’s success have never seen a world without a relatively (for now) free US to make their new drugs, surgical techniques, and other medical advancements for them. When (and I hope this doesn’t happen) the US joins in the insanity of socialized medicine we will see that when you remove the brain from the body, the engine from a car, the candy from the striper, it just does not work.

So, please, stop pointing to all those “successes” that even while living off the US still kill hard-working people who could afford their own health care while they stand in line for the government’s version (people’s cancers growing while waiting 10 weeks for a routine scan, which these people could often afford on their own if allowed, is a human tragedy). Even the successes you gin up for them would not be possible without the last best hope of humankind (the US) on the front lines again making the miracles for the world.

Specifically, let’s also stop citing the Nordic countries as examples. The temporary success of (comparatively speaking) twelve herring-eating homogenous people is not an example that applies to anything outside of perhaps Minnesota, and they elected Stuart Smalley, so under any system they need serious free anti-psychotic medication immediately. Anyway, the Nordic country’s touted “success” is going to go the way of the Soviet Union’s plan to bury us, as their changing demographics (far more economic diversity and an aging population) change their culture and show the cracks in their utopian fantasy. As Milton Friedman (paraphrasing) said to a Swede bragging about how little poverty there was in his country "well, yes, I too have observed that among Swedes in America, there's also very little poverty."

To put it simply, right now the US’s free system massively intellectually subsidizes the world’s unfree (socialized) ones. That sucks. The only thing that would suck worse is joining them without anyone to subsidize us all.

Myth #4 A Public Option Can Co-Exist with a Private Option

This one has been the subject of some hot debate. Let’s first define it. Part of the current junta’s plan is to add a “public option” for health insurance. That is health insurance provided by the government (actually provided by you and your neighbors – this is a good thing to remember whenever you find yourselves thinking anything comes from the government, really, if you take away anything from this essay take away this!). They claim this “public option” can co-exist fairly alongside private health insurance, increasing competition and keeping the private system “honest”, and not deteriorate to a single payer (socialized medicine) system. They are wrong, or very dishonest, as in unguarded moments they admit that the single payer socialized system is what they really want. The New York Times disagrees with me, thinking the two can co-exist. But the New York Times still thinks Stalin was a pretty decent Joe.

Those advocating the “public option” say it’s just there to keep private enterprise honest. They point out that private doctors prescribe more expensive procedures than ones employed by the government, and then use that as evidence that the private system has inefficiencies (to get as inefficient as the government they’d have to proscribe enough CAT scans to turn you into Spider-Man if conveniently bitten by an arachnid along the way). It makes me want to ask them, “but then don’t we need that in every industry? Doesn’t the already massive competition in health care keep things honest?” Of course, this leads to the uncomfortable conclusion that by their logic the government must be a major player in every industry. Ah, just when you think you have them, you remember, they are socialists. They have you! This is in fact what they desire. Don’t throw them in the briar patch. But, in our case they are mendacious socialists who know that they will not achieve their massive imposition of state control on all aspects of life if they are honest about it. So they are dismantling liberty piece by piece. Now, let’s get back to the idea that the government can run a fair “private option”, but not forget that there’s nothing special about health care.

The government does not co-exist or compete fairly with private enterprise. It does not play well with others. The regulator cannot be a competitor at the same time. It cannot compete fairly while it owns the armed forces and courts. Finally, it cannot be a fair competitor if when the “public option” screws up (can’t pay its bills), the government implicitly or explicitly guarantees its debts. We have seen what happens in that case and don’t need a re-run.

The first thing the government does is underprice the private system. You can easily be forgiven for thinking this is a good thing. Why not, cheaper is better right? Wrong. They will underprice private enterprise by charging less to the purchaser of health insurance, not by actually creating it cheaper. Who makes up the difference? Well, you and your family do if you pay taxes, or your kids will pay taxes, or their kids will pay taxes. The government can always underprice competition, not through the old fashioned way of doing it better, they never do that, but by robbing Peter to pay for Paul. They are taking money from your left pocket and giving you a small portion of it back in your right pocket. They do it every day before breakfast, and take a victory lap for the small portion they return.

Second, the government ultimately always cheats when it’s involved in “honest” competition. Try mailing a first class letter through Fed-Ex, or placing an off-track bet with a bookie, or playing a lottery through a private company. Uh, you can’t, so please stop trying. I don’t want you to hurt yourself. Once the government discovers it cannot win, it changes the rules. You see, the government has the power to legislate, steal, imprison, and kill. Those are advantages most private firms do not have, save Google, and you didn’t hear that from me (we all know the Google guy with one eye-brow would crush your larynx for creating a competing search engine).

I have friends who say that I can’t compare doctors to postal workers or truck drivers or bookies as doctors are tireless altruists (pretty damn arrogant no?). I respect the skills of doctors, but they are the kids in college who wanted good jobs with prestige and money, and worked damn hard to attain them, but barely a one was more altruistic than the average truck driver (ever have a doctor drive you from Cleveland to Spokane for nothing but your participation in a duet?) And anyway, those who want socialism want to enslave these altruists while I want to free them, so I am not sure I need to argue this point.

Perhaps the best example of the destructive “public option” is our nation’s schools. Here we clearly have a government provided “public option” competing with (and in fact dominating in size) private schooling. But, is it fair? Does it work well? Not by a long-shot. To send your kids to private school (i.e., a school that competes with the government) you need to first pay your taxes. Absent vouchers or tax credits, the bĂȘte noirs of the “socialism in education” set, if you eschew the “public option” you have to pay for education twice. Double payment is not only unfair, but the quality of the product without competition is inhuman and a catastrophe to a generation of children the Left weeps tears over, but actively works to destroy (after all, the Left needs future customers). That the schools provided by the government pale next to the private options, which themselves pale next to what we would have with a full private system (even if publicly funded) is beyond sad, but not the direct point here. The direct point is a “public option” cannot exist without cheating – in this case making you pay for it even if you don’t use it (I’m pretty sure if a private company tried that it would be called stealing).

With a “public option” things inevitably would go the horrific way of our public schools. Instead of existing to please customers (patients and students respectively) the “public option” in schools exists largely to benefit empowered stakeholders of the system (health administrators and unionized school employees respectively), who will shamelessly pretend to give a darn about sick people and children. Watch the analogy play out if we go this route in health care. It will be like looking in a funhouse mirror and seeing a doctor where you used to see a teacher. All else will be the same.

Finally, let’s worry a bit about the end game. We are not here yet, but in a world where the “public option” replaced all private options, would we still be allowed, if we had the resources, to pursue private medical alternatives? Some socialized countries say yes, some say no. Imagine the answer is no in this country, where freedom is valued more than anywhere else in the world. Imagine a person is to be prevented from spending their hard earned money on their or their children’s health care, or a doctor was prevented from earning what he could in a parallel free system after all his training and work. If we get to this point, and I pray we do not, it’s time to skip all the Constitution but the second amendment (while we still have it), as it won’t be America anymore.

Let’s again conclude by asking why they are lying here about the “public option”? Well, the President has said if starting from scratch he’d prefer socialized medicine (he calls it something different, but again, he’s not telling the truth). He also now insists that this “public option” is not intended to lead to fully socialized medicine, and accuses those who say it will lead there of, you guessed it, lying. Odd no? But it takes literally seconds to realize that this “public option” cannot co-exist with liberty and thus will indeed lead to full‑on socialization. Since the simplest answer is usually best, and the President has already declared his preference for a “single-payer” system, and since this “public option” leads there with near certainty, might I be forgiven for assuming he knows this and is lying, and has a socialized medicine end-game in mind?

Myth #5 We Can Have Health Care Without Rationing

Rationing has to occur. This sounds cold and cruel, but it is reality. A=A. If you have a material good or service, like health care, that is ever increasing in quality, and therefore cost, there is no way everyone on Earth can have the best at all times (actually the quality increases are not necessary for rationing to be needed, it just makes the example clearer). It’s going to be rationed by some means. The alternatives come down to the marketplace or the government. To choose between those alternatives you judge on morality and efficacy.

Everyone on both sides seems to hate the rationing word. People favoring free markets point to the explicit rationing that occurs in other countries with glee, while those favoring socialism point to the number of uninsured who get their health care through emergency rooms and the like (a form of rationing). Both sides are wrong to complain about rationing per se, that’s a fact of life. But there are differences.

It is an uncomfortable truth that tough choices will have to be made. There is no system that provides for unlimited wants with limited resources. Our choice is whether it should be rationed by free people making their own economic calculations or by a bureaucracy run by Congressional committee (whose members, like the Russian commissars, will, I guarantee you, still get the best health care the gulag hospitaligo can provide). Free people making their own choices only consume what they value above price, using funds they have earned or been given voluntarily. With socialized medicine health care is rationed by committees of politicians trying to get re-elected and increase their own power, and people consume as much of it as the commissars deem permissible. I do not find these tough alternatives to choose between.

By the way, nothing says that part of this rationing cannot include large amounts of charity, privately or even (and the libertarian in me quakes) publicly, but that still involves rationing. Sorry, we can’t suspend the laws of physics and arithmetic.

So, why do they lie about rationing, other than habit? Well, rationing isn’t pleasant news for those who don’t get that 2+2 will always equal 4. Telling optimistic innumerates that your plan does not include rationing wins support.

Myth #6 Health Care is A Right

Nope, it’s not. But we are at the nuclear bomb of the discussion. The one guaranteed to get me yelled at or perhaps picketed by a mob waving signs printed up with George Soros’s money. Those advocating socialized medicine love to scream “health care is a right.” They are loud, they are scary, but they are wrong about rights (as the 1980 kid in me resists the temptation to type “TO PARTY” – you had to be there).

This is more philosophy than economics, and I'm not a philosopher. But, luckily it doesn't take a superb philosopher to understand that health care simply is not a “right” in the sense we normally use that word. Listing rights generally involves enumerating things you may do without interference (the right to free speech) or may not be done to you without your permission (illegal search and seizure, loud boy-band music in public spaces). They are protections, not gifts of material goods. Material goods and services must be taken from others, or provided by their labor, so if you believe you have an absolute right to them, and others don’t choose to provide it to you, you then have a “right” to steal from them. But what about their far more fundamental right not to be robbed?

In fact, although it’s not the primitive issue, the constant improvement in health care gives another good example of why the “right” to health care makes little sense. Did you have a right to chemotherapy in 1600 AD? You could have protested to Parliament all you wanted, but chemo just didn’t exist. Then, did you have a right to it the moment some genius invented it? You did not pay for the research. You did not make the breakthrough. Where do you get the right? How did it come into existence for you the moment somebody else created these things? I’m pretty sure you cannot have rights to material goods that don’t exist, and I am pretty certain that the moment some genius (or business, or even government) brings them into the world your “rights” do not improve. But strangely, many disagree.

Conundrums are easy to create. If a cure for all disease is discovered but it costs the GDP of Europe for each treatment, do we all have a right to it? Of course not. We can say we do, but it does not matter. We cannot have it (unless you agree with my forecast for Europe’s GDP and wait 50 years). But the absolute “health care is a right” position leads to a clear yes (you know those people bussed in by ACORN and the SEIU carrying signs saying “health care is a right”? Ask them what they think about this issue; I dare you). The smarter crazies might argue that they only mean the right to a reasonable level of health care. But then we have government running and rationing health care, as Congressional committee decides what’s “reasonable”? Health care is not a primitive right, but keep printing those signs.

So why do people scream health care is a “right” if it so obviously is not? If not a right it can still be willingly provided as charity by society (I’ll again leave aside the libertarian fight about whether we all need to be forced to provide charity). But those screaming “health care is a right” worry that this will not work out as well for them. It would work out if all they cared about was good health care for all, and not power, but they do love that power.

Those seeking free health care could admit these are not rights but they simply want other people’s stuff, and be honest supplicants, or open thieves. However, they believe that guilt and the false moral high ground work better for them. Do not cede that ground. They are beggars with the government’s guns behind them. They are beggars you may, or may not, choose to help. I personally have chosen to help many (those with my views are painted as non-humanitarians but we believe our ideas will make everyone better off). But that is your and my choice, not their right. When they ask you to help, please consider it, and do what your conscience and abilities suggest and allow. When they try to take it as their right, they are thieves and enslavers, tell them “no.”

Finally, while again we may choose to provide a minimum standard of health care to our neediest, we should not be ashamed that better health care, like all material goods, comes with success. Capitalism is simply what happens when you mix freedom and economics. Capitalism says if you achieve and build more, you can spend more and have more. You can have a bigger TV, a bigger house, a hotter spouse, and shinier teeth for your pets (or a hotter pet and shinier teeth for your spouse). How on Earth did the notion that it’s “unfair” to spend the money you earned on your own health care, probably the most important thing to you, come about? Well, I know how it came about. It rhymes with momunnism and has been pushed by a far left academia, far left candidates that don’t have a clue about economics beyond cashing a lobbyist’s check, far left trade unions pining for a workers revolution that just never came but now they’re trying to steal on the sly (but God forbid a secret ballot), and a far left media who just thinks they are smarter, better and kinder people than everyone else because they enjoy making snotty sarcastic comments about Republicans (and where is Jon Stewart going to get his health care under the new system anyway?).

But I digress again.

Ironically of course, as in all things, the profits made on allowing people to spend differentiated amounts of their own money on health care would fund so much better health care for all it’s sickening (pun intended). Think of the newly invented drugs and other advances that shortly would be cheap enough for everyone if companies were actually fully free to profit on them. It would be too long of an economics lesson to explain to my beret-wearing friends of Che that profits are a good thing, and that companies cannot charge whatever they want forever as the essence of capitalism is not love of the corporation but love of competition. But, while I admit it looks dark now, everyone would do well to study up on those things as they’re going to be making a comeback soon.

Finally, to reiterate, calling something a “right” and holding up signs screaming you have that right just does not make it so. I once picketed NASA for a whole summer with a sign that said "Faster Than Light Travel Is A Right" and "FTL NOW!!" (it was actually a whole back and forth chant that went “when do we want FTL!!”, with the sing-song response,“now!!”, etc., but it was just me and didn’t work too well). Alas, those twisted fascist bastards ignored me and we still have not visited the Crab Nebula.

So, Why Are These Crazy Things Believed (Or, Pretended to Be Believed)?

I forgive individuals. Lots of people are scared and misinformed by their politicians and the media or else they would understand the whitewash that is going on here and reject socialist “solutions” to a problem best solved for their families by freedom. In fact, eventually I think they will (if Congress and the President don’t first intentionally jam through a socialist bill they know cannot survive scrutiny by the American people). Now as to why the media and politicians say what they say, and propose what they propose, it is more complicated.

Actually the media is often just plain stupid (not all of them, some are geniuses, but as a group certainly), repeating tired leftist dogmas and looking down on anyone who believes in freedom as just a red state moron (trust me, they think that). How else do you explain free infomercials for Obama’s socialized medicine without rebuttal? How else do you explain the failed New York Times front page that’s less news and more editorial parody than Steven Colbert? Why the politicians do it is somewhat more complicated, and a bit more nefarious.

Some politicians may indeed just be idealistic dupes who actually want to help people but don’t realize they will harm them, or even fools who just want to feel important. But let’s leave Ms. Pelosi out of this for now and talk about the smart ones. I do not think true confusion among the political and intellectual class is most of their problem. I do not think they believe for a second that socialized medicine will make people better off. How could they? I think Barney Frank, and Chris Dodd and Rahm Emanuel (and his boss), and the rest of the K-street gang are smarter than that. I think they understand what they will lose if freedom wins.

Lots of politicians understand that the simple free system leaves them out in the cold. No power for them. No committees to sit on to decide people’s lives. No lies to tell their constituents how they (the government) brought them the health care they so desperately need. No fat checks from lobbyists as the crony capitalists pay dearly to make the only profits possible under this system, those bestowed by the government. Libertarians are often accused wrongly of loving “big business,” but we don’t, particularly when they predictably turn themselves into crony capitalists who try to succeed by wheedling from the government. On the other hand the socialists love cronies of all sorts, ones who command large enterprises all the better. Socialists are far closer than libertarians to building and countenancing the all-powerful corporate state they claim to fear. Odd I know!

That an array of crony capitalists are lining up from Wal-Mart to hospitals to medical insurers (bringing back Harry and Louise this time for socialism) hoping to cut the best deals for themselves before the iron curtain falls is sad. That they are being lauded by the administration as a sign its healthcare position is right is simply propaganda. Yep, when someone agrees to pay Al Capone protection, it's a clear sign Al Capone was right to begin with....

We further see this predicted abuse of power as the health care proposals are already filled with freebies to the President’s friends – including exempting unions from onerous features. Gee, the same unions in whose favor he has re-written the bankruptcy rules and wants to exempt from the most American of ideas, the secret ballot. It’s good to be a friend of the most ethical administration ever.

For another example how this is about government power and the suppression of private liberty, and not helping people, look no further than the fact that their massive tax increase on the "rich" (which by leftist definition are never paying their "fair share" if they have enough left over to remain rich) is on pre-deduction income.[5] That means if you give all your money to charity you still owe Caesar his 5+ percent on money you did not keep and do not have, but gave away to a good cause. This might raise some revenue, but it is largely about the destruction of private charity. Barack and Harry and Chris and Nancy and the other gang of four (yes our gang of four is much bigger than four) are about the people having to crawl on their knees to government (them) instead of anyone else, including private charity, not about helping people.

BTW, Congressman Charles Rangel said lawmakers targeted high earners because it “causes the least amount of pain on the least amount of people.” So does, in the short-run, imprisoning the rich and harvesting their organs for better health care for everyone else. Charlie, any thoughts on where you stop stealing?

Finally, if the above is not enough, the rush to pass a huge expansion of government now, and limit debate and discussion, is indicative of a group that knows it is wrong, and if people have time to think they will refuse to go along, but is attempting an exercise of naked power, to impose dictatorship before the people wake up. Paraphrasing Mark Twain, a lie can travel halfway around the world while the truth puts on its shoes. They are counting on this, and they don’t want to give the truth time to be shod.

And In Conclusion

At this point you might accuse me of offering only complaints about the Administration's plans, without constructive suggestions of my own. There is truth to that. But I make no apologies. If people believe crazy things it’s first and foremost important to change that before progress can be made. But also, I think we're doing okay enough without radical changes, certainly not hastily panicked changes towards socialism, and also because I lack the expertise to recommend the detailed practical steps that would be productive (in contrast it requires no expertise to see that the myths above are indeed lunacy).

I do understand people are frustrated at many aspects of the current system, and it is tempting to tear it all down and build something that looks shiny and new and perfect in the advertisement. Many of the complaints concern the complexity of getting insurance, treatment and reimbursement. I blame this mostly on excessive regulation, a complex employment-based insurance system strongly encouraged by tax law, and litigation for the benefit of trial lawyers rather than patients or anyone else. We do not need a single payer (socialized medicine) system to cut confusion and inefficiency. On the contrary we need unfettered competition and clear legal standards. Another major concern is provision of basic healthcare to the needy. This is an important issue, but not an expensive one in the scheme of things, and not one that should drive the trillion-dollar healthcare debate. You do not reorganize the entire housing industry and tax policy around the need for homeless shelters, you just build enough shelters and let the market take care of, and discipline, the people who can pay for their own housing. Finally there is the concern that healthcare costs make US workers too expensive to compete in global markets. As long as workers get full value for their healthcare dollars, it shouldn't matter whether companies pay in cash or in health benefits. The competitiveness issue is an important one, but healthcare costs versus wages versus taxes to pay for public health care is a minor detail in it. The main thing is not how it’s divided up but total costs, and total value received by the worker. Costs are minimized, and value received maximized, by open competition. I recognize these are general prescriptions rather than specific healthcare reform proposals, but you don't have to be a weatherman to know which way the wind blows (are non-Leftists allowed to quote Dylan?).

[1] Some say health care advances are really an achievement of the government as the government funds university research. Wow. What a clear case of the government muscling in, taking over, and then pointing to their taking over of Poland as a success. We Poles feel differently.

[2] By the way, it’s really not only about cost. That companies try to maximize profit is not something they or I should apologize for, it is beautiful and fair and the reason why great things are created, but for this analysis I’ll just focus on cost.

[3] FYI, your author is a hockey nut.

[4] Truth be told this isn’t about just Canada but any group that negotiates en masse for prices that cover variable not fixed costs. But the general point is still valid. The success of some groups at this does not mean it’s a viable system for all, in fact it’s impossible to be a viable system for all. We cannot all be free riders.

[5] While not the subject of this essay, let’s put another widespread myth to bed. “The rich only give to charity for the tax deduction.” Please note, when the rich give substantial amounts to charity they end up with substantially less for themselves. The idea of the charitable deduction (which some libertarians may argue with as it subsidizes behavior the government finds “nice”) is that if you do not keep the money you earned, but pass it on to a good cause, you do not also pay taxes on it. That seems pretty reasonable as you did not keep it. That many, even most, think this is somehow a giveaway to the rich is a statement on the sorry state of understanding, and the dangerous level of class-warfare we already have in this country.

[i] AQR Disclosure

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC its affiliates, or its employees. The information set forth herein has been obtained or derived from sources believed by the author to be reliable. However, the author does not make any representation or

warranty, express or implied, as to the information's accuracy or completeness, nor does the author recommend that the attached information serve as the basis of any investment decision and it has been provided to you solely for informational purposes only and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such.

Cliff’s Additional Disclosure

This is Cliff speaking now. AQR's legal department would like me to add that I am criminally insane and barred by an order of rhetoric protection from speaking on AQR's behalf. Anyone trading on my advice, or a client, consultant, employee or Iraqi insurgent thinking he has been wronged by my attitudes or opinions can have a $250 out-of-court

settlement right now if you'll sign a waiver, otherwise we'll break you. Oh, and we lied about the $250, but seriously, we will break you. Please note, nobody can predict where markets will go in the short-run and sometimes even the long-run. When I point out individual things in the marketplace that I think are strange, or wrong, it doesn't mean I have the perfect answer or can easily make money from it for my clients, for myself, or certainly for you reading this essay! Furthermore, if you read one guy's opinion and do anything based solely on that, you are an idiot. Next, as the legalese above alludes to, the actual funds and accounts AQR manages are run using models that may or may not agree with what I'm writing herein, particularly as our models will generally have a shorter time horizon than the things I'll be writing about. Listen to me at your own risk! If you choose to read what I write please only use it as one input for you to critically evaluate in your decision process.

Finally, my style is to write very aggressively and passionately about what I believe. So unless you are a libertarian/objectivist, small government and free market loving, socialist hating, value investing geek you probably won't agree with everything or anything I say. If you find the way I say it insulting, I'm sorry about the first few words you couldn't help reading, but if you read a moment past that (in this disclaimer or later), it is on you. I agree we need to censor things occasionally but only to protect children and madmen (and of course the children of madmen). If you believe in censoring anything else short of a nuclear secret you'd probably look good in hobnail boots and the crooked cross. Thanks for listening.

[ii] I don’t claim any great originality here. Much, or even all, of what I’m saying has been said elsewhere. But, we’re still losing, so it’s worth repeating all this again with some new angles, a few new pieces of black humor, and perhaps a different font. In particular, and not even close to exhaustively, I can recommend recent pieces of Newman, Sowell, Stossell, Szasz , Will, and many by the Cato Institute that cover a lot of the same ground I attempt to re-take.

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