Thursday, March 31, 2011


Motel money, murder madness
Let's change the mood from glad to sadness
--The Doors

Am attending U of Dayton's RISE conference over the next coupla days. Missed the morning sessions but caught two interesting afternoon panels, one on risk management post credit crisis and the other on general economic outlook going forward.

Can't scribe much right now, but will note that none of the four professional risk mgrs (Nuveen, two hedge funds, Credit Suisse) on the first panel were able to steer their firms from major losses during the meltdown. The two hedge fund guys both admitted that without the bailouts, they would be not be around today. The lady from Nuveen was at WaMu during the meltdown and we know how that turned out.

On the economic outlook panel, the audience (maybe 2000 strong) were asked they thought that chances of recession were significant over next 12 months. Perhaps half dozen hands went up. All five panelists (JPM, MS, Fed Reserve, EU guy, Western Southern strategists/CIOs) were all very bullish. Only the moderator, an economist who does radio for Bloomberg, voiced bearish concerns.

It once again became clear to me during this discussion that the finanicial services industry is a license to print money for its participants with little downside for taking too much risk. Everyday people just do not understand how much wealth transfer is occurring with the system as currently structured. It is so far away from a free market that it is mind numbing.

position in SPX

Wednesday, March 30, 2011

Bail Tale

This is the wildest party that there ever could be
Oh don't turn on the light 'cause I don't want to see
--Three Dog Night

Burgeoning debt in the US coupled with $trillions in money printing. Record earthquake and subsequent nuclear meltdown in Japan. Middle East on fire. Sovereign debt crisis in EU coming to a head.

Yet, this am, domestic stock markets are challenging fresh recovery highs?

Outside of nefarious conspiracy theories that has the US government or its agents buying stocks here, the most reasonable explanation I can find is that markets are looking thru all of these problems to what they believe to be the solutions to them all: more bail outs with an emphasis on money printing.

This is, of course, the essence of moral hazard.

position in SPX

Tuesday, March 29, 2011

Tea is for Turnaround

"So, here's to the men who did what was considered wrong, in order to do what they knew was right--what they knew was right."
--Benjamin Franklin Gates (National Treasure)

In the mid 1990s, a Republican-led Congress would not sign off on a Clinton-sponsore budget bill, which subsequently led to a brief shutdown of various govt operations. Subsequently, the GOP was 'blamed' for the shutdown and Dems got some voting mileage out of it.

Today, it seems, many Republicans are gun shy w.r.t. aggressive budget cut proposals out of fear of a repeat of 1995. And Democrats have been none too shy of reminding them that it could be deja vu all over again in hopes of winning a cheap compromise.

Old school Republicans seem to be listening, as many have been careful to state that they don't want to shut the government down.

But a portion of the freshman Congressional class, many associated w/ the Tea Party movement, are not lugging that historical baggage. They are exhibiting the understanding that, given our fiscal field position, a govt 'shutdown' of some degree is inevitable. It's a matter of whether we proactively turn this thing around while the situation is still in our control, or whether we wait until market forces take Leviathan apart in uncontrolled fashion.

Tea Party budget proposals, which are more aggressive than mainstream proposals, seem to be gaining more attention. One data point: the normally spineless House majority leader John Boehner has exhibited some backbone and spurned a sweetened compromise deal offered by Democrats.

Before the incoming Tea Party class matriculated, skeptics opined that many freshman would be quickly coopted by the status quo. That may still happen. But as of now, it is heartening to observe many standing their ground for what they know is right.

War Games

David Lightman: Is this a game, or is it real?
Joshua: What's the difference?

A week ago we noted that once again the US are involved in unconstitutional war, this time in Libya. Last night, while watching President Obama's sad attempt at justifying his action, I was once again reminded of the intelligence behind the Constitution's design.

The framers understood that placing the power of military action in the hands of the chief executive leads to expansive government over time. Avenues are paved for imperialism abroad and dictatorial power at home. The standing army, already a threat to freedom, becomes an instrument of executive power.

Placing the authority to declare war with Congress reduces the chance for abuse of military power. And it increases the likelihood that freedom will be preserved.

Monday, March 28, 2011

Continental Divide

Don't want to discuss it
I think it's time for a change
You may get disgusted
And start thinking that I'm acting strange
--Van Morrison

The sovereign debt crisis in the European Union has been taking a back seat to problems in Japan and the Middle East. While attention has been elsewhere, however, sovereign credit spreads in Portugal, Spain, and elsewhere have continued to widen.

Today Ireland said it wants senior bond holders of Irish banks take a hit as part of any debt restructuring plan. Seems reasonable. After all, in an unhampered market, these bondholders would take a hit, up to and including total loss of their investment if Irish banks went bankrupt.

But other EU countries oppose the idea, claiming that smacking bondholders in Ireland might cause a contagion of debt selling in other countries by skittish investors.

Europe faces an intractable problem with 'domino effect' potential. While other issues around the world currently seem more urgent, investors ignore the increasingly volatile situation in the EU at their own peril.

position in SPX

House Call

So if you think you're life is complete confusion
Because your neighbor's got it made

A 3/25 Financial Times article suggests US banks are in talks with federal regulators re a proposal that would pay borrowers more than 90 days behind on their mortgage payment up to $1000 to seek independent financial advice and $20,000 in cash as a fresh start payment toward living costs in a new home.

Seems hard to believe. If true, folks might conclude that it is the banks' money; they can do with it what they wish.

But most of that money was obtained via nefarious means from the govt (TARP, QE2, etc). In fact, many big banks would have been vaporized without these programs.

Now on the table is using these bailout/stimulus funds to juice the housing market.

This would not private enterprise in action. This would be govt meddling writ large.

position in SH

Sunday, March 27, 2011

Pyramid of Ignorance

All the old paintings on the tombs
They do the sand dance, don't you know
If they move too quick
They're falling down like a domino
--The Bangles

Two years ago, politicians and media were quick to recognize and report the ponzi scheme run by Bernie Madoff at the expense of his investors.

Today, however, a much larger Ponzi scheme is being run by the US government at the expense of US citizens. The US Treasury sells bonds to banks. The banks then turn around and sells those bonds to the Federal Reserve. The Fed buys those bonds w/ freshly printed dollars.

This is sometimes referred to as 'monetizing the debt.' But it is a Ponzi scheme, pure and simple.

btw, nice work for those banks that serve as middlemen, as they are privy to free money for brokering the pyramid.

The United States has resorted to monetizing its debt. That should be a frontline story. Yet, politicians and media remain largely silent...

Friday, March 25, 2011

Partial Freedom

Here comes the rain again
Raining on my head like a tragedy
Tearing me apart like a new emotion

People frequently claim that they are 'socially liberal but fiscally conservative.' Or vice versa. The take away, it seems, is that many people ascribe to a philosophy of partial freedom.

Many socialists, for example, seem to think that it is possible to abolish economic freedom while maintaining other freedoms (e.g., freedom of speech).

But social life is holistic. What may be referred to as the economic sphere of social life is merely a conceptual convenience--a simplification of what in reality is inseparable from other dimensions of social life. If an omnipotent authority can dictate the tasks that individuals must perform, and confiscate the products of their work, then individuals possess no freedom or autonomy. The choice is between obeying or facing forceful penalty.

Recently, groups have assembled at various state capitals to protest legislation that would weaken public sector unions. They claim to have standing to stage these protests based on 'rights' of free speech and assembly. It would be interesting to know where these protestors think these rights come from.

On what basis do the rights of free speech and assembly exist?

The protesters also claim that the legislation that they protest violates another 'right'--the right to collectively bargain in public sector labor negotiations. The objective behind bargaining collectively is to employ 'strength in numbers' to increase negotiating power over economic resources. In the public sector, a right to collective bargaining is akin to granting the public sector unions coercive power over individual taxpayers. It would permit public sector workers to employ government agents to take wealth from others via force.

On what basis does the right of collective bargaining in the public sector exist?

Thursday, March 24, 2011

Central Error

"A fool and his money are lucky enough to get together in the first place."
--Gordon Gekko (Wall Street)

Jim Grant, in recent testimony before the House financial services committee, cited the work of Henry Parker Willis. Willis was involved in the origin of the Federal Reserve back in the early 1900s.

As Grant observes, the Federal Reserve envisioned by Willis had gone of the rails almost as soon as it opened its doors in 1914. After watching the travesty that followed, Willis wrote his swan song The Theory and Practice of Central Banking to capture what he viewed as the proper role of central banking, and where the Fed had bastardized the concept.

To Willis, the proper role of a central bank was to function as a big commercial bank--particularly during times of systemic stress. Back then, commercial banks functioned to provide liquidity to industrial transactions. During times of stress back in the 1800s, commerical banks of the day would not step between short term transactions and fund them.

Willis thought that this should be the Fed's proper role. By providing short term credit, commerce would still be able to function and would be less prone to 'crash.'

While I'm not sure I agree with that logic, limiting a central bank's role to facilitating short term commercial credit is much more palatable than what is actually done today.

Today, the Fed's role is as central planner of the economy with a printing press to enforce policy. Willis was quick to point out the flaws of such a model--flaws that he witnessed first hand thru the unfolding of the 1920s and 30s.

Years back I undertook study of the founding years of the Federal Reserve. My main question was how could a country that valued free markets so highly approve such an institution of central planning?

Willis offers some insight as to why some may have been duped. Some may have believed, like Willis, that a US central bank could truly ease short term commercial credit crunches by providing liquidity to good money, self-liquidating commerical transactions. The Fed would accomodate the needs of the community, not determine what those needs would be.

Noble as that purpose might be, anyone in 1913 with a modicum of understanding about political economy should have clearly been able to grasp the naivety of such a scheme.

Wednesday, March 23, 2011

Asset Allocation Targets

Drivin' home this evening
I coulda sworn we had it all worked out
You had this boy believin'
Way beyond a shadow of a doubt
--Bryan Adams

I've been rethinking my asset allocation strategy over the past couple of months. Given the bold, persistent nature of monetary and fiscal policy blunders made be bureaucrats both in the US and worldwide, chances of bigtime inflation have materially increased from where I sit.

As such, I'm starting to migrate toward asset allocations that better reflect an inflationary posture. Here are current positions and targets.

Stocks (current 6%/target 20%). I have not 'owned' stocks in quite a while. But I'm feeling the need to build some core equity positions. My preference is for cash rich firms with dominant brands that pay a dividend. I've taken a position in select tech, e.g., Microsoft (MSFT), and healthcare, e.g., Johnson & Johnson (JNJ), that appear to offer decent, but not great, value at these levels. I'm pretty sure that I'll be able to use price to my advantage to build more meaningful positions at lower prices.

Commodities (current 8%/target 20%). My commodity exposure has been 'in and out' now for a couple of years. I'm now looking to put longer term exposure on my sheets. In a world experiencing a blizzard of fiat money printing, the gold SPDR (GLD) is the obvious centerpiece. I would like a smaller core position in general commodity ETFs such as RJI and DBC. The subsector ETFs (e.g., DBO, DBE, RJA, JJC) are good trading vehicles, but they are hard to hold due to roll yield related slippage.

Fixed income (current 6%/target 10%). Hard to hold fixed income in an inflationary world. I'm keeping my duration short. Primary vehicles are CDs, but will look closer at some individual govie/corp issues as well as some bond ETFs if prices come down.

Alternative assets (current 9%/target 10%). I'm including currencies, real estate, and short positions in this group. Currently, my exposure here is a short position in the SPX (SH). Over time, I'd like to add some forex and perhaps a REIT or two.

Cash (current 71%/target 40%). Why such a large cash fraction in an inflationary world? Because inflation is not a lock, cookie. There's still a good chance that we experience a major deflationary wave lower given the levered state of the world. So a decent cash stash provides a cushion against a general price decline in risky assets. It also serves as a pool of opportunistic capital to pick up bargains at lower prices.

As always, these targets are subject to change as the world turns...

positions in GLD, JNJ, MSFT, RJI, RJA, SH

Tuesday, March 22, 2011

Power Lineup

As you're leaving, please would you close the door?
--The Outfield

The past couple of weeks have reinforced the notion that Republicans and Democrats in Washington say one thing then do another so that, in the end, they look more alike than different.

Republicans have been banging the drum about the need to get debt and spending under control. Yet, with notable exceptions among the Tea Party minority, the GOP has been lining up behind proposals to increase the federal govt debt ceiling and to cut spending by trivial amounts.

Democrats have long claimed to be opposed to war. And Dems loudly voiced opposition to military actions taken under the Bush administration. However, when a president from their own party takes similarly unconstitutional military action, this time in Libya, Democrats largely line up and shut up.

Both parties wear the same uniform--the uniform of Big Government.

And they all hit for power.

Monday, March 21, 2011

Dollar Drama

"I've been working steady for the past twelve years, minus the last three."
--Johnny Drama (Entourage)

It's getting close to fish-or-cut-bait time for the US dollar index (USD). The USD has been in a decade long downtrend. (offline, compare the 10 yr USD chart to a chart of gold over the same time period)

On the back of QE2, the USD is once again probing the lows for the move. Near term support resides right around here at about 75ish. Below that rests the 2008 lows at 71-72.

If that support gives way, then it'll be a brave new world...

position in gold

Line Dance

It's not in the way you've been treating my friends
It's not in the way that you've stayed till the end
It's not in the way you look or the things that you say that you'll do

Interesting battle shaping up here at SPX 1300. The S&P has rallied over 30 handles in three days.

It is now hitting its head against resistance at 1300, which also corresponds to the 50 day MA.

I added some short exposure in here given the tight defined risk parameters. Should the SPX decisively chew thru resistance here and motor higher, then I'll humbly stop this trade out.

position in SPX

Another War

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

With our participation in the military intervention in Libya, we have once again violated the Constitutional requirement that only Congress can declare war. Since WWII, the United States has engaged in numerous violent conflicts, all of which have been done outside of Constitutional authority.

In doing so, we trample the freedom of US citizens.

Quite ironically, we also fail to recognize the sovereign right of other countries to govern themselves--as different as their choices might be relative to ours.

Sunday, March 20, 2011

Land Grab

Morpheus: The Matrix is everywhere. It is all around us. Even now, in this very room. You can see it when you look out your window or when you turn on your television. You can feel it when you go to work, when you go to church, when you pay your taxes. It is the world that has been pulled over your eyes to blind you from the truth.
Neo: What truth?
Morpheus: That you are a slave, Neo. Like everyone else you were born into bondage. Into a prison that you cannot taste or see or touch. A prison of your mind.
--The Matrix

The federal government owns about 30% of the land area of the United States. This land constitutes a huge wasting asset because it is largely producing nothing.

At the same time, Congress has spent every penny that people have paid into Social Security--payments that has been made under force. Those now at retirement age who were forced to pay into Social Security are owed something. But who owes them? Politicians would like to take it out of the hides of those still in the workforce in the form of higher taxes. But that is unfair, as it has been those same politicians who have squandered the resources. The federal government that has not lived up to its end of the contract.

GMU professor Walter Williams says that he would be willing to make a deal w/ the feds whereby he would foresake all Social Security and Medicare benefits owed him in exchange for, say, 50 acres of land in Alaska (the federal govt owns about 70% of Alaska).

I would certainly jump at a similar offer--as long as I would not have to pay anything more into the system from this day forward.

But I wouldn't even need the land sweetener. I'd be willing to call it even right here. Government could keep all that that I've paid in the system. In exchange, I would take no future Social Security or Medicare benefits and I would no longer be subject to any related taxes.

Saturday, March 19, 2011

Labor Pains

"Look, what does a capitalist do? Let me ask you that, Mike. Huh? Tell me. I mean, what does he make, besides money? I don't know what he makes. The workers do all the work, don't they? Well, what if they got organized?"
--John Reed (Reds)

Marx's (1867) framework of class conflict is motivated largely by his labor theory of value. Like nearly everything he wrote, this theory is refutable thru observation and reason. For example:

Marx: The value of a thing is determined by the amount of labor put into producting it.

Reality: Value is subjective and has no direct relationship to labor. Consumers place value on what is wanted. Toiling to create a product that no one will buy generates no value.

Marx: Capitalists appropriate all value that labor produces less subsistence-level wages to workers.

Reality: Wages come out of production. The more capital used in production, the greater the output of labor (i.e., the greater the productivity). Higher productivity improves standard of living. Wages to labor depends on consumer demand on what is being produced as well as the supply of workers who can do the work.

High worker supply suppresses wages even in strong product markets. Unless, of course, some group intervenes to prop wages above market rates.


Marx, K. 1867. Das kapital, Vol 1. Hamburg: O. Meissner.

Friday, March 18, 2011

No Confidence Vote

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

Opposition to the recent continuing budget resolution numbered over 50 in the House--topping the half dozen or so 'no' votes to the first CR a few weeks back.

Does this mean that Tea Party principles are gaining traction? Perhaps, but Ron Paul is not optimistic it will be enough soon enough to proactively curb our spending and debt addiction, stating the odds as 'one in a million.'

Sadly, he may be correct.

Make no mistake, though, our addiction will cease. Am hoping (praying) for proactive measures, since the reactive measures that will be imposed by market forces will be much less palatable.

Thursday, March 17, 2011

Blind Addiction

Your lights are on, but you're not home
Your mind is not your own
--Robert Palmer

US public debt recently crossed $14.2 trillion which nearly matches annual GDP. This debt level amounts to nearly $46,000/citizen and over $128,000 per taxpayer.

State and local shortfalls amount to nearly $3 trillion more.

Total US debt exceeds $55 trillion, or more than $676,000 per family. This does not include unfunded entitlement liabilities of at least $30 trillion.

At the federal govt level, we are borrowing nearly $5 billion/day and face daily interest expense of over $500 million/day (expense that will surely rise when the Fed loses control of interest rates).

Federal govt outlays are about $3.5 trillion/yr, which creates a deficit of $1.5 trillion annually.

This is where we are.

And yet there are those who suggest that our current finanical position is not dire.

The Federal government just passed another temporary budget extension that included $6 billion in domestic spending cuts--less than a day's worth of Fed govt spending. Some in Congress are calling these cuts draconian and that no more can be done without crippling government.

Denial and escalation. Traits of the addict.

no positions

Wednesday, March 16, 2011

Treasury Dept

Peeled off my Treasury (TLT) position into leg higher this am. This article has been circulating among trading desks suggesting Japan is losing control of the nuclear problem.

no positions

Blizzard of Yen

Nathan Algren: "How is your poem coming?"
Katsumoto: "The end is proving difficult."
--The Last Samurai

Last nite the Bank of Japan (BOJ) continued to pour 'liquidity' into Japanese financial markets. Total money printing over the past three days has been nearly $700 billion worth of yen. That amount exceeds the objective of the Fed's QE2 program.

At first glance, one would expect the yen to be hammered by this massive wave of money printing. However, the yen is actually higher over the past couple of days.

How can this be? Over the past few years people have been borrowing yen from the BOJ at ultra cheap rates and using the proceeds to speculate in stocks, bonds, and other risky projects. This called a carry trade--borrowing at cheap rates and investing in a project with a higher rate of return. The idea is to make money on the spread between the cost of 'carrying' the cheap loan and the return on the risky project.

The risk to carry trades is that either a) borrowing costs rise or b) returns on risky projects decline. When either occurs, carry traders sell their risky projects and seek to buy back currency in order to pay back their loans and reduce leverage.

Right now, investors want out of risky projects that were funded with borrowed yen. They are effectively short the yen, and to cover their short position they need to buy yen, which is putting upward pressure on price due to higher demand.

Once the urge to close out carry trades sets in, herd mentalities of risk aversion can make this behavior persistent.

It should also be mentioned that carry trades funded by US dollars have increased dramatically over the past couple of years as investors have been exploiting ultra cheap rates offered by the Federal Reserve.

position in US Treasuries

Tuesday, March 15, 2011

Drop Zone

And there's some chance we could fail
But the last time someone's always there for bail
--Toad the Wet Sprocket

Want to see what a crash looks like? Take a look at the Nikkei (NIKK) in two days.

The NIKK is off 17% since Monday. At one point last nite, NIKK futures were about 25% percent lower.

Domestic markets bounced after opening about 3% lower this morning. Final tally found the S&P 500 down about 1.5%.

Bulls will likely drink this news pretty, and a rally to relieve some pressure may be due. But there may be unfinished business, perhaps a lot of it, to the downside.

In any event, risk management seems the order of the day...

position in SPX

Monday, March 14, 2011

GAO Financial Statements

I have a tendency to wear my mind on my sleeve
I have a history of losing my shirt
--Barenaked Ladies

While I'm jotting data, a couple of snippets from the GAO financial statements of United States for FY ending Sept 2010. All numbers below in $billions.

From the income statement (2010):

Consolidated revenue  $2,217
Consolidated net cost  $4,296
Net operating revenue (cost)  ($2,080)

From the balance sheet (9/30/10)

Total assets  $2,884
Total liabilities  $16,357

They don't do this, but equity here is 2,884 - 16,357 = -$13,473. In the world of markets, negative equity = insolvency.

The GAO includes off-balance sheet actuarial estimates of the present value of the various entitlements (Social Security, Medicare, etc). Their 2010 estimate is $30,857 (a value that seems way too low).

Regardless, if we add these off balance sheet liabilities to the on balance sheet liabilities we get $47,214, which puts equity at -$44,330.

The operative words here are insolvency and leverage...

Federal Outlays

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

Wanted to jot these numbers down so that they're more clear in my head. Taken from OMB data table 3.1 Outlays by Superfunction and Function: 1940-2016.

2010 Federal Govt Outlays

Social Security $707 billion (20.4% of total)
National Defense $694 (20.1%)
Income Security $622 (18.0%)
Medicare $451 (13.1%)
Health $369 (10.7%)
Net Interest $196 ($5.7%)
Education, Training, Employment, Social Services $128 (3.7%)
Veterans Benefits and Services $108 (3.1%)

Total Federal Outlays $3,456

If we combine the Medicare, Health, and Veterans categories, we get a $921 billion 'healthcare' category which is about 27% of total outlays.

The categories above make up the bulk of what have been labeled 'nondiscretionary,' 'mission critical,' or the like, meaning that these categories should be off limits w.r.t. reductions. These categories sum to $3,276, which is 95% of total outlays.

Support Group

I have a tale to tell
Sometimes it gets so hard to hide it well

Should the downward move in the S&P 500 (SPX) continue, what does chartgazing suggest about significant support below?

Pulling the time horizon back to a 3-4 year frame, important support appears to rest around SPX 1225 (about 60 pts below current levels). This level reflects the intersection of a horizontal and trendline support dating back to the Spring 2009 lows.

If/when we get there, SPX 1225 may constitute a meaningful battleground bulls and bears to slug it out.

position in SPX

Earthquake Wake

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

Death tolls from last Friday's catastrophic earthquake in northern Japan have now topped 10,000--a number that is almost certain to rise significantly higher. The country is now working to stave off additional disasters at a couple of nuclear power plants that have experienced reactor damage.

Last night the Nikkei sold off more than 6%. The Bank of Japan (BOJ) injected  $200+ billlion billion of 'liquidity' into the financial system in the form of short term money market credit, and asset (bond and ETF) purchases.

In the midst of the BOJ's money printing, the yen actually rallied last nite. As explained here, one reason for this is that there is an immediate need for cash in Japan. People who have have purchases risky assets with yen borrowed at uber cheap BOJ rates (a.k.a. 'the yen carry trade) are now looking buy those yen back to shed risk and whether the economic storm.

Stateside, there has been some fear that Japan might start unwinding its huge stash of US Treasury debt in order to raise cash as well. Thus far, the aggressive BOJ monetary actions appears to have stemmed any predilection to liquidate US bonds.

This is a dynamic situation that requires careful watching.

position in TLT

Sunday, March 13, 2011

Hold the Line

It's not in the way that you hold me
It's not in the way you say you care

It has been said that it's better to draw trend lines with a dull crayon rather than with a sharp pencil, lest one is prone to jump to conclusions about pattern changes.

Such is the current technical state of the S&P 500 (SPX). The uptrend since last March is being challenged. Not decisive enough to confidently conclude that the trend is broken.

But certainly close enough for bulls to be looking over their shoulders.

position in SPX

Saturday, March 12, 2011

Ponzi's World of Debt

All I want is to be left alone
In my average home
But why do I always feel
Like I'm in the twilight zone

My brother asked me the other day how the entire world could be in debt. Isn't it a zero sum game, he asked, where someone lends and someone borrows? Shouldn't there always be a creditor and a debtor?

This would be true if the borrowing process directly involved lending the underlying economic resources that serve as the basis for exchange. If I chop wood for a living, then cords of wood are my income. I could loan some of my saved income to someone else--say, a baker. The baker would owe me cords of wood in return, or the some agreed upon substitute, perhaps loaves of bread, based on the terms of the contract.

When borrowing involves real economic resources, then there is truly a creditor and a debtor.

Things are different, however, when borrowing involves money in the form of paper currency. The economic purpose for money is to facilitate exchange. Instead of the awkward process of bartering cords of wood for loaves of bread, money makes the exchange more efficient.

When money supply is held constant so that it accurately and consistently reflects quantities of underlying economic resources, then the borrowing process is still a zero sum game--there are creditors and debtors.

Unfortunately, money serves political purposes as well as economic purposes. Bureaucrats can print money to pursue political objectives. When bureaucrats can print money, they certainly will. Thus, the money supply is not stable. Instead, it grows over time (a.k.a. inflation). As money supply grows, it loses its relationship to underlying economic resources.

As money's relationship to underlying economic resources becomes obscured, then precisely who the creditors and debtors are in the borrowing process becomes difficult to determine. It is possible to lend money while consuming all underlying economic income. The primary restraint in this process is the extent to which political will motivates further money printing.

Over time, it is likely that the borrowing process is likely to morph into a ponzi where people lend and borrow printed money from each other. All the while underlying economic resources are consumed rather than saved.

This lasts until all economic resources are depleted.

Friday, March 11, 2011


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

Occaisionally on these pages, we've observed the incompatibility between democracy, defined as a governmental system grounded in majority decision-making, and liberty (e.g., here, here, here).

GMU professor Walter Williams recently penned an insightful missive on the subject.

The central idea, one that can be linked to thought that founded this country, is that people are born with natural rights that are not granted by any individual, group, or governing body. Those same entities have no just claim over those rights either.

Democratic process is sure to infringe on natural rights--because over time special interest groups that can amass enough votes can trample the natural rights of the minority. Mob rule.

The Framers understood the poor fit between democracy and liberty. Their idea was to design a government grounded in the rule of law instead of the arbitrary rule of bureaucrats.

The Framers' idea remains radical to this day. Mob rule remains conventional thinking and practice.

Thursday, March 10, 2011

Domino Effect

What'll you do when you get lonely
And nobody's waiting by your side
You've been running and hiding much too long
You know it's just your foolish pride
--Derek & the Dominos

Markets have been largely looking past the increasingly ugly debt situation in Europe. Sovereign spreads continue to widen. Yesterday, Spain got a debt downgrade from Moody's.

Situation continues to feel like 2007 before the mortgage dominos starting falling...

position in TLT

Tuesday, March 8, 2011

Dollar Days

"Fort Knox? Ha! It's for tourists."
--Simon Gruber (Die Hard: With a Vengeance)

Since markets began sniffing out QE2 last summer, the US dollar has been declining. The dollar index (USD) has lost about 20% of its value since last June.

The USD is now sitting on support marked by a gentle sloping multi-year uptrend. A bounce around these levels would not be surprising.

position in TLT

Monday, March 7, 2011

Dandruff Problem

To the heart and mind, ignorance is kind
There's no comfort in the truth
Pain is all you'll find

Am seeing more head-and-shoulders patterns (representative one below) than I've seen in a while.

When this pattern becomes apparent across many stocks/sectors, it's often a sign that the tape is changing its tone.

position in SPX

Sunday, March 6, 2011

Emotion in Motion

I would do anything
To hold onto you
Just about anything
Until you pull through
--Ric Ocasek

Since the earliest posts on this blog, we have been considering the trade off between freedom and safety, and why we have been ceding liberty for more dependence on govt for physical and social security.

Judge N speaks much more eloquently than I on the topic.

As he notes, government has now created dependency that it can no longer afford.

It is easy to be fearful of this situation. But fear is government's best friend.

To make it to the other side, we'll need to master our emotions.

Saturday, March 5, 2011

Collective Bargaining and Government Power

So glad we've almost made it
So sad they had to fade it
Everybody wants to rule the world
--Tears for Fears

It has been argued that government power would increase if collective bargaining were not permitted among public sector workers. How valid is this claim?

Consider two scenarios. In the first one, collective bargaining is permitted. Government officials and public sector unions agree to a contract that pays each worker $100,000 annually in wages and benefits, guarantees annual wage increases over the life of the contract, and permits employess to retire at age 50 with full benefits.

In the second scenario, collective bargaining is not permitted. Absent public sector unions, government officials get tough and decrees that government workers will be paid $5,000 annually with no benefits.
Under which scenario does government accrue more power?

In the first scenario, the creation of well paying government jobs attracts workers who would otherwise be employed in the private sector. Government payrolls swell relative to the private sector. Productive capacity in the private sector decreases.

Moreover, negotiated work agreements put political favor for sale. Insidious relationships develop between politicians and public sector unions. Union workers, who are also voters, back candidates who support union objectives. SIG city.

To pay public sector workers, government must appropriate property from others. As payrolls grow, so do taxes. Freedom of some is compromised as government takes control of more property in order to pay public sector workers. If/when taxes become politically unpalatable, government borrows to cover the shortfall as public sector payrolls consume more resources. Debt grows, placing additional burden on private sector citizenry.

There can be no doubt that government power flourishes in the first scenario at the expense of individual freedom.

In the second scenario, low wages attract few people. Government payrolls shrink relative to the private sector. Productive capacity of the private sector grows.

Absent a rich stable of public sector workers, markets for political favor and the SIGs that thrive in them decline. Markets for political favor require government control of economic resources. If politicians were unable to take property from some and give it to others, then markets for political favor could not exist.

When public sector payrolls are low, government loses control of economic resources. Should government try to appropriate property from the citizenry, government lacks the strong armed workers vital to force compliance. Absent capacity for force, government power declines.

Removing collective bargaining from the public sector seems unlikely to increase government power. More likely, government power will be reduced.

Friday, March 4, 2011

Bargaining Rights

Those one track minds
They took you for a working boy
Kiss them goodbye, you shouldn't have to jump for joy
You shouldn't have to jump for joy
--Tears for Fears

In unhampered markets, potential buyers and sellers are free to bargain in any way they see fit. The negotiations are voluntary, however. No one is forced to bargain with anyone else. If both sides cannot come to terms, then no trade occurs.

In labor markets, a prospective seller of labor cannot be forced into working for someone else under terms that the individual worker does not agree with. This is slavery and a violation of one's natural right to his/her wherewithal to produce.

Workers are free to walk away from deals deemed undesirable.

Likewise, a prospective buyer of labor cannot be forced into employing workers under terms that the employer does not agree with. This is theft and a violation of one's natural rights to his/her property.

Employers are free to walk away from deals deemed undesirable.

Forcing workers or employers into unwanted contracts also violates one's freedom of association--in this context defined as the freedom to do business with whomever one wishes.

Under conditions of coercion, no valid contract exists.

Thursday, March 3, 2011

Current AA

In the paper today tales of war and waste
But you turn right over to the TV page
--Crowded House

After peeling off crude exposure yesterday, I wound up adding some back today, along with significantly adding to my preciothus metal exposure. Am always reluctant to add after big price increases, but my sense is there's a decent chance of a step higher in commodities here.

Current asset allocation (liquid financial asset basis) is as follows:

cash 62%
fixed income 15%
commodities 10%
short equity 9%
stocks 4%

positions in GLD, SLV, DBO

Wednesday, March 2, 2011

Bargain Basement

I'd gladly lose me to find you
I'd gladly give up all I got
To catch you, I'm gonna run and never stop
--The Who

The 'collective bargaining' controversy continues to be framed incorrectly. The popular lens views the issue as whether public sector workers have the right to negotiate in groups.

This view misses the real issue, which is whether government has standing to negotiate the type of contracts of interest to workers here (i.e., long term wage agreements, closed shop job protection, lucrative pension/benefits).

To the extent that governments have overstepped their Constitutional bounds to engage in activities such as education, then the answer is obviously 'no'--govt has no standing to negotiate w/ workers because those workers should not be on the payroll to begin with. The labor negotations should be taking place in the private sector.

In private industry, profit motive and risk of property loss govern negotiations with management and labor. Rich concessions to labor by management divert property (up to and including control of the enterprise) away from the owners.

This process, grounded in property rights, restrains overconsumption of scarce economic resources.

Negotiations in the public sector face no such restraints. Workers can vote in bureaucrats motivated to kick back rich labor deals in reward for their vote. This is corruption at it worst. Political favor for hire. SIG city.

In the private sector, the principals (business owners) who do not like how their agents (managers of the business) negotiate with labor can walk away--by selling their ownership stake. In the public sector, the principals (tax paying citizens) cannot sell their stake. They are forced to go along by the terms of the deal.

In the short run, this situation allows certain special interest groups (public sector workers and complicit bureaucrats) benefit at the expense of others. In the long run, general standard of living falls as scarce economic resources are diverted from more productive endeavors.

One way both situations are similar is that, given enough time, economic failure kills labor contracts in both private and public sector contexts. Like businesses, governments can default. Default renders public sector contracts void.

And the richer the public sector worker worker labor deals, the quicker that government careens toward default.

Crude Attitude

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

Sold a decent chunk of crude exposure into this morning's spike higher.

Could oil still move higher from here? If unrest continues to heat up in the Middle East, the answer is most definitely yes.

If so, I have some 'secondary' exposure in the form of DBE and RJI that I plan to hold w/ a longer horizon.

Meanwhile, seemed prudent to take some gains after a gappy 10% move in crude.

position in DBE, RJI

Tuesday, March 1, 2011

Shut Down Showdown

"Shut it down. Shut it down now."
--Telco operator (Die Hard)

NPR show discussing the prospects of government shut down if no budget bill is soon passed. While shows like this bring discussants with various viewpoints together, these viewpoints are widely understood. And views by themselves do little to get us toward the truth.

The issue here is government spending--spending which is now growing exponentially. The spending problem is bipartisan in nature, although the Obama administration has taken this behavior and associated deficits to unprecedented and nearly mindblowing levels. For example, outlays (see Table 1.1. here) in 2010 were $3.5 trillion (16% higher than Bush's already monstrous spending in 2008), reflecting a deficit of $1.3 trillion (which makes Bush's $459 billion deficit, which was a record at the time, look almost tiny in comparison).

The magnitude of these numbers and the general trend clearly suggest out-of-control behavior--behavior that has perhaps become addictive in nature.

We can propose this because, by and large, government remains in denial about the problem.

A couple weeks back, the president proposed a budget intended to increase govt spending in 2011. House Republicans nearly matched that ineptitude, countering with a proposal to cut govt spending by a 'whopping' $60 billion (do the math: what is $60 billion on 2010 spending of $3.5 trillion?).

Almost as laughable are people who laud that GOP proposal as too drastic...

Make no mistake, unless we take action to reverse course in a hurry, the spectre of a 'government shutdown' will be low on our list of worries.

Economic forces will see to it.