The Affordable Care Act’s legal troubles are far from over. The Supreme Court’s announcement that it will review King v. Burwell, the case challenging health insurance premium subsidies for those who buy their insurance on the 36 federal exchanges, increases the priority of reforming the most destructive aspects of the Act. This announcement comes just over a year after Judge James R. Spencer of the U.S. District Court for the Eastern District of Virginia agreed to rule in the case, then called King v. Sebelius.

Last year, few had heard of King v. Sebelius or its parallel case, Halbig v. Sebelius. With Friday’s Supreme Court announcement, the case could upend the Affordable Care Act. Congress should focus on passing legislation before June, in case the Court rules in favor of the plaintiffs. Then, President Obama would have an incentive to sign the bill to stop his signature piece of legislation from falling apart.

The essence of King v. Burwell is whether those who buy health insurance on federally-run exchanges are eligible to receive premium subsidies. The IRS says yes. The letter of the law says no. The answer as to whether the implementation of the Affordable Care Act will move forward lies with the nine justices.

If the justices rule that subsidies are not permitted on the 36 federal exchanges, then insurance markets in these states would break down. Eighty-five percent of people who bought plans on the exchanges received subsidies in 2014, according to the Department of Health and Human Services. If Americans on the federally-run exchanges do not qualify for health insurance subsidies, far fewer will sign up because plans will be unaffordable for many. If fewer people sign up, rates will rise, leading to a vicious cycle and possible collapse of the plans offered.

If the ACA begins to fall apart, President Obama will have to sign remedial legislation to preserve it. The Act will be practically repealed-unless most or all of the remaining 36 states set up their own state exchanges. Without functioning exchanges, employers will not have to offer health insurance, since there will be no subsides available, and the employer mandate in those states would vanish.

According to the text of the Affordable Care Act, subsidies are available to those who get their health insurance “through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.” Or, in another section, those “enrolled in…an Exchange established by the State under section 1311.”

Section 1321 of the Act allows the federal government to set up exchanges in states that have not set up their own web-based portals. But nowhere does the law state that people on federal exchanges can receive tax subsidies.

New York Times columnist Paul Krugman argued on November 10 that defining exchanges as “established by the State” was an “obvious typo.” Krugman wrote, “not only is it clear from everything else in the act that there was no intention to set such limits, you can ask the people who drafted the law what they intended, and it wasn’t what the plaintiffs claim.”

However, MIT professor Jonathan Gruber, one of the architects of the ACA, said in January 2012 that subsidies were put in place to encourage states to set up exchanges: “What’s important to remember politically about this is if you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits-but your citizens still pay the taxes that support this bill. So you’re essentially saying [to] your citizens you’re going to pay all the taxes to help all the other states in the country. I hope that that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges.”

Regardless of the letter and the intent of the law, in a May 2012 ruling, the IRS extended the subsidies to those getting health insurance on any exchange by defining an exchange as a “State Exchange, regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange.” The Department of Justice argues that the law is ambiguous, so the IRS had the right to extend subsidies to the federal exchanges.

A three-judge panel in the D.C. Circuit Court of Appeals decided on July 22, 2014, in Halbig v. Burwell, that individuals could not receive subsidized premiums. On the same day, the U.S. Court of Appeals for the Fourth Circuit ruled in King v. Burwell that they could. This appeared to be a circuit split, until the entire D.C. Circuit Court of Appeals decided to rehear Halbig v. Burwell in December, vacating the panel’s ruling.

The potential of this case to upend the Affordable Care Act was one of the reasons that Senate Majority Leader Harry Reid triggered the “nuclear option” in November, 2013, and broke long-standing Senate rules requiring confirmations with 60 senators. Now only 51 senators are needed. Judges Patricia Ann Millett and Nina Pillard were confirmed to the D.C. Circuit in December 2013, and Judge Robert Wilkins was confirmed in January, 2014, giving Democratic appointees a majority on the Court.

The overtly-political use of the “nuclear option” is likely one reason that the Supreme Court decided to take the case.

If the Supreme Court rules in favor of the plaintiffs, the ball would be in Congress’s court to offer a replacement, since it would have substantial leverage. The question is, what would such a bill contain? Here are five suggestions.

Reforms should solve the central problem before the Court by giving individuals at all income levels a tax-free subsidy to purchase health insurance. This would qualify everyone enrolled through the federal exchanges for subsidies and mitigate the current financial disincentives to work and marry.

Due to the steep subsidies that phase out gradually and then completely at $95,000 for a family of four, families have an incentive to keep their income under $95,000. As a result, some adults are working fewer hours, with others dropping out of the labor force entirely, all in order to keep their healthcare subsidies. Other couples have had to delay, or completely forego, marriage in order to keep their combined income low.

As I wrote in these columns last week, ACA reform should reduce disincentives to hiring. This means repealing the requirement that employers offer health insurance to full-time employees or pay a fine. Beginning in January 2015, employers with more than 100 full-time equivalent workers will face a substantial penalty for not offering the right kind of health insurance. In January 2016, the penalty will apply to employers with more than 49 full-time equivalent employees. This pressures firms to create fewer jobs, or staff their businesses with part-time employees to avoid paying penalties for those workers.

Congress should allow any state-approved plan to be offered on the exchanges in order to lower the cost of insurance. Currently, all plans offered have to contain free preventive care, drug abuse coverage, mental health coverage, free contraceptives, and even free pediatric dental care-even for those without children. People should have the option to buy basic plans, without all the bells and whistles, that better fit their needs..

Congress should repeal the medical device tax, which compels medical device manufacturers to expand their offshore production, or forgo developing innovative medical equipment. America needs all the jobs it can get, and new technologies are one critical component of better healthcare. Ending this job- and innovation-killing tax is an area of strong bipartisan agreement, and should be a commonsense first step for the 114th Congress.

Congress should get rid of the Independent Payment Advisory Board, which has the power to dictate which drugs and devices are cost-effective and therefore permitted to be covered. This reduces innovation by discouraging companies from developing many novel treatments will not receive coverage. An expensive drug or device that is expensive now can fall in price and become routine the following decade, as well as spawning other pharmaceutical and biomedical inventions.

No one knows how the Supreme Court will rule in June 2015. But regardless of the decision, the new Congress should be prepared to act swiftly to improve the most destructive aspects of the Affordable Care Act.


From Barry Ritholtz

People who work in specialized fields seem to have their own language. Practitioners develop a shorthand to communicate among themselves. The jargon can almost sound like a foreign language.

Finance is filled with colorful phrases such as “Spoos,” “Vol,” “Monte Carlo simulation,” and “Gaussian Copula.” In these columns, I try to eschew the usual Wall Street jargon. But I have used the phrase “secular cycles” (most recently here), and a reader recently called me on it. To redress that error, this week I will discuss what a secular — vs. cyclical — market is, its significance and what it might mean to your portfolios.

Based on a lifetime of observations and a few decades in the markets, I understand that societies, beliefs and fashions all move in long arcs of time. We call these arcs several things: cycles, periods, eras. They vary in length and intensity, but they are typically characterized by an idiosyncratic set of qualities that set them apart from each other as unique.

Regardless of the name we affix to them, we intuitively understand what defines a specific period of time. If you name an era, I can describe for you the dominant economic and societal themes and trends. Ultimately, all of these eventually find their way to equities and bonds.

Rather than describe these obliquely, let me give you a definition, and then a few specific examples:

Secular cycles are the long periods — as long as decades — that come to define each market era. These cycles alternate between long-term bull and bear markets. Societal elements affect these markets. These cycles are driven by specific and dominant economic ideas.

Each secular market cycle reflects the key issues of an era. These can include geo-politics, economics, resource consumption, technology or any one of a number of other elements. Over time, each of these factors comes to define the dominant economic theme of a generation. Consider the post-War World II era, or the inflationary malaise of the 1970s or even the roaring 1980s and 1990s. Each period can be defined as a secular cycle.

With each secular cycle, a dominant Market Trend emerges. Historically, these have been extremely powerful and, once established, are very difficult to break. They can last 10 to 20 years.

As an example, let’s use the post-World War II boom. This long expansion lasted from 1946 to 1966 (with a few mild recessions along the way). The economy was driven by a broad assortment of factors that all aligned at once: Millions of troops returned home from the war; more than half of them took advantage of the GI Bill, which provided a stipend ($110 per month) to obtain a college education. A well-educated workforce never hurts the economy.

After being on a wartime footing for so long, civilian manufacturing responded to years of pent-up consumer demand. Commercial aviation expanded until it became an ordinary part of life. The electronics industry expanded rapidly and the seeds for the semiconductor and software revolution were planted.

The postwar period also saw the suburbanization of America, the rise of the homeowner, the build-out of the interstate highway system and the rise of automobile culture. Credit availability expanded dramatically.

Given these factors, would it come as a surprise to learn the stock market had a good run from 1946 to 1966? The long boom led to a long market rally. During that period, the secular bull produced outstanding returns. The Dow Jones industrial average was well under 200 in 1946. By 1963, the Dow was trading five times higher at a level of 1,000.

This postwar expansion was followed by another secular cycle — the ugly secular bear market of 1966-1982.

For example, say to a person “the 1970s” and they will conjure a vivid memory of that era: disco, polyester, gas lines, stagflation, as well as recession. It was an era of socio-political upheaval and a general economic malaise, defined by spikes in inflation, the Watergate scandal, the oil embargo and the Vietnam War. The market experienced a lot of rallies and sell-offs, but stocks failed to make much forward progress overall. The Dow kissed 1,000 in 1966 but did not manage to get over it on a permanent basis until 1982 — 16 frustrating years later.

The period from 2000 to 2013 was similar. Defined by the bursting of the dot-com bubble, 9/11, massive corporate accounting frauds and the wars in Iraq and Afghanistan, it too featured an inflationary spike and high oil prices. But the financial crisis killed inflation, making deflation the greater threat. Big rallies and sell-offs also defined this era. The S&P 500 hit 1500 in 2000, but did not climb above that until some 13 years later in 2013.

The 1982-2000 era is worthy of its own book. I suggest “Bull: A History of the Boom and Bust,” by Maggie Mahar. The patterns seem to keep repeating.

That is the yin and yang of long cycles. The underlying factors that drive each era come to dominate them. Sometimes it’s war, or inflation, or technology, or some combination of these. But they are extremely powerful, and they can drive global economies for decades at a time.

The takeaway is that we continue to see secular bull markets leading to secular bear markets which, in turn, lead to new secular bull markets, and the cycle repeats into the future.

My own views have been slowly inching into the new secular bull market camp. While we can never be certain about these things until they are long past, the great secular bear market of 2000-13 appears to have finally ended. But as I noted, we can never be sure of these things until afterward. The 1966-1982 era looked like it was over in 1980, only to see a 28 percent slide to the 1982 lows.

Several factors have influenced my thinking that we are entering a new secular cycle.

Stock prices: By spring 2013, most major U.S. stock markets and indices had broken above their previous range. All-time highs soon followed, including for the Dow Jones, the Russell 2000 and the S&P 500. The Nasdaq is the only laggard. Having fallen 78 percent from its March 2000 peak, it has yet to recover to its prior highs, which are still almost 20 percent away.

Economic expansion: Over the past five years, I have often referred to academic studies showing that typical post-credit crisis recoveries are much weaker than the usual recession recovery. I have warned of subpar GDP, weak job growth and poor retail sales. And, in fact, that is what we have gotten — and still the market has powered higher. As the economy continues to slowly heal, it should reflect in improving earnings, which is always a positive for equities.

Disbelief in the rally: When I speak with folks who worked on The Street in the 1970s and 1980s — people like Jeff Saut, chief strategist at Raymond James, or Ralph Acampora, the former director of technical analysis for Prudential Securities and founder of the Market Technicians Association — they all make comments about how similar the current sentiment is when compared with the environment in the early 1980s. No one back then seemed to be willing to accept that the 1970s bear market was over. The same skepticism is present today.

The wild card, of course, is the Federal Reserve. We are in a historically unprecedented era. Quantitative easing (QE) and zero interest rate policy (ZIRP) have been conducted on a scale that never happened before. Now they appear to be ending. No one knows what that unwind will look like, or what possible ramifications it might bring.

Aside from that unknown, most of the other factors are lining up to suggest that we are entering a new secular bull market.

Two last things worth mentioning: We have had a terrific five-year run, without much of any sort of correction or pullback. No one knows when the next 15 to 20 percent correction will occur, but it should not surprise us if we see something along those lines. As a reminder, five years after the last secular bull market began in 1982 we had that little glitch in 1987. While history does not repeat that precisely, a one-day 23 percent fall is certainly worth remembering. Most people forget that markets actually finished 1987 up, albeit a mere 1 percent.

Finally, if historical patterns hold true, and this is a new secular bull market, it could last much longer — another decade or more. We won’t know for sure until it is in the history books.


We have our final exam, contract, this afternoon.


Brookings Business Figures 1-2

This was the empirical data that was contained in the link within the comments section.

This data is the evidence to support primarily this argument:

Constant monetary devaluation however, results in increasing costs and more onerous fiscality so that in the long run, new entrants are precluded a priori.

The data runs from 1978 – 2011.


Easy enough to see the creation of M2 money from 1978. This, at first glance supports the argument highlighted.

On the creation/destruction data, the trend is lower, but, within that downtrend are ups/downs. This is the business cycle. The business cycle is best described in terms of productive stages that leads to finally to consumption goods.

*To be continued


After sitting Intellectual Property yesterday, only Contract remains.


Forbes has an excellent profile out on DoubleLine’s Jeffrey Gundlach. The entire piece is worth a read since Gundlach is not only one of the most respected investors out there today but he’s also very outspoken and entertaining.

There was one part of the interview that I thought was interesting as it relates to the finance industry. Gundlach was describing Jeffrey Sherman, his 37 year-old protégé at DoubleLine:

“Sherman is extremely analytic, which I am always attracted to,” says Gundlach. “But he also understands psychology. There are a lot of people who are quants, and they think you can explain the world with an econometric model. You just get the coefficients right and you can explain everything about the future. Sherman understands all of the coefficients and can derive all the equations just like I used to do, but he understands that it won’t predict where the market is going to be in a month. He is also good at explaining, which, of course, is the secret sauce of this business.”

Gundlach lays out what I think are the three most important skills for anyone working in the investment business:

They have to be analytical.
They absolutely must have an understanding of human psychology.
And they have to be able to communicate and explain their views so everyone else — clients and colleagues — understands what it is they’re trying to get across.
Wall Street is full of analytical worker bees. There will never be a shortage of intelligent finance people that are able to analyze the markets. Behavioral finance is definitely becoming more mainstream, but there are far fewer people in finance that understand psychology than can analyze financial statements. Most people in finance still think they can outsmart you instead of beating you with their emotional intelligence (a huge mistake).

There have always been those with good communication skills in the investment industry, but the majority of them work in the sales and marketing departments. They’re only concerned with the psychology of getting you to buy something, not the process of reducing behavioral biases. There’s a huge difference between having the ability to sell a client a product and explaining to a client an investment process or idea.

I’ve seen extremely intelligent portfolio managers lose multi-million dollar mandates because they didn’t have the ability to relay their message correctly to their clients. The thing I’m most often impressed with when it comes to the all-time great investors – guys like Buffett, Marks, Dalio, Klarman, Munger and even Gundlach – is their ability to translate their ideas into simple terminology. Not only are these guys brilliant, but they all simplify their message when explaining their process instead talking over your head or trying to make things more complicated than they need to be.

It’s rare to find an investor that has the ability to combine all three of these skills. The first two are important for anyone investing their money in the markets. The last one, as Gundlach says, is definitely the secret sauce for anyone trying to make it in the investment business.



I was interested in this chart because of the MACD divergence. However, the Gold/Oil ratio suggests that gold does indeed have to fall lower to return to the 10yr ratio.

In the short term…say next 3mths, I think gold has a potentially trade-able bottom and is due for a bit of a bounce.


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