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From Butterfly Wings to ObamaCare

07/31/2013

If a Monarch butterfly flaps its wings in Mexico, how does it affect the weather in Virginia Beach?

A group of bright young mathematicians, econometricians, and old-fashioned computer nerds from MIT started a little company called Hidden Levers which looks at the quantitative relationships between many, many things.  Their goal is to predict the impact on individual portfolios from some exogenous shock, such as a credit downgrade for the U.S, for example.

My portfolio here could be affected by a change far away, and I want to know about it.  If a change in Factor A causes a change in Factor B, which causes a change in Factor C, then we know that a change in Factor A causes a change in Factor C.  When there are about 30 thousand factors, even a computer can get a headache!  Their computer program is capable of crunching about 2 million numbers daily — without Excedrin!

They have now studied the impact of Obamacare under three different scenarios.  Quoting them, “if successful, Obamacare will make the USA more competitive by lowering health care costs.”  In that case, they and their incredible computer expect the S&P 500 will rise 15% over the next year.

Continuing to quote them, “Obamacare will fail if costs balloon, causing a drag on the GDP growth.”  In that case, the computer expects the S&P to drop 10% over the next year.

The worst case is “if attempts to defund the ACA [Affordable Care Act or Obamacare] force a government shutdown, the US risks a replay of the fiscal cliff — and it’s difficult for the Fed to step up further.”  In that worst case scenario, they expect the S&P would drop 14%.

I do not detect any political bias at Hidden Levers.  They acknowledge that Obamacare is not what Obama wanted.  (He wanted universal healthcare or a single-payer system.)  This is not what the Republicans wanted either.  Maybe, we should call it “FrankenCare.”  Regardless, we seem to be stuck with it, and I don’t want my portfolio to suffer because of it.

However, neither the computer program nor the analysis by Hidden Levers touches on the long-term consequences of Obamacare.  Even a computer cannot see more than a year into the future, I guess . . .

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