Tuesday, July 29, 2014

Delinquent Debt

"I'm tapped out, Marv. American Express has got a hit man looking for me."
--Bud Fox (Wall Street)

New report indicates that about 77 million Americans have debt in collections. That's about 35% of poeple with credit files.

In the collection cycle for unsecured debt, the collections phase occurs when payment is more than 180 days past due.

At this stage, debt is charged off by the creditor. The creditor can subsequently sell the charged off accounts to debt buyers, attempt to collect via in-house or third party collectors, and/or warehouse the defaulted account.

Wondering about the extent to which moral hazard influences decisions by both creditors and debtors in this process.

Monday, July 28, 2014

Rebellion and Government Size

Young Soldier: Home! The English are too many.
William Wallace: Sons of Scotland. I am William Wallace... and I see a whole army of my countrymen, here in defiance of tyranny. You've come to fight as free men, and free men you are. What will you do with that freedom? Will you fight?
Veteran Soldier: Fight? Against that? We will run and we will live.
William Wallace: Aye, fight and you may die. Run, and you'll live--at least for a while. And dying in your beds, many years from now, would you be willing to trade all the days, from this day to that, for one chance, just one chance, to come back and tell our enemies that they may take our lives, but they'll never take our FREEDOM!

A commonly held belief is that the larger the size of government, the less likely it will be that the governed will rebel. As government grows so does its capacity for force. In the eyes of many, large government is too big to take on, leaving the citizenry compliant.

A plausible rival hypothesis is that larger government increases the likelihood of rebellion. In order for government to grow, it must take resources from the people. As people become relatively poor vis a vis government, the liberty preference of more individuals becomes engaged. They are more willing to resist state aggression and defend their property.

Government size is really a proxy for degree of government plunder. As plunder increases, citizens become more resolute, not discouraged, in acts of rebellion--acts of self-defense against state aggression.

Sunday, July 27, 2014

Hurt's So Good

When I was a young boy
Said put away those young boy ways
Now that I'm getting older, so much older
I long for those young boy days
--John Cougar Mellencamp

Celebrating the induction of Frank Thomas into the Hall of Fame today.

Hats off to The Big Hurt!

Saturday, July 26, 2014

Zero and Positive Sum Games

So maybe I'll win
Saved by zero
--The Fixx

A zero sum game is an exchange where one party wins while the other loses. For example, when government takes from some to give to others, some benefit from free economic resources while others lose their property.

A positive sum game is an exchange where both parties benefit. For example, when two people voluntarily engage in trade, both are typically better off than if they did not trade. The trade would not have occured had either thought that they would be worse off after the trade.

Some factors likely to influence the nature of the game at hand include availability of information and presence of aggression force. Zero sum games are more likely to be played by ignorant individuals. People who do not 'know better' might get 'taken.' The more information available, the more likely individuals are to engage in positive sum games.

Presence of aggressive force will coerce some into playing zero sum games. An individual might surrender money to a thief at the point of a gun. The lower the presence of aggression, the more likely that individuals will prefer positive sum games driven by mutual cooperation and volition.

Friday, July 25, 2014

Junk Weakness

"So, what you're telling me is the music is about to stop, and we're going to be left holding the biggest bag of odorous excrement ever assembled in the history of capitalism."
--John Tuld (Margin Call)

For the past couple of weeks, I've been thinking about high yield (a.k.a. 'junk') bonds. Junk bonds are bonds issued by companies with shaky prospects (e.g., weak balance sheets, low cash flows. They are able to sell debt only if they offer coupons at interest rates significantly higher than more credit worthy firms.

In today's 'reach-for'yield' environment, junk has been bid to the stratosphere with commensurate tightening in credit spreads, i.e., the difference between Treasury yields and junk yields. Over the past few months, junk spreads have been tightening to historic lows.

That Little Voice has been telling me that it is time to keep half an eye on junk spreads for signs of widening. Widening spreads would suggest declining appetite for extreme risk among market participants.

Today, ZeroHedge reports some weakening in high yield credit markets. Relative to stocks, high yield is trading heavy:

And we're starting to see some outflows from junk bond funds:

Nothing huge, but worth watching. The real test will be credit spreads. If junk spreads start blowing out then heads will turn and eyes will focus.

position in SPX

Real Campaign Finance Reform

I took it all for granted
But how was I to know
That you'd be letting go
--Bryan Adams

Jacob Hornberger nails the durable solution to campaign finance reform. It is not new laws or restrictions on political donations. As long as government has the power to redistribute wealth, then markets for political favor (whether they be legal or black markets) will operate.

Those markets no longer have incentive to operate if government no longer has the power to redistribute wealth. Cut off the resource stream, and politicians and special interest groups have nothing to trade.

Real campaign finance reform requires dismantling the warfare/welfare state.

Thursday, July 24, 2014


It's been such a long time
I think I should be going
And time doesn't wait for me
It keeps on rolling

Lags are time delays between cause and effect, between stimulus and response. Lags are a feature of nature. The time between planting a seed and germination. The time between sun hitting a rock and the rock getting hot. The time between force applied to a branch and the branch's failure.

Human behavior is influenced by various types of lags. Neuromuscular make-up creates a delay in muscular reflex. Cognition necessitates time to process information. Social pressures gradually nudge people to run with the herd.

When making sense of the world, lags must be accounted for. If we ignore the influence of lags, then reasoning and empirical analyses are apt to be flawed. Errors in understanding relationships (e.g., cause and effect) are likely.

Wednesday, July 23, 2014

Prices and Wages

We're talkin' 'bout the dollar bill
Now what are we all to do
When the money's got a hold on you?
--Simply Red

One way to assess severity of inflation is to compare prices to wages. If prices increase more than wages, then inflation is bound to be felt by wage earners.

Food prices, for example, have been increasing much more than wages. Even if the reported CPI seems low, wage growth has been even lower. That taxes purchasing power at the grocery store.

While government can fudge price data, it cannot fudge real production. Stagnant real production means stagnant wages. Stagnant wages in even a 'low inflation' environment means restrained purchasing capacity. Each item purchased costs relatively more in wages. Less purchasing power is a central condition of inflation.

Sooner or later people will get it, regardless of the fairy tales told by officials.

Tuesday, July 22, 2014

Major Blow to ACA

They make no mention
Of the beauty of decay
Blue, yellow, pink umbrella
Save it for a rainy day
--Tears For Fears

This morning the DC Circuit Court of Appeals ruled that the Affordable Care Act does not permit the federal government to issue insurance subsidies to enrollees in states that do not operate their own exchanges. The decision reverses a lower court ruling that the federal government did have such authority.

The ruling is grounded primarily in the ACA language itself, which in several instances limits subsidies and credits to any "Exchange established by the State." Thirty six states opted not to operate their own health insurance exchanges.

While it is destined to be appealed and likely headed for the Supreme Court, today's ruling vacates the IRS regulation allowing the federal exchange to give subsidies. More than 80% of enrollees on the federal exchange receive subsidies, and those subsidies cover over three quarters of the premium on average.

This is a major blow to Obamacare, perhaps a lethal one. Interestingly enough, it is a self-administered blow. The law is tripping over its own bureaucratic syntax.

Monday, July 21, 2014

AK-47 Sanctions

"Of all the weapons in the vast Soviet arsenal, none was more profitable than the Avtomat Kalashnikova model of 1947--more commonly known as the AK-47 or Kalashnikov. It's the world's most popular assault rifle. A weapon all fighters love. An elegantly simple nine pound amalgamation of forged steel and plywood. It doesn't break, jam, or overheat. It'll shoot whether it's covered in mud or filled with sand. It's so easy, even a child could use it--and they do. The Soviets put the gun on a coin. Mozambique put it on their flag. Since the end of the Cold War, the Kalashnikov has become the Russian people's greatest export. After that comes vodka, caviar, and suicidal novelists. One thing is for sure, no one was lining up to buy their cars."
--Yuri Orlov (Lord of War)

As part of a recent round of sanctions against Russia, the Obama Administration has banned US business contacts with Russian arms makers including those making AK-47s.

The AK-47 is the most popular assault rifle ever made. No one knows precisely how many have been made since volume production began in 1949, although the count is probably in the hundreds of millions.

The recent ban has sparked a run on AK-47s in the US. CNN's exclamation of 'surprise' is either disingenuous or na├»ve. Restrict supply below market and shortages will result. So will black markets.

Every time this administration restricts gun markets, the gun industry reaps a windfall.