Things That Have Crossed Our Desk…

Health Care is a Big Number.

There is nothing more Rube Goldberg-esque than health care in America. It is one scaffold stacked on top of another scaffold. No one would ever create this system from scratch. But so be it, we have to play the hand we’re dealt.

The good news is health costs have been rising at a slower rate recently, from double digit increases to slightly more manageable levels. In addition the public seems satisfied with Medicare and Medicaid. It’s the devil you know versus the devil you don’t know. Medicare is complicated what with all the deductibles, co-pays and co-insurance but most of us have mastered the lingo well enough that we don’t want to learn something new. It would probably be even more complicated and confusing.

The health insurance price tag, however, is still significant. Medical prices have consistently gone up faster than the general rate of inflation. Money Magazine estimates that the typical 65 year old couple retiring this year will pay $11,752 in health care costs. This includes premiums on Medicare (both Parts B and Part D - drug coverage) and all copayments, deductibles and other out of pocket expenses. It also includes dental care which Medicare doesn’t cover. By age 85 the typical annual medical cost in today’s dollar goes to almost $32,000.

Caveat Emptor, these costs do not cover long term care either in the home or in a facility. And these costs are a biggie since so much of health care spending occurs in the last year or two of life. Our only advice: stay healthy!

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What’s in a Name Anyway?

In China I guess a lot is involved in a name. Hainan Island, the “Hawaii of China” is at the very southern tip of the country. Hainan has oodles of resorts and hotels and many use old world European names to spice up their image. But China is getting more nationalistic and Hainan officials are taking the lead, threatening to eliminate the “worship of foreign things” and replace “feudal” names with Chinese monikers. The JinJiang Group, a Chinese company with over 10,000 hotels worldwide uses names like “Victoria” and “Heidelberg” for some of its “Vienna” brand hotels. Hainan officials want these names “rectified,” although what “rectified” means is still very unclear. Even names associated with China’s imperial past such as “Coral Palace” and “Imperial Garden District” are thought to be no-nos.

This got us thinking about where this blame-game-in-names might end. The Trump Organization has registered dozens of trade names in China including Trump Estates, Trump Plaza, and, of course, Trump Tower. What if these get on China’s no-go list of names. And how do we respond? Does Washington fight back by forcing a renaming of “General Tso’s Chicken” in 10,000 Chinese takeout restaurants across the U.S.? It’s a complicated world.

The Wall Street Journal, Then and Now…

 The Wall Street Journal (WSJ) published a special issue on July 8 commemorating the 130th anniversary of the first edition, July 8, 1889.  In my estimation, the WSJ, along with The New York Times and The Economist are the three absolute best publications.  Read them.  

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A lot has changed since 1889, including the price of The Wall Street Journal (see chart), up 1% a year after adjusting for inflation. The special issue pulls together snippets of the most memorable articles of the last 130 years.  The German invasion of France in World War I (1914) is there, as is the Japanese attack on Hawaii (1941), the breakup of Standard Oil (1911) and AT&T (1983), and cultural events such as the British invasion (1964) and the oil gas lines of 1973. And, of course, there are articles about the rise of today’s super giants including Microsoft (1987), Amazon (1996) and the first Apple cellphone (2007) which, amazingly is only just over ten years old.

On the investment front there is the roller coaster stock crash of October 1987, the birth of the credit card (1959) and ATMs (1972), and the fragile financial shape of Social Security, which was commented on as far back as 1975.

Three important articles for individual investors also caught my eye. First, saving for retirement was as important then as it is now. In 1995 the Journal wrote that Baby Boomers had saved little and many would run into trouble in retirement. The same story is being written today about Millennials and Gen Z. Traditional pensions have gone away and saving for retirement is very much Job One.

A second article reminds us that “history may not repeat itself but it does rhyme.” Nearly three decades ago Japan was the economic juggernaut, the “Sputnik of the 1990s.” Nothing was going to stop them economically just as nothing was going to stop the Russian space prowess of the 1960s. Well things didn’t pan out exactly as feared. Today the worry is China. Its economic might is real but remember one’s worst fears and greatest hopes generally don’t come about. Keep historical perspective. 

A final article is from 1972. The Dow finally broke through 1,000 on November 15.  Today the Dow is near an all-time high of over 27,000. If you do the math this works out to a 7.2% average annual increase. When you add in an annual dividend of between 21/2 % and 4%, you come up with a total rate of return of 10% or more.  An impressive result amidst all the conflict and confusing events.

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Fifty years from now what will the Special Issue of the WSJ look like? Obviously I have no idea. But we can assume there will continue to be plenty of scary stories, wars will be fought, new products will emerge, old (and new) companies will fail and yes, there will be market crashes. But the U.S. economy has always had an incredible talent for self-renewal and without being too cocky or overconfident, I think this strength will continue.

The investment takeaway from the 130th Special Issue is don’t be the investor in the drawing above. Buy good companies at attractive prices and then, and this is the hard part, hold them through thick and thin. Get rich slowly.


What Happens When Public Transit Becomes Free?...

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Have you heard that in Tallinn, Estonia, public transportation is free for residents? Not only has it been free since 2013, but it also works great. According to The Economist, “The buses are on time, the trams are shiny and new, and passengers usually get a seat.” And that’s not all. Far from draining city finances – go figure – the city is turning a profit. Allan Alaküla, the Head of Tallinn’s EU office, says, “There’s no doubt that we not only cover the costs, but also come out with a surplus. We earned double as much as we have lost since introducing free public transport.”

Tallinn is a tech hub with a reputation for innovation, so perhaps its free public transit experiment isn’t surprising. But who knew that by 2016, Tallinn could declare a profit of €20 million a year?

This is how it works: As long as you are registered as a resident of the city, if you buy something called a “green card” for €2, you can ride the city’s entire network of trams, buses and trains at no cost. Visitors still need to pay to ride the system. Single-ride paper tickets are €2 and electronic QR tickets are €1, though you can also get a day ticket or other passes that appeal to tourists. In any case, Tallinn’s system has been such a success that Estonia now is extending free transport across the country.

For Tallinn, the finances have worked out because since it introduced free public transit, some 30,000 people have stepped up to become new city residents. Residency entails paying the municipality €1000 -- a tax that more than makes up for the loss in ticket sales and leaves funds for refurbishing tram lines and keeping things spic and span. Essentially, Tallinn’s “free-riders” pay for transportation in the cost of their residency.

This clearly isn’t a setup that will work everywhere. Still, that hasn’t stopped other cities from trying or at least thinking about it. Luxembourg is moving to free transport by March 2020. Paris is studying the possibilities. And cities from Bucharest, Romania to Chengdu, China have been in touch with Tallinn to learn from it. Tallinn’s city website even has a page dedicated to the study of free public transportation with research resources and a conference schedule.

And why not? Intuitively, free public transportation does sound great. If you can raise public ridership, you would naturally reason that you could reduce auto congestion, improve air quality, help out lower-income residents, stimulate local businesses and possibly revitalize city centers.

Unfortunately, the reality isn’t that simple, and free public transportation doesn’t always work. Several years ago, Joe Pinsker wrote in The Atlantic that even when public transport becomes free, it often doesn’t work because it doesn’t get enough people to stop driving. In the U.S., experiments in free public transportation in Denver, Trenton, and Austin all failed in that they increased ridership among those who walked or biked, but not those who drove. Likewise, Rome tried free public transit in the 1970s to alleviate heavy city traffic, but it found that this wasn’t enough to get people to abandon their cars.

Very large cities, in fact, may not be the best suited for free public transit. Smaller cities with certain layouts or college towns or resort communities where populations swell seasonally do better. And Tallinn, with a population of about half a million, may be just the right kind of city for success. It’s not a terribly crowded city, and most rides aren’t longer than 15 minutes. What’s more, Tallinn is a vibrant tech hub where residency is attractive.

But even in Tallinn, it isn’t clear that free public transportation has helped city congestion or air quality. Alaküla, the head of Tallinn’s EU office, says that congestion in the center is getting better, but this may be due partly to higher city parking fees or other factors. And while public transit ridership has increased, there isn’t good evidence on whether it’s replacing walking or driving.

Still, it’s hard to knock a city public transit system with an approval rating close to 90%. If it’s clean and you can usually get a seat, I’d say that sounds pretty good.

In Case You Haven’t Heard…

Our population is getting older and doing so at a quicker pace than was projected in the past. For the first time in U.S. history there are more people over the age of 65 than under the age of 5.

Here in Vermont this has led to a recent downgrade in our sterling AAA bond rating by Fitch to AA+, which pulls Vermont in line with the rest of the New England cohort. Fitch reasons that Vermont now has the third oldest population in the country leading to slower projected economic growth with more social programs and less tax dollars available for funding. Vermont is an old state and very well may be the canary in the coal mine for the rest of the globe.

The historical pattern for fertility has typically followed a roughly 100 year trajectory whereby newer countries peak at around six children per family and level out at the naturally sustainable fertility rate of around two children. This fertility evolution stretched about 88 years in the United States. But the pattern unfolded at a much quicker pace in places like China and South Korea, where moving from six to two happened in only 22 years (See illustration.) In fact, in South Korea things have now dropped below the 2.1 naturally sustainable population level, leading experts to predict total population in that country to be 30 million by the year 2100. That’s a whopping 40% decrease from current population of 51 million.

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But there are areas of the world population that still are growing quickly, mainly in Africa. Small farmers make up 70% of the Sub-Saharan African population and extra hands to help out are in high demand. One sure way to increase a workforce on these farms is through childbirth. As the saying goes, “children have two hands but only one mouth.” But even in these pockets of the world the downward trend in fertility is moving more quickly than was originally anticipated.

As countries mature opportunities for education and career alternatives lead to lower fertility and focus on less tangible things, like spending quality time with children. Raising a child is expensive which in turn drives fertility rates down. This is a First World problem.

We are also thinking differently as we move from generation to generation. 2019 will mark the first time that Millennials will outnumber Baby Boomers. Generally speaking Millennials are more socially liberal. Same sex marriage, interracial marriage and legalization of marijuana are all things Millennials see as the norm. They are also less focused on raising a large family and more interested in their careers, which at the moment are dominated by the tech industry.

So what does this all mean? The positive is hopefully these population changes will be good for the environment. But it also means we may need to start to think of things a bit differently. There are two main drivers to economic growth; population growth and productivity. If we aren’t having enough babies then the only other way to grow population and in turn the labor force is through immigration. Immigration broadens the talent pool for future innovations leading to greater productivity, propelling our economy forward.

So perhaps the investment opportunity lies in companies that focus on improving productivity and less on those companies producing products and services in the discretionary consumer sector, which relies more heavily on ever increasing populations. These products geared towards improving productivity include automation, robotics and technology.

The patterns clearly show a slowing in worldwide population growth and as previous generations have always shown economic adjustments will be made to account for the new reality. Who knows, we may be closer to the first robotic President than we think.