Friday, February 27, 2009

Thru the Looking Glass

Newspaper taxis appear on the shore
Waiting to take you away
Climb in the back with your head in the clouds
And you're gone
--The Beatles

Speaking of irony, the title of the President's budget book for 2010 is A New Era of Responsibility.

You just can't make this stuff up.

Wednesday, February 25, 2009

Words and Music

From out of the shadows
She walks like a dream
Makes me feel crazy
Makes me feel so mean
--John Cafferty & The Beaver Brown Band

Needed to take a brief time out from a personal 'fast market' for a quick missive. President Obama spoke to a joint session of Congress last nite. I usually don't listen to political speeches as talk is cheap, but I figured that the proposals floated during this speech would be pretty expensive.

Early in the speech the President said (paraphrased) that he wasn't a supporter of big government. I suppose he should have defined what he meant by 'big,' because the rest of the talk centered on the necessity of historic levels of U.S. government control over near and long term economic issues that will require $trillions in funding. In particular, his remarks focused on the 'essential' role of government in creating jobs, re-engineering energy and healthcare markets, and reviving credit markets.

The merits of specific programs have been and will continue to be debated.

But keep in mind the core problem. We're broke. We binged on credit for decades to artificially boost our lifestyle. Those debts are coming due. The natural market reaction to such a situation is to begin saving and pay down debt. Indeed, that is what is happening.

Bureaucrats don't want this. They think that we can spend our way out of debt with money that we don't have. They want to breathe life back into credit markets so that more borrowing and consumption can be done.

If, instead of being wowed by eloquent rhetoric and oratory skill, you engage your brain and reasoning power, then the sheer folly of the strategy articulated last nite should become painfully apparent. You should also gain a sense for the huge risk we're taking by seeking to borrow ever more from future generations in order to reclaim an artificially inflated present lifestyle.

Our current situation, where an administration criticizes others for making ill-advised leveraged bets while at the same time suggesting courses of action that will take leverage up to unprecedented levels, will not be lost on those who appreciate irony.

Tuesday, February 24, 2009

Movin' On

Well, I'm gonna find a home
And we'll see how it feels
Goin' mobile
--The Who

A month or so back, I began to feel pangs that it was time to move. The basic thought process was that, if I live in my current house for another ten years, I'd have a hefty stream of capital improvements to fund in order to get things where I'd like them (new bath, remodeling, etc). So why not find a place that already has those amenities installed.

Two alternatives seemed reasonable. In one scenario, I would downsize to a condo. No more yard work, newer digs, attached garage, increased energy efficiency. I might even move out of the city to improve tax efficiency.

The other choice was to find another house that had all things I dreamed of in a house. In that situation, I would remain where I live now, given its, well, livability.

After browsing some listings online and discussing things w/ Rob, it became clear to me that the condo option wasn't for me. Too much freedom and privacy lost. Plus those condo fees...

A few Sundays back I thought I'd walk thru a few open houses to see what the possibilities were, and I happened to find one I liked. With Rob's help, and a week's worth of negotiating later, we inked a contract for a new house today.

Does this project make sense given the economic turmoil centered on housing and the credit markets? Discussion on this to follow.

Monday, February 23, 2009

Sorry, Darwin

In the shadows of a golden age
A generation waits for dawn
Brave carry on
Bold and the strong

Nationalization of Citi (C) appears to be pending. Is it not ironic that many of the same folks who rail against 'big business' and corporatism support efforts to keep failing monoliths alive?

In a free market, of course, inefficient firms fail. Firms more capable of allocating capital and managing resources replace them.

Many small banks have declined to participate in government rescue programs. These firms have made prudent decisions and, in a free market environment, would be poised to benefit from failure of the large banks.

By propping up the big banks, we snatch opportunity from the hands of the prudent and innovative firms. Over time, the message is that it does not pay to be prudent and innovative.

Standard of living is certain to decline in this situation.

no positions

Friday, February 20, 2009

String Music

"Sun don't shine on the same dog's ass every day but, mister, yours ain't seen a ray of light since you got here."
--Opal Fleener (Hoosiers)

A central argument for a continuation--and perhaps more extreme--deflationary environment going forward is that, despite central bank balance sheet expansion and government stimulus programs, credit is no longer pyramiding through the system. Banks are reluctant to lend, and borrowers don't want to borrow. As such, policymakers are 'pushing on a string' with their interventions. Consequentially, deflation will persist and those fearful of extreme inflation will have a long wait.

I get that argument, believe me. Indeed, I was camping with deflationistas for quite a while.

But this line of thought assumes that governments will 'give up' once they see that current measures to revive credit markets aren't working. This may be shortsighted, as I believe policymakers worldwide have signaled that they are ready and willing to go to utmost extremes to reverse deflation.

If current measures don't work, then future initiatives get more radical. Two that come to mind:

1) Loosen credit via nationalization. Nationalization of a large portion of the banking system may be eminent. In such a scenario, reluctance to lend decreases, as there is no longer need for prudence to preserve balance sheets or profits. The government could fix interest rates lower to encourage borrowing.

2) Bypass the credit system. If the credit system still isn't working, then why would policymakers not try to work around it? Money could be sent to people directly. Current 'tax rebates' are but one example of the classic 'helicopter drop.' Sure, people may pay down debt with some of the paper (this will hasten the end of deflation as debt gets retired). Regardless of how risk averse they may be, people will still use a portion of their windfall funds buy things they need. This behavior is likely to increase prices of core goods, as more fiat currency chases them.

The dollar, of course, goes to dust in either scenario. In desperate times, however, bureaucrats won't care about that. When facing a deflationary bust, policymakers will endeavor to create an inflationary holocaust instead.

Perhaps gold is sniffing this out.

position in gold

Thursday, February 19, 2009

Full Metal Jacket

You could have a big dipper
Going up and down, all around the bends
You could have a bumper car, bumping
This amusement never ends
--Peter Gabriel

Gold continues to move as bureaucrats around the world crank up their printing presses.

From a DeMark perspective, gold is close to exhausting an intermediate uptrend. Hard to see a deep reversal based on the macro picture, but downside DeMark projections propose $600 bullion.

As such, I did make some sales around these levels due to looming technical resistance and to raise cash for a potential house down payment (!).

position in gold

Wednesday, February 18, 2009

Desperately Seeking Amanda

Carparker: "To win big you gotta do what?"
Other carparkers: "Lose big."
Carparker: "What are we doing now?"
Other carparkers: "We're losing big."
--Some Kind of Wonderful

Another round of stimulus is being poured into the system as President Obama underwrote a nearly $800 billion package yesterday. A bewildering number of perspectives have been offered among talking heads as to whether this program will 'work.'

Stay focused on the basic situation. We spent more than we earned for a long time. Absent savings, we borrowed in order to maintain high lifestyle.

Now, bills are now coming due and we can't pay them.

There are two primary choices:

Door #1. Scale back present lifestyle. Pay down debt. Save.

Door #2. Borrow even more in attempt to maintain present lifestyle.

Door #2 is where we are. I've heard many bureaucrats, including the President, suggest that we 'have' to do #2 because the consequences of doing #1 are even greater. Yet, few people would look at the two doors above and conclude that #1 is risker than #2.

We're engaging in classic prospect theory (Kahneman & Tversky 1979) behavior. Essentially, we're 'behind' and we're taking more risk--in this case anteing up our kids' future on a leveraged bet that we can 'save' current living standards.

And what if this leveraged bet loses? This is one question you won't hear bureaucrats answer.


Kahneman, D. & Tversky, A. 1979. Prospect theory: An analysis of decision under risk. Econometrica, 47: 263-291.
Kahneman, D. & Tversky, A. 1979. An analysis of decision under risk. Econometrica, 47: 263-292.

Monday, February 16, 2009

Eye of the Tiger

So many times, it happens too fast
You trade your passion for glory
Don't lose your grip on the dreams of the past
You must fight just to keep them alive

Recent BW cover profiled Exxon (XOM), and suggested that the company is weaker than it appears once you look under the hood. The innuendo running throughout the piece is that XOM may be too risk averse. For example, it hasn't gone hog wild into alternative energy as have others in the industry.

Personally, I view managers at this company to be among the best decision makers on the planet. Suggesting that these folks haven't made intelligent capital investments over the past few years seems pretty bold to me. In an industry littered with leverage and low cash levels, Exxon's balance sheet seems more like the model for others to emulate.

Exxon is one name I'd be interested in socking away for the long term should the stock trade materially lower.

One more thing, the BW article cites XOM's problems with replacing oil and gas reserves. This is, of course, a secular problem for the industry (and the world)--one that paints a bullish picture for fossil fuel related commodities over time.

position in oil

Wednesday, February 11, 2009

Falling Down

Howl at the wind rushing past my lonely head
Caught inside its own motion
How I wish it was somebody else instead
--Duran Duran

As usual, Mr P skillfully captures the chronology that lead to our current situation. Government can't be the solution; they are the enabler of the problem.

To me, much of the argument and action structured to oppose market forces are akin to fighting the law of gravity. You may be able to oppose it for a while but gravity ultimately wins.

Mr P draws a similar analogy, noting: "There's too much debt, and creating more debt is no longer an option. This is sad, but economics is like physics: You can't expect to jump out of a window and go up."

Risk, as Mr P notes, is high.

Tuesday, February 10, 2009

Masters of Disaster

I staggered back to the underground
And the breeze blew back my hair
I remember throwing punches around
And preaching from my chair
--The Who

During his press conference last night, President Obama focused on the economic situation and the need to quickly pass the new spending initiative. The tone of the exchange was set by Mr Obama's claim, something he's voiced before, that presently 'the federal government is the only entity left with the resources to jolt our economy back to life.'

This is, of course, nonsense. Government must obtain resources by direct (taxes) or indirect (debt, inflation) confiscation from the people. He is saying that the government knows better how to deploy these resources than individuals do, and it will commandeer accordingly. Folks who accept these claims at face value are either not engaging their brains, or they're granting the speaker a pass.

Today, Treasury Secretary Geithner followed with the announcement of a new $2 trillion tranche for the banks. The plan was long on concept and short on details, something that disturbed both Senate Republicans and the financial markets. When Senator Jim DeMint from South Carolina asked Mr Geithner where this $2 trillion would come from, the Secretary effortlessly suggested that we'd borrow it by selling notes to both domestic and foreign creditors. He also also asserted that the government 'must act early and aggressively' in these difficult times.

In case you haven't noticed, the Federal government has assumed control of the situation.

Oxymoronish indeed.

Monday, February 9, 2009

Baden Hill Blues

Be running up that road
Be running up that hill
With no problems
--Kate Bush

Very nice missive by Lew Rockwell that articulates our current situation in a non-partisan manner. The problem of course, is not with the Left or the Right, but with the wrongheaded idea that government can control economic activities better than multitudes of individual buyers and sellers who are motivated by reward and risk.

Note also Mr Rockwell's focus on the potential for runaway inflation should all the potential monetary energy layered into the system by policymakers ever turn kinetic. That's my growing concern as well.

Unfortunately, I'm less sanguine about the potential of the current administration to 'turn on a dime' and pursue the correct course of action. It seems more likely that as long as we permit the scope of government to include the confiscation and redistribution of wealth, then bureaucrats will chart a path toward squalor.

Saturday, February 7, 2009

Punxsutawney Politics

"Come on, all the long distance lines are down? What about satellite? Is it snowing in space? Don't you keep open a line for emergencies or for celebrities? I'm both. I'm a celebrity in an emergency."
--Phil Connors (Groundhog Day)

A popular claim of those who opposed the Bush administration's policies, particularly those policies related to the war, was that the administration employed 'fear mongering' tactics to scare people into consenting to government actions. Threat of terrorist attack, WMD, etc were offered as rationale to act now in the name of national security.

Fast foward to the Obama administration's rhetoric regarding the urgent need for gigantic economic stimulus. We need to act boldly and now, they claim, in order to stem the next Great Depression. Once again, the argument is in the name of national security--that of an economic nature.

A similar argument is structured around the environment and the need for bold and urgent action to save the planet from 'global warming.'

More vuja de for Phil.

Bureaucrats from both sides of the aisle realize that fear sells. The more control we grant government to combat these 'threats', the more we give our liberty away.

Friday, February 6, 2009

Paper Chase

Looking out at the road rushing under my wheels
I don't know how to tell you all just how crazy this life feels
I look around for the friends that I used to turn to to pull me through
Looking into their eyes I see them running too
--Jackson Browne

Jim Rogers suggests that this may be the year of the currency crisis, and notes that he's on the hunt for currencies that will hold value. This, of course, is the chronic problem with all fiat currencies. Over time, bureaucrats attempt to paper over all problems and the currency heads toward zero.

Mr Rogers also clarifies the reason for the USD's recent rise. The dollar is not increasing because of its value as a safe haven. Rather, people have borrowed gobs of dollars over the last few years at cheap rates and then sold them to buy all sorts of speculative assets. Now these assets are coming down in price, and speculators need to buy back dollars to cover their 'synthetic' short positions. It's a gigantic short squeeze, essentially.

What to look for in a sound currency? Jim Rogers thinks currencies of well managed countries with large natural resource bases may be attractive.

Seemingly, however, unless a currency is explicitly backed by gold (or some other asset with similar monetary properties), then fiat printing encourages a chronically flawed condition that promotes a futile search for the 'right' piece of paper confetti.

position in gold

Make Your Move

"It seems to me that if there were any logic to our language, trust would be a four letter word."
--Joel Goodson (Risky Business)

Is risk appetite returning to the marketplace? Judging from the upward trend in short term T-bill yields, perhaps very slowly.

Yields aren't exactly screaming higher. Heck, currently the 3 month yields only .3%. But that's nearly triple the rate of a month ago.

This series remains one of my faves for monitoring risk appetite. Based on current levels, it's hard to argue that risk appetite is anywhere near normal.

But keep half an eye on the trend.

position in T-bills

Tuesday, February 3, 2009

Spectrum of Freedom

"These walls are funny. First you hate 'em, then you get used to 'em. Enough time passes, you get so you depend on them. That's institutionalized."
--Ellis Boyd 'Red' Redding (Shawshank Redemption)

A fine little video framing the American form of government in the spectrum of possibilities. A few notes:

-->Contemporary framing of the left side of the political spectrum towards socialism and the right towards fascism is inaccurate as both ends represent government controlled by a small group of rulers. (Personal note, this is precisely my conclusion as when you really think it through the political endgame pursued by 'liberals' and 'conservatives' is not readily distinguishable.)

-->A more reasonable political spectrum looks like this: 100% government <------------> 0% government.

-->There are five categorical choices across the political spectrum: monarchy, oligarchy, democracy, republic, anarchy.

-->In reality, monarchy, or rule by single individual, doesn't exist. Even highly visible ruling personalities are supported by their small group of administrators. In practice, all monarchies are really oligarchies.

-->Oligarchy is rule and control by a small group. The elite set policy and govern as they see fit. Most governments in the history of the world have been oligarchies.

-->Anarchy means no government. Freedom is not supported by anarchy, since people are constrained by constantly trying to protect their property from theft. Anarchy is an unstable form of government, and has historically marked a transitional phase toward oligarchy.

-->Democracy is government by majority rule. Many believe democratic government was the founding principle of the United States. It was not. Did you know that the word democracy does not appear in the Declaration or Constitution? Many Constitutional framers were concerned about the consequences of an unrestrained majority that results from democracy. A democratic majority (a.k.a. 'mob rule' or 'tyranny of the majority') can vote to end lives, or to seize property from individuals as they see fit. Historically, democracies have proven an unstable form of government that typically morphs into oligarchy.

-->Republic represents rule of law. The scope of law is limited to establishing and enforcing protection of person and property. Republic was the form of government intended by many (but I personally would argue not all, based on study of history) of the Constitutional framers. Republican government is the position on the political spectrum most consistent with the principle of liberty. Government's role in a republic is to enforce law that protects person and property, which facilitates freedom.

-->Finally, government growth reduces freedom. Government power increases with size. These conditions are supportive of oligarchy.

It seems clear that that America is losing its grip on republican form of government, and that we're sliding toward oligarchy.