Thursday, October 30, 2014

QE3 Beneficiaries

Everybody stop
Hey, what's that sound?
Everybody look what's going down
--Buffalo Springfield

The FOMC announced yesterday that its bond buying program known as QE3 would indeed end this month. Who has benefited most from this program? The big banks--both domestic and foreign.

Since the onset of QE3, bank reserves have increased by $1.3 trillion. This is money printing, pure and simple.


Most of this has flowed to the big banks.


There was no room at the inn, it seems, for smaller banks. Their competitive position has been weakened w.r.t. the big guys as a result of QE3.

How this form of corporatism remains invisible to the general public continues to amaze.

Wednesday, October 29, 2014

Six Sigma Days

Bits of my creation
Is it real?
--Oingo Bingo

For me, six sigma days are those where so many things stray from normalcy or expectations that the probability or likelihood of their joint occurence seemingly approaches the six sigma level of .00034% (3.4 parts per million).

Yes, variety is the spice of life.

Of course, chaos can be seen as the ultimate experience of variety...

Tuesday, October 28, 2014

Robot Fallacy

The problem's plain to see
Too much technology
Machines to save our lives
Machines de-humanize
--Styx

Another refutation of what might be called the 'robot fallacy'--i.e., the wrongheaded proposition that machines installed to improve productivity will permanently displace workers.

Versions of this theory have been floated for hundreds of years and have been put down for hundreds of years.

What I like about this particular refutation is its focus on entrepreneurial calculation. Entrepreneurs constantly seek to employ capital in manners that will return more than the capital's cost. Thus, entrepreneurs constantly look for new ways to satisfy customers.

If customers believe that they will be satisfied, then they will trade with the entrepreneur. Customers trade portions of their income, obtained thru productive effort (of their own or of someone else's) for the goods and services offered by the entrepreneur.

However, this exchange can only occur if customers have been sufficiently productive to generate income for trade.

The robot fallacy basically proposes that the aggregate decisions of entrepreneurs to install machines to boost productivity will lead to a situation where the entrepreneurs will possess capital that is essentially worth nothing because there will be few buyers willing to afford the goods and services produced by robot-laden processes.

This is unlikely.

Because capitalism is a self regulating process, if their incomes are falling because customers are not buying their products, then entrepreneurs will cease allocating capital to processes that are not providing adequate returns on investment. Entrepreneurs will not purchase and install equipment to produce products for which there is no market.

Instead, as environmental uncertainty grows, it seems likely that entrepreneurs will employ more humans to do work. Human labor is far more versatile than machinery, and it can move rapidly in response to greater opportunities in turbulent times.

What bothers me is that we are seeing continued capital investment in many industries despite rising levels of environmental uncertainty that would seemly discourage high fixed cost investments. Capacity continues to climb at rates that outstrip demand, causing secular decline in capacity utilization.

The self regulating mechanism does not seem to be working properly. My sense is that interventionary forces are throwing off entrepreneurial calculation. In part, these interventions create moral hazards. Entrepreneurs take more risk than they should when they think that their behavior is being subsidized or insured.

Robots can be over-employed only in hampered markets that distort entrepreneurial calculation.

Monday, October 27, 2014

Failing Rallies

Dr Alexander Denny: You know you don't have to do this.
Doug Carlin: What if I already have?
--Deja Vu

Interesting analysis by John Hussman of the rigorous rallies that often follow initial technical breakdowns of secular trends and major subsequent declines. He shows the failing patterns at work in 1929, 1972, 1987, 2000, and 2007.

We'll see whether history once again rhymes in the present case.

position in SPX

Sunday, October 26, 2014

Info Tech and Invasion of Privacy

"There goes the Fourth Amendment...or what's left of it."
--Carla Dean (Enemy of the State)

Last Friday's Blue Bloods episode included a scene where a waiter secretly videotapes a conversation Henry Reagan is having with an old friend, and then posts it on the YouTube. Because the conversation includes some politically incorrect anecdotes, the elder Reagan is later chastised by the NYPD PR guy for his lose lips in a public place.

Henry countered that what was done amounted to an illegal wire tap--invasion of a private conversation.

He's right. Technological advances do not give an individual the right to peer into (and share) a conversation between two people that is meant to be private--even if that conversation is held in a public place. No different than tapping phones or peeping Toms.

This is a fourth amendment issue. Convict one YouTube poster (or one NSA agent) and info tech becomes less harmful and more helpful.

The right of all individuals to be secure in the person and possessions is insecure until then.

Saturday, October 25, 2014

Economics for Youngsters

They're seeing through the promises
And all the lies they dare to tell
Is it heaven or hell?
They know very well
--Journey

Some lessons in economics for youngsters offered by the late great Leonard Read. Not sure I'd pick the same items, but the notion of structured lessons in elementary economics and finance seems essential.

The young generation is going to need all of the economic and financial literacy it can assimilate to right the wrongs being done by adult generations.

Friday, October 24, 2014

Today's Stock Pools

"To be normal, to drink Coca-Cola and eat Kentucky Fried Chicken, is to be in a conspiracy against yourself."
--Jerry Fletcher (Conspiracy Theory)

Back in the 1920s groups of speculators joined together in 'stock pools' to manipulate stock prices. These syndicated operators sought to push prices around in order to attract uniformed investors--particularly trend followers. Ultimately, the goal was to 'fade' naivety, meaning selling when the uninformed were buying or vice versa.


I wonder whether stock pools might not be with us again. Rather than being groups of private investors, however, might today's stock pools be government-led syndicates?

The government-network would seek to operationalize non-economic agendas. For example, the goal could be to levitate security prices under the assumption that people view higher stock prices as indicators that economies (and government policies aimed at improving them) are ok. Stated differently, the goal would be to prop up public confidence using methods that could be viewed as unconventional propaganda.

Government officials could operate stock pools directly, or work via networks of carefully selected agents.

The key question, of course, is how such pools would work. A number of key parameters would have to be met. For example, presumably, these operations must be covert lest the public would see the naked emperor.

Hopefully, we'll entertain this question in future posts.

position in SPX

Thursday, October 23, 2014

Dollar v Gold

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

Many have been blaming the US dollar's recent rally for weakness in gold. The idea is that gold is the 'anti-dollar.' As the value of the dollar drops, then more are required to buy an ounce of gold.

For perspective, I pulled monthly charts for the USD and gold since 1990.


One can see that the dollar rally, which began earlier this year, merely brings the USD toward multi-year resistance in the 87ish zone. However, the USD remains on the lower end of its range since 1990.


Gold, on the other hand, has pulled back about 40% from a hyperbolic move that ended in 2012. Yes, much of that move corresponded to the dollar's decline from high to low between 2002 and 2008. And that will have an outsized influence on statistical correlations calculated between the two series. But eyeing these two charts clearly suggests that other factors have influenced gold price besides the changes in the USD.

Stated differently, viewing gold's movement as the function of dollar movement presents an incomplete picture of the dynamics at play.

position in gold

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.