Wednesday, October 22, 2014

The Fed Crutch

When the good times never stay
And the cheap thrills always seem to fade away
When will we fall?
When will we fall down?
--Toad the Wet Sprocket

Read this piece to gain a sense of the moral hazard created by Fed policies. Increasingly, market participants think that the Fed has their backs in the event of price declines. This causes market participants to take more risk than they would in 'uninsured' markets.

The author suggests that the "emergency is over" and Fed policies to backstop investors are no longer necessary. If the Fed does not withdraw these policies, "markets will never stand on their own feet again."

Because markets have been leaning on the Fed crutch for years, taking the crutch away will likely cause markets to fall a few times before they learn to stand on their own.

Tuesday, October 21, 2014

Economic Malpractice

Drawn into the stream
Of undefined illusion
Those diamond dreams
They can't disguise the truth
--Level 42

Prof Walter Williams discusses the epidemic of economic malpractice related to minimum wage laws.

What these pages have frequently viewed as basic ECON 101 principles, Prof Williams calls the first fundamental law of demand. The higher the price, the lower the demand, and vice versa. The higher the price, the less people will buy, and the lower the price, the more people will buy.

This law is grounded in basic axioms of the human condition.

Thus, we know that when the price of jewelry, cars, houses or any other scarce resource capable of satisfying human needs and wants increases, demand will decrease.

Yet, the argument put forth by proponents of minimum wage laws is the opposite. Raising the price of labor will not change employer demand--in fact it might even increase it.

To any reasoning mind, such a proposition should ring hollow. After all, if raising labor prices slightly prompts no reduction in worker demand, then why not raise wages to the moon? Why stop at the current legal minimums if buyers will take the same amount of labor or more at higher prices?

The train of thought is silly, of course. Meanwhile, proponents of minimum wage laws scratch their heads and demonize employers that implement automation and/or move jobs offshore in response to laws that raise minimum wages. These individuals either don't understand or simply ignore the reality that minimum wage laws constitutue compulsory unemployment.

As Prof Williams observes, economists who contend that the first law of demand doesn't apply to wages are engaging in economic malpractice.

Monday, October 20, 2014

Worldwide Ebola Cases

Crossing that bridge with lessons I've learned
Playing with fire and not getting burned

Graphic shows current number of confirmed Ebola cases worldwide. Judging by current intensity of media coverage, my guess is that most people would be 'over' if they were asked to estimate how many cases currently existed.

Not to downplay the severity of the epidemic. Worldwide death toll has topped 4500, and mortality rate for those infected is 70%.

Moreover, am scheduled to fly to Tampa via Atlanta in about a month for a conference. The thought of imposing a personal airline travel ban has crossed my mind more than once.

Sunday, October 19, 2014

Fountain of Youth

They put a parking lot on a piece of land
Where the supermarket used to stand
Before that they put up a bowling alley
On the site that used to be the local Palais
--The Kinks

Interesting pic of Fountain Square circa 1962. View is looking south across Fifth Street. Where the Albee Theater once stood the Westin Hotel stands today. The bottom of the Carew Tower can be seen at the far right at the corner of Fifth and Vine. The fountain itself, of course, has been moved multiple times over the years.

The Albee Theater, which opened on Christmas Eve 1927, was razed in 1977. On a grade school class field trip, I visited the Albee to see a show. Can't remember the show, but I remember how grand the building looked both inside and out.

Have to agree with the caption. I like the look of Albee-backdropped Fountain Square compared to the post-modern current one.

Saturday, October 18, 2014

Seated Liberty Half Dollar, 1839-1891

"It's a giant of a human thing."
--Paul Scott (The Valley of Decision)

Commencement of half dollar production in the United States began with the Flowing Hair series, followed by the Draped Bust and Capped Bust half. As he tinkered with the Capped Bust design in the late 1830s in light of new steam power mint technology, engraver Christian Gobrecht grew restless for new designs that he could develop on his watch.

Between 1837 and 1840, Gobrecht's influence became apparent. Inspiration for a new half dollar came from noted portraitist Thomas Sully, who had fashioned a neoclassical design originally intended for silver dollars, but subsequently adapted for lower denominations as well.

1856-O Seated Liberty Half Dollar PCGS AU55 CAC

The obverse featured a head-to-toe rendition of Ms Liberty seated on a rock. Her right hand rests on a shield and her left hand grasps a staff topped by a Liberty cap--a symbol of preparedness and freedom. Thirteen stars surround the top and the date appears at the bottom.

The reverse is essentially the same design developed by Gobrecht for the final Capped Bust 'reeded edge' variety. A shielded eagle looking left holds an olive branch in one talon and three arrows in the other. UNITED STATES OF AMERICA surrounds the top, and HALF DOL. below.

Diameter: 30.6 mm
Weight: 13.36 g
Composition: .90 silver; .10 copper
Edge: Reeded

In 1853 the weight of the Seated Liberty half was decreased slightly to 12.44 grams to conserve silver. Diameter and silver/copper composition remained the same. To signify the change, coins minted in 1853 included small arrowheads on either side of the date on the obverse, and rays above the eagle on the reverse. The 'Arrows and Rays' variety was born.

1853 Seated Liberty Half Dollar PCGS XF45 Arrows and Rays

The Arrows and Rays variety was shortlived, however, because circulation wear on the reverse rays was deemed excessive. In 1854, the reverse rays were removed although the obverse rays remained.

1854-O Seated Liberty Half Dollar PCGS AU58 Arrows

In 1856, the arrows were removed, presumably because the reduction in coin weight had become common enough knowledge that the special designation was no longer necessary. The design reverted back to the original 'No Motto' look.

It remained that way until 1866 when IN GOD WE TRUST was added to the reverse. The motto appears in a scrolling ribbon above the eagle. The motto remained on the Seated Liberty half for the remainder of the series.

1880 Seated Liberty Half Dollar PCGS PR63 CAM

In 1873, the weight of the The Seated Liberty half was increased from 12.44 grams to 12.50 grams. The increase was signified once again by adding arrowheads on either side of the date. The 'Arrows' variety lasted two years. In 1875 the arrowheads were removed, and the design remained constant until the series ended in 1891.

1874 Seated Liberty Half Dollar PCGS AU53 Arrows CAC

Save for collectors, the Seated Liberty half seems an obscure coin. After all, it was minted before any American living today was born. However, this series enjoyed a run unequaled among United States half dollars with high silver content. Struck from 1839 to 1891, it circulated from Antebellum thru Civil War and Reconstruction periods. It facilitated commerce during times of spectacular growth in industrial production and standard of living.

The tenure of the Seated Liberty half dollar spanned one of the most remarkable periods in American history.

Friday, October 17, 2014

Household Net Worth

Oh it's too easy to live like clockwork
Tick tock watching the world go by
Any change would take too long
So dry your eyes

Taken from this article, the below chart plots US household net worth (HNW) since the early 1950s. Fairly stable at around 350% of GDP until the late 1990s, when HNW began increasing toward 500% in fits and starts.

The obvious question: How is it possible for households to gain wealth in increasing proportions to overall production? Generally, real productivity improvements should increase output and wealth simultaneously. Plausibly, higher savings rates might generate proportionately more wealth as those savings are invested in productive capital. But we know that US savings rates have been going down, not up.

The answer is that this isn't about changes in real wealth. It is about paper wealth gains. Inflationist policies have distorted the asset side of balance sheets--i.e., assets appear more valuable than they really are.

Overlay a chart of the SPX on the HNW line since the mid 1990s and you'll get the picture.

You can be certain that policymakers get the picture as well.

position in SPX

Thursday, October 16, 2014

Pavlovian Bail Out Cries

You've gone too far this time
But I'm dancing on the Valentine
I tell you somebody's fooling around
With my chances on the danger line
--Duran Duran

No market has likely been more laden with moral hazard than the present one. One indicator of this is constant chatter among market participants and pundits about fresh intervention by the Fed whenever prices meaningfully weaken.

"Prices are lower, give us a bail out."

This has been a reflexive response, similar to the Pavlovian bell, learned and reinforced from numerous cycles of price declines and subsequent interventions.

Consequently, market participants have ratcheted up their risk profiles under the assumption that policy-makers have their backs.

The higher the risk profile, the quicker the Pavlovian response to lower prices and losses.

Wednesday, October 15, 2014

Contagion and Moral Hazard

"You can't make a dead person sick."
--World Health Organization Doctor (World War Z)

Another reason why government is not very capable at containing infectious disease: moral hazard. Many people believe that it is indeed government's role to protect them against infectious disease. They believe that government is acting on their behalf to keep them safe, and that those actions will be effective.

Because they believe that government has their back, people take more risk than they otherwise would w.r.t. actions that might expose them to harmful pathogens. "If it wasn't safe," people reason, "authorities wouldn't permit the action." And, "Government will let me know what to do."

So people think less critically on their own and act more foolishly, thereby raising the probability that they will become infected.

Stated differently, confidence in government causes people to take more risk, which likely exacerbates contagion.

Liberty for Disease Control

"Somewhere in the world, the wrong pig met up with the wrong bat."
--Dr Erin Mears (Contagion)

Ron Paul argues that it is liberty, not government, that is capable of containing infectious diseases such as the Ebola virus. Countries plagued with infectious disease are usually marked by strong central governments and chronic war. Such countries lack the capital necessary to build strong healthcare infrastructure.

Sadly, US foreign policy has tended to prop up dictatorships and promote militarism in these countries. Moreover, President Obama's recent move to send US troops to West African countries to help contain the Ebola disease was done without Congressional approval for this overseas military deployment. Once again, no specifics were provide as to the duration, cost, or even Constitutional basis of this mission.

The people of Liberia and other afflicted nations would be better off if the US government let these countries alone. This does not mean that people around the world should ignore this problem. Instead, it means that private capital and other assistance in the form of industry and charity should be free to voluntarily mobilize to address the problem.

Private investment and trade would help develop strong healthcare infrastructure. Airlines would be free to protect passengers from disease (lest the carriers lose business) while providing safe means of transport for people seeking treatment in the US (which removes incentive for refugees to lie about exposure to the disease). Experimental medicines should not be hindered by regulatory barriers such as those erected by the FDA's cumbersome approval process.

Limiting goverment is the best way to protect and improve health both here and abroad.

Tuesday, October 14, 2014

Resource Dependence Theory

You can't always get what you want
But if you try sometimes you just might find
You get what you need
--Rolling Stones

Resource dependence theory (Pfeffer & Salancik, 1978) posits that organizations engage in exchanges with other entities in their environment to obtain important resources. And because few organizations are self-sufficient with respect to such resources, this situation leads to conditions of interdependence. Interdependence occurs when one actor does not control all conditions necessary for achieving an action or desired outcome (Handfield, 1993).

Faced with external uncertainties, organizations will seek to create negotiated environments (Cyert & March, 1963). When acquisition of important resources is questionable, organizations will reduce uncertainty and manage dependence by structuring exchange relationships in a manner that establishes formal and informal links with other entities (Pfeffer & Nowak, 1976).

These links can often be seen as means for increasing the extent of coordination between exchange partners. In a sense, organizations seek closer ties to obtain 'collaborative advangage' (Kanter, 1994). Organizations operating in more uncertain environments have greater need for closer relationships with suppliers (Pfeffer, 1972).

Organizations might use various strategies for managing their resource environments to reduce uncertainty (Pfeffer, 1972). These strategies include cooptation (absorbing representatives of powerful groups into the organization), long term contracts, illegal collaboration (e.g., price fixing, conspiracies), joint ventures, and using the power of the state (e.g., obtaining subsidies, entry barriers, price floors/ceilings), and mergers.

It should be noted that dependencies that must be managed extend beyond material resources. For example, status, reputation, and legitimacy are vital resources that must be acquired from external sources as well (Eisenhardt & Schoonhoven, 1996).


Cyert, R.M. & March, J.G. 1963. A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice-Hall Inc.

Eisenhardt, K.M. & Schoonhoven, C.B. 1996. Resource-based view of strategic alliance formation. Organization Science, 7: 136-150.

Handfield, R.B. 1993. A resource dependence perspective of just-in-time purchasing. Journal of Operations Management, 11: 289-311.

Kanter, R.M. 1994. Collaborative advantage. Harvard Business Review, 74(4): 96-108.

Pfeffer, J. 1972. Merger as a response to organizational interdependence. Administrative Science Quarterly, 17: 382-394.

Pfeffer, J. & Nowak, P. 1976. Joint ventures and interorganizational dependence. Administrative Science Quarterly, 21: 394-418.

Pfeffer, J. & Salancik, G.R. 1978. The external control of organizations: A resource dependence perspective. New York: Harper & Row.