Saturday, January 30, 2010

Narrow Margin

Here come the world
With the look in its eye
Future uncertain but certainly slight

James Kostohryz downplays America's debt problem, citing a McKinsey study showing that US debt levels are not out of line with the rest of the developed world.

Dismissing the severity US debt issue based on this type of analysis seems imprudent for a number of reasons. How meaningful are relative debt comparisons, for example? If all developed countries are carrying on average 200%+ debt levels relative to GDP, it seems unwise to conclude that because the US falls somewhere in the middle of the pack that we don't have a problem. On an absolute basis, there's an argument to be made that the entire developed world is essentially broke due to chronically borrowing from the future to live better in the present.

During the ~20 yr period of the McKinsey report, debt levels of all developed countries have been increasing substantially--in some cases 2x or 3x. As we've observed in sector markets over the past couple of years, accumulating debt eventually leads to levels that can no longer be serviced or funded. Exactly what that level is, no one knows. But if creditors get risk averse and no longer fund chronically increasing borrowing habits, then the world has a problem.

Moreover, the McKinsey analysis ignores future liabilities. In the US and elsewhere, this would easily double or even triple country debt levels. Moreover, leverage baked into debt-related derivatives, the notional values of which run in the hundreds of $trillions, are not considered. Given the world's leveraged, interconnected state, a seemingly 'small' problem eminating from an isolated part of the world could knock dominos onto the US and elsewhere. We've seen hints of this over the past two years. Ignoring this scenario given what we've already witnessed just doesn't make sense to me.

Leverage is a measure of debt to the value of underlying assets. If the underlying assets are valued at inflated levels, then leverage will appear lower than actual. There is a good case to be made that asset levels are being propped up by interventionary policies. If market forces re-exert their influence and take prices lower, then measured leverage will increase accordingly. And then selling begets selling as folks seek to delever...

In short, grounding a risk assessment of US debt levels in a report such the McKinsey analysis seems a myopic approach to the problem.

Friday, January 29, 2010

Politics and Fiscal Disaster

"When I asked for your advice, I didn't mean that you should actually speak."
--Bill Cabot (Sum of All Fears)

I thought this was a well written piece from an author who has been positioned for excellent perspective. Non-partisan (as in he blasts both sides of the aisle) in analysis as well.

Particularly liked his refute use common sense, back-of-the-envelope accounting of the popular argument that government intervention was necessary to save the system from collapse.

His primary thesis is primarily this: thru government's interventions, all discpline for fiscal oversight has gone out the window. And likely cannot be reversed.

Serf's Up

"I caught my first tube today, sir."
--Johnny Utah (Point Break)

Some nice quotes from Hayek (1944) Chapter 5 'Planning and Democracy.' Boldface emphasis mine.

"The common features of all collectivist systems may be described, in a phrase ever dear to socialists of all schools, as the deliberate organization of the labors of society for a definite social goal."

"...the individualist concludes that the individuals should be allowed, within defined limits, to follow their own values and preferences rather than somebody else's; that within these spheres the individual's system of ends should be supreme and not subject to any dictation by others. It is this recognition of the individual as the ultimate judge of his ends, the belief that as far as possible his own views ought to govern his actions, that forms the essence of the individualist position."

"When individuals combine in a joint effort to realize ends they have in common, the organizations, like the state, that they form for this purpose are given their own system of ends and their own means. But any organization thus formed remains one 'person' among others, in the case of the state much more powerful than any of the others, it is true, yet still with its separate and limited sphere in which alone its ends are supreme. The limits of this sphere are determined by the extent to which the individuals agree on particular ends, and the probability that they will agree on a particular course of action necessarily decreases as the scope of such action extends."

"We can rely on voluntary agreement to guide the action of the state only so long as it is confined to spheres where agreement exists. But not only where the state undertakes direct control in fields where there is no such agreement is it bound to suppress individual freedom."

"It is often said that democracy will not tolerate capitalism. If 'capitalism' means here a competitive system based on free disposal over private property, it is far more important to realize that only within this system is democracy possible. When it becomes dominated by a collectivist creed, democracy will inevitably destroy itself."


Hayek, F. 1944. The road to serfdom. Chicago: The University of Chicago.

Thursday, January 28, 2010

Boo's Clues

I've been looking so long at these pictures of you
That I almost believe that they're real
I've been living so long with my pictures of you
That I almost believe that the pictures are all I can feel
--The Cure

Over the past year, sustained downside market action has been rare. Thus the recent heavy action has stood out.

Chartgazing, however, suggests nothing for the bulls to get too concerned about yet, as we've had a couple other episodes like this (7-10% pullbacks) off the March lows.

Lotsa traders are watching SPX 1080 as near term support. We bounced off 1080 today. The old technical adage is that support gets weaker with each visit, as additional demand is stripped away at this level that could offer future support.

My eyes gravitate to the 200 day MA at about 1025, and I wonder whether Boo might get his groove on down to this area which constitutes another discernable zone of support.

Personally, I kicked out all longs a coupla wks back as this uptrend seemed to be running on vapor, and many trend exhaustion signals were sounding. It remains to be seen, of course, whether that was the right thing to do.

Currently, I do have some short exposure, and may use further lifts to add some more, as my sense is that the tape's tenor may be changing in Boo's favor.

position in SPX

Back and Forth

"All the same, Mr Fitzsimmons, if you aren't confused, you don't know what's going on."
--Frankie McGuire (The Devil's Own)

After the 2004 presidential election, I offered to my disappointed sister that she might take solace in the likelihood that the Bush administration would be unable to keep the wheels on the economic wagon for another four yrs, and that in 2008 it would be a bad time to be running for president as a Republican.

Such a prognostication didn't require sophisticated foresight. One merely had to observe the extreme actions being taken by the majority party to paint the surface pretty while underneath these same actions were making a bad situation worse.

The same thing is now happening in the new large and in charge party. The Democratic majority is engaging in pretty much the same types of unproductive economic interventions--they're just taking things to new levels of extreme.

The chances that this will end badly for them are very high. Early election and poll numbers are beginning to reflect this.

One has to wonder if/when the voting public throws of the curse of 'expecting different results from the same process' and regains sanity.

Wednesday, January 27, 2010

Hands Over Eyes

World serves its own needs
Listen to your heart bleed
Tell me with the rapture
And the reverent in the right, right

A couple nights back I was watching a Conservative talking head bash the current administration for spending money we don't have which is putting our future at risk.

When the subject turned to Ben Bernanke's reappointment, however, the pundit staunchly defended the Fed chair, claiming that Mr Bernanke's actions have been vital to market lifts worldwide and that not reappointing him might precipitate a severe market pullback.

Just one example of the ignorance, or hypocrisy, displayed by politically-minded people who treat fiscal and monetary policy as mutually exclusive. In reality, they are joined at the hip.

And together they're breaking us.

Kiss of the Dragon

Forty seven deadbeats living in the back streets
North east west south all in the same house
Sitting in a back room waiting for the big boom
I'm in a bedroom waiting for my baby
--Escape Club

My friend Vitaliy skillfully sketches structural problems growing in China. What I particularly like about his analysis is that it comes from someone who grew up in a similar authoritarian regime. He has first hand experience of big-time capital misallocation by central planners.

What I wish Vitaliy would have done was sketch the consequences, not just for China but for the world, if (when) this bubble pops.

Nonetheless, his missive heightens my sense that China is a train wreck in the making. The impact of such a crash will certainly resonate globally.

Tuesday, January 26, 2010

No Chainsaw Here

"Our job is to cut costs. Cut them to the bone."
--Art Thomas (The Secret of My Success)

John's annual living expenses currently amount to ~$30K. For daily lunch during the workweek, he buys a $5 footlong at Subway. This habit costs him $1000-1500 annually, or about 3-5% of annual expenses.

Economic uncertainty has John thinking about cutting his spending over the next year. Here's what he decides:

-->Let's freeze spending on those lunchtime subs. No cuts, just no increases.

-->All other expenses, the other 95-97%, are exempt from the budget plan. Based on previous year's trends, expenses in the exempt categories have been increasing anywhere from 10 to 200% annually.

Based on his plan, how successful will John be at curbing expenses?

About as successful as President Obama's proposed spending freeze. As Mike Shedlock notes, given its tiny scope and hefty exemptions, proposing such a plan should be downright embarrasing for this administration.

Al Dunlap doesn't have to worry about surrendering his nickname anytime soon.

Monday, January 25, 2010

Title of Justice

I must've dreamed a thousand dreams
Been haunted by a million screams
But I can hear the marching feet
They're moving into the street

Lots of good points here by Murray Rothbard on the subject of justice and property rights. He begins with a point that is often overlooked. Whenever an economic exchange takes place, what is really being exchanged is title of ownership.

It is therefore inconsistent to condone free economic exchange between two parties while proposing that individuals do not have full rights to this property.

Viewed in this manner, denying such an exchange or such rights would be unjust.

Yet folks who frequently engage in free economic exchange also want to confiscate the property of others in the name of 'justice.' The rationale often offered is that the property was not the confiscatee's to begin with. Rather, the property is jointly owned by the community, and therefore can be rightly redistributed to others in the community.

As Rothbard points out, in denying the property rights of an individual, only two alternatives are possible. a) A certain class of people has the right to appropriate another class's property without the appropriatee's consent, or b) Everyone in the community has an equal share in the property of everyone else.

While the injustice of a) should be apparent, we witness such action routinely via taxation, eminent domain, et al. The 'communal' solution expressed in b) is grounded in the absurdity that individuals are entitled to own a part of everyone else but not entitled to own themselves.

As Rothbard notes, b) leads to a world where no one would be free to take any productive action without prior approval or command by all others in society. Because it would be physically impossible for everyone to keep tabs of everyone else to ensure that communal goals were being upheld, supervision (and ultimately control and ownership) would devolve into a specialized group of people who would become the ruling class.

Confiscation in the name of others would therefore practically devolve into an oligarchy of confiscators.

The oligarchs confiscate in the name of communal 'justice.'

Sadly, this twisted state of affairs is not a hypothetical. It is becoming reality.

Sunday, January 24, 2010

Inquiring Minds

"Scientific criticism has no nobler task than to shatter false beliefs."
--Ludwig von Mises

Have started in once more on Mises's (1951) analysis of socialism. I now have three projects along these lines pushed away from shore. The others include Hayek (1944) and Schumpeter (1942).

Mises's approach is to study socialism using a scientific, logical approach which, as he notes early on, is something that Marx and other developers despised.

When a particular mindset seek to barracade itself from scientific thought and critical thinking, you're likely looking at something with a low degree of validity.


Hayek, F. 1944. The road to serfdom. Chicago: The University of Chicago.

Mises, L. 1951. Socialism: An economic and sociological analysis. New Haven: Yale University Press.

Schumpeter, J.A. 1942. Capitalism, socialism, and democracy. New York: Harper & Brothers.

Saturday, January 23, 2010

Crude Awakenings

Out where the river broke
The bloodwood and the desert oak
Holden wrecks and boiling diesels
Steam in forty five degrees
--Midnight Oil

Subscribers to Peak Oil Theory generally claim that we've passed the point of maximum oil production and that, consequentially, we're destined for supply shortages and higher prices.

This situation may indeed be true for classic sweet crude supplies. There are likely few remaining low cost oil deposits to be discovered.

However, as profiled in this article, there remains a very large supply of what I like to think of as 'shadow' oil reserves. Forms of shadow oil include Canadian oil sands, oil lodged in ideosyncratic geological cavities, and residual oil from previously 'used up' conventional oil fields.

Estimates suggest that there may be 500 billion barrels or more of shadow oil supply. By my estimates, we currently use about 85 million barrels/day * 365 days/yr = 31 billion (!) barrels/yr. That's a huge amount of consumption, but shadow sources may offer at least 15 yrs worth of oil given current usage levels.

Oil bulls argue that world usage levels have nowhere to go but up in a capacity constrained world. But conservatory efforts, and innovation in the energy space, could easily alter the dynamic. Substitutes may lower demand for crude, plus capacity may be much higher than currently estimated as shadow sources are developed.

Oil bulls also argue that costs to develop shadow supplies only kick in at higher crude prices. This is true, but as the article reports, the economics are already attractive for development of some shadow sources at current prices. And, it is difficult to imagine that efficiency does not improve with volume as operators learn by doing, thereby reducing the breakeven point of shadow projects.

Couple this with a deflationary view of the world and it's hard for me to get bulled up about the future of crude. There's a bullish scenario to be sure, but there's also plenty of risk that makes the picture far from clear from an investment perspective--at least as I'm seeing it.

no positions

Labor Pains

Found my coat and grabbed my hat
Made the bus in seconds flat
Found my way upstairs and had a smoke
And somebody spoke and I went into a dream
--The Beatles

This article sketches the domestic job situation. High domestic labor prices, a growing global labor pool that can do similar work much cheaper, and info systems that facilitate remote linkages blow strong secular headwinds in the face of US workers.

One outcome is that those who are employed are more likely to be in a 'contract worker' situation with less benefits and less security than in the past.

There are innuendos in the article that domestic employers are cruel for engaging in these types of practices, and that government must intervene to provide more security in this situation.

As some folks like to say, however, the toothpaste is out of the tube w.r.t. global trade. Past efforts to prop labor prices above market (e.g., labor unions, minimum wage, protectionist trade rules) are now making for a greater fall from the ledge.

Further intervention promises similar 'killing with kindness' outcomes.

Friday, January 22, 2010

Dark Shadows

Oh, a storm is threat'ning
My very life today
If I don't get some shelter
Oh yeah I'm gonna fade away
--Rolling Stones

Using even a crayon, the uptrend line on most indexes from last March lows has now been broken. 50 day MA has also been lost. All of this on increasing volume.

Lots of things coming together. Simple technicals, trend exhaustion, structural, political.

Will be looking to add to my short position given the right set up next wk.

position in SPX

Surgical Strike

Deputy Marshal Samuel Gerard: "How's the boy doing?"
Dr Anne Eastman: "He saved his life."
--The Fugitive

Interesting BW article profiling an innovative Everett, WA hospital. Suggests the ton of low hanging fruit that could drive significant cost savings and quality improvement in health care.

The question is why more operators don't engage in such efforts. Read the article and look for incentives/disincentives for improvement.

Something that should stick out is the stifling influence of Medicare/Medicaid. 53% if this hospital's revenues come from the pair--a bit higher than the ~45% share of health care expenses encompassed by goverment programs.

Both government and private insurers reimburse on a fixed fee-for-service basis. The way to goose revenues in this model is to treat more, test more, etc. Do more, get paid more. No premium is paid for quality and there is little incentive to improve productivity.

Moreover, lower fee schedules enacted by Medicare/Medicaid encourage providers to compensate for low government reimbursements by raising invoices to private insurers 30%+ over Medicare rates (a.k.a. 'fee shifting'). Private insurers have less bargaining power than the Medicare/Medicaid bloc.

Can you see that private insurers are likely to look like bad guys because they are shouldering more of the cost increases? In reality, fee shifting from Medicare drives much of this phenomenon.

Nearly 20 yrs ago I was a member of a corporate project to reduce my company's health care related expenses, which were increasing at nearly 15% annually. Docs, hospitals back then lamented about the influence of government fee schedules on provider efficiency. Two decades later, little progress has been made.

As noted in the article, the proposed health care legislation retains the fee-for-service design.

The primary roadblock to medical progress is government's escalating presence in health care markets. Solving the 'health care crisis' requires less, not more, government involvement in this sector.

My Man Ben

"Sorry, Mr President. I don't dance."
--Jack Ryan (Clear and Present Danger)

An interesting development today is that a few Democrat senators are suddenly turning their hats around and signaling thumbs down for reconfirming Ben Bernanke as Fed Head. Today, Senators Feingold (D-WI) and Boxer (D-CA) blinked, making the total now five against reappointment.

Why such a big deal? Mr Bernanke is President Obama's choice. In lieu of deciphering the 'message' sent by voters in Massuchesetts on Tues, some senators seem to be hedging some political capital away from the president.

The old Potomac two step...

All the more interesting given Mr Bernanke's selection as Time's Man of the Year and Warren Buffett's suggestion that we should thank our lucky stars for Ben's actions last yr.

Thursday, January 21, 2010


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

Drawn from Hayek, probably the most lucid elaboration of the competing notions of equality that I've seen:

"[Individualism] can see no reason for trying to make people equal as distinct from treating them equally. While individualism is profoundly opposed to all prescriptive privilege, to all protection, by law or force, of any rights not based on rules equally applicable to all persons, it also denies government the right to limit what the able or fortunate may achieve. It is equally opposed to any rigid limitation of the position individuals may achieve, whether this power is used to perpetuate inequality or to create equality. Its main principle is that no man or group of men should have the power to decide what another man's status ought to be, and it regards this as a condition of freedom so essential that it must not be sacrificed to the gratification of our sense of justice or of our envy.

"If all men were completely equal in their gifts and inclinations, we should have to treat them differently in order to achieve any sort of social organization. Fortunately, they are not equal; and it is only owing to this that the differentiation of functions need not be determined by the arbitrary decision of some organizing will but that, after creating formal equality of the rules applying in the same manner to all, we can leave each individual to find his own level...There is all the difference in the world between treating people equally and attempting to make them equal."

How one views the notion of equality (equal treatment under the rules versus different rules in the name of trying to make people equal) profoundly shapes framework for sensemaking.

Poor Problem Solving

Brantley Foster: "Look at this! They send requisitions through two departments to get procurements for a third. What kind of thinking is that?"
Fred Melrose: "That's suit thinking. Something happens when a man puts on a necktie. Cuts off all the oxygen to his brain."
--Secret of My Success

President Obama continues to demonize financial institutions for taking 'excessive risks' and thus in need of more regulation.

To the extent that the president's claims stem from sincere analysis, rather than from political grandstanding (which of course is certainly questionable), then this demonstrates poor problem solving process.

If we accept the claim that risks taken by banks et al were indeed excessive, then effective problem solving requires us to ask why these firms took excessive risks. "Because they weren't regulated" doesn't answer the question. Regulation is a potential remedy rather than a cause.

Risk of the type we're considering is related to leverage. Depending on the type of institution, leverage ratios range from about 10 to 1 for retail banks to 30 to 1 or more for investment banks. Leverage requires borrowed capital which requires lenders of capital.

The question, you see, becomes who is willing to lend capital to these highly leveraged institutions? All roads lead to the Fed and other central banks.

Another potential cause? These institutions know that the system is set up to bail out poor decision making. Bailouts in terms for their frequency and magnitude have have been escalating over the past 25 yrs. And they happened again in spades over the past two years. When decision makers know that someone has their back for decisions gone awry, then they take more risk. This is what is known as moral hazard.

Want to wring excess risk taking out of the system? Eliminate below-market rates of credit as manipulated by the Fed. And get out of the way of market forces that drive inefficient operators to failure.

Neither of these, of course, is politically acceptable to this administration.

Wednesday, January 20, 2010

Short List

Abigail Chase: "You're treasure hunters, aren't you?"
Ben Gates: "We're more like treasure protectors."
--National Treasure

In the interest of seeing both sides of the trade, I like to read a variety of market commentary. However, there is a short list of viewpoints that I really hold close to the vest. They've won my respect because of their abilitiy to articulate well reasoned and independent stream of thought.

Here is my perception of where some of these folks currently stand w.r.t multi-year outlook for domestic stocks, and their inflationary or deflationary bias.

Bill Fleckenstein -- agnostic to bearish (inflation)
John Mauldin -- bearish (deflation)
Jim Rodgers -- bearish (inflation)
Mike Shedlock -- bearish (deflation)
Mr Practical -- bearish (deflation)
Peter Atwater -- bearish (deflation)
Todd Harrison -- bearish (deflation)

Eighties Envy

You must be my Lucky Star
'Cause you make the darkness seem so far
And when I'm lost you'll be my guide
I just turn around and you're by my side

Peter Atwater pens what is one of the more concise explanations as to why this recession may wind up being unlike any over the past 30 yrs.

In a word: debt. We have way more of it this time than before, and we've only added to it during the last 18 months of 'crisis mgt.'

Moreover, social attitudes toward debt appear to be shifting. People want less of it, not more. If true, then reflating an economy via additional credit creation won't work this time.

He cautions that the recent uptick in stocks, economic indicators may be a mirage. No V this time; we're merely relieving oversold pressure before downtrend resumes.

Couldn't agree w/ Peter more.

position in S&P

Tuesday, January 19, 2010

Out of Stock

And it's whispered that soon
If we all call the tune
Then the piper will lead us to reason
--Led Zeppelin

Following up on earlier post today, the lift in pharma stocks today found me peeling off remaining pharma exposure.

Am now completely void of long stock positions for first time in a few yrs. May not be right but definitely honest.

Also added to token short S&P position.

position in SPX

Ballot Bets

"If you are not inside, you are outside."
--Gordon Gekko (Wall Street)

Some are watching the 'prediction markets' such as Intrade as to the direction of the Massachusetts special election. The idea is that it 'pays' to watch how real money is betting on the outcomes of things.

Makes sense to be sure.

But I'll never forget the night of the 2004 presidential election, when the contract indicated a virtual lock for Kerry. Then, after the Ohio results came in, the Kerry contract cratered while the Bush contract zoomed to the moon--pretty much a 10 bagger move in a small timeframe.

Just a lesson that under conditions of imperfect info, and emotion, the money is not necessarily 'smart.'

no positions

Healthy Choice

I'll move myself and my family aside
If we happen to be left half alive
I'll get all my papers and smile at the sky
For I know that the hypnotized never lie
--The Who

While larger issues loom in the balance over today's special senate election in Massachusetts, I, like Prof Anderson, have been wondering about the ramifications of this vote on health care stocks.

It's been straight up for sectors like pharma for the better part of a year. Can't help but wonder whether primary risk isn't to the downside. And that the Mass vote will be a 'sell the news' event regardless of outcome.

Personally, I'm essentially out of this sector after a couple of months of selling. Remaining positions 'placeholders' only--less than 1% of total assets.

positions in MRK, PFE, S&P

Pig Pen

"Pork bellies, which are used to make bacon, which you might find in a 'bacon, lettuce, and tomato sandwich."
--Randolph Duke (Trading Places)

Nice missive by Mish noting the spectre of sovereign debt defaults by the PIIGS (Portugal, Ireland, Italy, Greece, Spain), and the timing of a dollar crisis. He suggests that the dollar crisis may be 5-10 yrs out, while in the meantime we have primarily deflationary forces in play. These include PIIGS debt default, Japan, and, yep, a bubbly China.

All this resonates pretty well w/ me.

position in USD

Getting the Fever

Now I've been smoking for so long
You know I'm here to stay
Got you in a stranglehold baby
You best get out of the way
--Ted Nugent

What's the most encouraging thing I see in the midst of our current state of affairs? People are waking up from a long slumber. They're realizing that their freedoms vanished while they slept. They're asking questions that haven't been asked for a long time by a goodly portion of this country. They're thinking back to our founding roots.

When old time rockers are getting it, perhaps you really have something.

Monday, January 18, 2010

Trembling Shock

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

The sad story streaming from Haiti should serve as reminder about the exacerbating effects of poverty and political corruption on capacity for dealing w/ disasters. Part of the concern now involves how to get disaster relief across the black hole of plunder that has historically diverted humanitarian resources to those in need in this country.

The long term solution to these sorts of problems is not interventionist efforts such as larger world wide safety nets or UN sponsored efforts to rebuild/restructure Haiti. A durable solution is grounded in a free people who operate free markets who engage in free trade. This is what builds security against extreme events.

Unfortunately, it is not any outsider's place to 'force' freedom onto a country in the name of liberty, nation-building, et al. Others can certainly suggest and encourage, but internally the people must feel it and strive for it.

Other designs increase probability of maladoption.

Saturday, January 16, 2010

Divert and Conquer

"They want what every first term adminstration wants: a second term."
--Ritter (Clear and Present Danger)

Grandstand of the week was President Obama's proposed tax on bank exec bonuses. The president continues to blame the banks for our economic probs and he wants tax payers to get 'paid back.'

Blaming banks, of couse, deflects away from root causes of our probs. Demonization is a common political tool, a smokescreen, meant to divert public attention from the fact that current remedial actions are soaking the public (grab hold of FDR's 1933 inaugural address for some deja vu).

How can you tell that the president's entire train of thought is bogus? Mr Obama suggests that banks were too leveraged and took undue risk. What has been the government's response to this situation? Levering up and taking more risk.

The political tactic is to blame someone else for their actions but then perpetuating the same behavior.

Am hopeful folks are starting to wise up to this ploy.

Friday, January 15, 2010

'Feeling Offended' Phenomenon

Now it cuts like a knife
But is feel so right
--Bryan Adams

Statements about 'feeling offended' by someone or something seem more numerous over the past couple of yrs. My sense is that it's a symptom of darkening social mood.

What I find interesting about the phenomenon is that the individual (or group) that feels offended usually state the situation in a manner that makes it appear that the offending individual (or group) 'caused' the offense (e.g., "I am offended by your remarks.").

Subsequently, the offendee often demands an apology or some other form of restitution from the purported offender. The demand often calls for the offender to do this publicly.

An interesting situation if one thinks it thru.

First, being offended is a personal choice. Human beings are different from other animals in that they possess self-awareness which allows them to control their responds to stimuli--particularly social stimuli. We can choose to be part of herd-like tendencies of a crowd, for example. Or not. We can choose to let someone's harsh words offend us. Or not.

So a statement of "I'm offended by your remarks" could be reinterpreted as "I've chosen to let your remarks offend me."

The offendee's subsequent demands for a retraction is also curious. Why would a retraction be necessary if the offender's claims were untrue? Perhaps the offendee worried that others will accept the offender's claims as accurate. Or perhaps there is some truth in the offenders claims.

Either way, how does a retraction change alter the situation?

Juvenile, playground are words that come to mind.

Thursday, January 14, 2010

Green Light Gaze

Nick Carraway: "You can't repeat the past."
Jay Gatsby: "Can't repeat the past...Why of course you can!"
--The Great Gatsby

Another nice anthology of cartoons from the 1930s. One of my faves (from Jan 1930) below.

One more reminder that Gatsby was right.

Tale of Two Faces

Nowhere Man, don't worry
Take your time, don't hurry
Leave it all, 'till somebody else
Lends you a hand
--The Beatles

One of the more nauseating things about bureaucrats (and political partisans in general) is their hypocrisy. Chastize bonuses for bankers but condone payouts to wards of the State.

no positions

Tuesday, January 12, 2010

Chinese Checkers

"Great cars."
--Han Sing (Romeo Must Die)

Looks like Jim Chanos is sizing up the risks in China similar to me. Overcapacity, bubbly real estate, capital allocated by central planners.

Plus, sentiment on China seems solidly in Hoofy's court.

If we're headed toward another deflationary wave, I still wonder whether China might not provide the impetus.

no positions

Monday, January 11, 2010

Breaking Nest Eggs

"Go to the sporting goods store. From the files obtain forms 4473. These will contain descriptions of weapons, and lists of private ownership."
--Colonel Ernesto Bella (Red Dawn)

One reason why I don't mind taking early withdrawals from my retirement accounts. More government involvement and control seems well within the spectrum of possibilities. Things could be much different by the time we seek to withdraw funds for retirement.

To me, it makes sense to do some hedging by bringing some of these resources into the present--even at the expense of paying a penalty.

Friday, January 8, 2010

Shrinking Vols

"Long cruise, wasn't it, sailor?"
--Charlotte Blackwood (Top Gun)

Volatility indexes have completed a round trip from 'pre crash' levels. Vols tend to be decent sentiment indicators. When vols are high, folks are willing to pay up for put options (a.k.a. fear). When vols are low, option protection is ignored (a.k.a. complacency).

Just because vols are cheap doesn't mean the bottom will fall out of the market. Volatility can remain low for a long time. Moreover, there were periods in 2004-2006 when vols moved below 10 (currently in 16-17 range).

As such, volatility indexes tend to be concurrent indicators with little forecasting value.

That said, we can toss low vols to a growing pile of evidence that collective sentiment is pretty bullish.

position in S&P

Thursday, January 7, 2010

Quote of the Day

From Hayek:

"It is often said that democracy will not tolerate capitalism. But if here 'capitalism' means a competitive society based on free disposal over private property, the much more important fact is that only capitalism makes democracy possible. And if a democratic people comes under the sway of an anti-capitalistic creed, then this means that democracy will inevitably destroy itself."

Benevolent Despotism

"Would you tell me please, Mr Howard, why should I trade one tyrant three thousand miles away for three thousand tyrants one mile away? An elected legislature can trample a man's rights as easily as a king can."
--Benjamin Martin (The Patriot)

I found this article from 1947 interesting from at least three standpoints:

1) Liberals then and now. The classic concept of liberalism concerns the struggle of individuals to assert their liberty against authority. Those who call themselves liberals today (equally applies in 2010 as it did in 1947) believe in increasing the authority of the state at the expense of individual liberty. Classical liberalism is suspicious of government and seeks to restrain its power. Today's liberals look upon the citizen with suspicion and upon governments with approval.

2) All men are created equal. This passage from the Declaration refers to equality under the law. Our founding was a departure from history. Under the rule of authority, which has dominated civilization over 5000 yrs, people of different social status are treated differently under the law. Our legal system continues to exhibit tendency to substitute justice based on class distinction for equality under the law.

3) Dilemma. The author nicely states the dilemma facing many of those who call themselves liberals today. Quoting,

"Sincere, modern liberals do not deliberately desire to set up an authoritarian government. All they want to do is to improve the lot of mankind. They want everyone to be decently housed, decently fed, decently clothed, and they are willing to give government unlimited authority to accomplish desireable ends. They wish to override individual liberties only when individual liberties hinder government in accomplishing results which they approve. They want government to be powerful to do good without being powerful to do harm."

The author goes on to note the weakness of 'benevolent despotism' (nice tag) is that there's no guarantee that benevolence will stick, and he cites late 1800s Germany as an example. I'd go further to note that history indicates that such a state has never persisted.

Power, corruption, and incompetence that accompany the redistribution of resources by the state inevitably break this design economically.

Sentimental Journey

You talk about things that nobody cares
You're wearin' out things that nobody wears
You're callin' my name but I gotta make clear
I can't say baby where I'll be in a year

Interesting chart by Jason Goepfert who studies market sentiment. Individual investors have their highest stock allocations since late 2007 and the lowest cash levels. Am assuming this is asset allocation measured in brokerage accts.

People are funny in that they love stocks when they're higher and hate 'em when they're lower.

The stuff trend reversals are made of.

Wednesday, January 6, 2010

Straight Flush

"Generally you don't see that kind of behavior in a major appliance."
--Dr Peter Venkman (Ghostbusters)

Classic example of the folly of government intervention in the name of 'conservation.' When extra flushes and other, um, spillover costs of smaller capacity toilets are considered, we have a classic case of government interference that reduces standard of living.

To the extent that there was buyer demand for a low water capacity toilet, market forces would have motivated entrepreneurs toward that solution.

Once low capacity toilets are mandated, then entrepreneurial incentive to innovate is flushed away...

One more reason to prefer old rather than new houses, though.

Monday, January 4, 2010

Wealth of Ages

"Crazy. I mean, like so many positive waves...maybe we can't lose."
--Oddball (Kelly's Heroes)

Richard Russell sagely articulates what, in my view, is the proper way to view gold. The actual physical metal should be viewed as an integral part of one's estate that is never held for sale.

I like to think of it as pure wealth--the type that one seeks to accumulate and pass down to subsequent generations. Hopefully, they'll add to it and do the same. Heirloom wealth.

He also suggests that ounces accumulated matter more than price paid. I think he's right, although I like to spread my buys over time to manage risk.

position in gold

Truth Police

"Before I go, I just want you two to know something, alright? The supercop story...was working. Okay? It was working, and you guys just messed it up. Okay? I'm trying to figure you guys out, but I haven't yet. But it's cool. You ****ed up a perfectly good lie."
--Axel Foley (Beverly Hills Cop)

Spoken like a true central banker.

Reason suggests otherwise.

Sunday, January 3, 2010

Lace 'em Up

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

As the teams get ready to take the field, here are my primary personal financial goals for 2010:

Pay off mortgage. My mortgage is all that stands between me and being debt free. On Jan 1, I chunked another $10k toward the mortgage, which takes the balance below $100k. Hoping to finish this off by Aug.

Buy some bullion. Nothing huge, but want to hedge a bit vs my primary deflationary stance. Weapon of choice is physical gold, such as gold American Eagles. Would be happy to pick up a coupla oz each quarter on a dollar cost avg basis.

Deflationary 'reaction.' If another deflationary decline commences, then I might look to deploy some cash, perhaps by raising my short position or by looking for value in beaten down stocks.

Eye of the tiger, cookie.

position in gold, USD

Oven Ready

There's times I've been mistaken
There's times I thought I'd been misunderstood
So wait a minute darlin'
Can't you see we did the best we could?
--Bryan Adams

Current asset allocation as we enter 2010:

cash 55%
real estate 23%
precious metals 11%
fixed income 7%
short 2%
currency 2%
stocks 2%

Basic design is heavy cash/light on risk as I still favor a deflationary scenario.

Well Said

I was halfway home I was half insane
And every shop window I looked in just looked the same
--Style Council

Over lunch yesterday my buddy Don offered that the previous decade was the decade that personal responsibility went out the window.


Saturday, January 2, 2010

Misguided Search

"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!"
--Arthur Castus (King Arthur)

I've read a number of recaps about the recently ended 10 yr period, ranging from magazine cover stories to blog posts. A dominant theme in these missives is that this was a difficult decade (the worst ever according to Time). Commonly cited factors linked to the malaise include 9/11, wars in Middle East, crashing stock markets.

There is also a theme of 'poor leadership' in many of these missives--with most such comments directed toward the Bush administration years. And hope is often expressed that the 'new' leadership of the Obama administration will deliver us from the malaise.

Let's look at a few factors selected from a different thematic set that have plausibly shaped our present situation:

-->Obsession with elevating our standard of living in the present, which has caused us to borrow or acquire resources in gargantuan quantitites from others--often using coercive means such as war and taxation.

-->Unwillingness to accept the pain of dialing back our present day standard of living to pay off the debts we have accumulated.

-->A reliance on government 'leadership' to solve our problems.

The theme here, of course, is that it has been our poor individual choices that have brought on our current difficult situation. Viewed thru such a lens, improving our situation is grounded in personal actions such as:

  • cutting back on personal consumption
  • increasing personal saving
  • paying down personal debt
  • refusal to support government programs that seek to spend at the national level while individuals seek to save
  • refusal to support government programs that seek to elevate standard of living of some individuals at the expense of others
  • reallocate resources for decentralized self-defense rather than for a centralized standing military

Taking personal responsibility and action.

Debt and Depression

"You hear that Mr Anderson? That is the sound of inevitability."
--Agent Smith (The Matrix)

Quick quiz. Which of the following factors is common to all economic depressions in the history of mankind:

a) Too much saving
b) A currency constrained by the gold standard
c) Deregulated industry
d) Excessive debt

The answer, of course, is d). There has never been a prolonged economic downturn in the history of the world that has not been based on too much debt. Folks borrow to live higher on the hog in the present, whether this be thru increased consumption, speculation in financial markets, or to build additional capacity.

At some point, this debt has to be paid back. This either causes folks to dial back on resource utlization while in repayment mode, or to default. These activities are deflationary.

In either case, there will be a period in which the system needs to rebalance itself. The people push out this rebalancing process, the longer and deeper the ultimate rebalancing process will take.

This is, of course, the precise path we are taking via current programs of monetary and fiscal intervention. We're prolonging and exacerbating the inevitable. Essentially, we're trying to counter natural deflationary forces with more man-made inflationary forces.

It should be noted, btw, that a), b), and c) above help combat deflationary busts. Saving, gold-backed currencies, and competition keep debt creation in check, and tug leveraged systems back toward a balanced state when debt has been taken too far.

position in gold

Friday, January 1, 2010

2009 Financial Lessons Learned

I stood and watched the dark sky rise
With glaring sunlight in my eyes
I thought of all the times gone by
And laughed aloud at the crimson sky
--Modern English

Reflecting on key personal finance lessons learned over the past year.

New house. On the surface, it seemed like a risky time to move. Slow housing market, plus I wanted to upsize to a larger house (and a bigger mortgage). But, despite a more absorbing process than anticipated, the move was well worth it. I sought about $100K worth of upgrades including brick exterior, nice garage, sun room, nice wood, eat in kitchen, two baths, working fireplace--a wish list that was nearly completely satisfied. With about $30K in additional upgrades, my new house is a joy to live in each day.

Mortgage phobia. Although my mortgage was on good terms (15 yr fixed @ 4 5/8%), I learned that I just don't want to lug debt anymore. As such, I began paying down my mortgage at a fast clip. At year end, I'd retired nearly half the principal and about $50K in interest expense. Primary goal in 2010 is to finish this thing off.

Buying in risky environments. I'm commonly too early with most investment decisions. In early 2008 I began buying pharma stocks like Merck (MRK) and Pfizer (PFE) thinking they were attractively valued and perhaps immune to a general market decline. Big mistake. They went down like everything else. The thing to do would have been to buy them when there was blood on the Street, as it was last spring. Easier said than done to be sure, but in high risk market environments, only buy stocks when they are getting slaughtered and value is a no brainer.

Dividend cushion. Stocks paying a decent yield offer a margin of safety. When I bought MRK and PFE, they were yielding 5% or more. This helped soften the blow during their declines. When these stocks rallied, the cash obtained from dividend payouts pushed these trades above water at prices nearly 10% below my initial purchase price. Although 'getting back to even' should not be a primary goal when investments go bad, it was a good feeling to unload to unload positions at a decent profit toward year end.

IRA withdrawals. I dipped into my rollover IRA multiple times during the year, first to fund some of my mortgage downpayment and home projects, then to crush down my mortgage. Despite pushing up my marginal tax rate and the 10% early withdrawal penalty, this was worth it. Thus far I've saved over $50K in mortgage interest expense, plus I've increased my liquidity to live in the present. Cutting back on retirement account contributions has been one of the best decisions I've made in the past couple of years. Early IRA withdrawals to improve my current situation ranks up there as well.

positions in MRK, PFE