Sunday, December 21, 2014

Academia's Liberal Bias

"I'd rather be with someone for the wrong reasons than along for the right."
--Amanda Jones (Some Kind of Wonderful)

Wanted to bookmark this piece for future use. It reviews an in-press paper that addresses liberal bias in academia. The paper (Duarte et al. 2014) focuses on social sciences and humanities--specifically in the area of social psychology.

Browsing the paper, I found a number of interesting citations that might prove useful in the future.

The authors' thesis is that growing liberal bias in the social sciences has been reducing the quality of research. Lack of political diversity undermines the validity of research through various mechanisms including groupthink and confirmation bias. These mechanisms steer researchers away from important yet politically unpalatable research topics, and and produce conclusions that mischaracterize reality.

The authors, of which the law of averages suggest that at least four of the six are liberals, appear to have checked their own biases at the door and proceded to write a well thought assessment of the state of academic inquiry in a biased context.

Their arguments and findings likely apply to all academic disciplines.

Reference

Duarte, J.L., Crawford, J.T., Stern, C., Haidt, J., Jussim, L. & Tetlock, P.E. 2014. Political diversity will improve social psychological science. Behavioral and Brain Sciences. (in press)

Saturday, December 20, 2014

Policymakers NEED Inflation

"The mother of all evils is speculation--leveraged debt."
--Gordon Gekko (Wall Street: Money Never Sleeps)

This missive is exactly right. The Fed and other central banks NEED inflation. Properly defined, inflation is expansion of money and credit supply. A system gets leveraged as credit inflates.

With current leverage in the system, it takes only a small decline in asset prices to turn balance sheets upside down. Because our incomes cannot support current level of debt service, we must resort to ever more borrowing to make ends meet.

This is why the Fed keeps pushing out the date for raising rates. Still grasping some principles from ECON 101, the Fed knows that raising rates (raising the price of debt) reduces quantity of debt demanded.

No credit expansion->not enough debt service->not enough stimulated demand->falling prices->upside down balance sheets->insolvency.

So the ponzi continues until credit can no longer be created at ZIRP or NIRP. Then comes pure money printing a la Weimar.

A most laughable claim is that the Fed is an inflation fighter. In reality, the Fed is an inflation factory.

Friday, December 19, 2014

Opening the Curtain

Someday soon we'll stop and ponder
What on earth's this spell we're under
--Styx

As ZeroHedge observes, even mainstream media outlets are beginning to catch on. Where would equity markets be without the Fed? The press is learning the answer.


This is not to say that journalists or everyday citizens believe that Fed involvement in stock markets is bad. In fact, they might welcome manipulation as long as prices move in their favor.

Regardless, more are realizing just how rigged these markets are.

position SPX

Thursday, December 18, 2014

NIRP

Don't ask me what I want it for
If you don't want to pay some more
--The Beatles

First we had zero interest rate policy (ZIRP). Now we have negative interest rate policy (NIRP). In NIRP, depositors don't get paid interest rates on their funds. They pay banks for the privilege of keeping their funds on deposit.

In June the ECB announced the first major central bank NIRP. Last night the Swiss National Bank (SNB) followed suit.

What's the purpose of NIRP? Bureaucrats want people to spend and invest in risky assets instead of save. Thus, they place a penalty on keeping wealth in 'risk free' cash.

The stupidity behind NIRP cannot be overstated. Reasons as to why NIRP consitutes supremely misguided policy include:

Class discrimination. Old people and others with low risk appetite are hit with what is essentially a tax. People who rely on steady income streams not only get no income, but they must surrender principle to depository institutions.

Inviting structural instability. NIRP is a policy of financial repression. To the extent that policymakers are successful in chasing investors out of cash and into risk, then the finanical system becomes more vulnerable to exogenous shocks that could vaporize massive amounts of wealth.

Bank runs. Modern day banks are bankrupt from the get go. They typically keep less than one dollar in their vaults for every ten they take in. This means that demand for withdrawal exceeding 10% of deposits cannot be met. When they must pay rather than get paid for their deposits, depositors are more likely to withdraw funds. This will put pressure on already thinly capitalized banks to maintain enough equity to remain solvent. Banks may face a Cyprus Syndrome.

More leverage. With NIRP, borrowers essentially get paid to take out loans with a negative cost of carry. Leverage in the system climbs.

Reduced savings. Worst of all, negative interest rates discourage saving. Any interventionary policy that suppresses interest rates below market is bad in this regard. However, at a time when world savings are already low or negative, NIRP is a disaster for future prosperity--one that will enslave our children and coming generations for years.

Surely, history will look back on NIRP with disdain.

Wednesday, December 17, 2014

Kudos Elizabeth Warren

Been away
Haven't seen you in a while
How've you been?
Have you changed your style
--Dave Mason

Usually, what comes out of Elizabeth Warren's mouth is pure drivel. But, as they say, even a broken clock gets it right now and then.

Warren was one of the thumbs down Senate voters on the federal budget bill. She railed against the banker friendly elements of the bill and the moral hazard that it promotes.

Directing her remarks toward the self-proclaimed 'small government' types who supported the bill, "If you believe in smaller government, how can you support a provision that would expand a government insurance program and put taxpayers on the hook for the riskiest private activities?"

She's correct.

Of course, Warren herself is not a small government type, and she supports expanded government programs and putting taxpayers on the hook in other areas. She's doing what politicians do so well: assuming the role of the pot calling the kettle black.

Still, Liz, it's a start. You're on the right track this time. Keep coming back!

Morning Optimism

"I love the smell of napalm in the morning."
--Lt Col Bill Kilgore (Apocalypse Now)

Once again, the tenor of the tape seems to be changing. To be sure, we have had false signals before and this may be another--particularly with the FOMC announcement out this pm which has been good for a few stick saves during this bull run.


Recently, however, green morning futes have been sold when the bell rings. This takes bites out of bullish optimism, and leaves traders lugging inventory bought higher. If this happens enough times then optimists become pessimists and buying turns to selling.

Once again we had a gap higher out of the gate. Keep half an eye on it.

position in SPX

Tuesday, December 16, 2014

Liberty Xmas List

Frank Cross: Grace, put yourself down for a towel, too.
Grace Cooley: What about my bonus?
Frank Cross: Towel and a facecloth.
--Scrooged

After lamenting the passage of the federal budget, Ron Paul offers a Christmas list supportive of liberty.

1) Shut down the Federal Reserve, an institution that not only degrades citizen's lives thru inflation, but also enables the federal government's massive borrowing habit.

2) Dismantle the IRS, as the federal government is capable of fulfilling its constitutional requirements without an oppressive income tax.

3) Cease US militaristic foreign policy by bringing home all troops and ceasing all foreign aid. Replace it with a policy of peace and free trade with all.

4) Shut down agencies that promote domestic militarization such as the CIA, NSA, TSA. End domestic spying and the unconstitutional war on drugs.

5) End all welfare, including corporate welfare and programs that benefit the politically connected. Phase out low income welfare over time.

6) Padlock the Department of Education and government-influenced education of our children.

7) Scrap Obamacare in favor of a true free market in healthcare.

Hit your knees and pray for these this Christimas.

Monday, December 15, 2014

Energy Credit Spreads

There's no need for argument
There's no argument at all
And if you never hear from him
That just means he didn't call
--Van Morrison

Energy credit spreads continue to blow wider--particularly at the high yield (read: junk) end of the spectrum.


Huge declines like we've seen in oil, while good for consumers at the pump, tend to wreak havoc in structured (read: leveraged), finance. Producers, debtors, creditors feel balance sheet stress when underlying collateralized assets drop in value.

As we observed six years ago, when leverage gets high enough and asset prices get low enough, things start blowing up and the dominos start falling.

position in SPX, oil

Sunday, December 14, 2014

Banker's Budget Passes Senate

"You can take that to the bank!"
--Senator Vernon Trent (Hard to Kill)

The banker friendly federal budget bill jammed thru the House a couple nights back also passed the Senate on, yep, a Saturday night. Vote was 56-40. Interesting mix of no votes from both sides of the aisle, including a straight down vote by Tea Party types.

Now it is on to the president, who has been a BBBF (big banker's best friend) during his time in office.

Saturday, December 13, 2014

Liberty and Property

Benjamin Martin: May I sit with you?
Charlotte Selton: It's a free country. Or at least it will be.
--The Patriot

Wonderful Mises essay originally given as a speech at Princeton University in 1958. Essentially, Mises reviews economic system progression toward capitalism and associated political progress toward liberty.


So many compact insights. Just a few here that stuck out to me:

"[The Industrial Revolution's] main achievement was the transfer of economic supremecy from the owners of land to the totality of the population." (19)

"There is under capitalism one way to wealth: to serve the consumers better and cheaper than other people do." (20)

"Representative government by the people is an attempt to arrange constitutional affairs according to the model of the market." (21)

"Socialism substitutes the sovereignty of a dictator, or committee of dictators, for the sovereignty of the consumers." (25)

"Society is essentially the mutual exchange of services." (34)

"Government is essentially the negation of liberty." (34)

"Capitalistic business is not the perserverance in the once attained state of production. It is rather ceaseless innovation, daily repeated attempts to improve the provision of the consumers by new, better and cheaper products." (42)

"[Private property] is the means to stimulate a nation's most enterprising men to exert themselves to the best of their abilities in the service of all people." (44)

"The distinctive principle of Western social philosophy is individualism. It aims at the creation of a sphere in which the individual is free to think, to choose, and to act without being restrained by the interference of the social apparatus of coercion and oppression, the State." (48)