The Independent Investor: Pandemic Reveals Weakness in U.S. Health-Care System
If it is not already apparent, our health-care system needs a lot of work. There is nothing like a global pandemic to point that out. The question is, that after decades of arguments, tinkering and promises, are Americans finally willing to do something to change it?
Now, I am not talking about how much a doctor is being paid, or what a pharmaceutical company can charge, or not charge, for a new wonder drug. Those are popular headlines that, time after time, distract us from the underlying weaknesses in the system. The main problem I have identified throughout this national disaster is the nation's inability to make centralized decisions.
It seems to me that we do not have the ability to provide Americans with a rational and efficient health-care supply and distribution system. Whether it is how to procure N95 masks and other protective gear, testing equipment, swabs, additional hospital beds, doctors, nurses and a thousand other variables, our system has been found sorely lacking when compared to other nations.
Think of it this way. You are a rancher, and pride yourself in growing the world's greatest beef products. What good does that do you if the livestock hitch you use keeps breaking down on the way to the slaughterhouse? And if the slaughterhouse is old and sloppy, and grinds up all your beef into ground beef (instead of steaks), and the packaging leaks, and the refrigerated train or truck they use to deliver your beef to the market breaks down constantly, in the end, what does it matter how good your product is?
Over the past few weeks, we have also witnessed the public rage and blame that has arisen over the bidding war between the states and the federal government over procuring the much-needed scarce supplies of life-saving medical equipment. This is insane, but understandable, given a health-care system with no central authority. No other country in the world competes against its own people in this matter.
Listening to Gov. Andrew Cuomo's daily briefing in the disaster afflicting New York City was also an eye-opener for me. There are 200 hospitals in New York state totaling 53,000 beds, of which 20,000 are in the city. These beds belong to both private, for-profit hospitals and state-run public hospitals, which are part of the New York State health-care system. Up until Cuomo took charge of this crisis, these hospitals were working independently, not only to assign beds, but to distribute and deliver medical services. It was not working, no matter how good their intentions.
The right hand had no idea what the left hand was doing until Cuomo took charge and effectively ordered them to meld their resources and form one big New York State hospital service. Cuomo effectively socialized the health-care system in a state that had more coronavirus cases than any other country in the world. His actions probably saved dozens of more lives.
As it stands, we still do not have nearly enough testing equipment, or the means to administer it. Like my rancher, when the product (a reasonable, low-cost coronavirus test) is finally developed, how long will it take, and how efficient will the supply and delivery system be to administer it to 331 million Americans?
There are so many other flaws in our present system that it would require several more columns to list them all. However, as an example, about 50 percent of Americans enjoy health-care insurance as a corporate benefit — unless they are fired, retired, or laid off. In which case, they can elect to pay Consolidated Omnibus Budget Reconciliation Act (COBRA) premiums for the next 18 months. The hole in this doughnut is that during an emergency, like this one, a laid-off worker will have to pay up for COBRA benefits at the very time they may need them most, while having no money to pay for them.
Critics of this column will argue that I am advocating for universal health care. It will evoke memories of the Bernie Sanders' primary campaign platform of health care, which was rejected by many as far too expensive to contemplate. My answer is that when all is said and done, the cost of the Sanders' program will look cost-effective compared to the money the government ultimately will spend to repair the damage to the health-care system and our economy that we have now.
Others will argue that this pandemic is a once-in-a-lifetime event. Many politicians will argue that things will go back to normal (inefficient and disorganized), in six months or so. Why, therefore, worry about it?
If recent history is any indication, the spread of global epidemics is increasing. They could remain a danger to the world's health system for years to come. SARS, the West Nile virus, Ebola, Marburg virus, and Lassa fever are just the latest plagues to bedevil us. Our present system provides no defense for the spread of such dangers, in my opinion.
Am I convinced that universal health care is the only answer? Not quite yet. When I look around the world, I see countries such as Italy and Spain, which do have universal health care. Their systems did not work well enough to stem the number of deaths and cases of the virus. But in places like Germany and Norway, their health-care system worked exceptionally well.
Maybe in the U.S. case, we might need a centralized governmental system for supply, distribution, and delivery, while maintaining private-sector incentives for research and development. As for maintaining the high quality of doctors, nurses, and other trained medical professionals, some system of free or discounted education costs could be offered in exchange for lower salaries. These are simply suggestions to jump-start a conversation. Please feel free to contribute your own ideas.
The point is that the system needs to be changed, but in a way that is uniquely American. Let's dispense with all those dated, nonsensical reasons why not, and come up with a system that we can all be proud of and that will, in the process, save lives.
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@theMarket: Virus Numbers Help Stocks
Stocks rose this week on the hope that the U.S. may be close to a peak in virus cases, at least in the country's "hot spots." Adding to the reduced case count, the government's efforts to support the economy and the market have had a positive impact on most financial instruments.
Some strategists have warned that the market's gains will prove to be ephemeral, once the fallout from this pandemic begins to seep into the economic data. Some of that data is already showing up. For example, Thursday's unemployment data revealed that another 6.6 million Americans filed for unemployment benefits this week. That brings the total close to 20 million people in three weeks. That is a historical pace of losses. Yet, the stock market gained on the news.
One reason the market went up (instead of down as many expected), was yet another stimulus program announced by the Federal Reserve Bank almost simultaneously. The Fed committed an additional $2.3 trillion to support the new Coronavirus Aid, Relief and Economic Security Act (CARES) Act, called the Payroll Protection Program and the Economic Injury and Disaster Loan Program. There was some concern by banks that loans to all these small-business owners might be a risky proposition, especially in the time frame that the government was demanding.
Stepping up to the plate to support these loans, the Fed has come in at just the right time to ensure the success of the government's fiscal stimulus effort. There is no telling what else the central bank may be willing to do. As it stands, Fed Chairman Jerome Powell said this week that "there's no limit on how much we can do as long as it meets the test under the law."
The only thing they can't do, I suspect, is buy equities out right. Of course, the U.S. Treasury could do so, and the Fed could fund the purchases. Given that kind of power, is it any wonder stocks skyrocketed again this week? It is for these reasons that I have cautioned readers not to sell. In this era of corporate socialism, even financial markets are fair game. The government's control of the economy and financial markets has never been this vast and far-reaching.
In addition to these events, there are also plans by the Trump administration to get people back to work as early as May. The success of this plan is largely dependent on the ability to test Americans for the COVI-19 virus. That is nowhere near possible today, but the hope is that it will be soon.
The White House plan would be for a gradual reopening of the economy, starting with those areas and cities that have low or non-existent cases of the virus. The risk here is that the effort might backfire. The transmission rate could reignite, for example, giving a second life to the spread of the virus.
As we enter this three-day holiday, readers should expect that after a 28 percent rebound in the S&P 500 Index from its lows on March 23, a period of profit-taking could be in order. We have reached an important technical level at 2,790. If we can hold above it, we might have a chance to close in on 2,900, however, the odds are not in our favor.
As we enter Passover, I find some similarity between those in Egypt and our own plight today. It may have been the blood of the lamb brushed above the door, or the mask and gloves we wear today, but I am sure the feelings are the same. I will take this time to hope and pray that this modern-day plague will pass over your homes and the loved ones who dwell within it. And for all the Christians and Easter Bunny believers out there, have a Happy Easter!
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The Independent Investor: Small-Business Owners Run Into Red Tape
The $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act has two programs that can help America's business owners to weather the COVID-19 storm.
The $349 billion, first-come, first-served loan programs have seen an overwhelming response from troubled small-business owners nationwide. The job is to get the money into their hands quickly.
The challenge will be to remove or amend a mountain of regulatory requirements that the Small Business Administration and the financial sector have had in place for decades. Adding to the confusion are the owners themselves, who are either not aware that there are actually two loan programs or aren't sure which to apply for.
The Economic Injury and Disaster Loan (EIDL) offers owners up to $2 million for working capital needs like fixed debt and payroll. The interest rate is 3.75 percent (1 percent less, if you are a non-profit) and the term of the loan can be up to 30 years.
There is an automatic one-year deferment of repayment. That means the first payment is not due for 12 months, although interest starts on the date of disbursement.
If you apply for the EIDL you can also apply for a up to $10,000 advance for working capital at the same time. This entire application can be done online and no additional documentation, like tax returns or personal financial statements, are required. The SBA claims that the $10,000 grant (which does not have to be repaid) will be on its way within three days after the application is filed.
The second loan program is called the Paycheck Protection Program (PPP). This loan can amount to as much as $10 million or 2.5 times the average monthly payroll costs of the company's previous year. The proceeds can be used for payroll costs, health insurance, salaries/commissions, rent and mortgage interest, utilities and other business interest incurred after Feb. 15, 2020.
In order to receive this loan, you need to apply through an SBA-certified lender beginning on April 3. This process can take several weeks. This loan, which may be partially forgivable, must be applied for by the end of June 2020.
The greatest potential benefit of the PPP loan is that the amount of the loan eligible to be forgiven is the amount you spend during the first eight weeks of the loan on group health insurance premiums and other health-care costs, payroll costs, rent (pursuant to a lease in force before Feb. 15, 2020), and utilities such as electricity, gas, water, transportation, telephone or internet access expenses for services. These expenses must have been in place before Feb. 15 of this year.
If it sounds too good to be true — wait — because there is a catch. In order for the amount to be forgiven, the company must maintain the same number of employees during a certain time period, for example, from Jan. 1, 2020, to Feb. 29, 2020. There are further stipulations involved, so be sure to read the guidelines of the PPP loan.
You can apply for both loans, but you cannot use the proceeds for the same expenses. Further, the up to $10,000 grant (EIDL) gets deducted from the forgivable portion of the PPP loan.
The potential demand for these loans by the roughly 30 million small businesses in this country could swamp the program. The government recognizes this and promises to replenish the well once it has gone dry. Congress is now working on another $250 billion bill to supplant the existing programs. But in the meantime, there appear to be all sorts of hurdles from the simple intake and processing side to questions of risk and security.
Banks, for example, are worried about the creditworthiness of these new customers. Loan officers like to lend to those they know, companies with a credit history with their department.
As such, from the bank's point of view, it would only make sense to grant those existing small-business customers priority in the loan processing. But that's not the program's intent.
And then there is the Financial Crimes Enforcement Network (FinCEN). Money laundering has long been a challenge. FinCEN has charged the nation's banks to develop and uphold an exacting process, which involves stringent background checks of every new client ever since the terrorist attack on the World Trade Center.
These know-thy-customer regulations, together with the processing time and credit checks, could mean months before approval is granted. Of course, that flies in the face of the congressional intent of the bill, which is get the money in the hands of small businesses immediately.
This week, the Federal Reserve Bank added its weight to backstop the programs. They have committed an additional $2.3 trillion to buy up these CARES loans like PPP and EIDL, as well as other fixed income financial securities.
Hopefully, between the Fed's actions, pressure from lawmakers, and the business public, the SBA and the banks that elect to provide loans, will work out the kinks. We are all counting on them to deliver. I think they will.
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@theMarket: Don't Trade This Market
Markets that go up or down several percentage points a day is the new norm. As COVID-19 begins to infect the U.S. heartland, more and more of the country is shutting down. Deaths and cases have still not peaked, so why should we expect the stock market to have bottomed out?
The financial media, I believe, is providing investors a great disservice. Every day, some analyst, money manager, or company executive is either trying to pick a bottom, or telling you the bottom is already in, or arguing that it may be weeks or months away. Ignore them.
My column is not about giving you false hope, or doom-and-gloom warnings. It is about the fact that the stock market is simply "un-investible," right now. I haven't used that term for more than a decade (since the financial crisis of a decade ago), but it is as true today as it was then.
It is a time when events move too quickly for investors to even guess at the financial and economic implications of each news item. Facts are difficult, if not impossible, to ascertain. Financial markets, as a result, react in a strange and unpredictable manner. That describes today's markets to a "T."
But un-investible does not mean you should sell everything and get out of the market. It means that you should do nothing until such time that we have at least an inkling that the storm has passed. A good place to start would be to listen to the medical experts, while ignoring the administration and its constant stream of misinformation. When the doctors see a peak in the virus around the nation, then we can start adding up the economic and financial damage.
Right now, we don't know enough to make any kind of assessment as to what earnings will be, what unemployment will be, how long it will take the economy to get back on firmer footing, and at what rate of growth it may or may not return to. Given that, the probabilities of trying to invest in the stock or credit markets successfully has about the same odds as playing the blackjack table in Las Vegas (if you can find one that is still open).
The unemployment numbers, which doubled again this past week to 6.6 million new jobless claims, was higher than expected. Friday's monthly jobs report for the month of March was expected to be a loss of some 100,000 jobs but the number came in at 701,000 jobs lost. It is simply another indication of people trying to game the economic effect of the pandemic without all the facts. The markets swooned on that data, but bounced back, thanks to some good news in the oil market.
The price of oil has evidently dropped to a point where the Russians, Americans, and Saudis have decided enough is enough. The turnaround began with a series of tweets by the president, who is taking credit for getting Putin and the Saudis to at least negotiate a truce. The price of oil has skyrocketed as a result, up almost 30 percent in two days since the news broke. That is good news for our shale producers, who were teetering on the economic edge ever since the price war erupted.
Over the next few weeks, we should be able to form a clearer picture of what is in store for the country and the markets. Remember that markets tend to discount the future rather quickly. In the absence of any good news (a vaccine or a cure), it wouldn't surprise me if we retested the recent lows. The new virus cases and deaths should continue to climb and that would likely put added pressure on investor sentiment.
My advice is to hang in there. Give it time. Even a hurricane like this will ultimately pass and when it does the sun will break out on all of us.
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The Independent Investor: How the CARE Act Changes Tax-Deferred Account Rules
Listen up, big changes have just occurred because of the newly passed CARE Act. Aside from the "free money" that 90 percent of Americans are expecting, important changes to your retirement accounts have been passed. These changes can save you a bundle in taxes while providing instant cash relief, if you need it.
Normally, if you need money from a retirement account, and you are under 59 1/2 years old, you are required to pay a 10 percent penalty, plus the income tax owed on your withdrawal. There are some exceptions to the rule and the CARE Act just added a big one. The federal government just eliminated that 10 percent penalty for any distributions from IRAs, employer-sponsored retirement plans, or a combination of both.
Individuals can withdraw up to $100,000 in 2020, as long as the withdrawal is "Coronavirus-related." That definition leaves plenty of room for interpretation. If you or a spouse or dependent have been diagnosed with the virus, you qualify. If you or your family have been hurt financially by COVID-19 as a result of being laid off, being quarantined, or reduced working hours, you qualify.
Those who have been unable to work because you have no child care, or if you own a business that has closed or operates under reduced hours, then you can take a distribution as well. In fact, Congress seems to be making this option available to most Americans who require some relief from the negative impact of the virus.
In addition, under normal circumstances when you take a rollover distribution from an employee-sponsored plan such as a 401(k) or a 403(b), the proceeds are subject to a mandatory withholding of 20 percent, but COVID-19 distributions will be exempt from this requirement. The IRS is willing to simply rely on your word that the distribution was virus-related.
There is even better news. Let's say you take out the money, which you will need to tide you over for the next nine months. After that, the economy begins to revive. You get your old job back. If so, the government is allowing you to repay or roll the money you borrowed back into your retirement account. You will have three years to do so. You can return all, or part of what you took out and repay it in a single lump sum, or in multiple repayments.
You will still need to pay regular taxes on whatever you take out this year, but the entire tax bill doesn't have to be paid in 2020. Let's say you do need to take $100,000 out this year. If you normally make $75,000/year in reported income, that will put you in the 12 percent tax bracket if married and filing jointly. But because of the distribution, you would be reporting $175,000. Your taxes would double. The government is allowing you to evenly split the distribution money into tax years 2020, 2021, and 2022, so you only need to pay taxes on one-third of that extra income each year.
For those who have been taking a required minimum distributions (RMD) from their tax deferred accounts each year, that requirement has been waived for this year. The provision applies to IRAs, SEP IRAs, SIMPLE IRAs, 457(b) plans and both 401(k) and 403(b) plans. Both account owners, as well as beneficiaries who are required to take stretch distributions from inherited IRA accounts, are included in the provisions.
What if you have already taken your RMD? You can return the money that was distributed to you in two ways. Simply write a check for the amount and put it back into whatever tax deferred accounts it came from, as long as you do it within sixty days of the distribution. If you took the distribution longer than sixty days ago, you could just consider it a coronavirus withdrawal and you can return the money anytime within the next three years.
There are plenty of other provisions in the CARE Act that I will discuss in future columns. If, in the meantime, you have specific questions, you know how and where to contact me.
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