Book Club - Arguing With Zombies #1
Intoduction and Chapters 1-4
Welcome Back to the Rolling Thunder Book Club
This week, I read the first quarter of Arguing with Zombies by Paul Krugman. The book’s core concept is that certain discredited ideas—what Krugman calls “zombie ideas”—continue to resurface in public discourse, even when evidence disproves them. Krugman’s insights from 20 years ago often feel strikingly relevant today, making this book an excellent read for both historical context and current implications.
The first set of topics focuses on social welfare, particularly Social Security and healthcare, before diving into the housing bubble. I’ll share quick thoughts and a synopsis of each section and then discuss what these insights might mean from an investing perspective. How does a book covering 20 years ago through five years ago help with that? Because many of the arguments made back then are resurfacing in the plans of Trump 2.0. While not everything discussed will happen, some of it likely will—especially with a Republican trifecta in power. This creates potential catalysts for value in certain sectors and companies. Let’s dive in.
Saving Social Security
Summary
Krugman critiques the recurring argument that Social Security must be privatized to “save” it. Advocates of privatization often manipulate timelines and lump Social Security’s challenges with those of Medicare to paint a dire picture. Privatization, Krugman argues, would shift the burden of managing retirement investments to individuals, many of whom lack the time, interest, or expertise to do so effectively.
Social Security’s current structure is simple, cost-effective, and requires no active management from beneficiaries. Privatization, by contrast, would introduce administrative overhead and create opportunities for financial firms to extract fees, making them the primary beneficiaries of such a change.
Investment Takeaway
While the likelihood of Social Security privatization is low (less than 5%, in my view), it’s worth considering which companies would benefit if it did happen. Investment firms profiting from management fees, such as Franklin Resources (BEN), T. Rowe Price (TROW), and Northern Trust (NTRS), could see significant upside.
The Road to Obamacare
This section highlights how expensive and inefficient the U.S. healthcare system is compared to other developed nations. Pre-Obamacare, there was significant fear-mongering about potential reforms, often citing examples like longer wait times in Canada. However, Krugman notes that Medicare—our public system—handles the majority of one frequently cited procedure faster than Canada: hip replacements. This essentially means our public option is more efficient in this case.
The main takeaway is that the U.S. system remains very expensive and inefficient. Although this section predates Obamacare, the discussion feels timely, as many in power would like to repeal it. Full repeal seems unlikely, but partial repeal or adjustments favoring profiteering are plausible (I’d estimate a 40% chance).
Investment Takeaway
If this happens, major beneficiaries would include big insurance companies and pharmaceutical firms. Companies like UnitedHealth (UNH), Merck (MRK), Pfizer (PFE), CVS Health (CVS), Cigna (CI), Humana (HUM), Elevance Health (ELV), Aflac (AFL), Eli Lilly (LLY), Johnson & Johnson (JNJ), AbbVie (ABBV), and Bristol Myers Squibb (BMY) stand to gain.
Tangent: Weight Loss Drugs
A quick tangent: Avoid weight loss drug companies for now, particularly Novo Nordisk (NVO), the Danish maker of Ozempic. Some figures in Trump’s inner circle, notably Kennedy (heading Health and Human Services), appear hostile toward the drug. Additionally, Trump’s demands for Greenland to be handed over by the Danish could lead to tariffs and other trade war scenarios. This could really disrupt the market for the drugs, and cost Novo a lot of money.
Investment Takeaway
This creates an opening for American companies like Eli Lilly (LLY), which would benefit if trade tensions impact Novo’s supply chain. Other U.S. players in this space could also capitalize if Novo loses its edge.
The Attack on Obamacare
Similar to the previous section, this part discusses how Obamacare was designed to function as a three-legged stool:
Covering pre-existing conditions.
Mandating individual insurance purchases.
Providing subsidies to make it affordable.
Obamacare was modeled on Mitt Romney’s Massachusetts plan, so there isn’t a more conservative alternative to build from the GOP side. Most efforts have focused on making it work less effectively. Krugman highlights how states that embraced the program have better, cheaper coverage, while those that resisted have worse outcomes.
Investment Takeaway
For investors, continued attacks on the ACA likely mean more profits for insurance companies and Big Pharma. Companies like UnitedHealth (UNH), CVS Health (CVS), and Cigna (CI) will lobby for and benefit from regulatory changes that tilt the rules in their favor. Just like above, Big Pharma would also benefit.
Bubble and Bust
Finally, a break from entitlement programs! This section covers the housing bubble’s lead-up and aftermath. In hindsight, the speculative housing market was fueled by low rates post-dot-com bubble, creating unsustainable conditions. Krugman’s articles from 2004/2005 highlight warning signs like increased investment purchases, declining household savings, and rising home equity debt.
The broader lesson here is that bubbles in one sector can drag down the entire market. For instance, if today’s AI-driven tech boom proves to be a bubble, its burst could drag down the S&P for the year as it drove most of 2024’s gains.
Investment Takeaway
For LEAPS investors, the risk is even greater, as a market downturn can render options worthless. If bubbles form in areas like housing, bonds, crypto, or the “Private Credit” markets, I’ll keep a close watch and report back. The financial industry has a history of “innovating” its way into risky bets that avoid regulations and deliver short-term profits but leave investors holding the bag when things collapse.
Summary
The first chapters of this book reveal striking parallels between 20 years ago and today. If you haven’t already, consider picking up a copy from your local library. Krugman’s writing is insightful, and these chapters have been a valuable read.
Key Takeaways
Bubbles in any sector are a real risk for LEAPS investors, as they can drag down the broader market.
A push for Social Security privatization would benefit investment firms. I am going to give them each a rundown and share any attractive LEAP candidates.
Changes to Obamacare will likely make the system less effective but more profitable for insurers and pharmaceutical companies. This extra catalysts could prove to make good investments (UNH and Merck) into great ones. I will rundown the other companies and share any attractive LEAP candidates.
Be on the lookout for upcoming stock rundowns, as I’ll be focusing on opportunities in the Financial, insurance and pharma sectors. Companies that look strong today could deliver exceptional returns with the above catalysts.
Thanks for reading, and check back next week for the next quarter of the book club, where I’ll cover Chapters 5-9!
Have a great weekend.
S. Andrew