Monday, November 24, 2014

Central Banks and Social Instability

There's a room where the light won't find you
Holding hands while the walls come tumbling down
When they do, I'll be right behind you
--Tears for Fears

Minsky-esque hypothesis that efforts by central banks to stabilize economies and financial markets will create social instability as the wealth chasm grows between people at the top and bottom of the social pyramids. That social instability, in turn, could exert significant political pressure on the system to remove interventionary monetary policy.

Of course, such social instability could also spawn riots in the streets.

Sunday, November 23, 2014

Uncertainty Avoidance

I can see clearly now the rain is gone
I can see all obstacles in my way
--Jimmy Cliff

Uncertainty avoidance is the degree to which a culture prefers structured over unstructured situations. In high uncertainty avoidance cultures, people have high anxiety about uncertainty and ambiguity. Laws, rules, regulations, and controls are designed to reduce uncertainty. Things that are new and different are considered dangerous and risky.

Low uncertainty avoidance cultures are less dismayed by ambiguity and have greater tolerance for various options. There are less rules and more risk taking. Change is more readily accepted.

Hofstede (1978, 1980, 1997) developed the uncertainty avoidance construct in the context of country cultures, although it obviously applies elsewhere.


Hofstede, G. 1978. The poverty of management control philosophy. Academy of Management Review, 3: 450-461.

Hofstede, G. 1980. Culture's consequences: International differences in work-related values. Beverly Hills, CA: Sage Publications.

Hofstede, G. 1997. Cultures and organizations: Software of the mind. New York: McGraw-Hill.

Saturday, November 22, 2014

Hungry Alligator

Out along the edges
Always where I burn to be
The further on the edge
The hotter the intensity
--Kenny Loggins

Plot 20+ years of the SPX and the VIX and what do you get? The 'hungry alligator' pattern. Currently the gator's jaws are opened to record wides.

Poised to snap shut, perhaps, on nearby risk.

position in SPX

Friday, November 21, 2014

Senior Savings Famine

Sun streaking cold
An old man wandering lonely
Taking time
The only way he knows
--Jethro Tull

Charles Schwab estimates that people aged 65+ lost more than $2000/yr on average due to the Fed's financial repression programs. Because seniors tend to spend about $2 for every $1 of interest income, Schwab estimates that financial repression has cost the economy upwards of three quarters of a trillion dollars in lost spending by seniors over the past six years.

Moreover, many seniors have also taken on more risk in search of yield bearing instruments. Instead of CDs with puny yields, for example, many seniors have substituted dividend-paying stocks and high yield (read: junk) bond funds.

Seniors and other savers have been experiencing a famine that Charles Schwab suggests is coming to an end with the recent closing of the Fed's QE3 project. Not so fast, Chuck. Central banks around the world, recently those of Japan and China, appear to revving up their interest rate suppression machines.

And just because the Fed is no longer buying bonds in large size does not mean that it intends to raise short rates (which have large influence on yields linked to savings vehicles) any time soon. Or that the Fed wouldn't re-engage their QE habit at the drop of a stock price, er, hat.

Seniors and others hungry for yield are likely to continue down the path toward starvation.

Thursday, November 20, 2014

Presidential Nullification

And the men who spurred us on
Sit in judgment of all wrong
They decide and the shotgun sings the song
--The Who

Nullification is usually defined in the context of states refusing to enforce what are perceived to be bad laws passed by the federal government. In this context, nullification can be seen as an expression of distrust in government and as a mechanism for coping with oppressive rule. 

More broadly, nullifaction can be seen as overt refusal to enforce law by an institutional entity. States can refuse to enforce a law. So could branches of the federal government.

Currenly, President Obama is preparing an executive order that would effectively nullify federal immigation law. Similar to Judge Nap, I can sympathize with this action to some degree. Under natural law, people should be free to travel where they wish--provided that they do not infringe on someone else's property rights.

However, under current our current system, open immigration policy in the US would infringe on the property rights of others. This is because immigrants could tap various social welfare programs funded by property taken from some people by force. Immigrants who partake in those services are party to robbery.

A president who selectively enforces federal law also portrays himself as a discretionary ruler who dictates legality by fiat--someone who believes in the rule by authority instead of rule of law and who thinks that he is above the law.

Finally, a president who nullifies federal law violates his oath of office. He essentially condones lawlessness. When someone else, be it another government official or Everyday Citizen breaks a law, the president cannot complain or seek to prosecute.

Because he has done the same thing himself.

Wednesday, November 19, 2014

Information Processing Theory

I want to know
What you're thinking
There are some things you can't hide
--Information Society

Information processing theory (Galbraith 1973; Tushman & Nadler 1978) views effective production as the organization's central objective. In order to effectively produce, the organzation must obtain and process information relevant to its 'task environment' (market demand, customer requirements, new technologies, regulations, etc).

The difference between information required to perform a task and the information already processed is known as 'task uncertainty' (Galbraith 1973: 5). Uncertainty creates lack of clarity about what must be accomplished to satisfy market needs, and generates exceptions to the status quo (Ford et al. 2014). At low levels of uncertainty, exceptions to what is already known are passed up the decision-making hierarchy for resolution.

However, as uncertainty increases, exceptions mount, and the hierarchy must process ever greater quantities of information in order to achieve acceptable performance (March & Simon 1958). At some point, information processing capacity of the hierarchy is exceeded, and exceptions can no longer be handled in conventional channels without lowering performance.

To take pressure off the hierarchy and improve performance, organizations must develop information processing mechanisms that enable effective task execution. As uncertainty increases, performance should benefit from coordination and control mechanisms that reduce information processing requirements. Joint planning, establishing standard operating procedures, and creating self-contained work groups decrease the need for frequent interaction and take pressure off the hierarchy as long as task performance remains within specificiation.

If uncertainty continues to increase, then benefits gained from mechanisms that reduce information processing requirements no longer compensate for the large number of exceptions that must be addressed. To cope with this situation, the organization must install mechanisms that increase information processing capacity.

Mechanisms for increasing information processing capacity are of two general types depending on the formality of the information. When the information to be processed is formal, then management information systems that span work unit boundaries create common languages and higher levels of information processing. For processing informal information, lateral relationships that cut across lines of authority create joint decision processes that effectively handle more data. Cross functional teams, task forces, and integrating roles such as project or program managers exemplify lateral mechanisms that add information processing capacity.


Ford, M.W., Evans, J.R. & Masterson, S.S. 2014. An information processing perspective of process management: Evidence from Baldrige Award recipients. Quality Management Journal, 21(1): 25-41.

Galbraith, J. 1973. Designing complex organizations. Reading, MA: Addison-Wesley.

March, J. & Simon, H. 1958. Organizations. New York: John Wiley & Sons.

Tushman, M.L. & Nadler, D.A. 1978. Information processing as an integrating concept in organizational design. Academy of Management Review: 3: 613-624.

Tuesday, November 18, 2014

Fed Fog Index

This one, he got some princely racket
That's what I said now
Got some big seal upon his jacket
--Spin Doctors

Interesting analysis by The Economist on the increasingly opaque wording of FOMC statements. The fog index began increasing around the year 2000 under Greenspan's tenure. It then jumped higher with the commencement of Quantitative Easing under Bernanke.

It's been ratcheting higher since.

The Fed's communication strategy: Make it sound complicated, and perhaps the people will let us get away with murder. Murder of the dollar, that is.

Monday, November 17, 2014

Stability and Adaptation

"I belong to the warrior in whom the old ways have joined the new."
--Katsumoto (The Last Samurai)

Stability is often defined in terms of resistance to change or ability to withstand force without distortion. When viewed in this manner, stability relates to maintaining the status quo.

In turbulent environments that demand change, however, clinging to the status quo is maladaptive. Resistance to change brings instability (Farjoun, 2010).

Dynamically, stable systems are those capable of responding to change when necessary.


Farjoun, M. 2010. Beyond dualism: Stability and change as a duality. Academy of Management Review, 35: 202-235.

Sunday, November 16, 2014


Can we last forever
Will we fall apart
At times it's so confusing
Questions of the heart

A month back we gazed at Fountain Square circa 1962. The below pic shows Fountain Square in 1875. The view is looking east on Fifth Street.

When I view old pics like this, I often wonder what in the picture might still be around today. None of the people, of course. Very little of the infrastructure either.

Maybe some of the items in people's pockets?

1875-CC $20 Liberty PCGS XF45 CAC

Here's a twenty dollar gold piece struck in 1875 at the Carson City Mint. The CC Mint itself was shut down in 1893 although the building still stands as the Nevada State Museum.

How many hands have touched this coin over its nearly 140 yrs of existence? Perhaps it could have been found, shiny and new, in someone's pocket that day on Fountain Square.

Saturday, November 15, 2014

Mutual Fund Epicenter

This wouldn't be the first time
That things have gone astray
Now you've thrown it all away
--Bryan Adams

Interesting theory floated on Ask Fleck yesterday that the Next Time Down will be triggered by redemptions in fixed income mutual funds. Leveraged loans and junk bonds are beginning to show impairment.

If income sensitive investors begin liquidating fixed income mutual fund positions out of necessary (because they have reached for yield in overly risky bond funds), then the redemption ripple will work from periphery to core--taking out stocks as well as bonds.

position in SPX