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.
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.
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.
The Independent Investor: An Economic Game Plan
Now that Congress and the Federal Reserve Bank have fired the first salvo of relief spending, investors are wondering how long the trillions of dollars in aid will take to actually do something to alleviate some of the losses to the economy.
Administration officials believe that the cash payments to Americans should start arriving within the next three weeks. That said, most economists expect the country will fall into recession in the second quarter. That begins next week. No one knows how deep of a decline we will ultimately suffer, but suffice it to say, it will be a shock to most of us.
We can also expect a large, possibly a historical, jump in the unemployment rate; some say by 30 percent or more. If today's unemployment data is any indication (3.28 million new jobless claims) we are in for some bad sledding. Just about every economic statistic that we use to predict the economy should also take a huge hit. My hope is that if you are prepared for these developments, you can take them in stride.
Let's be clear: this is a self-inflicted wound to the economy. The nation needed to shut down, if even partially, to slow the spread of COVID-19. As such, we should bear the brunt of the damage in the second quarter, but we will not be out of the woods. As we enter the third and fourth quarters, expect more weakness, with the best case that by the summer into the fall; we could see a "transition" period.
Hopefully, if all goes well, the virus cases (and deaths) will have peaked by then, at least in the large metropolitan areas. That forecast is a bit "iffy" because it depends on a number of things. How long and how many states ultimately embrace a lock-down, and whether or not the shutdown is effective.
To date, because of the failure of the United States government to effectively respond to the disaster, we still do not know how many people are, or will be infected, or how and with what to treat them. In the midst of this uncertainty, President Trump wants us all to go back to work by Easter. Many health experts believe the president is speaking prematurely. If so, it wouldn't be the first time.
Given the timeline and best-case guesses of the economists and the Federal Reserve Bank, the third quarter should experience negative growth as well. By definition, two negative quarters in a row would qualify 2020 as a recession year. Exactly how negative the third quarter will be is anyone's guess, but the hope is that the losses won't be as bad as the second quarter. The unemployment rate may continue to increase, but then turn around by the fourth quarter as more and more Americans go back to work.
The fourth quarter is when we should expect things to improve. Economists are hoping that by the holidays there will be some reason for consumers to celebrate. By the first quarter of next year, we should see an upward explosion in growth as things get back to what I will call "a new normal."
Readers should be aware that the $2 trillion Federal spending bill that was passed this week is not a stimulus program. It is simply an attempt to partially compensate for the estimated $2.5 trillion in lost growth that the economy will suffer in the coming quarters. Likewise, the central bank's multitrillion-dollar injection of liquidity into the financial sector is not meant to stimulate, but only to provide support.
The question I ask myself is what will the economy look like next year after the pandemic has come and gone? Many on Wall Street expect that the government may pass another huge spending bill that will target economic stimulus. The question to ask is whether Washington can put aside partisan differences long enough to do so. Given the present high-level partisan divide in this country, despite the dangers of this pandemic, I wouldn't hold my breath. Stimulus is different from relief. In an election year, who knows if anything can be passed.
We will also be entering 2021 with a vastly higher deficit. Today, both the one-month and three-month U.S. Treasury bills are yielding below zero returns. In the coming months, it is possible that we will follow the rest of the world into a fixed income environment of zero interest rates across the spectrum of U.S. sovereign debt.
Although interest rates are expected to remain historically low, there is no guarantee that that scenario will play out. It is far too early in this new economic cycle to start making forecasts for next year, but given the number of unknowns we face, I would advise readers to keep an open mind as far as the future. Anything can happen in this new environment, where all the rules and records seem to be coming undone on a daily basis.
The Independent Investor: An Old Dog Learns New Tricks
When I made that decision last Friday, I didn't think it would be a big deal. After all, I have worked at home before (when I was sick or recovering from one of my many surgeries).
But as I am in day four of this self-imposed isolation, I am learning that, at least for me, my work habits are going to need an overhaul.
As a self-confessed workaholic, who loves what he does, even the idea of working from home never attracted me. I love the give-and-take of daily work life in the office. For me, the employees are like an extended family and I miss seeing them. I feed on office life and it feeds on me.
Therefore, when researching the pitfalls of working remotely, I expected to read that the greatest risk in working at home was that you won't work at all, or, if you do, you work at a reduced pace. Imagine my surprise when I discovered the opposite occurred. Without the comings and goings of my office routine, there was no stopwatch to tell me to take a break, drink fluids, eat lunch, exercise or even when to put the computer away.
The interruptions that occurred (and that sometimes irritated me at the office), I now realize, were timely cues to take a break. A colleague needing to talk, or convey information, an assistant asking for clarity, a delivery, a meeting, even a loud noise, or one of the office dogs barking are now all absent. As a result, I work at a frenetic pace.
At first, I worked at the dining room table. Big mistake. At the end of day one my back and shoulders were killing me, and I had a headache from leaning down working on a laptop in a dining chair that sloped backwards. Since I don't really have an office set up, I moved to the kitchen counter the second day. Better, but still left something to be desired. Tomorrow I will experiment with an office chair I had sitting around and hope for the best.
Given that I was so busy yesterday, I forgot to eat lunch. I have also made a habit of working out at the local gym for an hour during the day. Obviously, that isn't happening. I could exercise at home, but so far, I haven't.
Given that I have the software/hardware and telecom equipment at home to access my office, I connect when I wake up, rather than do the things I usually do like exercise, meditate or take the dog for a walk. So yesterday, for example, I worked from 6:30 or so until 6 at night.
And remember I am an investment adviser with worried clients, hysterical markets and a constant stream of new and challenging developments to contend with on an almost hourly basis.
I have already begun to adjust. My seating situation is evolving and like Goldilocks I will certainly keep trying to find the ideal arrangement for my aging body. I have started setting a timer for work activities with an allotted amount of time to get up, walk around, and breathe.
Today, come hell or high water, I will exercise for an hour around lunchtime. As for my hours, well, I will rely on my spouse, and she on me, to keep our working hours more reasonable.
All in all, I am sure that I will adjust to working this way. Others, who are also experimenting with this alternative work style, will be sharing their "tricks of the trade" and before long, who knows, I may actually come to enjoy it.