Bullish on the Dow?

According to Merrill Lynch’s Richard Bernstein, the Q4 rally in stocks was deceiving. As reported by Minyanville’s Kevin Depew, the 2006 Dow rally is Euros was far more subdued:

"According to Bernstein, many of the recent rallies in various asset classes are a form of "money illusion." For example, the fourth quarter rally in U.S. stocks was almost entirely due to this kind of illusion. Bernstein writes that when priced in Euros the Dow peaked in October and… you might want to sit down for this… was actually down in the fourth quarter. The nearly 16% rise in the Dow last year was actually only about 4% priced in Euros, he notes.

Eh, so what, you might say.  I get paid in dollars, I buy in dollars, so dollars are all I care about. That misses the point, Bernstein notes.  Each dollar you get paid in buys less and less as the currency declines. Let’s put it another way.  Step back for a moment and think about this: when a currency declines so does ones standard of living."

Call it "the race to the bottom:" When a debtor nation reaches a perceived point of
no return, they devalue their currency. Their exports become more
attractive, tourists come to that country (and go shopping), the repayment of debts is done not for literally 50 cents on the dollar, but paying back  with dollars that have become worth far less than they were due to the devaluation.

Bernstein is late to the party on this one: You can show any index is up or down, depending upon how you price it: Dollars, Euro, Gold.

But I am not sure just how much insight pricing the Dow in dollars provides, if any.

These relative comparisons have been around for a long time. Why stop with the Euro versus the dollar? If you follow Bernstein’s logic to its logical extreme, then the Dow Industrials, priced in Gold, is actually down since 1999.

As we noted last year:


Source:  Chart of the Day

Bottom line: The big question this raises is, given these Euro based returns, will it impact the US markets ability to attract overseas investments? Other than that, the brouahaha about Euro-based returns are mostly noise…

Do My Eyes Deceive Me?
Kevin Depew
Minaynville, Jan 05, 2007 10:42 am

The Illusion of a Rising Dow
Peter Schiff
January 14, 2006

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  1. Eclectic commented on Jan 11

    This is exactly why I made the comments that, were Adam Smith here today, he’d scoff at the notion that this economy (including economies of the industrialized West) has shown sustained growth, merely because of a reorganization of phantom asset values. ‘Phantom’ is a very useful word, in very many ways.

    Money illusion is a great part of it, and that’s true for both domestic and international forms of illusion, regardless of the currency it’s based in, or the intrinsic commodity-money it’s referenced to… or even the commodity-money’s reference to o-t-h-e-r commodities that have real intrinsic value.

    The only commodity that matters is L-A-B-O-R, and its price, worldwide (wages), is at present in a still downward spiral in real terms.

    And so I’ll say again: All money creation is the philosophical expression of intellect, and intellect expresses itself in both mechanical and intellectual labor.

    The only difference in this source of true wealth creation is that intellectual labor is to mechanical labor… as power is to money.

    On both sides of this expression, the two elements are each the component expressions of the same philosophical entity.

  2. Fred commented on Jan 11

    THANK YOU BARRY! This type of analysis is laughable, and deceiving.

    More importantly (and often forgotten) is the fact that the $$ has moved back to the RANGE BEFORE THE CURRENCY MELTDOWNS of the last decade. The $$ was TOO HIGH because those emerging economies hadn’t gotten their acts together. They are now (generally) acting like responsible economies should — controling inflation, promoting (global) growth, etc.

    We’re now just entering a period of currency, commodity, and interest rate STABILITY (imho) that will allow continued global growth, and a “catch up” of our stock market.

  3. S commented on Jan 11

    Story on Bloomberg yesterday talking about how foreign central banks are becoming increasingly sophisticated about how they deploy their vast foreign currency reserves. The reserves are so large, they are no longer content simply buying treasurys/agencies and are increasingly seeking out equities to buy.

    The world is flat. Capital will go where it is treated best (Thailand didn’t get the memo). Currency values matter.

  4. Can Economist commented on Jan 11

    Dow down vrs 1999 Gold?

    I would say that is about right. Truth is, America has had very little, if any, real growth since the nineties. Lots of borrowing and accounting tricks though. Bottom line, real wealth is down, way down. Productivity is down. Savings are down. Wages are down. Medical coverage is down. Education is down. Poverty is up. Debt is way up. Dollar is way down. Stability is now in question.

    Furthermore, the money borrowed was not invested, it was squandered. Yes corp profits are up, but those same corps have to have doubled their net worth to be at the same real value as at their 1999 levels. Not many of them did that. Meanwhile, real inflation is eating away the real gains of the nineties.

    Also, a very large chunk of American corp profits depend on overseas operations, which, in turn, are almost entirely dependent on American consumer borrowing. That borrowing is unsustainable.

  5. Fred commented on Jan 11

    Eclectic…”The only commodity that matters is L-A-B-O-R, and its price, worldwide (wages), is at present in a still downward spiral in real terms.”

    While I don’t understand the multi layered, last part of your post, I couldn’t disagree more with what I highlighted.

    What matters most is cerebral, pragmatic, original, balanced, entrepeneurial THINKING that creates productivity, and creates wealth, health, and stability. Labor outsourcing is a scapegoat for a fat and lazy populace that fails to recognise that capital will flow where it is best served. I know Lou Dobbs doesn’t understand this basic premise. We need to recognise “which way the wind blows”, and get our people thinking, learning, and evolving into this “new” world. We will not be able to go back…to a “make work”, entitlement system, where we make all the rules and everyone plays by those rules.

  6. BDG123 commented on Jan 11

    I guess the rally in the dollar over the last few weeks, which was clearly predictable, thank you very much, means that we’ve gathered back much, if not all of that drop in the Dow. I’m not sure how high the dollar will go but it could be a significant rise for more than a year.

    Bernstein is a very, very smart gentleman and his commentary and calls are worthwhile but…these daily gyrations in the dollar and those squawking about it reminds me of Chicken Little. If the dollar craters, it likely won’t be against the Euro anyway. I don’t want the dollar to fall because I’m generally of the opinion it reduces our competitiveness globally regardless of what prognosticators say. That said, the dollar cratered in the late 1980s and it led to the greatest wealth appreciation this country has ever seen. (Although I don’t believe there is any evidence that was correlated to the dollar) In other words, people, including Bernstein, should quit worrying about the dollar and worry about their ridiculously valued, highly correlated investments.

  7. Teddy commented on Jan 11

    Fred, I bet you’re all excited that the Easter Bunny with all his eggs will be here in less than 90 days. And with all the productivity gains occurring in the United States AS WE SPEAK, I’m excited too. Now at least, the US can have a national health insurance plan to cover every single, special, living human being in this great country of ours just like every other major industrialized country in this flat world.

  8. lewis commented on Jan 11

    Closed my account at Merrill about 35 years ago because I couldn’t suffer fools, and I see not much changed there. What a ludicrous article. It only matters how it did against the euro if I am dealing in euros, and in a world where import prices have yet to reflect the dollars plummit (courtesy of the artifical Chinese pegged currency) it hardly matters to anyone not living in Europe.

    Yes the dollar has cratered and that west to east sucking sound you hear is money and jobs and I agee those are most serious issues, but mixing apples oranges and pears and then comparing them, well, I leave that job to the fools…….

  9. BDG123 commented on Jan 11

    Amen Teddy. I’m tired of the utterance of socialism every time health care for all is mentioned. I prefer the term inhumane. Btw, I like the Cadbury sugar filled chocolate eggs and the malted milk ball eggs. Please tell the Easter Bunny that is what I wish for in my basket.

  10. GRL commented on Jan 11

    As someone who likes to travel overseas, I am no fan of the weak dollar. I have already cancelled my planned summer trip to Europe due in part to a weak dollar (plus the fact my wife’s union will probably go on strike in the spring).

    That said, everyone is bitching about the U.S. trade deficit, and how it needs to come down, and the weak dollar will, at least in part, accomplish that (be careful what you wish for!). Plus, it will do wonders for the dollar-denominated earnings of U.S. multinational corporations (so, that’s why MO is up so much lately — and with the Dow doing so pathetically, what does that say about the other Dow components?).

    Protectionism is on the rise, not here, but in Europe, where companies are screaming about what the $1.30-1.40 Euro is doing to their exports.

    So the weak dollar is not a total disaster, but a mixed bag. It facilitates the importation of inflation and the exportation of unemployment, something that should make Big Labor and the Demos in Congress happy as they jack up that ultimate product of cynical politics and inflationary, liars’ economics, the minimum wage.

  11. alexd commented on Jan 11

    I would suggest we price any markets with how many big macs we can buy. Then compare in different geographical areas.

    I will give you this many big macs for that Boeing 767. What a deal it was 22 million macs 6 months ago but now they only want 18 million. Meanwhile where is Boeing investing those macs? In the American Big Mac or the La Grande Mac Royals overseas?

  12. VennData commented on Jan 11

    The Dow was way downi n SHLD, my currency of choice, and sometimes where I shop.

    Bernstein is a bright guy, but he should have taken the day off unless he targeted his missive to financial newbies.

    As far as decades go, I’ll take the Nineties over the 80’s any day – or decade.

    The S&L bailout and the many years it took to pay off the Reagan debt – and relatively less associated growth – was one more data point counter to Supply Side Theory. Assets, homes, the dollar, stocks etc. increased more. It’s not debt, tax cuts or wars that increase wealth in the long run, it’s productivty. And productivity is what rocked in the Nineties (even after Bush II came in and recast the numbers, to give themselves a better base to ‘work’ with.)

    Productivity begets income and return on assets. Philisophical – or even meta-physical! – that was the Nineties.

  13. jules commented on Jan 11

    the world of investing today is, as david fuller often points out, an international beauty contest, where currency valuations, governance, fiscal responsibilty, etc. all play a role. It is absolutely noteworthy that the Dow, S&P, Nasdaq have very much underperformed in terms of the euro,oil, gold, silver (which are also “currencies”) The same holds true of bonds. Given the huge foreign holdings of US paper and equities this becomes relevant. It makes one wonder what mugs we US based investors are, bidding up an underperforming market. I suspect these comparitive valuations will only get worse. At some point overseas investors will begin the long process of adjusting their asset mix significantly.

  14. Macro Man commented on Jan 11


    We are already seeing an improvement in the trade deficit, which is lower than it was this time last year in both nominal and real terms.

    As for health care, it is has historically been part of the social contract in the US that the governemnt takes a more minimal role in people’s lives then elsewhere. Changing the health care system means changing the contract. And make no mistake, raising the level of health care for the currently unprovided for will almsot certain entail lowering the standard of health care at the top end and perhaps even for the middle.

    As a “customer” of the NHS in Britain, all I can say is be careful what you wish for…

  15. DMR commented on Jan 11

    Hmmm, My freakonomics radar goes up everytime somebody pits one asset class against another for some arbitrary time period and comes up with conclusions.

    Just a couple of points:

    1) It is 2007. Gold is not used as a currency anywhere. Its supply is more limited than for dollars, oil, houses, etc. but it is still just a commodity.

    2) There can be manias and panics for gold just as for other commodities. I’m sure that last year, our good friends in real estate could have shown us a Dow/Real Estate graph that looked similar.

    3) It is one thing to say that the Dow is going down against Gold just as it is still down against Real Estate, but it something else to draw conclusions on the health of the economy, American power, the coming of the apocalypse, or .

  16. Howie Copywriter commented on Jan 11

    On Dec 12th, good old Ambrose Evans-Pritchard of the Daily Telegraph commented on the expectation of the Pound Sterling to plummet. This becomes relevant where the role of the fall of the pound triggering a further catastrophic fall of the dollar is making the rounds this week.

    Meanwhile, the oil price is falling. This may be a welcoming sight for motorists around the world, but this will go into the mix, or shall we say the descent into the maelstrom. Hedge funds could take a big beating. They have been betting on big macho man Cheney to hit Iran and start the rise of oil toward $200 a barrel. But, it has been delayed, though not entirely called off. Here’s a little bit of advice to my hedge fund friends. If the Democratic congress nixes the “surge” in Iraq, then oil will continue down. And alot of hedge fund people are going to be hung out to dry, like what happened to the Amaranth Hedge Fund people up in Greenwich Ct. Or the Amaranth people out in the Cayman Islands. You know, the usual arrangement, the onshore and the offshore branches of twin companies. Anyway a real crash is definitely in the mix for hedge fund people nation.

    Of course, the dollar crash is the real big crash, the strategic event. It could be stopped. That’s why they call it political-economics, unless you believe in the little green men under the floorboards of the invisible hand. HedgeCo.net is reporting on some of the details of this, if not all of the implications. Things are so amazing, apparently the Wall St. Journal has just discoved that speculators make a big chunk of the housing market in such lovely places as the State of Nevada. Even Naral admits that 28% of the housing purchases in areas like Naples, Florida were by speculators. Just don’t use that as an excuse to find religion, we, at least in the States, have enough fundis already.
    More at a href=’http://www.realcrash.com’>real crash

  17. Fred commented on Jan 11

    “Truth is, America has had very little, if any, real growth since the nineties.”

    Can Economist — are you joking? The road is littered with corpses of those betting against America (and the dollar).

    No growth? How about the FACT that the S&P earnings went from $51.02 in 1999 to $85.58 (per First Call) in 2006. Where I come from, a 69.6% increase is GROWTH! Please short the $$ and the S&P on maximum leverage — TODAY!

  18. BDG123 commented on Jan 11

    Ok, MM, you are assuming basic health care for all people must be socialized. That it has to be based on what is offered elsewhere. It doesn’t. The US is in an enviable situation where we’ve had enough time to witness what has worked and what hasn’t worked. There is no doubt in my mind a market based basic healthcare system can be achieved. Secondly, the largest cause of middle class bankruptcy in the US is because of health care crisis. We pick up the tab regardless because if people cannot afford it, it is eventually picked up by the government through extremely expensive urgent care in many situations in lieu of preventative care. Additionally, health care catastrophies create a burden on society.

    So, we spend 2x as much as the average of other industrialized countries yet tens of millions have little or no health insurance and our infant mortality rate is nothing to write home about. How many mothers and fathers care about your social contract when their child is dying?

    The cost to business, government and individuals is easily offset by a well thought out basic health care plan for all human beings. It is also killing legacy corporations in their significant burdens. It isn’t about some ridiculous social contract. That is bullshit and I’m so tired of this type of argument. The biggest health care provider, and growing, in the US is the US government. So, I guess we ought to tell all of those people on Medicaid and Care that they aren’t covered anymore. I’m sure thsoe people with a social contract would love to hear that.

    Basic healthcare in the richest country on earth is a matter of human dignity. Not political mumbo jumbo resultant from policital kickbacks from the “haves and have mores”. It’s about being able to wake up in the morning and know that no matter what happens that dignity cannot be taken from you. Just like the other basic values of dignity this country is founded on.

    I wonder what you would say if you didn’t have that safety net and you had a life altering illness. I’ve seen people’s lives devastated.

  19. M.Z. Forrest commented on Jan 11

    The significant risk of further currency devaluation should play in most portfolios. I’m heavy in Europe because I expect 4% appreciation annually due to dollar weakness before even considering the fundamentals of a company. It’s like stocks with a bond risk. I don’t even need to go high risk. I’ll take a 4-5% dividend on a mature/high-dividend company on top of 4% currency appreciation. Tell me where else I can get 8%+ gaurenteed return with little risk.

  20. Steve commented on Jan 11

    M.Z. Forrest

    Better check that portfolio today.

  21. Macro Man commented on Jan 11


    Hey, it’s not my social contract, hammer. It was established long before either of us were alive.


    Amen, brother

    While there can probably be little argument that the dollar will ultimately fall against the currencies of China, Russia, the Middle East, etc., given the managed nature of those exchange rates it need not come as a ‘crash.’

    That the dollar must necessarily fall against the euro is more arguable, as the dollar is substantially undervalued against the euro and sterling, a fact evidenced by yesterday’s trade figures and the (narrowing) trend in the US deficit with Euroland and the UK.

    And if Bernstein wants to play the alternative currency game, why doesn’t he mention that 2005’s tepid Dow performance turns into a relatively punchy 19% gain in EUR terms?

  22. jules commented on Jan 11

    i’m certainly not a gold bug, but let’s examine the gold “mania” during the life of the US: it held relatively steady from 1775 until the early 20th C, between $18-22.
    We all know what happened since, a “steep” climb to $35 under Bretton Woods and then, well, who knows…I imagine it’s no coincidence that this roughly corresponds to another “mania”, the New Deal and Great Society spending.

    I suspect we can look for a secular decline in PE’s in the US stock market, as overseas investors move away from US investments EVEN AS decent US growth continues.

  23. Teddy commented on Jan 11

    BDG123, Couldn’t have said it any better. And just picture this, now that productivity is exploding in the US, all those CEO’s and their cronies won’t have to steal from their companies by backdating options anymore. This will make the companies that much stronger and enable the PLATFORM corporations to easily contribute to this national health insurance. It will merely be a drip of a drop in the bucket for them!

  24. BDG123 commented on Jan 11

    There is no social contract established before anyone was alive. You obviously don’t live here and are in territory you don’t have any facts to support. So you are pulling rabbits out of your … hat.

  25. M.Z. Forrest commented on Jan 11

    Doing fine Steve. Thanks for asking.

  26. jkw commented on Jan 11

    Market based healthcare doesn’t work. The problem is that most people don’t know what they need, so they do whatever the doctors tell them to do. Since the doctors are the ones getting paid, they have an incentive to recommend more expensive options. The best system is one where a single organization will be responsible for paying for your healthcare for your whole life. Then they have an incentive to do inexpensive preventive procedures to avoid the need for expensive procedures later.

    Markets only work when information is available for people to make informed choices. Most individuals do not have the time or ability to make wise decisions about healthcare.

  27. Fred commented on Jan 11

    I despise this healthcare discussion…but when I read “Since the doctors are the ones getting paid, they have an incentive to recommend more expensive options.” I have to remind the new keepers of Congress that Doctors order too many expensive tests because they don’t want to get sued! Tort reform is dead now, and that was the ONLY shot of getting costs under control. We need to have the same Tort system as Europe — you lose a (frivelous) suit, you PAY!!

  28. Macro Man commented on Jan 11

    I think your problem is with this gentleman, not me.


    (Health Policy, Health Insurance, and the Social Contract)

    There is a long history in the United States (of which I am citizen, thank you) of the government staying out of the helping hand business:

    * The lack of bailouts during the various financial panics in the 19th and early 20th centuries

    * The lack of assistance provided by the Federal government during the Mississippi flood of 1927 (aid was provided by the Red Cross)

    * The fact that many, many people thought that FDR was Satan himself for introducing elements of a welfare state during the worst economic crisis in the country’s history.

    Jefferson, Hamilton, and Madison, among others, were influenced by John Locke (author of…The Social Contract.)

    Proof enough for you? If not, what else do you require?

  29. BDG123 commented on Jan 11

    While I agree with your statement in general terms, markets always work if enabled. There is nothing to say that a market based system cannot be single payer. Are there market based economics in Medicaid? Yes.

    I also believe there is a tremendous amount of market based solutions which could be entered into the system. People couldn’t spell computer 30 years ago now we have five year olds who are computer geniuses. The list goes on and on. It’s enablement and empowerment. In other words, transformational reform which is needed. Empowering the consumer will yield market based health care. That is one reason why the Feds want to give us health care accounts. A weak band-aid but an attempt regardless.

    Today, there is no standard procedure for a particular diagnosis because there is no database of what truly does work with what affect. There are plans underway to change this. Applying technology to the medical infrastructure machine will play a pivotal role of health care in the US. We will lead the change across the globe without a doubt. Today doctors use anecdotal and experiential evidence to treat rather than what actually works most effectively. And, most beliefs held by docs are suspect to incorrect in that vein. There was a great article about the transformational efforts around this in BusinessWeek a year or so ago. In addition, ranking health care providers and specific doctors in a consumer database as to their abilities and success would also empower consumers. You know who makes the best pizza and best luxury sedan at the click of a mouse. Why not healthcare? I am not a health care expert but I am quite confident markets can and would work in health care reform be it single payer or otherwise. Give the consumer the responsibility and empower them with knowledge and the transformational tools to make it work. The American economy is the world’s greatest consumer empowered economy and all we need is market based capabilities to get us going. It will happen. Reforms and transformational efforts are happening right now.

  30. BDG123 commented on Jan 11

    What do I require? Something you haven’t provided. Where did Hamilton, Madison, or anyone else state health insurance for all is not a basic dignity and right as a citizen of the richest country on earth? And, while we are at it, I guess your social contract was busted long ago with entitlements. Yet, again, I repeat how does health care for all need to be socialized? How does the largest healthcare provider in the US, the government, fit into your argument?

    You can show me everything you want to show me and you will have no argument because it simply does not exist. You are twisting to support your argument of a basic loss of dignity. Something I am quite confident most Americans, rich or poor support. If I surveyed Americans and asked them if we could provide health care for all and it would save us money over what we are spending today, how many people do you think would say no? The facts are out there. Oh, beside you that is. Where does Jefferson talk about that? Well, I’d love to chat forever but I must be off. I’ll stop back tomorrow if you want to prattle on. Glad I could brighten your day.

  31. M.Z. Forrest commented on Jan 11

    Healthcare is responsive to market factors, but in totally undesireable ways. The reason we know this is because care is not normally distributed by income where the big expenses are. If you look at chronic conditions like heart disease and cancer where most of the health care costs lie, they are in actuality more heavily distributed amongst the poor. No one except the extremely old has discretion on whether they are going to receive treatment for cancer or a heart attack. Where discretion does lie, preventitive care, we do see normal distribution by income with people with more money getting more preventative care. Preventative care in the long run is cheaper. The only folks who act based on long term concerns are those who have the discretion to do so. No person is going to worry about their heart attack that could happen 5 years from now when they are worrying about making this month’s house payment.

    This is known in the insurance industry. Premiums are set by age, sex, tobacco use, and medical history. Premiums are not set by income. It would be nice if folks would stop applying commodity economics to insurance economics.

  32. Macro Man commented on Jan 11

    I made no value judgement on the social contract; I merely claimed its existence, which you proceeded to deny.

    Please do come back tomorrow: I always love a good straw man argument, and you appear particularly adept at constructing them. I cannot recall making any of the claims you attribute to me, and I do so enjoy being portrayed as a heartless bastard who wishes to deny people their “basic dignity”, whatever that may be.

    I’m coming around to Fred’s view on healthcare discussion…

  33. Teddy commented on Jan 11

    Kudos to Governor Arnold Schwarzenegger who unveiled a bold, new, universal healthcare plan for everyone in the state of California this week. Other states are looking into the plan since there is a financial healthcare crisis in this country.

  34. M.Z. Forrest commented on Jan 11

    I agree with Fred about our court system. I wish we would move to a Napoleonic court system. Oh well.

    As far as litigation raising costs, it is true. It adds 1-2% to your healthcare expense. There is simply no empirical evidence that the appreciation in health expense is signficantly attributable to litigation risk.

  35. Fred commented on Jan 11

    Talk to any Doctor about that “opinion”. They will laugh in your face. The redundancies of testing is an epidemic. If the plaintif had an economic risk at stake, as opposed to a “scumbag put” provision by using ambulance chasing contingency lawyers, you would see a much more efficient system. Period.

    You a lawyer perhaps, or married to one?

  36. Gn. Patain commented on Jan 11

    looks like dudley holding this market together. maybe the fed thinks what comes out of the housing pockets of americans, can be replenished with a roaring bull market in securities…fascinating

  37. Teddy commented on Jan 11

    Fred,IMHO,so many tests and so many ambiguous results,low specificity and low sensitiviy, too many false positives and too many false negatives. Are you old enough for a routine PSA?

  38. M.Z. Forrest commented on Jan 11


    I noted there is no empirical evidence, and you reply with anecdote. Beautiful! No I’m not a lawyer. I’ve worked on data integration in the medical insurance industry. I’m thoroughly familiar with the reinsurance arrangements of your typical company and what triggers a reinsurance claim. I’m sure you are too Fred. You are arguing over small potatoes. It is somewhere around 5% of the insureds represent 80% of the costs. You don’t break the system by having the other 95% getting unneeded testing. Yes, that problem may exist, but it is not where the money is. The money is in chronic care. If you cut breast cancer treatment in half, you would be shocked how many frivolous MRIs you can buy.

  39. DM commented on Jan 11

    I read all of these comments and am surprised to see few if anyone at all accepts that Bernstein’s correlation is worth chewing up and analyzing further. Why did the Dow/gold follow the cash market in the biggest boom in history neatly and then fail to show any benefit these last years? When has this happened before? Before anyone permanently damages their ‘freakonmics meters’ take a long walk through the 20th century’s perspective on this issue.

  40. LB commented on Jan 11

    What would my gain have been if I was in cash? That’s the point. If I was invested, I made 4% in Euros. If I was in cash, I only made ???? Oh wait, I lost money…crap.



  41. F commented on Jan 11

    From the Congressional Budget Office report on tort reform:

    “Evidence from the states indicates that premiums for malpractice insurance are lower when tort liability is restricted than they would be otherwise. But even large savings in premiums can have only a small direct impact on health care spending–private or governmental–because malpractice costs account for less than 2 percent of that spending.(3) Advocates or opponents cite other possible effects of limiting tort liability, such as reducing the extent to which physicians practice “defensive medicine” by conducting excessive procedures; preventing widespread problems of access to health care; or conversely, increasing medical injuries. However, evidence for those other effects is weak or inconclusive.”

  42. F commented on Jan 11

    From a study from the Harvard School of Public Health:

    “The researchers analyzed past malpractice claims to judge the volume of meritless lawsuits and determine their outcomes. Their findings suggest that portraits of a malpractice system riddled with frivolous lawsuits are overblown. Although nearly one third of claims lacked clear-cut evidence of medical error, most of these suits did not receive compensation. In fact, the number of meritorious claims that did not get paid was actually larger than the group of meritless claims that were paid. The findings appear in the May 11, 2006 issue of The New England Journal of Medicine.”

    “Finally, the authors found that the claims that did not involve errors absorbed a relatively small piece of the costs of compensation. Eliminating those claims would decrease the system’s compensation and administrative costs by no more than 13% to 16%. “Many of the current tort reform initiatives, such as caps on noneconomic damages, are motivated by a perception that ‘jackpot’ awards in frivolous suits are draining the system,” explained Michelle Mello, an associate professor of health policy and law at HSPH and a co-author of the study. “But nearly 80% of the administrative costs of the malpractice system are tied to resolving claims that have merit. Finding ways to streamline the lengthy and costly processing of meritorious claims should be in the bullseye of reform efforts.””

  43. Fred commented on Jan 11

    Thanks F.

    Are you suggesting that doctors don’t over test to protect themselves?

    “Although nearly one third of claims lacked clear-cut evidence of medical error, most of these suits did not receive compensation. In fact, the number of meritorious claims that did not get paid was actually larger than the group of meritless claims that were paid.”

    Don’t equate “claims that did not get paid” to “costs” to OUR system. We don’t “see” these costs without understanding the unfettered liabilty they have of getting sued. **Remember, an unsuccessful lawsuit “costs” the doctor, in time, legal fees, stress, etc. “Winning” is good for his insurance company – PERIOD. They will do whatever it takes to NOT get sued. Therein lies the costs, that Harvard won’t spend time trying to get their arms around.

    It is an inherantly flawed system, and a disgrace, where “one third of claims lacked clear-cut evidence of medical error”, and these people have no risk, or skin in the game. Lawsuits (and the costs of overtesting / over treating, would drop dramatically if we used the same system as Europe in this regard.

  44. zero529 commented on Jan 11

    Almost every American contributes to the funding of its public education system. For some folks, the public schools don’t cut it, and so they pay additional money for private schooling. It seems to me that an analogy can be made to universal health care. Everyone can be called upon to make basic health care services accessible (less expensive preventive care is preferred to costly ER visits), and those who wish to spend additional money to secure outside services are welcome to.

  45. Teddy commented on Jan 11

    zero529, that was AWESOME!

  46. Ollie commented on Jan 11

    Why are you leaving a figurative trail of breadcrumbs, instead of just making your point by citing the historical reference you clearly have in mind? Please tell me this is not one of those ‘Teach a man to fish…’ lessons. Some of us are allergic to seafood. Regards, Ollie

  47. F commented on Jan 11

    From the CBO report:

    “[Evidence for] other possible effects of limiting tort liability, such as reducing the extent to which physicians practice “defensive medicine” by conducting excessive procedures … is weak or inconclusive.”

    “Proponents of limiting malpractice liability have argued that much greater savings in health care costs would be possible through reductions in the practice of defensive medicine. However, some so-called defensive medicine may be motivated less by liability concerns than by the income it generates for physicians or by the positive (albeit small) benefits to patients. On the basis of existing studies and its own research, CBO believes that savings from reducing defensive medicine would be very small.

    A comprehensive study using 1984 data from the state of New York did not find a strong relationship between the threat of litigation and medical costs, even though physicians reported that their practices had been affected by the threat of lawsuits.(14) More recently, some researchers observed reductions in health care spending correlated with changes in tort law, but their studies were based on a narrow part of the population and considered spending for only a few ailments. One study analyzed the impact of tort limits on Medicare hospital spending for patients who had been hospitalized for acute myocardial infarction or ischemic heart disease; it observed a significant decline in spending in states that had enacted certain tort restrictions.(15) Other research examined the effect of tort limits on the proportion of births by cesarean section. It also found savings in states with tort limits, though of a much smaller magnitude.(16)

    However, when CBO applied the methods used in the study of Medicare patients hospitalized for two types of heart disease to a broader set of ailments, it found no evidence that restrictions on tort liability reduce medical spending. Moreover, using a different set of data, CBO found no statistically significant difference in per capita health care spending between states with and without limits on malpractice torts. Still, the question of whether such limits reduce spending remains open, and CBO continues to explore it using other research methods.”

  48. Fred commented on Jan 11

    “some so-called defensive medicine may be motivated less by liability concerns than by the income it generates for physicians or by the positive (albeit small) benefits to patients.”

    Easy for some CBO staffers to (cynically) conclude, as they don’t spend their nights wondering if they’ll be sued.

    Let’s change the subject, please.

  49. F commented on Jan 11

    Also, the HSPH study did include the legal fees of all lawsuits, and still the costs of meritless claims was only 16% of the total cost.

    As for the intangible costs you list, the study authors were certainly concerned, but for slightly different reasons:
    “In addition, enthusiasm about the precision of the malpractice system must be tempered by recognition of its costs. Among the claims we examined, the average time between injury and resolution was five years, and one in three claims took six years or more to resolve. These are long periods for plaintiffs to await decisions about compensation and for defendants to endure the uncertainty, acrimony, and time away from patient care that litigation entails.

    In monetary terms, the system’s overhead costs are exorbitant. The combination of defense costs and standard contingency fees charged by plaintiffs’ attorneys (35 percent of the indemnity payment) brought the total costs of litigating the claims in our sample to 54 percent of the compensation paid to plaintiffs. The fact that nearly 80 percent of these administrative expenses were absorbed in the resolution of claims that involved harmful errors suggests that moves to combat frivolous litigation will have a limited effect on total costs. Substantial savings depend on reforms that improve the system’s efficiency in the handling of reasonable claims for compensation.”

    “The profile of non-error claims we observed does not square with the notion of opportunistic trial lawyers pursuing questionable lawsuits in circumstances in which their chances of winning are reasonable and prospective returns in the event of a win are high. Rather, our findings underscore how difficult it may be for plaintiffs and their attorneys to discern what has happened before the initiation of a claim and the acquisition of knowledge that comes from the investigations, consultation with experts, and sharing of information that litigation triggers. Previous research has described tort litigation as a process in which information is cumulatively acquired.”

    IOW, blame the lawyers for being expensive, but not for being frivolous.

  50. F commented on Jan 11

    So I provide data, and you refute it with snarky comments. I provide more data, and you wish to change to subject. I guess I’ll stop wasting both of our time.

  51. M.Z. Forrest commented on Jan 11

    To put in a different parlance, every company claims that the road to increased profits is to cut waste. Politicians say it all the time. The problem is that waste is not a driver of costs. Production, be it white collar or blue collar, is the driver of costs. Waste is ancilliary. You’ll notice that once a company gets serious about increasing profits, they cut production. They cut production in their non-core competencies. Waste is a management issue. Waste will never explain production costs increasing 10% yoy. It just doesn’t happen.

  52. VennData commented on Jan 11

    I find it to be a delicious irony that all the people who blame the stultifying effects of anti-competitiveness, government interference, and tort law as the problem for US health care, are against allowing the free use of stem cells, and the for the – now minorty – government’s irrational control of such techniques. Imagine how much more efficient care providing may be if research turns up some great stuff.

  53. Jordan commented on Jan 11

    Productivity is exploding in the US?

    I guess we are being more productive in selling insurance, real estate and stocks, and pushing paper around better at our desks.

    If productivity was exploding, we wouldnt have a near $1 trillion trade deficit.

  54. Whammer commented on Jan 11

    So I provide data, and you refute it with snarky comments. I provide more data, and you wish to change to subject. I guess I’ll stop wasting both of our time.

    Posted by: F | Jan 11, 2007 2:52:24 PM

    F, it appears that you have summarized this quite well. Don’t let the facts get in the way of Fred’s story. Harvard School of Public Health — wrong. Congressional Budget Office — wrong. Fred’s view of the world: the facts are biased.

    Hmm, does that remind me of anyone?

    Maybe we should change the topic to global warming. Any guesses on what Fred thinks on that topic?

  55. Eclectic commented on Jan 11


    Gosh, you put a lot of words in my mouth that aren’t mine. I think you’re a very intelligent person, and I agree with the theme of most of what you say about pragmatism, etc.

    But it would be difficult to appeal to your logic unless you first purged your assumptions drawn about me from what I wrote.


  56. DM commented on Jan 11

    I didn’t have data handy but very simply it seems that at major inflection popints in the last 100 years the relationship between the major asset classes of the day all exhibited a lot of volatility. Real estate, precious metals, stocks and other paper seem to make bigger movements (in both directions before and after these larger turns…not just the movement of the secondary trends. Since much of the conversation on this site suggests such a turn is possible, I suggest this is a clue without adding any emotion to what are a lot of emotional arguments. Dave

  57. Ollie commented on Jan 11


    Thanks for the response. Some markets are now clearly past their inflection points; for instance, the Saudi Tadawul index is down about 65% from March 2006, and still falling. But does this merely indicate further weakness for crude oil, or does it have more to do with an uncertain future for the kingdom? I don’t know, but if we see more sharp rallies in oil that fail to follow through, I think we’ll have the answer.

  58. muckdog commented on Jan 12

    So if my lunch meal at Subway cost $4.50 last year, and now it costs $4.50, aren’t I okay?

    Of course, since CA’s minimum wage went up in January, that Subway meal now costs $5.25 as my local shop prices in the higher labor costs. But that’s not the US dollar crashing causing that.

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