Everyone is acutely aware of the risks that lay in front of us. With two devastating bear markets, many investors are just waiting for the next shoe to drop. Just for a moment, I wanted to bring your attention to an alternative scenario. What if things went right? What if all of the things we are worrying about today, just don’t materialize like we think they will? This isn’t just wishful thinking. History is filled with examples of innovation overcoming seemingly insurmountable obstacles. The automobile solved the issue of manure from horses infecting our cities. New technologies for finding oil solved the peak oil crisis we were supposed to hit 20 years ago.
So, I’ve listed the major obstacles we face today, and I’ve taken the liberty to think about what could go right:
- Government debt- conventional wisdom shows that our government debt is going to continue to climb to astronomical levels, eventually causing massive inflation. The reality is the debt has been shrinking with growing tax revenue and cost controls. With small changes to Social Security (raise retirement age, means testing, etc) and healthcare innovation (see below) to drive down costs, we could eventually see a surplus.
- Healthcare- one of the main drivers of government debt has been healthcare. The US spends more than any other country on healthcare per citizen, by almost double. Medicare is the leading cause of future deficits, so this is both a healthcare and budget issue. Technology will most likely be the answer to this problem. As I write this, there is tremendous advances being made in the biotechnology and healthcare technology. Where do most healthcare costs come from in the US come from? Testing. The US performs twice as many tests on patients than other countries. Nanotechnology and smart phones applications are being developed to perform these tests at a fraction of the cost. Technologies that will diagnose and prescribe medicine for you without seeing a doctor are also being developed. The point is that the costs associated with healthcare today could be drastically different in the future due to new technology.
- Natural Resources- there is a finite supply of natural resources in this world and eventually we will run out. This has been discussed for decades. In 1974 Jimmy Carter said we could use up all of the proven reserves of oil within the next decade. Why haven’t we run out? New technology has found millions of barrels of oil over the last several decades that could never be extracted before. In addition, natural gas, solar, wind and nuclear technology have come on line and it is hard to even predict where this will even take us in the next few decades.
- Education- the cost to educate a child is becoming absurd and the market for college loans is finally showing signs of cracking. Universities are now offering free online courses. I just took an MBA level course from the University of Virginia for free. Other sites like Khan Academy lets anyone watch online courses about nearly anything. Becoming educated will no longer require a $50,000 per year price tag. While no one knows how the educational system will change, there is a good chance that college will look a whole lot different in 20 years.
Innovation is not only the key to solving our problems, but will also be the key to growth over the coming decades ahead. When you bet against the economy and the market, you are betting against human ingenuity, which has almost always been a losing proposition. I am excited to see where that ingenuity takes us.
The International Federation of Health Plans has recently come out with their 2012 Comparative Price Report showing the costs of certain healthcare procedures in various countries. The results are astonishing on a number of levels. First, the average price of most procedures in the United States tend to be on the top end of every other major country surveyed. Second, the range in costs (between low and high) is amazing. For example, the range in cost for a hip replacement in the United States is between $25,061 (25th percentile) and $87,987 (95th percentile). It is hard to believe that there is that much variance in cost for this type of procedure.
As an example, I’ve embedded a chart showing the costs of a normal delivery:
You can look at this data as both saddening and encouraging. First, it is sad that the US is spending such a large amount on healthcare and is getting no better (or even worse) results than the other countries in this report (with regards to quality of life and life expectancy). It is encouraging in that the major driver of the US deficit is healthcare. This report shows that it is possible to bring down the cost of healthcare in the United States. If other countries are doing this there is no reason the United States can’t figure out a solution to bring these costs down.
A very interesting piece from the NYT about the slowdown in health care costs in the US. Seeing that all of the massive budget deficit projections revolve around out of control healthcare spending, this is a trend that is worth following. The implications could be large, as many have concluded that increased costs are going to cause consumers and businesses to contract spending in other areas just to pay for healthcare. If this trend continues this could be very bullish and may increase the outlook for the US economy. Here is the excerpt from the article:
In figures released last week, the Congressional Budget Office said it had erased hundreds of billions of dollars in projected spending on Medicare and Medicaid. The budget office now projects that spending on those two programs in 2020 will be about $200 billion, or 15 percent, less than it projected three years ago. New data also show overall health care spending growth continuing at the lowest rate in decades for a fourth consecutive year.
Health experts say they do not yet fully understand what is driving the lower spending trajectory. But there is a growing consensus that changes in how doctors and hospitals deliver health care — as opposed to merely a weak economy — are playing a role. Still, experts sharply disagree on where spending might be in future years, a question with major ramifications for the federal deficit, family budgets and the overall economy.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.