Friday, December 31, 2010

Historical Development of Natural Rights Concepts

"Knights, the gift of freedom is yours by right. But the home we seek is not in some distant land. It's in us, and in our actions on this day! If this be our destiny, then so be it. But let history remember that, as free men, we chose to make it so!
--Arthur Castis (King Arthur)

The concepts of natural law and natural rights are often attributed to the thinkers of the enlightenment and in particular to John Locke. The roots of natural law and natural rights are much broader and deeper. Rothbard's work provides some of the best insight on the progression of this stream of thought.

As I try to get this progression straight in my head, here are some of the influential groups along the way:

Scholastics (700s-1700s). Scholatisicm developed in early universities as a teaching system. It is grounded in dialectical inquiry, which is a form of learning by posing questions and theses, and then engaging in critical dialogue in search of the truth. A fundamental assumption of this approach is that individuals possess capacity for reason, and that thru this reasoning power, people can solve otherwise perplexing problems. Scholastic thought diffused thru Europe and religious orders (Thomas Aquinas was a Catholic Scholastic) during 1000-1500. The dialectical processes of scholasticism were readily applied to political and economic questions. Reasoning led scholastics toward the idea that certain laws govern human behavior and that certain rights accompany human existence.

Levellers (1600s). The English Civil War during the 1640s was motivated by clashing religious and political philosophies. One stream of thought belonged to the Levellers. The Levellers constituted the first conscious libertarian mass movement. Leveller doctring was grounded in rights of 'self-ownership,' private property, religious freedom, and minimal government interference in society. These rights were 'natural' in that they were derived from the nature of man and the universe. The Levellers did not triumph in the Civil War, but their ideas provided a basis for the work of Locke and others later in the 1600s.

Physiocrats (late 1600s-1700s). Across the pond in France, physiocracy was taking root. The primary politico-economic principle of the physiocrats was the rule of nature. The primary contribution of the physiocrats was in political economy. The physiocrats were among the first laissez-faire thinkers. They called for free enterprise and unfettered trade. They also saw that money is not wealth in itself. Money is only an intermediary that facilitates exchange. It was the exchange of real goods that built weath and improved standard of living for all.

The physiocrats were clearly inspired by the idea of natural law and natural rights that was increasingly at the center of the Enlightenment era. As stated by Francois Quesnay, the founder of the physiocratic school of thought: "Every man has a natural right to the free exercise of his faculties provided he does not deploy them to the injury of himself or others. This right to liberty implies as a corollary the right to property." The only function of government is to defend that right.

Locke (1632-1704). Interestingly, John Locke's early life was not libertarian at all. He was a statist in favor of enforcing religious orthodoxy. This all changed when he became secretary to the Lord of Shaftesbury (Anthony Ashley Cooper). It was Shaftesbury who instilled in Locke the notion of natural law and natural rights. Locke was thus transformed into a champion of libertarian thought who plunged into political and economic philosophy. Locke's seminal work, Two Treatises on Government, contains clear evidence of Scholastic and Leveller influence.

There are certainly other noteworthy individuals and groups in the progression, and I hope to add to my understanding of them.

The immediate takeaway for me, however, is that the theory of natural law and natural rights was at least a thousand years in the making before it was integrated into the founding principles of the United States.

Thursday, December 30, 2010

Selective Freedom

"You can't get a little bit pregnant, son."
--Lou Mannheim (Wall Street)

The First Amendment enumerates some of many natural rights of the individual: a person's right to free worship, speech, and assembly.  The amendment reads:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people to peaceably assemble, and to petition the Government for a redress of grievances.

But there are many other natural rights as well--which can be generally captured under the domain of property rights. All of these rights are 'natural' in that they are endowed by our Creator (or as a function of our humanity). They are inalienable.

They are also inseparable.

Some people demonstrate affinitity for only a subset of natural rights. For example, there are those who stand up in support freedom of speech while at the same time disdaining an individual's freedom of association, self-defense, or property ownership.

But natural rights are not like produce, where people can pick and choose what they like while tossing the rest back on the pile. Each right, such as speech, is but one dimension of holistic liberty.

People are not free if they can legally express their views, while being penalized by law for choosing to associate with a particular individuals, or for wanting to keep the spoils of their labor.

Selective freedom is an illusion of despotism and its proponents.

Wednesday, December 29, 2010

Dead End Debt

You were under the impression
That when you were walking forward
You'd end up further onward
Put things ain't quite that simple
--The Who
This missive proposes a coming state of debt scarcity. The thesis is that gigantic levels of borrowing in the past are saturating the market for more debt. Put simply, people may not want to borrow any more.

Even if the Fed offers unlimited credit supply, there will be little credit demand.

If such a situation comes to fruition, and I think that there's a good chance that it might, then it leaves only the government as the 'borrower of last resort.'

Indeed, we've already seen a shift in this direction, as risk moves from private to public ledgers.

The question becomes: how much can governments borrow if the citizenry does not want to borrow?

position in TLT

Tuesday, December 28, 2010

Precious Years

Whoa whoa tender years
Won't you wash away my tears
How I wish you were near
Please don't go tender years
--John Cafferty and the Beaver Brown Band

Russell lists end of yr gold prices for the past decade. Looks like 2010 will clock in at about $1400.

He's right. This is one of the greatest and underappreciated bull markets in history.

While my sense is that gold may undergo a pullback, perhaps a big one, in the coming months, this bull market will end with fireworks rather than wimpers.

position in gold, GLD

Monday, December 27, 2010

The Doctor is In

Doctor my eyes have seen the years
And the slow parade of fears without crying
Now I want to understand
--Jackson Browne

Dr J may have outdone Mr P with his end of year missive (and that's saying something). He makes a number of thoughtful points.

There are two primary theses for why long term rates have started to rise: 1) investors are worried about the inflation implications of recent rounds of central bank money printing, 2) investors are forecasting that the QE programs are working and that economic activity will fundamentally pick up. Dr J presents data that discounts both. Instead, he presents an argument in favor of a third thesis: that the recent increase in interest rates is due to investors dumping low risk assets in favor of high risk assets in response to Fed rhetoric that the central banks is targeting higher asset prices in attempt to create a 'wealth effect.'

The Fed has tried this before. As John notes, 'we've seen this movie a few times now, and the ending never changes.'

He also reiterates the overvalued state of the markets. In addition to the 10 yr valuation models that he has shared before (which current project ~ 4% annual stock mkt returns over the past decade, Dr J demonstrates that various valuation methods suggest that stocks in aggregate are about 40% overvalued. One of these approaches employs the Q ratio, which is essentially a ratio of stock price to underlying asset replacement value.


Over the long term, the Q ratio averages about 0.7. After bouncing off that level during the waterfall decline two years ago, Q has risen to 1.12--a level that suggests general overvaluation that has historically been surpassed only during the late 1990s bubble run-up. In fact, note that current valuations exceed those prior to the 2008 collapse.

Finally, near the end of the missive Dr J notes how market returns are not normally distributed. Returns are skewed to the left (a.k.a. negatively skewed). While the median market return is slightly positive, the distribution has a shortened right tail (lower than normal chance of large gains) and an elongated left tail (higher than normal chance of large losses). Current market climate exacerbates the 'unpleasant skew' associated with future returns.

A fine missive. One of those worthy of multi-reads.

position in SH, TLT

Sunday, December 26, 2010

Practical Holiday

"Do you know what this means? It means bankruptcy and scandal and prison. That's what it means!"
--George Bailey (It's a Wonderful Life)

Mr P checks in with some year end candor. He sees risk as high and increasing. Lopsided sentiment, rich valuations, and a deteriorating macro context (despite what mainstream financial media are reporting).

Unlike many, Mr P continues to doubt the Fed's capacity for endless money printing. He thinks the Fed will be reluctant to infinitely expand its balance sheet (which is what happens w/ the QE programs).

Meanwhile, folks have been slapping on the dollar carry trade in massive size thinking the Fed will in no doubt destroy the dollar. If this trade reverses, the movement to sell risky assets to buy back dollars could be harsh.

Essentially, Mr P thinks that further QE activity will move rates substantially higher (they're already on the move), which will discourage the Fed from further money printing. At that point, we face the 'funding crisis' that Fleck often discusses.

One of two things happen at that point. Either the Fed starts printing money and dropping it from helicopters, or central banks get out of the way and let market forces take over.

Mr P remains in the camp of the latter scenario which, if it occurs, is deflationary.

I'm pretty much camping on similar ground. Am carrying little upside risk into year end. Instead, lots of cash with small short equity and long Treasury positions. Plus, zero debt...

My primary hedge against the opposite (Big Inflation) scenario remains physical gold.

position in SH, TLT

Friday, December 24, 2010

No Vote of Confidence

"You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it."
--Morpheus (The Matrix)

Thought provoking piece from the always insightful Frank Chodorov. In it, Chodorov explains why he chose not to vote in major elections, and suggests why society might be better off if all would do the same.

He offers many interesting points in this missive such that it should be read carefully and perhaps multiple times. There are, however, a few passages that I want to put up here in there entirety (emphasis mine):

"Getting back to the economic advantages that the candidates promise me, in exchange for my vote, my reason tells me that they cannot make good on their promises, except by taking something from my fellow man and giving it to me. For government is not a producer. It is simply a social instrument enjoying a monopoly of coercion, which is it supposed to use to prevent indiscriminant use of coercion by individuals on one another. Its purpose in the scheme of things is to protect each of us in the enjoyment of those rights with which we were born. Its competence is in the field of behavior; it can compel us to do what we do not want to do, or to prevent us from doing what we want to do. But it cannot produce a thing.

"Therefore, when it undertakes to improve the economy, it is compelled by its own limitations to the taking from one group of citizens and giving to another; it uses its monopoly of coercion for the distribution of wealth, not for the production of wealth. So that, when I vote for the candidate who promises me betterment in my economic condition, I am condoning and encouraging some form of robbery. That does not square with my moral values."

That's one fine thought stream. It inspires conjecture about the standing of the above argument in the minds of most voters. Perhaps most voters operate in a Matrix-like state, having never made the mental connection between a politician's promise to improve their economic condition and the fact that someone else's economic condition must necessarily be reduced in order for the politician to deliver. Or perhaps they have rationalized the situation away in a manner that they don't see themselves as thieves who recruit politicians as strong armed government agents in crime. Or perhaps they understand the situation perfectly, but prospect of gaining economic economic resources thru political means is too enticing to forego.

One more passage toward the end:

"Thus, when we trace our political system to its origins we come to conquest. Tradition, law and custom have obscured its true nature, but no metamorphosis has taken place; its claws and fangs are still sharp, its appetite as voracious as ever. Politics is the art of seizing power for economic purposes. There is no doubt that men of character will give of talents for what they conceive to be the common good, without regard to their personal welfare. But so long as our system of taxation is in vogue, so long as the political means for acquiring economic goods is available, just so long will the spirit of conquest assert itself; for men always seek to satisfy their desires with the least effort."

It follows that cutting resources flowing to the government thru tax and moneyprinting streams serves to choke off that spirit of conquest.

Thursday, December 23, 2010

Common Defence

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

It has been argued that mandatory airport searches of all citizens and similar intrusive acts by Federal government agencies formed under auspices of 'homeland security' are valid because of power granted to Congress for providing for 'the common defense.' The common defense language appears in the first clause of Article 1, Section 8 (1.8.1) of the Constitution states:

1.8.1: The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

Does 1.8.1 grant power to the Federal government to expand activities related to security at its discretion--in this case to intrude on individual freedoms in the name of keeping people safe? No. We know this for a number of reasons.

Review of 1.8.1 suggests that its primary intent is to enumerate Congressional power to collect economic resources via taxation and other means. Subsequently, 1.8.1 specifies the various ways those economic resources, once collected, can be spent: for paying debt, for common defense, and for general welfare.

In the context of federalism upon which the republic was founded, resources applied toward 'common defense' should address needs that all states have in common and/or needs that require coordination by a central authority. In modern times, these might include conducting air or sea patrols, maintaining military reserves, or establishing communication networks that permit interstate action in the event of an attack.

The latter part of Section 8 enumerates Congressional powers related to the military in more specific detail (again suggesting that the emphasis of 1.8.1 is on Congressional authority to collect economic resources). Congress has authority to declar war (1.8.11), to raise temporary (!) armies (1.8.12), to provide and maintain a Navy (1.8.13), and to make rules that regulate land and naval forces (1.8.14).

Then come two clauses related to Congressional authority over 'the militia.' Militia is never defined in the Constitution, but it is presumed to be decentralized military forces located in the various states. The militia concept has deeps roots in founding thought of the United States (nice review here), primarily as a means to check central government power.

1.8.13: [The Congress shall have power] To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;

1.8.14: [The Congress shall have power] To provide for organizing, arming, and disciplining the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers and the Authority of training the Militia according to the discipline prescribed by Congress.

Over time, the various state militias became what today we know as the National Guard. It is clear in the Constitution that decentralized state militias were to intended to provide a substantial defensive resource--particularly in the context of domestic disturbances as specified in 1.8.13. Constitutionally, the Federal government is to fund militia resources and to enable their mobilization in support of the common defense of the states.

It seems clear that when it comes to issues of common defense on domestic soil (such as defending against terrorist 'invasions'), the Constitution empowers the Federal government to enact a decentralized approach where the states retain considerable authority over defense activities. The Constitution does not favor the creation of a centralized agency (such as the Department of Homeland Security) in this regard.

Finally, and perhaps most importantly, we know that intrusive acts such as airport searches done by Federal government agents are unconstitutional because of the Bill of Rights. The Bill of Rights was added to the Constitution to more clearly enumerate those rights retained by individuals and the states. Items appearing in the Bill of Rights are consistent with the concept of natural rights--the idea that all individuals are born with certain rights that are inalienable by the government.

As such, the rights enumerated in the Bill of Rights are rights that the federal government cannot supercede. These rights include, as enumerated in the Fourth Amendment, the right of people to be secure in their person and property against 'unreasonable search and seizures' without 'probable cause.'

Because the intent of the Constitution was to impose limits on government so as to preserve individual liberty, and because the Bill of Rights provides 'further restrictive clauses' on government authority to 'prevent misconstruction or abuse of its powers,' it is reasonable to conclude from the evidence that clause 1.8.1 does not authorize the Federal government to conduct forceful acts of search upon its citizens in the name of 'common defense.'

Wednesday, December 22, 2010

Property Rights

Most of freedom and of pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

Natural rights are often equated to property rights. Generally speaking, an individual's property consists of the following:

1) Life
2) Wherewithal to produce
3) Fruits of labor

Each individual a right to his/her property. No individual can forcibly take any of the above from another person. Forcibly taking life from another is akin to murder. Forcibly taking wherewithal to produce from another is akin to slavery. Forcibly taking fruits of another's labor is akin to robbery.

In a free society, government's role is to ensure that property rights are upheld. If individuals cannot defend these rights by themselves, then government is empowered to use force to help individuals defend their rights.

Any expansion of government power beyond this scope necessarily infringes on property rights.

To gain power, of course, government must do precisely this. 

Tuesday, December 21, 2010

Natural Rights

And when the night is cold and dark
You can see, you can see light
'Cause no one take away your right
To fight and to never surrender
--Corey Hart

Each night at the end of his show, Judge N presents a 3-4 minute 'closing argument.' Saw this one the other night and thought it excellent. The show producers did not subsequently post it, but fortunately someone captured it on YouTube (hope it stays up there).

The judge makes a cogent argument for natural rights, and for government's proper role in preserving them.

Natural rights are the rights that we are born with--i.e., they 'naturally' belong to us. Generally speaking, these rights involve the freedom to pursue our individual destinies without unwanted intrusion by others. When operationalized in our daily lives they include freedom of speech, religion, association, self-defense, and property ownership--among others.

Where do these rights come from? As the judge notes, if you believe in God, then you likely believe that these rights were granted by The Creator. If you do not believe in God, then these rights come from our humanity, like the features that comprise our physical being.

The concept of natural rights is part of the founding history of the United States. Evidence suggests that, prior to the Revolution, the natural rights concept (as expressed by the work of Locke et al) had been circulating among the Colonies for the better part of 100 years. Jefferson famously expressed the role of natural rights in inspiring (and justifying) the founding actions of the country:

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness."

As noted by Jefferson, natural rights are unalienable, meaning that they can not be separated from us. Government cannot take natural rights away by law since government does not grant them in the first place.

Yet, government constantly seeks to trample on our natural rights. It often does so in the name of security, in the name of trying to keep us safe.

But, as the judge saliently observes, safety is not a natural right. It is a good that should be privately purchased and provided. No one is born with the right, for example, to flight safety. You might need it to survive, but it is not a right that you were born with. Whereas the Fourth Amendment protects the right to be secure in person and property against arbitrary search and seizure--a right with which each of us is born with.

Government officials from both sides of the aisle often say that their first job is to keep us safe, whether that safety pertains to physical security or social security. They are wrong. The role of government officials is to uphold the Constitution (which they take an oath to do), which means their job is to keep us free--not safe.

If, on the other hand, the actions of government officials keep as safe at the expense of freedom, then they are not doing their job.

As the judge notes, freedom is our birthright, and the only legitimate role of government in our society is to defend this freedom.

Monday, December 20, 2010

Gold Bubble Blather

Here comes the rain again
Falling on my head like like a memory
Falling on my head like a new emotion
--Eurythmics

After reading articles like this Bloomberg piece, it's easy to conclude that gold prices still have a loooong way to go. The basic thesis of the article is that gold is in a bubble and that the primary driver of higher gold prices is retail investor speculation via the various gold ETFs such as GLD.

First let's consider the 'bubble' claim. Bubbles are sometimes defined as prices that rise significantly higher than fundamentals would suggest. The problem with definitions such as this is that there is no agreement on what the fundamental price 'should' be, or what constitutes 'signficantly higher.'

Another approach is the technical one--examining price increases over time. Bubbles in asset classes tend to occur when prices increase at eye-popping rates in relatively small periods of time.


The chart above was borrowed from a Buzz posting at the Ville made a couple months back. It includes various series of asset classes widely thought to have acted 'bubbly' over the past 13-14 yrs, including the NASDAQ, housing, Chinese stocks, and crude oil. While a better picture would have been to index each series to a relative 100 value for comparison purposes, it should be apparent that asset classes that have exhibited bubblish tendencies went thru a 2-3 yr period where prices spiked 5-10x before giving it all back in similar 2-3 yr fashion.

Gold (pink line) has yet to show such tendency. The 10 yr bull market has taken gold from under $300 to over $1400 in pretty much steady march higher fashion.

The article's other argument, that gold is being driven higher by uninformed speculation in various bullion ETFs is also laughable. Large chunks of GLD, for example, is owned by so called 'smart money' players. Even George Soros owns about half a billion dollars worth of GLD. The percentage of all 'dumb money' that has exposure to gold is still tiny. Compare that to the tech bubble runup of the late 1990s.

Moreover, the article fails to mention the very real fundamental and structural reasons for gold to be increasing in price. Gold is viewed as a hedge against currency debasement and against general disorder. It is hard not to argue that such conditions have becoming more prevalent.

I fully believe that, before the bull market in gold is over, we'll surely trace out wild action like bubbles past. While gold seems due for a pullback, perhaps a big one, articles like this suggest we're no where near THE top in bullion.

position in GLD

Transfer Station

Peace of mind
It's a piece of cake
Thought control
You get on any time you like
--Talking Heads

Peter Atwater compares current sovereign crises in Europe to the domestic credit crisis that unfolded in 2008. As he notes, the situation in Europe was (is) very predictable--despite EU bureaucrat statements to the contrary.

Sovereign problems are easily forecast because they are a natural extension of governments kicking the can down the road--substituting risk in the private sector for risk in the public sector. Cheap credit motivated many world wide to borrow huge sums and invest those borrowed funds in risky assets--real estate among them.

As highly leveraged institutions worldwide have approached insolvency, governments and their agents (i.e., central banks) have been purchasing those underperforming assets, such as mortgage backed securities, with funds that were either printed or borrowed. Now the collective holds those underperforming assets.

Risk has not been reduced, it has merely been transferred to the public sphere. And because many sovereigns entered this situation with mountains of underfunded social programs, risk in many ways has become elevated.

Now, that risk is coming due. Sovereign situations mirror private sector situations a year or two back. Sovereigns are now the insolvent ones. They need bailouts. But who is in a position to bail out the sovereigns?

Over the past couple of months, the consensus seemed to be that Germany, France, and the United States would be willing and able. None of these countries, however, is in strong financial condition itself. They may be willing, but they are not able.


It seems like the bond market is figuring as much, as credit spreads in the first countries to hit the breadline continue to widen.

Other markets currently seem to be turning a blind eye to the $ multi-trillion question: where, or upon whom, can the risk be transferred to next?

position in TLT

Saturday, December 18, 2010

Rushing Toward Unrest

We'll be fighting in the streets
With our children at our feet
And the morals that they worshipped will be gone
--The Who

Around the world, socialist programs are driving countries toward bankruptcy. As countries hit the breaking point, proposals of austerity programs aimed at cutting back entitlement programs are being met by riots in the streets. Greece, Spain, Ireland, UK...

The US is not far behind the EU in terms of financial position. Socialist programs here are pushing us toward the abyss. First up will likely be the big states. California, for example, is insolvent as we speak. Muni bonds continue to get smashed.

There is belief that the Federal government will bail out bankrupt states. Instead of legislative relief (less likely with the incoming Congress class), the odds on favorite is a bailout engineered by the Fed. QE for the states...

Any such intervention can produce no lasting results, however. Prosperity cannot be printed. At some point, spending will be cut. It either gets done proactively or gets imposed by market forces.

And when the inevitable austerity measures do hit the US, do people riot in the streets here like they have done elsewhere?

position in TLT

Friday, December 17, 2010

Tax Attack

Should five percent appear too small
Be thankful I don't take it all
--The Beatles

Congress has passed a bill that, among other things, extends current income tax rates for two more years. Absent this action, tax rates were set to increase on Jan 1st to levels that preceeded intervention during the Bush administration.

The bill is hard to swallow for some who believe in smaller government. Lower taxes are certainly good, but additional items in the bill call for increased government spending (e.g., extension of unemployement benefits, cost ~$60 billion). As such, some Tea Party types like Senator Jim Demint gave the bill a thumbs down, and incoming Senator Rand Paul has indicated he would have done the same.

Representative Ron Paul, perhaps the poster guy for the Tea Party movement, gave the bill a thumbs up. Basically, he's saying that the benefit of tax cuts outweighs the spending increase.

Either way, this is an excellent debate--one that should get louder w/ the incoming class of Congress.

In this particular case, I'm on the same side as Ron Paul. As I see it, the only way to chop the Federal government down to size is to cut off the resource stream. Taxes are a primary source of government size and power.

Sure, government can spend its way higher in the short term without additional tax related resources. Over time, however, market forces will make it difficult to acquire resources via other channels such as the Fed or thru borrowing.

As such, less resources from the tax stream serves as a choking manuever that cuts off resources vital to keeping Big Government alive. Which steps us closer to voluntarily dismantling the State on our own terms, or involuntarily standing by as market forces topple the system.

Thursday, December 16, 2010

Your Turn, Welfare Clause

These changing years
They add to your confusion
Oh and you need to hear
The time that told the truth
--Level 42

After yesterday's splash of enlightenment related to the Commerce clause, I experienced another a-ha moment last nite related to the General Welfare clause. Once again, the instigator was Judge Napolitano.

First, let's spell out the General Welfare clause. It appears as part of the first item spelled out under Article 1, Section 8:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.

The judge pondered the relevance of the General Welfare clause w.r.t. the healthcare legislation and to the current tidal wave of pork making its way thru the legislative process.

Does the General Welfare clause grant power to the Federal government for creating the various 'welfare' programs we have today? No, he noted. In the Constitutional context of limited government and federalism, the central government collects taxes and other resources that promote general welfare among the states, not specific programs targeting particular interests.

A-haaa (told you).

In reviewing the language of the item (and of other items in Section 8), we can also observe that the framers viewed the collection and distribution of resources collected by the Federal government as being uniform among the states, with no preferential treatment (no SIGs). Once again, if this was not the general understanding during ratification, then it is hard to see how all states, each viewing themselves as sovereign entities in a federation, would have signed on board.

The judge observed that the general welfare concept applies toward pork barrel spending as well. Because resources collected via the tax process must be distributed generally with no preferential treatment, pork projects and earmarks are unconstitutional.

When viewed thru this lens, the scope of 'general welfare' programs that Congress can fund narrows considerably. Only those programs where all states benefit in kind would be valid. Beyond the 'common Defence' mentioned in the item, I have trouble coming up with programs that would qualify. Perhaps the interstate road system would be a valid one.

Like the Commerce clause, then, what appears at first glance to be a loophole for infinite government expansion is actually, upon further scrutiny, quite limiting--which makes the General Welfare clause wholly consistent with restraining nature of the Constitution.

It is not the clauses, but their perversion by people in our three branches of government, that is the enemy of liberty.

Bond Ghouls Back?

Frank Cross: "I get it. You're here to show me my past, and I'm supposed to get all dully eyed and mushy. Well forget it pal. You got the wrong guy."
Ghost of Christmas Past: "That's exactly what Attila the Hun said. But when he saw his mother...Niagara Falls."
--Scrooged

Long bond yields worldwide have been backing up in the face of the Fed's QE2 rate buy down program.


Hard not to wonder whether we aren't witnessing the return of the long lost bond vigilantes...

position in TLT

Wednesday, December 15, 2010

Learning About The Commerce Clause

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

Mainstream media is generally not a good resource for those seeking to learn about the Constitution. A refreshing exception is Judge Andrew Napolitano. His perspective first caught my attention years back during the 2000 election issues. He now hosts what I believe to be the only show that focuses on viewing issues thru a Constitutional lens.

This particular interview w/ Neil Cavuto is about a year old, done while the healthcare legislation was still in process.

Early in the interview, the judge observes a growing admission by some in Congress that their basic approach to creating law is producing legislative output that they think is 'right' and then leaving it to the courts to decide if their work is Constitutional. As the judge observes, such an approach seems inconsistent with the oath that each of these people took to uphold the Constitution. Why would people who promise to uphold the Constitution endeavor to produce particular pieces of legislation when it is realized, ex ante, that prospects for passing Constitional review are questionable?

This does seem to be the mindset of many w.r.t. the healthcare legislation. Some people are currently opining that this legislation was destined for a date w/ the Supreme Court from the outset.

The larger point in the interview concerns the Commerce clause, which is being employed by the Dept of Justice and other supporters of the healthcare legislation as its primary legal justification. The Commerce clause is the third item in Article 1, Section 8 which enumerates Congressional powers. It reads as follows:

[Congress shall have Power] To regulate Commerce with foreign nations, and among the several States, and with the Indian Tribes.

The judge makes a number of salient points related to the Commerce clause in the interview. One is that economic exchanges between individuals and their providers are not commercial in nature (commerce being defined as large scale transactions between businesses or other large entities). Regulating such transactions is in no way what the framers intended in a Constitution meant to limit government and to preserve freedom and individual choice.

Moreover, he notes, the scope of regulating commerce, as well as other powers enumerated to Congress under the Constitution, was meant to relate to issues that were federal, not national, in scope. An excellent point and one that I had not considered previously. The intent of the Constitution was clearly to create a government that would oversee a federation of states so that state operations could proceed more effectively than they had under the previous Articles of Confederation. We 'know' this is true lest the states, who considered themselves sovereign entities, would never have all agreed to the Constitution's terms. The intent was not to marginalize state power in a manner that would make the states subservient to a nation-state central authority.

The judge observes that the purpose of regulating Commerce, according to James Madison, was to keep commerce 'regular', or flowing between the states. Although I do not have a firm citation on this (yet), my sense is that an important motivation for the Commerce clause stems from problems realized during the Articles of Confederation years, where states were raising protective tarriffs and other barriers that impeded the flow of trade. Viewed in this manner, the purpose of federal oversight can be seen as freeing up, rather than hampering, markets. Can not the Commerce clause, then, interpreted alternatively as the Free Market clause???

Parenthetically, it should also be noted that the framers continued their discussion of interstate trade in Sections 9 and 10, which as it now hits me, seemingly should be discussed alongside the Commerce clause for added meaning.

The final observation by the judge relates to the lack of interstate competition in the insurance industry. Before the judge's explanation, the issue of interstate insurance regulation had perplexed me for years. From where I sit, a no brainer for reducing health care costs has been to remove barriers that prevent insurance carriers who operate in one state from entering into markets in other states. (Indeed, as of today, it is now clear to me that the Commerce clause should require the Federal government to intervene to remove those barriers!!!) Instead, the Federal government has been condoning these trade barriers. Why? Because, as the judge notes, it permits the Federal government to get its hands on regulating insurance business. If free markets were permitted, competition would drive down prices and raise quality--and the Federal government would have nothing to control--i.e., the Federal government would lose power.

This was a very enlightening interview--one that I listened to about a dozen times in order to completely absorb the thoughts.

I should note that on the judge's show last nite, he ended with a quick note on the Commerce clause (I looked for the video clip on line but couldn't locate it). The judge observed that the case that made the Commerce clause an operational instrument in Big Government's toolbox was Wickard v Filburn 1942. Filburn was an Ohio farmer who was growing wheat to feed his chickens. Because the Federal government had imposed limits on wheat production to fix prices artificially high during the Great Depression, Filburn was ordered to burn his crops and pay a fine, even though he was not growing his wheat to sell (never mind the issue of selling across state lines).

The case went to the Supreme Court who ruled in favor of the Federal government. The court stated that because Filburn grew his own wheat, he would buy less. Because wheat was traded nationally, his reduction in demand would impair Federal activities to fix the price.

Surely, such a perverse judicial interpretation the framers never imagined.

It is perversion of the Commerce clause, as well as the General Welfare and Necessary and Proper clauses, that makes these items a tool of the State and a threat to liberty.

Tuesday, December 14, 2010

Clause for Pause

Most of freedom and of pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

The intent of the Constitution was to clearly enumerate what the central government was permitted to do. The principle of limited government, which drove the country's founding, was the driving force behind this design. The Tenth Amendment states what can clearly be assumed otherwise--that those powers not enumerated to the Federal government by the Constitution remain with the states and with the people.

Article 1, sections 8 thru 10, enumerate the powers of Congress. Nearly all items apppearing here are clearly limiting in scope. For example, Congress has the power to borrow money on the credit of the nation, to declare war, to coin money.

This does not mean that violation of these powers is not possible. After all, the three powers listed previously are currently being ignored or abused to some degree. Even the clearest laws are ineffective if people choose to ignore them. But establishing a clear framework is step one if a society is to be ruled by law rather than by men.  

There are three items in Section 8, however, that are not clearly limiting in scope. These items are often referred to as the General Welfare clause, the Commerce clause, and the Necessary and Proper clause.

When interpreted outside the founding principle of limited government, these three clauses provide the legal justification for infinite expansion of the Federal government. It should come as no surprise that the lion's share of legislation enacted over the past century that has expanded the Federal government's scope and power has been justified using these clauses.

When interpreted inside the founding principle of limited government, however, these clauses lose much of their significance. How can the principle of limited government be realized if the government can enact any program that it deems 'necessary' under the guise of the General Welfare clause? Or the Commerce clause? Or the Necessary and Proper clause? It surely takes no great mind to reason that the auspices for limited government are poor under such an arrangement.

Indeed, Jefferson and Madison are on the record as putting the clauses in the context of limited government.

The obvious question, of course, is this one: If these three clauses effectively grant unlimited power to the central government, then why bother writing a constitution at all?

Monday, December 13, 2010

Positive Sound in First Round

"I have to believe that when things are bad I can change them."
--Jim Braddock (Cinderella Man)

Two months after refusing a summary judgment in favor of a ruling, a Richmond District Court judge has ruled the health care bill unconstitutional.

In his written opinion, the judge indicated that the central issue involves an individual's right to choose to participate. The healthcare law used the Commerce Clause as justification for requiring individuals to purchase insurance. The judge, however, stated that the Commerce Clause does not give government the right to 'compel an individual to involuntarily enter the stream of commerce by purchasing a commodity on the private market.'

As the judge indicated, however, this ruling is but the first step toward the high court for the healthcare law.

It's a positive sign, however, as there is at least one judge out there who refuses to let the Commerce Clause serve as carte blanche for ever increasing State power.

Painting the Tape

In violent times
You shouldn't have to sell your soul
In black and white
They really, really ought to know
--Tears for Fears

I remember a time when articles like this would have raised some eyebrows. No more.

It's now 'common knowledge' that the Fed 'wants' markets higher.

Uncle Ben wants you (to take risk even though you think it imprudent). Just make sure you have a seat when the music stops.

position in SH

Saturday, December 11, 2010

Disinformation Discontent

"A free press, like a free life, sir, is always in danger."
--Ed Hucheson (Deadline USA)

In the 1930s FDR was able to convince the American public to swap their gold for pieces of paper. One reason that sham likely 'worked' was that there were limited avenues for other views to bubble forth. Yes, there were contradictory voices like Garet Garrett at the Saturday Evening Post and Isabel Paterson at the New York Herald Tribune, but their reach was largely isolated by geography and subscription base.

It seems unlikely that FDR could have realized such a coup today. Witness the widespread pushback to Fed chairman Ben Bernanke's propaganda campaign. He and others are making the rounds trying to convince the public that the Fed is not printing money via its Quantitative Easing campaigns. Hundreds of thousands of outlets have contested Bernankes claims.

Hard to keep the toothpaste in the tube today with so many alternative media sources. Bad for government propaganda, good for freedom.

There have been rumblings in the FCC and other government agencies may pursue initiatives to restrict this freedom in some manner--in the name of 'security' or 'balance.'

How the public responds to further government attempts to limit freedom of expression may signal just how strong the flame of liberty still burns in this country.

Friday, December 10, 2010

Getting Sentimental

"Fear? That's the other guy's problem."
--Louis Winthorpe III (Trading Places)

Jason Goepfert, purveyor of the fine Sentimentrader site, posted some interesting comments on the Buzz today.

The Rydex fund bull/bear ratio, which compares the value of assets invested in the Nasdaq 100 (NDX) long vs inverse funds, is near an all time high. Current, there are 34x more assets invested in the long fund. That ratio has been bested only a few times since 2000, all in the 2000-2001 period.

Over 40% of the core sentiment indicators that Jason tracks are now at optimistic extremes. 0% are at pessimistic extremes.

As we drift higher on progressively lighter volume, current conditions remind Jason of last spring prior to the 'flash crash.' He suggests the possibility that this extended rally gives back all its gains and then some in a swift and severe manner.

Resonates with me...prolly no surprise since I'm card carrying contrarian with big picture concerns.

I am in the process of unwinding what little long side exposure I have while beefing up my short side. Peeled off some MSFT yesterday and unloaded small SLV position today. That leaves CSCO, GLD, DBO, and RJI--all small potatos but held for sale if we jig higher.

Added to short equity (SH) and bond (TLT) positions today as well. Nothing crazy. Just gradually turning the wheel of my risk profile in favor of lower prices.

positions in CSCO, GLD, DBO, RJI, SH, TLT

Steppin' Out

Now, the mist across the window hides the lines
But nothing hides the color of the lights that shine
Electricity so fine
Look and dry your eyes
--Joe Jackson

We previously speculated about Ron Paul being named chair of the House subcommittee that oversees the Fed. It appears that will indeed come to pass.

While such a move guarantees nothing, it is most certainly a step in the right direction.

Ben's den has to be feeling a bit uneasy...

Thursday, December 9, 2010

Soft Sell

Sometimes I feel I've got to run away
I've got to run away
--Soft Cell

Let go small Microsoft (MSFT) position into yesterday's strength. Many folks are getting bulled up on Mr Softee based on the recent price action.


The present setup, however, can also be interpreted as a double top. Couple that with TD 13 sell signals ringing on nearly every index on the planet (sign of correlation), and I'm a better seller than buyer at these levels.

A snivlet of Cisco (CSCO) constitutes sole long equity exposure.

position in CSCO

Wednesday, December 8, 2010

The Liberal Mind Trick

"No more training do you require. Already know you, that which you need."
--Yoda (Return of the Jedi)

Today, the term 'liberal' means something much different than it did prior to 1900. Classical liberalism concerns the freedom and sovereignty of the individual. The theoretical framework for classical liberalism was greatly advanced during the Enlightenment period by thinkers such as John Locke.

Classical liberalism formed the philosophical basis for the United States. It is clear from our founding documents that the founders were highly influenced by liberal thought. For example, Jefferson pretty much cut and pasted words from Locke into the Declaration.

The meaning of liberal was altered during the populist and progressive movements of the late 1800s/early 1900s. Some believe this was an effort by enemies of liberty to alter language in a manner that creates positive substitute symbols. Essentially the idea is to keep a word that has emotional meaning among the citizenry, but change its meaning. Over time, the theory goes, the people will embrace the new definition.

It's a form of propaganda, cookie, and consistent with the militant principle of creating chaos with language.

Job seemingly well done, as today's definition of liberal is about as far removed from the classic meaning as could be imagined. Today, a liberal is someone who favors the collective over the individual. Someone who believes that it is ok to impair liberty for some greater good--often in the name of 'social justice.'

Modern liberalism is full of inconsistency, irony, and paradox. Today's liberals profess peace and non-violence, but recruit the State, by far and away the most coercive force in the history of the world, as their primary agent for strong-arming their agendas on those who resist. Today's liberals claim to value diversity, but chat up democracy and 'one world' orders that ignore the innate variety of the human condition and suppress the desires of the few in favor of the many.

Classical liberalism stands for individuals pursuing their destinies in an uncertain world. Modern liberalism stands for forcing individuals into collective pursuit of stabilizing that uncertain world.

Mises (1949) understood that forced pursuit of such stabilization is impossible, and that it is destined to end in chaos.

Reference

Mises, L. 1949. Human action. New Haven: Yale University Press.

Tuesday, December 7, 2010

Ready for What?

Got some revelation put into your hands
Save you from your misery like rain across the land
Don't you see the color of deception
Turnin' your world around again
--INXS

Perhaps the most common argument for gold is that it serves as a hedge against inflation. And, according to many gold bulls, people seem unprepared for inflation, judging by the small fraction of investors that have positions in precious metals.

While it is certainly true that few people own gold, it is possible that people have been positioning for inflation in other ways for some time. For example, the trend over the past 20+ yrs is for people to hold less cash and more debt. Such positioning is good in inflationary environments. Inflation gnaws at the value of cash. And debtors pay back creditors in devalued dollars.

Indeed, it could be argued that people have been responding smartly to a secular wave of inflation (appropriately defined as an expansion in money and credit) over the past couple of decades.

Seems to me that people are way less positioned for the opposite: deflation: where cash and zero debt rule the day.

position in gold 

Monday, December 6, 2010

Jet Set

Hey kids, plug into the faithless
Maybe they're blinded
But Bennie makes them ageless
--Elton John

Nice quote from Toddo today:

"The fact that the FOMC PR is in overdrive is perhaps all we need to know."

Well said, bro.

The 60 Minutes segment last nite w/ Ben Bernanke demonstrates just how weak media in general and 60 Minutes in particular has come. The softball questions lobbed at Bernanke suggest either a) financial illiteracy, or b) propaganda building.

Toddo's observation above has me leaning toward b).

European Theater

"The hard part of playing chicken is knowing when to flinch."
--Captain Bart Mancuso (The Hunt for Red October)

As was well portrayed in Wall Street II, the entities really pushing for government sponsored bailouts during the credit mkt meltdown were a) the holders of securities in impaired institutions, and b) sellers of credit default swaps in those impaired institutions.


Same thing now with the EU bailouts. Are Germany, France, UK doing these out of the kindness of their hearts? No way. Banks headquartered in these countries have $1.5 trillion in sovereign exposure to these countries. It's also pretty safe to say that a goodly number of related institutions have written credit default swaps in these bonds and stand to lose big time in the event of default.

And when the US steps up and says it is ready to support ECB in bailout efforts, you can be sure that domestic banks are on the hook for big money as well.

position in Treasuries

Sunday, December 5, 2010

Unjust Democracy

You declared you would be three inches taller
You only became what we made you
Thought you were chasing a destiny calling
You only earned what we gave you
--The Who

Democracy is a system of government based on the principle of majority decision-making. While it is often associated with the form government currently practiced in the United States, democracy was not what the framers intended. The word 'democracy' does not appear in any of the founding documents, and many of the framers were on the record as opposing democracy.

Why on earth would the framers be opposed to democracy? Because democratic systems are biased against the individual. The 'majority' rule principle pits the coercive force of government, and those special interests that can marshal enough votes to secure it, against people in the minority. The freedom of the few is thus destined to be compromised in favor of the many.

The framers understood this, and endeavored toward a form of government where all people would be treated equally under the law. Democracy does not facilitate such equal treatment. Instead, it facilitates predatory action of the majority on the minority.

A nice example of the injustice of democracy is demonstrated in the classic film Twelve Angry Men. A young man with a shady background is on trial for murder. After the courtroom phase, the jury heads off to deliberate. Eleven of the 12 members come into the jury chamber thinking that the defendant is slam dunk guilty, citing everything from circumstantial evidence produced by the prosecution to the man's demographic position.

If the decision to convict required the majority rule of a democracy, then there would have been a quick rendering of a guilty verdict. But the decision rule in jury trials is not based on democracy. A decision to convict requires unanimous agreement. As the film progresses, the observer comes to understand what a tragedy a majority ruling would have been, as the single dissenting juror proceeds to turn other jurors toward the truth.

Which bids the question: If democracy is an unjust decision rule in legal contexts, then why should it be a just decision rule in political contexts?

Saturday, December 4, 2010

The Solvency Problem

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

Governments around the world are fighting a solvency problem. Fueled by ultra cheap credit provided by central banks, individuals, organizations, and nations borrowed a ton to live large in the present. Some of the money obtained from borrowed funds was used to buy risky assets (stocks, real estate, bonds, etc). That buying jacked prices higher. And as prices went higher, people borrowed more to exploit the seemingly virtuous cycle.

But credit induced expansions are always 'crack-up booms.' At some point prices reverse, and the value of all assets declines. Over the past couple of years we have seen precisely this. Commonly referred to as 'the credit crisis,' the situation is one of insolvency. Asset values decline; liabilities don't. When asset values fall below liability values, then we have insolvency. Even if all the assets are sold at this point, what is owed cannot be covered by the proceeds.

This is the downside of leverage.

To stave off insolvency, governments have been borrowing more and using the proceeds to buy risky assets (such as bonds) directly, or indirectly by penalizing saving. Hopefully you can see the insanity of this. Borrowing drives liabilities ever higher, which intensifies the insolvency condition.

Presently, bureaucrats are resorting to 'monetizing debt,' which currently is taking the form of issuing more debt and buying it with printed money. While this seems inflationary, debt is still part of the picture.

And as long as debt remains central to all remedies, then the dominant underlying force is deflationary rather than inflationary.

position in Treasuries

Friday, December 3, 2010

Out and In

Captain Murphy: "All that damage you caused downtown is coming out of the department's budget."
Roger Murtaugh: "Fine, pay it off in Krugerrands."
--Lethal Weapon 2

Kicked my energy exposure this am into the continued strong move in crude as we are right around a double top on the daily charts.

However, in early afternoon noticed that a longer horizon paints a more bullish picture. Should crude break decisively thru 90, it has some running room.


As such, re-entered a bit of exposure late in the afternoon. May try a pyramiding approach similar to the silver trade a coupla months back should crude get its groove on next wk.

Should also mention that commodities in general are smokin' once again, w/ both gold and silver knock, knock, knockin' on new highs for the move.

position in DBO, RJI, gold, silver

Thursday, December 2, 2010

The Day the Dollar Died

I went down to the sacred store where I'd heard the music years before
But the man there said the music wouldn't play
--Don McLean

Is this scenario the odds on favorite? Not currently, no. But, given our present trajectory, it is easily within the probability spectrum.

It is worthwhile to run this scenario thru in your mind so that you can a) assign your own likelihood of its occurance, b) consider how prepared you need to be in case it does occur, c) so you're not a deer in the headlights should it occur.

position in gold, silver

Covert Ops

There will be no more isolation
In our secret separation
You touched my heart so deeply
You rescued me, now free me
--The Fixx

The Fed kicks and screams at every effort made to transparentize its operations. Recent evidence of printing and lending to foreign entities provides a sense as to why.

Central banks are serial money printers. That is their core competence.

The Fed prints and lends $3+ trillion off budget to anyone it wants with no accountability. Ron Paul is correct to call this criminal (and unconstitutional) action.

The longer we buy into the notion that the Fed is an 'independent' agency that does not need to be accountable to the American people, the poorer we will be.

position in Treasuries

Euro Bureau

"I think it's safe to say that this party is about to become a historical fact."
--Duncan (Some Kind of Wonderful)

A couple months back the ECB and EU were beings hailed as 'different' from the US. Europe is more fiscally prudent, it was said, and EU members were willing to swallow austerity in place of money printing and bailouts.

It should now be clear that there is no difference at all. Over the past couple of days, the ECB has signaled that they will go 'all in' if necessary to avoid an EU collapse.

Central banks are the same all over the world. Their actions are uniform and predictable.

position in Treasuries

Wednesday, December 1, 2010

Spies Like Us

"Oh well, there goes the Fourth Amendment...what's left of it."
--Carla Dean (Enemy of the State)

O'Reilly argues that those involved in posting classified State Dept docs are 'traitors' and should be executed or given life sentences. By divulging our 'secrets', the argument goes, the American people are put at risk.

Give me a break, Bill. The entities most at risk by the spilling of classified information are governments around the world. Leaking closely held info reduces State power and increases social power.

In fact, it can be argued that information assymetry is a key factor in motivating armed conflict. Entities are more likely to go to war with each other when they think that their 'military secrets' are secure and not well known by the other side. If all such information were out on the table for all to see, the probability of conflict may in fact decrease dramatically.

Moreover, granting government license to spy on 'enemies of the state' inevitably compromises individual freedom done in the name of 'national security.'

In a free society, national security is not the top priority. Liberty is.

Permitting government to amass confidential information in the name of national security increases State opacity and power. Remove that power, and freedom goes up.

Dandruff Problem

These changing years
They add to your confusion
Oh and you need to hear
The time that told the truth
--Level 42

Many commodities, including gold, are tracing out what could be head and shoulders topping patterns on daily charts.


I may look to kick my small exposure in this group on further strength. Of course, with lots of further strength, the dandruff pattern will be negated...

positions in gold, DBE, DBO, RJI

Tuesday, November 30, 2010

Pushing Out the Pain

Fearless people, careless needle
Harsh words spoken and lives are broken
--Seal

Peter Atwater suggests that EU should shift focus from sovereign bailouts to bank bailouts. He wonders if EU members/citizens have the stomach for it.

I get the idea in the short term. But don't see how it matters over time.

In the US we TARPed the banks et al, thus propping these inefficient institutions up by borrowing more, printing more. Which lowers credit quality and standard of living. Which puts future sovereign debt paying capacity in greater question...

Perhaps it pushes out the pain, but the pain seems inevitable.

position in TLT, SH

Monday, November 29, 2010

Storm Warning

If I can't swim after forty days
And my mind is crushed by the crashing waves
Lift me up so high that I cannot fail
Lift me up well
--Jars of Clay

When it comes to market sages, few are 'sagier' than Richard Russell. He's been studying markets since the 1930s, and he's been writing his newsletter since 1958.

People who have been successfully practicing a complex discipline for that length of time have likely acquired large quantities of 'deep smarts' (Leonard & Swap, 2005). Deep smarts can be viewed as deep seated intelligence about the operations of complex systems. This knowledge is largely tacit in that those who possess it have trouble explain just how they arrive at their conclusions.

While it is tempting to attribute tacit knowledge and the decisions that flow from it as linked to emotion and 'gut feel', there is reason to believe that such intelligence is driven by intense pattern recognition processes, where the mind combs vast previous experiences for situations that match the present 'problem' (Simon, 1987).

Few people have developed deeper smarts about markets, particularly w.r.t. price patterns and tape behavior, than Mr Russell.

Russell thinks that stocks face an ugly period ahead. He feels we're in the early stages of breaking a large market topping pattern and that there's alotta room to the downside. He has been of this bearish mindset for a few months now.

His best ideas for weathering the storm continue to be cash and gold. Not very sophisticated, to be sure. But it's hard not to respect someone with his track record.

position in gold, SH

References

Leonard, D. & Swap, W. 2005. Deep smarts: How to cultivate and transfer enduring business wisdom. Boston: Harvard Business School Press.

Simon, H.A. 1987. Making management decisions: The role of intuition and emotion. Academy of Management Executive, 1(1): 57-64.

Dublin Down

Confusion that never stops
Closing walls and ticking clocks
--Coldplay

Ireland becomes the latest recipient of EU bailout funds. Credit spreads of Spain and Portugal blow out more, suggesting stiff competition for next position in the Continental bailout parade.

There is increasing evidence that 'forced austerity' is not sitting well with sovereigns. Those inside bailout countries don't like being told what to do by outsiders. Moreover, ECB suggestions that everyone must share the pain will be distasteful among those who made prudent choices in the past.

Textbook behavior that can be under the heading 'why socialism doesn't work.'

Also, seems like sovereign pushback constitutes deflationary forces against central bank inflationary forces, no?

Hard not to sense that we're a couple steps closer to a collapse of the EU after the wkend activities.

position in TLT

Sunday, November 28, 2010

Anecdote Antidote

Anecdotal experience tells me that Black Friday weekend was a disaster in this locale. Street traffic near malls looked no different than any other weekend.

Any numbers that show positive yoy comps will be hard for me to believe.

Perhaps folks are doing their shopping online this yr...

Tape It Up

Drawn into the stream
Of undefined illusion
Those diamond dreams
They can't disguise the truth
--Level 42

Nice expression of government intrusion in markets. Over the past 60 yrs, govt employment has quadrupled, while manufacturing employment has been cut nearly in half.


One more data point demonstrating that distance from free markets is growing, not shrinking.

Friday, November 26, 2010

Funny Money

New car, caviar, four star daydream
Think I'll buy me a football team
--Pink Floyd

Nice discussion by Frank Shostak about the invalid assertion that money supply most grow with the supply of goods and services, lest economic activity will be suffocated. This argument is presented by many economists as to why a gold standard would never work(since gold is relatively scarce and cannot be increased in supply at will like paper money). This argument also is used to justify the 'need' for central banks.

Imagine a society where all money ever to be used is created before production begins. No additional money will be added over time. Now production begins. If, over a certain period of time, productivity increases, then each unit of money buys more goods and services (i.e., prices decline). If productivity of goods and services declines, then each monetary unit buys less goods and services (prices increase).

Money itself does not inhibit economic activity. The price of money in terms of the goods and services produced that it can buy may certainly change, but this bears no direct relationship on economic capacity.

In fact, in our hypothetical society, if productivity steadily increases over time, then prices should steadily decline over time. Central bankers and politicians would like us to believe that falling prices are somehow associated with economic armageddon. In a stable money world, however, falling prices are natural outcomes of productive society.

If one's brain is engaged, it should be easy to see that the argument that money supply must somehow be expandable at will is a poor one. Free markets will always seek money that is scarce in supply and that cannot be manipulated.

That is why gold has served as money for thousands of years.

position in XLF, gold

Thursday, November 25, 2010

Dragon Tales

Hang on to your hopes, my friend
That's an easy thing to say
But if your hopes should pass away
Simply pretend that you can build them again
--Bangles

Vitaliy's argument that China is a central planning accident waiting to happen resonates w/ me. As he notes, planning has been hailed as superior to unhampered markets a few times in the past century (usually after economic downturns that were driven by planning) only to have the subsequent results, um, disappoint.

Currently China attracts that 'superior' aura.

The problem with central planning systems, as Vitaliy observes, is that bureaucrats in a room are certain to misallocate capital on a large scale over time. This leads to lower standard of living when the bloom comes off the rose.

And absent any market mechanisms to wipe away those misallocations, then those lower living standards are likely to persist (see, East v West Germany, for examples, or the former Soviet Union).

China's GDP has been growing like gangbusters, and now ranks #3 in the world. But much of this is 'blind' growth driven not by capital formation and demand, but by bureaucratic whim. Signs of big capital misallocation patterns are beginning to emerge. For example, Ordos, a city built by planners to house 1.2 million people in Inner Mongolia, remains largely uninhabited.

It is unknowable to forecast with certainty what factor(s) will turn things sour. But it is knowable with certainty that this system will sour.

The world is currently betting a goodly portion of its chips on the Chinese story in interlinked fashion. If the story unravels, then the global economic picture likely turns a hazy shade of winter.

position in Treasuries

Wednesday, November 24, 2010

Crude Awakenings

After three days in the desert fun
I was looking at a river bed
And the story it told of a river that flowed
Made me sad to think it was dead
--America

For the first time, the International Energy Agency (IEA) has acknowledged in its annual report that we're past 'peak oil.' As noted by the author here, even the IEA's future assumptions about crude oil replacement over the next 20-30 yrs seem pretty courageous.

Seems to me chance favor much higher energy prices over the next decade unless the world economy, particularly w.r.t. China and other big growers, stumbles for a prolonged period. That may very well happen from where I sit, which is why I'm not long a ton of energy as well as other commodities.


That said, crude is still way off its 2008 highs and has been behaving relatively well in an overall market context that has turned pretty volatile. I like energy as an upside hedge against my generally bearish outlook, and will be looking for opportunities to add to my modest position as opportunities arise.

Preferred vehicles continue to be the commodity ETFs/ETNs over energy-related equities.

positions in DBE, DBO, RJI

Tuesday, November 23, 2010

Border Patrol

There is freedom within
There is freedom without
Try to catch the deluge in a paper cap
--Crowded House

Dr J conducts a nice review of the Federal Reserve Act to demonstrate how recent Fed actions have been illegal/and or unconstitutional. Clearly the Fed has overstepped its boundaries.

Perhaps I need to get more familiar w/ the Federal Reserve Act as my knowledge of its specific contents is tiny. I have not paid much attention to it because it seems the FRA itself seems unconstitutional to me. I cannot see how the institution of the Fed does not violate the Constitutional mandate that Congress alone authority to coin money. Congress cannot delegate this power to an agency--particularly one that is not directly accountable to the citizenry. The Constitution was never amended to change Congressional authority in this regard, leaving any subsequent piece of legislation, such as the Federal Reserve Act, as an unconstitutional law.

Now, as Dr J notes, the Fed is now expanding its powers beyong those that can be construed as illegal to begin with.

We have many Fed supporters claiming that increased sentiment against the Fed is 'politicizing' things. This is laughable, as the Federal Reserve is a political construct.

De-politicizing the Fed will only occur when it is taken apart.

Sovereign Stop Payments

She's the dollars, she's my protection
Yeah she's the promise in the year of election
Oh sister, I can't let you go
Like a preacher stealing hearts at a traveling show
--U2

Peter Atwater suggests that perhaps Ireland et al will decide it is in their best interests to default rather than get bailed out. Indeed, "countries don't have friends, they have interests."

Should a string of sovereign defaults ensue, this will surely add additional stress cracks to the already weakened EU infrastructure. Moveover, hard to see how voluntary defaults do not send country borrowing costs higher worldwide.

Meanwhile, pressure has not come off the system even after the EU bailout announcement. And, based on its spreads blowing out this am, Spain has jumped ahead of Portugal as next in line.

position in Treasuries, XLF

Monday, November 22, 2010

Irish Ail

I get knocked down
But I get up again
You're never goin' to keep me down
--Chumbawumba

Although markets generally seemed to shrug off Ireland's weekend bailoutl (altho the banks did appear to trade heavy), can't help but think this is beginning of a new round of storms in the EU. Spain and Portugal getting queued up per CDS spreads.

While I never watch CNBC at home, I do turn the station on in the morning when I'm on the road (like now). Was shocked at how little the Irish bailout was covered this am.

Maybe the EU should ask Big Ben to print a few more hundreds...

position in XLF

Saturday, November 20, 2010

Fly Boy

Pretty much a test post here as I'm blogging from my itouch at 36000 ft en route to SD. Don't want to invest much here since not sure this will post. Full body scan by TSA Gestapo. Countering that is multimedia on this flight to left coast. Free wifi and sat tv. Watching Arkansas v Miss St while typing this. Noice.

Friday, November 19, 2010

The Cisco Disco

I could feel her coming from a mile away
There was no use talking
There was nothing to say
As the band began to play and play
--The Hooters

Initiated a small position in Cisco Systems (CSCO). A few days back the stock was splattered after dialing back future expectations as part of their earnings report.


Minyanville's Fil Zucchi sagely observes that CSCO may reflect decent value here. It's throwing off nearly $10 billion in free cash flow and has about $15 billion in net cash on the balance sheet. At current prices, CSCO's market cap is about $109, making enterprise value ~$94 billion. Enterprise value:FCF less than or equal to 10 feels like good value to me...concur, Fil.

CSCO joins a snivlet of Microsoft (MSFT) added a few months back as the sole stocks under management right now.

positions in CSCO, MSFT

Thursday, November 18, 2010

Showdown

It's all the same
Only the names have changed
Every day
It seems we're wasting away
--Bon Jovi

Sentiment toward the Fed is growing darker. Ron Paul can't recall a time in his career when the Fed as attracted this much media attention.

Now, it is very possible that Ron Paul may become chair of the House subcommittee on monetary policy. Should this come to pass, Dr Paul would control subpeona power over Fed bureaucrats which could, for instance, be used to force Fed officials to lay open their books to Congressional scrutiny.

This has to have politicians on both sides of the aisle shaking in their boots. Three times in the past, bipartisan efforts squelched Paul's appointment as chair. This time, however, preventative efforts are less likely because of rising public interest in the matter and the results of the election two weeks back.

Should Ron Paul get the nod, however, Lew Rockwell is pessimistic about the new chairman's prospects to successfully exercise his newfound power. If Paul wanted to subpoena Fed bureaucrats, both the committee and the House would need to vote in favor of enforcing those subpoenas. Rockwell doubts that will happen, because of bipartisan support for the Fed's nefarious actions.

In any event, high drama is likely if Paul gets the chair. Sit back and watch bipartisan efforts to justify and protect the Federal Reserve, while Dr Paul and a new wave of Tea Party-backed electees seek to tap the social power of the citizenry.

I've long awaited a sequel to Andrew Jackson's 1832 command performance. Is it possible that production is finally getting under way?

Wednesday, November 17, 2010

Spinning from Omaha

Other people's thoughts they ain't your hand me downs
Would it be so bad to simply turn around
--Spin Doctors

Warren Buffett could have made this op-ed much more straightforward. He could have just said this:

"Thanks, US Government, for bailing out my firm and others who took too much risk. Since it was you that offered the ultra cheap credit upon which the leveraged house of cards was built, I figured that you'd step in and make us whole.

Indeed, you have made me $ billions at the expense of those who were prudent.

I look forward to the next round of bailouts.

Your partner in moral hazard, WB."

It is easy to regard this piece as an effort to elevate public sentiment in favor of government intrusion--to offset the hawkish tone carried by many incoming members of Congress.

We get it, Warren. You're in the pocket of bureaucrats, and you're returning the favor by spewing spin.

position in XLF

Tuesday, November 16, 2010

First User Advantage

Well I've been looking real hard
And I'm trying to find a job
But it just keeps getting tougher every day
--Steve Miller Band

Wealth cannot be created by printing money. However, wealth can be redistributed by printing money.

Nearly all money created in our current system comes from credit creation. This is the domain of the Federal Reserve. The Fed offers credit (currently at near zero cost) to big financial entities (we'll just call them banks here) and quasi government agencies. If the banks and agencies borrow from the Fed, then 'credit money' is created. The banks and agencies become 'first users' of the new money.

Money that is created out of thin air has the most value when it is first created. This is because it takes a while for prices to readjust to the increase in money supply and commensurate increase in demand for things that the new money can buy. After a few exchanges, however, the purchasing power of the new money declines as demand bids prices up.

It should not be hard to figure out who gets wealthier and who gets poorer in this arrangement. The big banks and government get first use of the money. They can buy things like financial assets, property, labor, etc while prices are still relatively low. Subsequently, prices rise. Banks are wealthier. Politicians can deal in favor for their SIGs.

Everyday people don't enjoy the same priviledge. While they are waiting for the new money to trickle down, the dollars that they already hold decline in value because they purchase less of the assets that the banks et al have bid up in price. Those near the bottom of the social pyramid are particularly hurt because they own few financial assets (e.g., stocks and bonds) that move higher on the speculative actions of the first movers. By the time the wave of new money trickles down to Main Street, the average person possesses fewer economic resources than previously.

Presto! Courtesy of the Fed and the politicos, wealth has been redistributed. Resources migrate to the first users at the expense of the late users.

This is the principle of First User Advantage.

If you're looking for factors that widen distribution of income, then you've just found another one.

position in Treasuries, SPX