Thursday, December 31, 2009
--Lee (Enter the Dragon)
As we open the door into 2010, I still sense a pretty good chance of another deflationary wave lower. Given US debt levels that have only increased over the past year, it seems straightforward to speculate about a domestically led deflationary mechanism.
Increasingly, however, I wonder whether the mechansim might be situated in China. China's planners have been stepping on the economic gas pedal and signs of overcapacity are growing. Moreover, urban Chinese real estate markets are sporting that familiar bubblicious feel.
Centrally planned systems inevitably misallocate capital in a big way. If China's planners have mistakenly allocated enormous sums of capital toward facilities, raw materials, and, yes, US debt that they 'shouldn't' have, then the bust that follows will almost certainly resonate globally in a deflationary fashion.
Wednesday, December 30, 2009
Gee it's good to be back home
Leave it till tomorrow to unpack my case
Honey disconnect the phone
James Turk questions whether sovereign debt defaults signal the end of socialism. Doesn't seem eminent to me, but he's correct that insolvency of socialistic systems is inevitable.
He captures a few nice quotes about socialism/statism worthy of record for future reference.
"Socialism is workable only in heaven where it isn't needed, and in hell where they've got it."
"The State is that great fiction by which everyone tries to live at the expense of everyone else."
"The problem with socialism is that you eventually run out of other people's money."
"The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism in the equal sharing of miseries."
Would like to have specific cites for these...
--Captain Marko Ramius
Professor Kostohryz reminds us of the lack of value in making predictions for the new year.
I also liked his approach to scenario analysis. He assigns a 65% chance of a self sustaining recovery and a 35% of a double dip recession. While that would seemingly tilt his financial choices toward the bullish side, he also notes that the consequences of the double dip would be drastic. As such, this is keeping him in cash till he sees the odds more in his favor.
Nice lesson in a 'weighted average' probability assessment--weighted based on the severity of being wrong.
Tuesday, December 29, 2009
Making chicken a la king and peanut butter swirls
But she knew in her heart there had to be something better somewhere
Why are missives that appear in Op-Ed sections labeled opinion and not fact? Primarily because opinions are contestable.
For instance, opinion writers like this one can make claims about events (e.g., the first major wave of banking deregulation was done by the Reagan administration), or about cause and effect (e.g., no serious bank crackups from 1945 thru 1970s were due to a tightly regulated banking system) that don't have to be defended by data or by careful reason.
Were such claims submitted to intellectually honest scrutiny, they are unlikely to be viewed as valid.
As such, opinions tend to be easier to generate than more reasoned forms. Less work.
One reason why I'm not particularly fond of verbal debates is that they nearly always reflect battles of opinion. It is particularly difficult during conversation (at least for me) to have command over the thought process or facts necessary to justify claims in a valid manner.
Writing, however, puts claims to the test. Written claims become subject to self-scrutiny and to the scrutiny of others.
Well reasoned outlets are careful to admit only those writings that withstand intellectually honest review.
Op-ed outlets don't do this, which reduces their value to the critical thinker.
Monday, December 28, 2009
But nothing hides the color of the lights that shine
Electricity so fine
Look and dry your eyes
Bonds have been getting sold. Although not huge in absolute terms, 10 yr yields have risen nearly 20% since early December. From where I sit, the technical picture suggests higher rates, as a multiyear downtrend appears may be reversing. Moreover, the pattern has a reverse head and shoulders-ish look to it.
It goes without saying that higher rates are a negative for an economy dependent on stimulus and credit.
What might be moving this market? Another $trillion spending bill, raising of the debt ceiling, and Senate passage of the health care bill for starters. All of these suggest more credit demand by the gov't, and lenders are raising the price. It's also hard not to view these initiatives as inflationary.
A move above TNX 40 (4% 10 yr yield) will likely grab significant attention.
position in USD
Saturday, December 26, 2009
Hazy eyed they catch my glance
Pleasant shudders shake their senses
My warm momentum throws their stance
After the Senate's early Xmas Eve morning passage of its health care bill, President Obama served up some glad tidings in a press conference (click the video link here). Those who accept the claims made here are not engaging their brains.
The president clearly paints the insurance industry as primary bad guys here. To the extent that industry participants do actually possess pricing power, much of it comes from regulation. For example, current regs prohibit interstate competition.
If we focus on the 'problem' of rising health care costs, then there are other factors contributing at least as equally, including out of control malpractice process, presence of federal programs and subsidies (currently at ~45% of US health care expenditures, and a design that favors a 3rd party payment system--which removes consumer motivation to shop for value.
The bill on the table does nothing but elevate these factors to a higher level of relevance.
I found it amusing that the president equates this bill with the most significant piece of 'social legislation' since Social Security in the 1930s and Medicaid in the 1960s. Those two programs, of course, have generated a pile of $30+ trillion of unfunded liabilities--and growing.
Near the end of his remarks, the president offers that this bill, should it be voted into law, will prevent us from 'dooming' future generations from rising health costs, reduced health coverage, and exploding deficits.
Yet, only fools would not conclude that it is precisely this future, one of squalor, that is the odds on favorite should this bill come to pass.
Thursday, December 24, 2009
--Benjamin Franklin Gates (National Treasure)
It has long been understood that individuals are prone to cede some amount of liberty and freedom to an abusive government before pushing back. When scribing the Declaration, Thomas Jefferson was careful to note such:
"Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed."
However, when that breaking point is reached, notes Jefferson:
"But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security."
Ben Gates, I think you nailed it...
The abuses and usurpations are mounting at an accelerated pace. I find it difficult not to wonder whether the health care issue pushes things over the top.
Wednesday, December 23, 2009
--Sibylla (Kingdom of Heaven)
How do you view the natural state of individuals?
Do you believe that the natural state of individuals is to be free, where individuals are at liberty to pursue their own destinies as they see fit?
Or do you believe that the natural state of individuals is to be restrained, where individuals must conform to the will of others?
A strong view in either direction is likely to lead person down completely different paths in life.
The Founders were strong in their view, and it led them to amazing achievements.
I read the news today, oh boy
Four thousand holes in Blackburn, Lancashire
And though the holes were rather small
They had to count them all
And now they know how many holes it takes to fill the Albert Hall
My sister tosses another log onto the firey debate about media bias. The general argument has been with us for some time and usually follows a common sequence. First one or more media outlets are identified that purportedly present limited viewpoints on a story that merits multiple perspectives. Evidence is then offered in support of this claim (ironically, such evidence often seems quite one sided itself). Finally, it is often suggested that something must be done to change this bias, or that a particular outlet's pattern should be emulated.
One issue with this train of thought is the underlying assumption that media outlets 'should' be unbiased in the first place. In markets, supply follows demand. If consumers of media content favor drivel over sound thought process, then that is what suppliers will deliver. And, if you agree with the claim that there has been a general decline in critical thinking among US citizens, then it should be no surprise that providers have segmented to cater to particular taste preferences for biased content.
If there is an unmet need for balanced, thoughtful content, then opportunity exists for entrepreneurs.
Particularly on the web, some innovators can be observed pursuing such an objective.
Tuesday, December 22, 2009
In black and white, they really, really ought to know
--Tears for Fears
If you seek understanding of the Depression from the a classical economic perspective, there's none better than Murray Rothbard's work. Rothbard was a student of credit expansion and contraction (a.k.a. booms and busts), and his apolitical style is fresh and fun to read.
In this missive, Rothbard refutes the claim that the Depression was a consequence of 'free market capitalism' gone awry. As he notes, markets were not free during the Roaring Twenties runup into the period. Bureaucratic policies, such as ultra loose credit from the Fed, blew a bubble that ultimately burst. Subsequent intervention by bureaucrats to 'fix' the bust merely extended the corrective period.
Indeed, as Rothbard notes, never in previous US history had there been such significant intervention, nor had there been such a drawn out depression.
History often rhymes...loudly.
See Rothbard (1963) for his seminal cite-laden work in this area.
Rothbard, M.N. 1963. America's Great Depression. Princeton, NJ: D Van Nostrand Co.
Monday, December 21, 2009
All round the day was going down slow
Nice comparison graph of where the S&P stands versus two other prolonged market downturns. Note that we're only halfway thru the 20 yr time scale. And that during both the 'Depression' and 'Japan' comparison series touched -80% at least once during the 20 yr period.
What do all 3 of these periods have in common. Massive credit expansion followed by a bust, a.k.a. deflation.
position in S&P
--Jefferson Smith (Mr Smith Goes to Washington)
Following nearly two decades of informal development and two years of formal drafting and revision, bureaucrats quickly pushed the Federal Reserve Act thru holiday thin House and Senate votes just before Christmas in 1913.
Fast forward 96 years and we find the Senate trying to jam thru a $trillion health care bill. A final vote is scheduled for, yep, Christmas Eve.
When politicians seek to push bills thru holiday periods, they often want to exploit distraction.
By many measures, The Federal Reserve Act has proven to be one of the most consequential pieces of legislation enacted in United States history. Distracted citizenry has paid dearly for chronic inattention.
Does history repeat with the health care issue?
Sunday, December 20, 2009
Carmen Donnelly: "He won't, you know. He doesn't stand for baloney."
At last week's global warming mtg in Copenhagen, President Obama once again proclaimed that the 'science' of global warming is not up for debate.
This, of course, is not true as nearly every claim offered by global warming proponents is contestable.
The purpose of science and inquiry should be pursuit of the truth. The truth is an idealistic construct that will likely never be completely elaborated. Thru iterative learning process, however, progress can be made.
When doors leading toward inquiry and reasoned debate are closed, then science ceases to exist.
What is called 'science' is instead propoganda used by bureaucrats to pursue political agendas.
--Leroy Green (The Last Dragon)
Many folks point toward the 21st century as belonging to China. On the surface, it seems 'obvious.' A billion in a half people now in the 'developing' stage of economic activity. Economically, China's growth has been on a moonshot. Multi-consecutive years of double digit economic growth has vaulted China's economy into the #4 slot in the world.
Few people, however, seem to inquire about the factors behind China's quick rise. Let me offer a couple.
Cheap credit world wide. Low cost borrowing has goosed world demand for stuff, as well as investment in Chinese productive capacity.
China credit. China has been recycling funds received from others into extending even more credit to borrowers.
Centrally planned supply. China is a communist country that operates a centrally planned economy. The planners have 'decided' that China should become a world power, and they have been channeling resources toward export driven industries.
On the surface, the planners' mercantilistic strategy appears smart, as China's positive trade surpluses are the envy in the world.
What we know based on history, however, is that central planners chronically misallocate resources over time. Planners have to get two things correct: properly allocating resources for today, and then continually adjusting those resources based on the dynamics of tomorrow.
This is a tall order. My sense is that China's planners' will fail at some point, with consequences that will certainly spill over to the world.
Currently, there are growing signs of over supply in many Chinese sectors. Yet China's planners keep adding capacity and buying commodities such as steel, copper, and oil to support them.
This has the makings of a socialistic bust that, should it occur, will send deflationary waves that abroad.
Friday, December 18, 2009
--Floor trader (Trading Places)
Why is herding such a dominant social phenomenon? We see it in market behavior, where buyers are higher and sellers lower. We see it in fashion trends, political movements.
Some suggest it's in our genes. Survival instinct at work. Just as animals bunch together, we perceive strength in numbers.
But we're not like other animals. What separates us from other organisms is our sense of self-awareness. Reliance on our limbic systems is rarely necessary because we have the capacity for reason.
Reasoning permits us to process information and make rational choices. We are in charge if engage our brains. If we don't reason, then we are prone to follow others--thinking that they must 'know something.'
If our primary MO is to tag along with the pack, then we are destined to follow the herd over a cliff at some point.
Thursday, December 17, 2009
The baggage carousel
The people keep on crowding
I'm wishing I was well
I said it's no occasion
No story I could tell
The dollar seems to be getting its groove on. The technical picture suggests a trend reversal underway.
All of those carry traders who have been borrowing dollars over the last 6 months to buy risky assets must be praying that this doesn't morph into one mother of a short squeeze.
Should such a scenario come to pass, it will likely be an interesting last couple of weeks in 2009.
position in USD
Closing walls, and ticking clocks
It's been years since I've read a thick fiction book from start to finish. Why do that when our current reality reads like the wildest of fiction stories?
Time has named Fed chair Ben Bernanke the 2009 Man, er Person, of the Year. Time knows how to pick 'em. Some past choices include Hitler, Stalin (twice), and Khomeini.
Minyanville writers suggest that this event may mark the top in the perceived importance of central banking. We can only hope.
Wednesday, December 16, 2009
Mr Miyagi: "For life, not for points."
--The Karate Kid
Liberals have been bashing Senator Joe Lieberman, primarily because he has wavered in support of the Left's favored health care proposal. This particular tirade includes calls for boycotting charities that sport connections between Lieberman and big pharma.
Politics drips with hypocrisy. It is frequently observed that a particular bureaucrat (e.g., Joe Lieberman) has ties or connections to a particular interest group (e.g., big pharma) and subject to influence from that group. Typically, however, those folks doing the observing are tied to a different interest group (e.g., the Left) and are seeking to impart their own brand of influence (e.g., vote for the health care proposal that we like) on that politician.
One must conclude that the Left isn't upset that Mr Lieberman is subject to influence from interest groups, but that he currently is not kowtowing to the Left's influence.
As long as we operate a government that allows bureaucrats to allocate economic resources, then politicians are likely to have an 'interest.' And interest groups will fight each other like kids on the playground in an effort to influence politicians for a piece of the pie.
--Senator Vernon Trent (Hard to Kill)
Central banks had been selling gold since $250/oz. Now they're buyin' 'em at $1100+. Not sure where this ranks in terms of contrarian indicators, but central banks actions have been quite fadeable over the yrs.
position in gold
Tuesday, December 15, 2009
Get to know the feeling of liberation and relief
Looking for a 30 second summary of the mechanism behind the housing bubble? Check out this commercial for Century 21 circa 2005.
Pretty nice explanation of the thought process...
I'm gonna be the man who's working hard for you
And when the money comes in for the work I do
I'll pass almost every penny on to you
Treasury Secretary Tim Geithner proclaims that US gov't will see profits as big banks pay back TARP funds. Don't hold your breath for a dividend or capital gains check in the near future.
As usual, such a proclamation does not tell the whole the story.
The TARP project was only one of many initiatives floated to keep the financial system from coming unglued (think massive bank run). The cost of those other initiatives, such as gov't backing of bank deposits and printing dollars to shore up bank balance sheets, amount to $ trillions.
US citizens will not be getting all that back anytime soon.
position in USD
Monday, December 14, 2009
--Cameron Poe (Con Air)
On 60 Minutes last nite, President Obama claimed that he 'did not run for office to be helping out a bunch of fat cat bankers on Wall Street.' I did the LOL thing when I heard the sound bite.
His record, of course, indicates that he's been bailing out Wall Street since the day he took office. $Trillions have been channeled toward the big banks under this administration's watch. This includes boatloads of free money offered by the Fed so that the fat cats can mend their balance sheets risk free.
The chunky contributions that Wall Street made to the president's campaign are difficult to ignore as well.
Perhaps the president is seeking to counter those in the press who are assessing his actions rather than his words. He's trying to talk a good game. And the president knows that many folks love to listen to him talk.
However, the extent to which the public (and the press) give free passes to statements like this seems a nice proxy for how far capacity for critical thought has fallen.
Just because we get around
Things they do look awful cold
I hope I die before I get old
I'm not sure we can remind ourselves too many times about the basic economic problem we face. Income, although it's measured in dollars, constitutes a certain quantity of economic resources earned thru labor or effort. We might chop a cord of wood, for example, and sell it for $30. That $30 reflects an amount of economic resources equivalent to that cord of wood we labored to produce.
Our problem then becomes what to do with those $30 worth of resources. We have two basic options. We can consume them, thereby elevating our standard of living today. Or we can save them--i.e., we forego consumption today, which compromises present day standard of living in order to add to our standard of living in the future.
What if we want to elevate our present-day standard of living beyond our income of resources? Then we have to find individuals who have saved some income and are willing to lend their saved resources to us. They may be willing to do this if we promise to pay them back with some extra resources (often termed 'interest') along with their original principal in the future.
The longer we elevate our present-day standard of living beyond our incomes, the greater the chance that we will have to settle for a lower standard of living in the future. This is because we will need to allocate more of our future income of economic resources towards paying off debts to others. Essentially, we have borrowed resources from the future to live in the present.
If we reach a point where we are incapable of paying off our debts, then this means that resources are lost to the future.
This is what is meant when it is suggested that our current behavior threatens the livelihood of future generations.
Keep thinking this basic situation thru until you get it. Once it sinks in, then you will need no 'experts' to tell you what the problem is.
Sunday, December 13, 2009
Saturday, December 12, 2009
Friday, December 11, 2009
Noah Newman: "I'm thinking."
Samual Gerard: "Well, think me up a cup of coffee and a chocalate donut with some of those little sprinkles on top, while you're thinking."
Since making a ton of sales a couple of weeks ago in the pharma names, I've pretty much unplugged from granular tick watching for the time being. Relative to overall assets, my financial market risk profile is as flat as it's been for quite some time, consisting of 2% stocks (residual pharma exposure), 2% currency (long the dollar), and 2% short (token S&P index short).
I can't help but wonder whether growing strength in the USD portends a downside resolution to the sideways tape action. An awful lot of folks have the dollar carry trade on, meaning that they're short dollars and long risky assets of all shapes. If (big if) those folks decide to take risk off and cover their dollar shorts before year end, then we could be looking at the mirror image opposite of the fabled 'Santa Claus' rally.
One would 'think' the technical action in the dollar, which finds it trying to reverse a multi-month downtrend, is an early step in this direction.
Am not acting on this idea currently, but trying to stay alert for clues that further validates (or invalidates) such a scenario unfolding.
position in S&P, USD
Thursday, December 10, 2009
Wednesday, December 9, 2009
Joe Moore: "In the heart of the pure."
Masterful piece by Jim Grant on the dollar and the gold standard. One of those 'must reads' for people seeking perspective on monetary systems and their centrality to standard of living.
Perhaps my favorite concept from Mr Grant's missive: A proper gold standard promotes balance in financial and commercial affairs. A pure paper systems promotes and perpetuates imbalances.
Until we reestablish the connection between money and a reference standard like gold, and remove central banks from the system, we'll wind more instability into the system.
This imbalance creates more and more potential energy that at some point will be irrepressible in the opposite direction as the system unwinds toward a balanced state.
position in gold, USD
Tuesday, December 8, 2009
Monday, December 7, 2009
When it's all black and white
And the winners are losers
You see it every night
It appears that the widely anticipated correction in gold has arrived. The short term parabolic rise in the Gold ETF (GLD) was snapped last Friday on big volume with some follow thru today.
How this plays out, of course, is anybody's guess. Nervous trader types sitting on gains will likely eye the 50 day moving average (currently at GLD 107) as one reference point. Then comes the breakout points at 104 and the big enchilada GLD 100.
Just as higher prices encourage buying, lower prices will drive more selling.
I continue to sense lower prices are in the cards, but my feel has been wrong as rain for months.
position in gold
--Danny Walker (Pearl Harbor)
Pearl Harbor Day is today. This morning, when a newsperson noted that the Day of Infamy occurred 68 yrs ago today, my knee jerk reaction was that she did the math wrong, that it was longer ago than that.
I suppose since this event occurred a generation before I was born, it still seems a bit like ancient history to me. To this day, I imagine those periods in black in white. And I remain captivated whenever I see color footage of WWII. It just doesn't jibe w/ my paradigm.
Speaking of having to revise my mindset, I've also changed my view on the validity of US involvement in WWII. I now believe that we did not have to participate. We had been escalating committment long before Dec 7th and there's a good argument (and some evidence) to suggest that FDR 'needed' us in the war by the end of 1941 for various reasons.
If one believes that individual freedom is the most precious of life's gifts, then the only valid reason to fight is when one's personal liberty is under direct attack. This liberty is expressed in three areas: your life, your wherewithall to produce, and your property. If someone seeks to coercively appropriate of any of these 3 areas from you, then you are justified to defend your liberty accordingly.
This is what the Founders did, making the American Revolution one of the few just wars in history.
Sunday, December 6, 2009
Friday, December 4, 2009
Thursday, December 3, 2009
Wednesday, December 2, 2009
Tuesday, December 1, 2009
Monday, November 30, 2009
The title of this piece by John Mauldin does not accurately reflect his primary subject. After weighing in on the Dubai situation, John shares thoughts on why he's optimistic about the future.
While I may not see eye to eye with him on some of his assertions, John offers a nice reminder about the dangers of extrapolating trends into the future. Using dark forecasts made by some during the stagflationary 70s as an example, John argues that nature (and particularly humans) adapt to difficulty (the difficulty serves as a stimulus for change). This adaptation will likely change the trend.
This reminds me of a talk I once heard by systems theorist Russ Ackoff (who sadly passed away a few weeks ago). Dr Ackoff cited numerous examples where forecasters missed the mark when predicting the future based on past and current data. The reason is that actors in complex systems change and adapt when challenged, rendering straight line forecasts of little use--particularly when forecasting future behavior inside of social systems.
John offers some plausible examples such as electricity as a viable substitute for gasoline powered cars.
When extrapolating distressing trends into the future, one needs to think about how people and the systems they live within might adapt.
Sunday, November 29, 2009
Usin' every one of them and running in wild
The past couple of days I drove by or thru a number of suburban Cincy shopping districts (Kenwood, Beechmont, Eastgate, Milford, Rookwood). Traffic was surprisingly thin--even for a bear like me.
Anecdotal to be sure, but these data suggest a low end Black Friday wkend. Casts some doubt on the 'upside surprise' holiday spending scenario when extrapolating forward.
Saturday, November 28, 2009
Friday, November 27, 2009
Thursday, November 26, 2009
Wednesday, November 25, 2009
Monday, November 23, 2009
John Mauldin makes the case that the Fed's cheap credit policy is facilitating a monster dollar carry trade. Folks are borrowing dollars for virtually nothing and investing them in risky assets of all sizes.
Essentially, those involved in this trade are short dollars. Should something spook this trade, a large dollar rally should ensue (as folks buy back dollars to cover their short position). And, of course, they'll have to sell all of those risky assets (stocks, bonds, commodities) that the original dollar proceeds purchased.
Carry trades work well in high risk appetite environments. When folks collectively become risk averse, then the carry trade works in reverse, causing correlated price declines across asset classes.
John thinks there's a potential market accident waiting to happen should the dollar carry unwind.
position in USD
I think it's today, yeah
The girl that's driving me mad
Is going away
The sell tickets have been flying over the past few sessions as I've been busy unwinding most of my stock exposure. Most of this exposure has been in pharma companies Merck (MRK) and Pfizer (PFE).
These names have seen a nice runup and are registering overbought signals (as well as some DeMark trend exhaustion signals).
One strategy for making sales into upmarket environments is to stick a stop underneath current prices and roll those stops up if prices trend higher. If successful, this approach reduces the chance of premature exit and help you ride trends closer to the top.
This approach has always been hard for me to do when things get moving like they are now, since there can be significant overnight 'gap risk' (where stocks can open way lower than the previous day's close).
Instead, my preferred strategy is to make sales on the way up. Depending on the size of my position, I might divide my sales into 4-5 pieces. Using this approach, you hope that 'your first sale is your worst sale' as you ride the uptrend to piece out more stock. This approach often finds me leaving the party early but at least I know my exit price and I've flattened my risk.
My stock exposure has been cut from over 30% of assets to about 3% as of this am. Last Friday and this morning's action had that frothy feel to it--often indicative that the final 'panic' phase of a trend is in full force.
They may indeed continue higher from here. But I'm content to have reduced my risk profile and watch the action from the sidelines.
positions in MRK, PFE
Sunday, November 22, 2009
Black and hairy very small
Now he's up above my head
Hanging by a little thread
Ron Paul has it right in his criticism of the health care proposal. The ineffectiveness of intervention, in health care or elsewhere, always has politicians arguing for more intervention down the road.
A few voiced similar concerns before Medicare/Medicaid was passed in the 1960s. Now, that government-sponsored program is predicably falling apart.
But rather than just toss those disasters of The State on the scrap heap of history, we're looking now looking a larger version of bureaucratic waste staight in the eyes.
Friday, November 20, 2009
--Professor Marvel (The Wizard of Oz)
This article remains me of the old saying that you can't tell the players without a scorecard. Right is Left. Conservative is Liberal. And vice versa.
Labels that reflect classical liberalism have had a wild ride over the past 100 yrs.
Also suggests the need for carefully defining terms before getting into an idealogical discussion.
Tick tock watching the world go by
Any change would take too long
So dry your eyes
Part 1 of a four part interview w/ Jim Rogers. Not too much new except he seems to be long the USD for a trade, citing lots of near term pessimism.
Seems like we're both on the same page. Near term bullish, long term bearish.
He continues to sense some major issues in currency markets on the horizon.
position in USD
Thursday, November 19, 2009
Ain't that America somethin' to see baby
Ain't that America home of the free
Little pink houses for you and me
--John Cougar Mellencamp
About one in 7 US mortgages were either in foreclosure or delinquent in Q3, a record. An amazing stat when you step back and think about it.
Foreclosures are now chewing into the 'high quality' fixed rate tranche.
Tuesday, November 17, 2009
I say, hi it's me, who is it there on the line?
A voice says, hi, hello, how are you?
Well I guess I'm doing fine
Very interesting recount by Morgan Stanley (MS) CEO John Mack of the week following Lehman's bankruptcy in Sept 2008. While there are many noteworthy remarks, the heart of the story is his pushback against government attempts to sell MS to JP Morgan (JPM).
While Mr Mack's nose is not totally clean (his firm subsequently did take $ billions in government funds), his resistance to government intrusion in private affairs is exemplary.
Another takeaway from Mr Mack's presentation is the degree to which the State is willing to meddle in such private matters. Whether the rationale is to maintain stability or for the greater good, seeking to prevent firm bankruptcies, stem stock market crashes, or mute economic downturns for that matter, such intervention is simply not the role of government as defined by the Founders.
You only see what we show you
We're the slaves of the phony leaders
Breath the air we have blown you
A couple of useful reference slides related to health care. First, national health care spending has tripled from about 6% of GDP in the mid 1960s to about 17% today.
Second, for those who believe the US health care system is based on 'free market' economics, they need to review how much spending come from government sources. Current, Medicare, Medicaid, and other public sources account for about 45% of national health care spending.
One data point that's missing, and one that proponents of government sponsored health care don't want to show, is a time series showing the increasing fraction of government sourced health expenditures over time.
Over the past 100 yrs, government health expenditures have gone from low levels (covering war vets and gov't employees) to nearly half of the overall health spending pie today.
It should be no mystery, then, why health care expenditures consume 3x the GDP that they did 40+ yrs ago. State intervention has broadened access and scope of coverage, thus more resources are consumed thru health care channels. Plus, the inevitable State bureaucracy has constrained efficiency and innovation.
Yet, here we are considering even greater State influence over this system.
Monday, November 16, 2009
Just to get a glimpse beyond this illusion
I was soaring ever higher
But I flew too high
In the past couple of weeks, the number of articles about the dollar carry trade has increased considerably. A carry trade is when you borrow money at low cost and you invest it in positions perceived to provide attractive returns. Investors seek to make money on the 'spread' between the rate of return and the cost of funds.
The emerging thesis appears to be that, because the Fed is likely to keep rates low for a long time, speculators are likely to borrow huge quantities of cheap dollars and speculate with them--perhaps lighting a persistent bid under asset prices.
Could it happen? Sure. But keep in mind that those who borrow cheap dollars and then buy other assets with them are effectively short the dollar. At some point, they'll need to buy those dollars back to close out their trade. Late last year the dollar rallied on the back of big closure of dollar-denominated debt projects.
If/when another round of deflationary risk aversion sets in, then the dollar carry is once again likely to shift into reverse.
position in USD
And I got a plan to get us out of here
An account of the auto bailout from the car czar. Not a bad look thru the eyes of central planners. Note all the levers these folks pull once they tune out market forces.
The chances of bureaucrats getting these decisions correct--and then correctly adjusting their decisions as markets evolve--are miniscule.
All we've done is propped up large inefficient operators with resource sets that, if market forces were permitted to rule, would be redeployed to more efficient ends.
Consequently, standard of living suffers.
And at some point those market forces will rule despite attempts to intervene.
Friday, November 13, 2009
Capt John Colby: "At the far post, facing the ball."
Capt Robert Hatch: "Thanks. For a while there I thought you were keep it a secret."
White House economic adviser Austan Goolsbee doesn't believe that the repeal of Glass-Steagall was (note pervasive use of past tense now) a primary cause of the financial crisis. This is one of the few intelligent statements I've heard from this administration's economic team.
Lack of regulations over operations is not a problem.
Rather, protecting sellers and buyers from market-imposed penalties for poor risk-taking is a significant problem.
And this is what we've done.
Thursday, November 12, 2009
--Sir Thomas More (A Man For All Seasons)
Some people in this country believe that they have claim on certain goods and services (e.g., food, shelter, jobs--or at least an income, and, now, healthcare) even if they do not acquire these things via productive work and exchange. They rely on political means--on government--to coercively take property from others and redistribute it accordingly.
Supporters justify this approach as providing for 'basic human rights.'
Over the past few centuries thinkers like John Locke and Frederic Bastiat have reasoned that the natural rights of people cannot include the redistribution of property by government. One problem involves deciding just how much wealth to appropriate from one individual and give to another. Perhaps more importantly, once government gets into the wealth distribution business, the historic tendency is for government to consolidate power and suppress individual liberty.
Instead, these thinkers have argued that the redistribution of wealth by government actually violates the few basic rights that endow the human condition. What are these rights? Most fundamental is the right to life. Murder, for example, violates an individual's most fundamental right to live. But so is incarcerating an individual who refuses to comply with government's wealth redistribution scheme. A 10 year jail sentence for such an act subtracts that much from an individual's productive life.
Second, an individual has a right to his/her own productive capacity. These are the talents, skills, and work choices that enable an individual to produce and create wealth. An individual is free to direct personal productive capacity as he/she sees fit. No one else has claim. Mandatory schooling, for example, that seeks to impose a particular skill set or work approach on an individual violates this basic right. Moreover, when an individual must toil months out of each year to produce output that will be confiscated and given to others, that individual is effectively enslaved to others for that period of time.
Finally, an individual has a right to the property earned from their productive labor and exchange. Confiscation of this wealth violates an individual's property rights.
When these three rights are respected, then an individual is free.
Government's proper role is to protect these rights. When another infringes on these rights in a manner that an individual cannot defend for him/herself, then government intervenes on the defendent's behalf. Such defines the appropriate scope of 'the law.'
Guilt for property rights violatations does not rest with government alone. Indeed, bureaucrats can be viewed as 'hired guns'--the agents of people who require strong arms to pry property away from rightful owners' and deliver it into the hands of the sponsoring thieves.
Wednesday, November 11, 2009
Tell me what is wrong
Was I unwise to leave them open for so long
Commenting on the health care proposal, Ron Paul argues against its passage far more eloquently than me.
Near the end of his missive, Congressman Paul suggests that, should the bill pass, then its operationalization will hasten the day that we have to come to grips with excessive government intervention. Essentially, he's saying that we'll accelerate the speed of the train that is careening toward a brick wall.
While that may be true, the cost of accelerating the process will be measured in a lower standard of living for many millions of people.
The little children laugh at him behind his back
And the banker never wears a mack
In the pouring rain, very strange
Laurie Petersen notes that credit card issuers are increasing fees--many in stealthy ways. The implication of many such pieces is that credit card companies are gouging customers and being unfair. As Laurie describes, some even write their representatives in Washington to complain. And there is a bill on the Senate floor seeking to require/regulate credit card issuer behavior in this area.
We need to be careful here. If a credit card issuer has violated a contractual agreement, then it should be subject to prosecution under the law. But if a company wants to abruptly change its fee structure in a manner that does not violate previous agreements, then there should be no regulation that prohibits such.
It strikes me that what the credit card companies are doing is poor business policy. And if it is, then customers should vote with their wallets and go elsewhere.
When instead folks seek regulatory assistance from bureaucrats, they are essentially seeking claims on property rights that are not theirs (i.e., they don't want proprietors to freely make operating decisions). Moreover, by abdicating responsibility to undertake due diligence when purchasing credit, consumers are likely to promote the inefficiencies they claim to abhor.
Classic moral hazard, cookie.
Tuesday, November 10, 2009
Charlotte Selton: "It's a free country. Or at least it will be."
George Soros's proposal for a 'New World Architecture' exemplifies the UN-like viewpoint of putting the entire world under a single governing umbrella.
Mr Soros bases his argument on the claim that the US economic model, which he labels 'international capitalism' (but never subsequently defines), is dysfunctional. Rather than offering rationale as to why this model is or became ineffective, he suggests that the world needs to create a new order grounded in global planning and oversight.
Because Mr Soros tends to view the world thru a socialistic lens, he may truly believe that such a structure will lead to improvement.
An alternative view is that the world's economic problems have been driven by escalating levels of precisely what Mr Soros claims we need more of: government intervention. Over the past century, such intervention has increasingly crowded out free markets in favor of centrally planned alternatives destined to fail at some point.
And fail they have.
Because countries represent sovereign entities, it is not the business of others to dictate how a nation should organize economically. The United States has not been innocent in this regard, we have often meddled in the affairs of others.
It's time we stopped this.
America would best serve the world by throwing off the shackles that bind markets from operating freely. Our trade with others should be open and unhindered as well. No special alliances (e.g., NAFTA), no embargos (e.g., Cuba, Iran).
The best policy the U.S. could adopt is one that fully expresses the liberty won by our Founders. For the better part of 200 years, the world observed and learned from the actions of a freedom-loving American people. They saw that we so loved freedom that we were willing to die for it.
We need to get back to actions grounded in the principle of liberty.
A world managed by bureaucratic planners is not what we need. A United States that returns to its libertarian roots is the best contribution that our country can give to the world.
Monday, November 9, 2009
But my heartache's in me till this day
The Dow ripped to another high for the year to today. Other major indexes such as the S&P (SPX) aren't quite there yet.
By the day, sentiment of 'they're better higher' feels like it's increasing. Underperformance anxiety is squeezing both money managers and retail investors into the market as the proverbial train is increasingly seen as leaving the station.
While the possibility for a melt-up into year end certainly exists, these types of situations invariably end in tears.
For my part, I've been making sales into this wave higher. First have been trading positions slapped on over the past month or two. I have two remaining and they are being held for sale.
Next comes my 'core' pharma exposure. Given the weight I'm assigning to a pending deflationary wave, I just don't want to be holding significant positions in any risky asset.
I hope to use price to my advantage and make sales in the days to come.
position in S&P
Saturday, November 7, 2009
--Henry Drummond (Inherit the Wind)
Last night I finally had the opportunity to view the 1960 movie Inherit the Wind. The film recreates 1920s legal battles over teaching evolution in public schools.
The movie is billed as featuring a religious right conservative lawyer played by Frederic March against a liberal lawyer played by Spencer Tracy. That billing seems correct only if the 19th century connotation of 'liberal' is employed. Tracy's character argues for individuals' rights to think for themselves and to study what interests them. Our power to reason, he suggests, is what separates us from the rest of world creation.
Essentially, Tracy's character is battling to ensure that the market for ideas, open mindedness, and reason is preserved.
While such a stance is wholly consistent with the classical notion of liberalism, it does not reflect the MO of the modern day liberal. Like their biased conservative foils, today's liberals promote a particular view of the world and bash those who don't side with them.
The newspaper guy who hires Tracy's character, played by (of all people) Gene Kelly, turns out to be a good reflection of today's liberal profile. Thruout the movie Kelly's character animosity against the right extremists escalates. At the end of the movie, Kelly's character explodes in a tirade against the conservatives, paradoxically mirroring the anger and condemnation expressed by the religious zealots thruout the process.
Quite reflective, it seems, of today's circumstance.
Friday, November 6, 2009
--Guinevere (King Arthur)
What is the implication when the government bans or regulates citizen behavior related to drinking alcohol, smoking, eating fast food, texting on your cell phone while driving, etc? As Lew Rockwell notes, such intrusion implies that:
You don't know what's good for you so you must be forced to do what the government thinks is good for you.
People support such intervention because they believe that they are smart and understand what's good and safe, but others do not.
This is a primary avenue by which freedoms could be abolished in a democracy.
Filling out forms, waiting in line
The headline unemployment rate crossed 10% today. Months ago pundits/bureaucrats claimed that we'd never get there. My sense is that we'll head higher still.
The less reported U6 number, which is more in line with how we measured unemployment years ago, is now above 17%. In the 1930s, this number hovered around 20%.
Thursday, November 5, 2009
--Doyle Lonnegan (The Sting)
A couple days back, Berkshire Hathaway (BRK.A) announced a $40+ billion acquisition of Burlington Northern Santa Fe Corp (BNI). Warren Buffett termed the purchase "an all-in wager on the economic future of the United States."
I (and others e.g., Toddo) find Buffett's actions (and choice of words) interesting. Berkshire will deplete considerable cash to fund this acquisition as well as issue significant stock. This will place Berk in a less liquid, more leveraged state, which may impact the company's credit rating.
The company will also split its B shares 50 to 1 to permit BNI shareholders to more easily participate in Berkshire stock. A stock split is something Buffett long claimed he would never do, since it attracts the hot money trading set.
Like his 'Buy Stocks' call last fall, I find Buffett's actions curious. BNI is no high margin/low capital business. Moreover, I don't see the current macro picture as fitting for making an 'all-in wager' on our economic future.
Wednesday, November 4, 2009
Same as the old boss
Yesterday's elections saw Republican victories in a number of higher profile runoffs. The Right, of course, is hailing this as a new wave of momentum for the GOP.
Another interpretation is that both parties engage in similar interventionist initiatives that are certain to fail over time, thereby causing voters to continually cast off the majority party ('it's this party's fault') in favor of minority ('anything's better than what we have now').
All the while, however, voters merely elect more of the same.
Tuesday, November 3, 2009
Joe Moore: "In the heart of the pure."
Pretty chart for the gold proxy GLD as the yellow metal bolted higher for another all time high today. The 'cause' was an announcement that India bought about 1/2 of the IMF's bullion held for sale in a private transaction.
Textbook stairstep pattern since July. Note the volume spikes each time price fires higher.
Unfortunately, my feel for gold prices over the past few months has been awful. TD counts on many time frames continue to suggest trend exhaustion, however.
But perhaps this is The Big One.
position in gold
Monday, November 2, 2009
--Sara Sidle (CSI: Crime Scene Investigation)
On the surface the 'casino' issue (Issue 3) seems the right thing to do, as it permits commerce in a sector that up until this point in time has been banned by the state of Ohio.
As written, however, this is not a 'market-oriented' proposal.
Issue 3 will grant monopoly rights to a single operator in particular geographic areas. This shuts out competition, which over time will stunt efficiency and innovation.
Moreover, a significant layer of bureaucracy will be created to oversee and regulate the operation. Not only does this sap resources away from productive means, but it creates a condition for regulatory failure and moral hazard down the road. As such, chances of us propping up a too-big-to-fail institution increase.
The right thing to do is to let industry operate freely. Entrepreneurs who perceive an attractive risk/reward profile will allocate capital accordingly. Buyers will ultimately determine whether those resources are being properly allocated.
In free market situations, the real vote happens when buyers vote with their wallets.
Looks any different to me
And the slogans are replaced, by-the- bye
Tomorrow's vote surfaces a couple of thoughts that recur to me each election season. One is the juvenile behavior of many folks w.r.t. politics. Reversion to the playground you might call it.
The second is the human tendency to select information that supports a single point of view. Confirmation bias runs rampant in political process.
We can choose not to do these things.
Sunday, November 1, 2009
Fred Melrose: "Is this something I could get fired for?"
Brantley Foster: "Absolutely."
Fred Melrose: "I like it."
--The Secret of My Success
Last Friday the Obama administration proclaimed that 1 million jobs have been saved or created as a result of government stimulus programs. Of course, inquiring minds are curious to learn just how such a figure is derived.
One thing we can be sure of, bureaucrats will not be stepping forward to shoulder blame for any of the jobs lost or 'uncreated' during the bursting of the credit bubble. Measured unemployement has increased from 7 million to 15 million since the credit bubble began bursting in earnest in December 2007.
--Eddie Wilson (Eddie and the Cruisers)
Just completed assigning key words to missives scribed on this blog. The resulting list of labels can be found by scrolling down and viewing the right hand column.
In qualitative research, key word lists are often referred to as 'data dictionaries' and form the basis of qualitative analysis. Simple counts of key words can reveal interesting themes.
Counting this missive, there have been 399 posts on this blog since inception. Here are the top 5 labels:
technical analysis (70)
Counts suggest that primary threads of this blog involve markets and government's role in them--particular w.r.t. government interference in market behavior. Thoughts on debt and leverage have also been a dominant concern. Technical analysis reflects attempts to pin thoughts to extant market levels and trends.
Such findings seem supportive of the original intent behind this blog.
Friday, October 30, 2009
--Joel Goodson (Risky Business)
Why do higher ed costs remain persistently high? Mike Shedlock hits it right on the nose. The reason is government subsidies. Loan programs like Sally Mae subsidize the market for higher ed. Subsidies always increase demand relative to supply. Consequentially, scarce resources are misallocated and prices rise.
Moreover, the 'cheap credit' structure of these subsidies has prompted borrowers to enter into larger commitments than they otherwise would. This should sound familiar, for it describe a process similar to the housing bubble.
How has this been operationalized on college campuses? Massive spending programs to build university capacity. Enrollment of students who would not have been admitted without subsidies--many of whom lack talent and motivation to do college level work. Diversion of resources away from those students with talent and motivation to do college level work. More debt. And, of course, higher prices.
Very few in the higher ed industry view this situation as bubblish. When reviewing the evidence, however, the familiar signs are there.
Which bids the question, what happens to these institutions and their stakeholders when the bubble pops, as bubbles always do?
Thursday, October 29, 2009
Now it's fading fast
Every second every moment
We've got to--we've gotta make it last
Frank Shostak suggests that those equating a decrease in overall credit with deflation are wrong. He argues that only a decline in 'unbacked' credit reflects a deflationary condition.
While this may be true, the capacity of financial institutions to pyramid capital 10 to 1 or more suggests that the bulk of credit outstanding is indeed of the unbacked variety.
Indeed, bank leveraging lies at the heart of the inflation engine. When deleveraging occurs, the engine works in reverse.
Wednesday, October 28, 2009
Been haunted by a million screams
But I can hear the marching feet
They're moving into the street
Paul Wilham's fine blog has alerted me to concerns about the City of Cincinnati demolishing properties with little justification. To me, it seems criminal to be taking these properties down.
Now, it seems this may literally be true. The city appears guilty of negligence to say the least.
Certainly increases validity of the argument that city officials do not clearly think things thru before moving to demolish homes.
As Paul demonstrates, the economics of the current demolition policy makes no sense at all.
Tuesday, October 27, 2009
--Captain Marko Ramius
Great piece by Kevin Depew on the mechanism behind the debt crisis. In it, Pep cites work by economist Irving Fisher in the late 1930s published in Econometrica that outlines Fisher's 'debt-deflation' theory of a depression.
Fisher pinned the deflation dynamic primarily on the creation and destruction of debt, which certainly appears 'right' to me. Parenthetically, Fisher suggests early in his piece that his ideas were unique, although in my readings a number of others at the time were focused on similar thoughts.
Pep notes that the rising dollar step in Fisher's sequence is the one he's focused on. He sees DeMark trend exhaustion data lining up to support a major bottom in the USD in upcoming months.
Near the end of his piece, Kevin concludes that the debt-deflation phase will inevitably end in inflation, but that those positioning for that inflationary phase now are likely to feel significant pain.
I'm coming to a similar conclusion.
position in USD