Carl from Chicago

Business executive interested in history, economics, taxation and energy policy.

Over the Air

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A few threads connected…

Recently I was at a dinner party with some friends. A young teenager from the East coast was at the dinner and I asked him the question “Do you know anyone who doesn’t have cable TV?” He thought for a few seconds and said “Yes, one friend has satellite.” He didn’t even think to consider that anyone would just get over-the-air TV.

A couple of months ago I helped my parents pick out a digital TV and surround sound system. My parents are “old school” and don’t even want to consider paying every month for television, so we just plugged in the over-the-air antenna to the one on his roof and we were in business with digital television. The picture quality is very high – over the air digital TV broadcasts in higher quality than over cable or satellite because it is uncompressed.

Today they announced that the Cubs playoff games were going to be broadcast on TBS only. If you don’t have cable or satellite, you won’t be able to watch the game. This situation is compounded by the fact that the games start at 9pm central time; if you are older it isn’t reasonable to expect that they’d go out to a bar or restaurant until midnight when the game is done. Of course, lots of them have cable, but probably the majority of the people that DON’T have cable would be older than average. I imagine that WGN TV, which has broadcast the Cubs for years, will be flooded with calls from irate viewers.

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Chicago Sales Tax Hike Proposed

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It is sad when two of my more depressing prophecy-type posts intersect…

Cook County is the vast county within which the city of Chicago resides, along with a large number of affluent suburbs. Cook County has a population of over 5 million and is the 2nd largest county in terms of population in the United States.

In this post from March of 2007 I discussed how a succession movement could be in the future of Cook County. Specifically, I noted how the huge expenses of maintaining hospitals was burdening the county and killing their ability to live within a balanced budget.

In this post from December 2006 I went through sales taxes, which are among the most regressive taxes in the arsenal of tax tools and the fact that Cook County and the City of Chicago have one of the highest and most unfavorable sales tax regimes in the country.

Now, in a single article in the Chicago Tribune titled “County Urged To Boost Sales Tax – City Total Would be 11% Under Plan” dated September 25, 2007 shows the likely intersection of these negative trends. Todd Stroger, the epitome of political nepotism, who campaigned on a plan to streamline the bloated Cook County work force, has done nothing of the sort and is now looking about for a revenue boost to cover the inevitable annual increases in expense growth.

The line from Mayor Daley says it all – “A sales tax is a hard pill, but how do we fund three hospitals?”

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Risk and Return

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A recent article in Barron’s magazine was titled ‘Weathering the Storm in Style’ and it discussed what retirees could do if the market tanked in the years while they were living off their retirement savings. The article mentions people who planned to retire just prior to the 2002 market meltdown but whose portfolios went down significantly (25% – 40%) and they had to change their plans and keep working as a result.

Later the article mentions how many “good years” you need in the years following the meltdown in order to make up for the bad times. For example, if the market drops 25% in one year, you will need to gain 46.67% in the following year to recoup the gain plus make 10% more (i.e. if you have a base expectation that the market will make you 10% in a year, you don’t just need to recover the drop, you need to make up for the ‘lost year’.

I covered a similar conceptual issue in a post titled “Percentage Returns… and other Lies” about how the portfolio managers could have a series of good looking years after a debacle like 2002 and yet investors still hadn’t recovered their initial investment (let alone make 10% / year to boot). I used a bit of my own portfolio for color commentary in that post, to “humanize” it, like a good journalist should.

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Health Care and Fixed Costs

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There are many health care plans being proposed to “fix” the growth in medical costs in the United States. Each of these plans has different elements but I haven’t really seen the particular linked issue addressed that I am going to speak of in this blog post.

I make a point of reviewing my medical bills. When you have surgery, for example, you receive an itemized bill. In that bill you can see services from each provider and also the cost for the room, medicine, etc… Frequently the costs seem far out of line from reality (outside the walls of medicine); a room could cost hundreds or thousands of dollars a night; an aspirin or readily available over-the-counter medicine could cost many dollars per pill.

The real issue is that the medical industry is primarily a “fixed cost” business, with very low “marginal costs”. For example, if you look at the Northwestern Hospital facility downtown, a vast series of interconnected buildings, and asked yourself this question:

“How would costs vary on a given day if the facility was full of patients vs. having NO patients?”

The answer is that the costs for that day would be virtually identical whether or not the hospital had patients. You still need to pay for the facility, the doctors, the electricity, and all the support workers and nurses. Virtually the only “variable” costs that would be avoided are the cost of medicines and food, but the medicines are inventoried and they need to hold stocks in advance and the food must be purchased based on planned demand and the spare food would just be thrown away (the costs would be pretty much the same).

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A Great Journalist / Writer – Michael Lewis

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Recently on my travels to and from San Diego I had a few hours of uninterrupted time and I chose to read some interesting paperbacks. I usually pick something like a business book or a military history book but this time I decided to liven it up a bit and pick two books by Michael Lewis, one titled “Moneyball” about baseball and “The Blind Side” about football.

I remembered Michael Lewis from reading “Liar’s Poker” in the 90’s about Salomon Brothers, the famous trading firm. The name of the book was from a game that traders would play involving betting on the digits on US currencies, a game that could be played for big stakes.

Liar’s Poker is a fascinating book about a period of time when Salomon was essentially the “king of the world” to borrow a phrase from the highest grossing movie ever. If you are interested in what is happening in the sub-prime market with collateralized debt obligations (CDO’s) or the “securitization” of debt this is a great place to start since Salomon basically invented and popularized the practice for home mortgages.

One interesting element of the book is that Michael Lewis actually was a bond salesman in real life, and this enabled his book to be far more “real” than it would be if written in an interview type format. This was his first book; I think at the time he started out planning to get into finance and then decided to write a book; in retrospect you could also see him going into this business as a writing opportunity. To contrast this with other journalists that we take swipes at from time to time, Lewis clearly understood his material as only a true “insider” could.

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