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.