Archive for the ‘Economics’ Category

The Next Global Financial Crisis

Posted: February 24, 2016 in Economics

There is a storm coming. The next financial crisis is looming around the corner. The sword of Damocles is hanging over all our heads. I say “our heads”, because we all live in a financially interdependent and intertwined world. Anyone who believes that they are truly financially independent must literally be living like Matt Damon in the Oscar nominated “The Martian”. The velocity and intimacy of the financial interdependence between all countries in the world has been increasing exponentially. Advances in communication and transportation technology, combined with free-market ideology, have given goods, services, and capital unprecedented mobility.

In 1965, Intel co-founder Gordon E. Moore observed the exponential increase of the number of transistors on integrated Circuits – Moore’s Law. Essentially, this means that processing capacity for computers is doubling yearly. This phenomenon has continued until today, with the number of internet users worldwide following similar trends. The explosion of technological progress over the last 25 years has helped facilitate a worldwide interconnection that continues to increase exponentially every day. The speed and ease of executing financial transactions privately or in the open market have also followed the aforementioned technological trends. The increased reaction speed of worldwide markets to information, true or false, makes it increasingly difficult to hedge against a worldwide crisis. The next crisis will come to fruition much more rapidly than in 2008. News travels like lightning across the globe – especially bad news.

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2016 has commenced with the worst start to the S&P index in its recorded history. After the 2008 Financial Crisis, The Dodd Frank Wall Street reform act implemented in 2010 has promised “sweeping overhaul of the United States financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression”.  This act has surely made the U.S. financial system more robust – but not unbreakable. Ever since the 2008 crisis, most of the world has been dependent on the Federal Reserve’s massive bond buying program (quantitative easing) to prop up equity prices and stimulate growth in emerging markets. Quantitative Easing is basically the Federal Reserve (not a government agency – a central bank), “buying” (with an IOU) “distressed” assets from other banks, in order to relieve the bank’s balance sheets so they can continue lending money, therefore increasing the money supply. In theory, this practice is supposed to assist the economy by ensuring liquidity and consumer/lender confidence.

In the other side of the pond, European banks have adopted “Negative Interest Rates”. Imagine a bank that pays negative interest. Depositors are actually charged to keep their money in an account. As crazy as it sounds, several of Europe’s central banks have cut key interest rates below zero and kept them there for more than a year. Now Japan is trying it, too. Negative Interest Rates work by by imposing penalties on excess reserves left on deposit with central banks, negative interest rates drive stimulus through the supply side of the credit equation – in effect, urging banks to make new loans regardless of the demand for such funds.

Quantitative Easing can be likened to a mail-in rebate after a retail purchase. You (Central Bank) make a purchase (buying distressed asset from financial institution) because you believe that you will be re-reimbursed (Central Bank buys distressed asset for discounted price, asset is assumed to go up in value after hectic period). Negative interest rates can be likened to a clearance sale. You (Central Bank) make a clearance sale (giving loan to a financial institution at rock bottom price) because you believe that having the clearance item in your inventory is costing you more money than it’s worth. The above scenarios are examples of monetary policies which are designed to manipulate inflation, the money supply, interest rates and overall economic activity.

A financial crisis has occurred in the U.S. about every five years, on average, since the end of WWII; and it has been seven years since the last one — we are overdue. The next crisis will be here in a few years, here is why:

China’s economy has slown down considerably. The Chinese stock bubble is deflating amidst new projections that the economy cannot sustain its booming growth in prior years. This spells trouble for the rest of the world, because most developed countries are financially vested in China and/or rely on them for raw materials. The Chinese economy is moving from puberty to adulthood, and is trying to shift slowly from primarily exporting goods, to relying on domestic production. Unfortunately, this changing of gears does not look good on paper because China is no longer slated to exceed its economic expectations. Additionally, there is confusion about the reality of the Chinese situation because of questionable accounting methodologies and absent financial regulations. The United States sells hundreds of thousands of cars (among other goods) to China every year. If Chinese consumers are unable to buy American vehicles because the economy in China is faltering, the United States suffers. Financial interdependence.

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Oil prices have been under $30/barrel for over a year now. The reason for cheap oil, is because of growing concerns over the Chinese economy, fears of a persistent surplus in oil supplies, and most recently the removal of sanctions on Iran. Iran has vowed to bring back 500,000 to 1 million barrels per day (mb/d) in oil within a year. This translates into cheaper gas at the pump because of excess supplies, but layoffs and eventual bankruptcies at many U.S. energy companies. Cheap oil is keeping inflation at bay, but if the oil investment bubble bursts in the next couple of years, it will send a shock wave throughout most developed economies.

The officially unemployment rate is currently at 5%. The problem with this “official” rate is that it does not count workers who are too discouraged to continue looking for a job. The real unemployment rate if you add back workers who have been discouraged less than a year is 10%. If you add back workers that have been discouraged for more than a year, the unemployment rate is 23%. If you calculate the number of workers over the age of 16 and divide that number by the U.S. population, the rate is about 40%. Aside from the fact that Baby Boomers are breaking the Social Security bank, the real unemployment rate has been rising because there are more discouraged workers every day – many of them Baby Boomers. Over the next few years, the real unemployment rate will continue to rise; it is a mathematical certainty. A rising unemployment rate “official” or otherwise, will deliver stress to the economy, incarnated by rapid media coverage.

The $1 Trillion dollar Student Loan Bubble. An ever growing number of American students are graduating from college staring down the barrel of a debt gun. Wages are not climbing along with the ballooning amount of student debt in the U.S. today. The average college graduate carries a load of about $35,000 today. The cost of education continues to rise, while baccalaureate salaries are barely keeping up with inflation. Unfortunately average student loan debt will continue to increase over the next couple of years.

Eurozone. The Eurozone recovery remains disappointingly weak after Greece fell back into recession and Italy has slowed into stagnation. Portugal only grew by 0.2% in the last quarter, down from 0.4% in the third quarter. That’s a blow to Lisbon’s new left-wing government, as it tried to unwind some of the austerity measures implemented by its predecessors. Finland, one of the most fervent supporters of austerity during the debt crisis, is also still shrinking. GDP fell by 0.1% in the last quarter. Germany grew only 0.3% in the third quarter because of exports falling faster than imports (cars to China). The European situation is getting more desperate every day and is compounded by negative interest rates and an influx of migrant workers into countries with unique, but mostly dismal Economic outlooks.

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The combination of the above factors will help facilitate another financial crisis in a few years. There is something that I haven’t mentioned, a Black Swan. A Black Swan is a rare and unforeseen event that is almost impossible to account for. The next crisis will be driven to a cliff by the aforementioned factors. The Black Swan will kick the global economy over the cliff. After that, we will build increasingly robust financial models that promise to account for all uncertainty – an uncertainty in itself.

 

 

 

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The Pharmaceutical industry has developed an array of miraculous concoctions over the last few centuries. Sadly, the birth of this industry can be juxtaposed to the discovery of fission in the 1930’s. Fission was seen as a practical way to generate energy and electrical power from a small mass, but was ultimately used to create the “Atomic Bomb”.

Nearly 75% of prescription drug overdoses are caused by prescription opioid painkillers; these drugs are involved in more deaths than cocaine and heroin combined. In 2010, pharmaceutical drug overdoses were established as one of the leading causes of death in the US; drug overdoses were more lethal than firearms or motor vehicle accidents.

The Pharmaceutical Industry is giant money making, for profit sector of the global economy. Consider the fact that it takes an average cost of about $800 Million (research, patents, lobbying, and production) to bring a new drug into the market. Consider also that a new drug patent will protect a company that developed a particular drug for only about 12 years. After that, all the other companies can jump in and start producing cheaper “generic” substitutes, which will eventually shrink the profits of the initial developer. I can tell you with financial certainty that the cost of developing a close to $1 Billion dollar product will put pressure on almost any public company, pharmaceutical or otherwise. The solution? Sell, Sell, Sell…. no matter what the cost.

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History of the Pharmaceutical Industry

Human beings have attained an evolutionary intuition from experimentation with plants, animals, and minerals which contain medicinal properties. Records of medicinal preparations date back to 28th century BC by the Chinese “Red Emperor”, Shennong. Shennong described, in ancient scripts, the anti-fever capabilities of a plant named “chang shan”. Many plant-derived medications employed by the ancients are still in use today and are referred to as “Traditional” or “Eastern” medicine. Egyptians have historically treated constipation with castor oil and indigestion with peppermint.

The Society of Apothecaries (pharmacists) was founded in the 15th century. This marked the emergence of pharmacy as a distinct and separate entity. The separation of apothecaries from grocers was authorized by King James I, who also mandated that only a member of the society could keep an apothecary (pharma) shop. Not much has changed today as pharmacy spaces are heavily regulated and an individuals entrance into the modern Society of Apothecaries is usually preceded by a Pharmacy degree. As technology exponentially evolved over the years, so did the research and development of drugs.

The Pharma industry’s modern era – isolation and purification of compounds and chemical synthesis – is widely believed to have begun in the 19th century. The isolation and purification of medicinal compounds was of tremendous importance for several reasons. Accurate dosages, toxicity reduction, and knowledge of the chemical structure of drugs would enable more intricate manipulations in the future.  Merck, the oldest Pharma Company in the world, successfully isolated morphine from opium in 1805. Merck also helped produce and market cocaine in this time period. Pfizer successfully developed citric acid in the mid 1800’s, which is used as a pH adjusting agent in gels and creams. When launched in 1886, Coca-Cola’s two key ingredients were cocaine and caffeine. The cocaine was derived from the coca leaf and the caffeine from kola nut, leading to the name Coca-Cola (the “K” in Kola was replaced with a “C” for marketing purposes). The pharmacy and retail industry have always been heavily intertwined in the modern era, with little regard for the consumers well-being. King James would be disappointed.

Legalization of drugs has never been about protecting you, the individual. It has always been about protecting corporations and their profits. Pharmaceutical companies would much rather you be medicating your depression with Prozac and making them rich, instead of medicating with an illegal narcotic and making a drug lord rich – both inefficacious decisions in my opinion.

Corruption

Many doctors today fresh out of medical school are approached by “agents” of Pharma companies. These agents will bribe young doctors drowning in debt, offering to pay for their educational debt in exchange for promoting a certain product. Pharma companies will do whatever it takes to gain market dominance.

In 2004, Generics UK, (Merck’s former British subsidiary) paid £12M pounds in a settlement over a price fixing cartel. The NHS (UK National Health Service) alleges various drugs companies exploited the oligopolistic market conditions, forcing the NHS to pay inflated prices for drugs. NHS fraud investigators believe there was a conspiracy to limit the supply of 30 of its most commonly prescribed drugs, including a class of penicillin antibiotics and to a generic version of best-selling ulcer treatment Zantac. Many other pharmaceutical companies have also been accused of corruption in recent times. Pfizer, Eli Lilly and Johnson & Johnson have all settled foreign bribery cases in the last three years.

Eli Lilly is the Pharma Company that developed Prozac (anti-depressant) in the 1970s. After making a highly successful and profitable career in the pharmaceutical industry, Dr. Virapen decided to come clean in terms of corruption within Eli Lilly. Virapen shared the truth behind the industry and how he helped to get Prozac, one of the most highly prescribed anti-depressant drugs in the world on the market. Virapen also admitted that the pharmaceutical industry “are not interested in curing any disease that you may have, they are more interested in making you have disease. They are interested in symptomatic treatments.” Pharma companies benefit the most from symptomatic illnesses such as: diabetes, arthritis and cardiovascular disease.

According to textbook economics, the enormous gap between the price and marginal cost of these drugs gives their manufacturers an enormous incentive to lie, cheat, steal and find other ways to get more people to buy their drugs. The Pharma industry is spending a fortune trying to mislead doctors about the safety and effectiveness of their drugs so they will prescribe them more widely. They also spend billions of dollars lobbying to congressmen in order to keep the FDA docile and unable to operate in the interest of consumers.

Pharma companies exaggerate most diseases and even fabricate them to make money off of the fears of the general public. The swine flu pandemic, also known as H1N1, in 2009 was a fabricated disease propagated by drug companies to make money worldwide. In fact the Parliamentary Assembly of the Council of Europe (PACE) stated in its 2010 report that the handling of the H1N1 pandemic by the World Health Organization (WHO), along with European Union agencies and national governments, resulted in a “waste of large sums of public money, and unjustified scares and fears about the health risks faced by the European public.”

Conclusion


There is a fundamental difference between the approach of modern medical science and one based on traditional (eastern) medical science. The former hides the symptoms of the basic illnesses and does not deal with the root causes. Most diseases are derivatives of a dozen illnesses. Herbal medicine attacks the roots of these diseases. A primary example is the patient that decides to medicate a cold with Nyquil, instead of medicating with green tea. The former will do nothing but numb the patients’ symptoms, while the ladder will actually speed up the detoxification process and aide the immune system. Another example is the patient that medicates depression with Prozac, instead of reaching out to friends and family or different aid groups. The former will mask the underlying issues related to depression, while the ladder will help remedy the root cause of the depression.

There are, of course, extreme cases in which modern medical science is necessary. Unfortunately, widespread abuse and reliance on modern medicine has ruined the lives of so many people that it is almost impossible to fully embrace. Instead, people need to fully inform themselves before introducing foreign substances into their bodies. People would be shocked to realize that – more often than not – they are just walking, talking chemistry experiments.

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