Saturday, August 31, 2013

Overconfidence and Complexity

"I don't mean to suggest that you're indecisive, Mr Hunter. Not at all. Just...complicated. Of course, that's the way the Navy wants you. Me, they wanted simple."
--Captain Frank Ramsey (Crimson Tide)

Interesting proposition by Peter Atwater: the higher the confidence, the greater the creation of complex systems. Highly confident people and organization embrace innovation and new technology under the belief that there is unlimited opportunity ahead. Things become more interlinked.

Atwater suggests extreme complexity as an indicator of peaks in confidence. Mortgage and derivative markets, healthcare, global sourcing, and even higher ed have been exhibiting this characteristic, he says.

I would add current financial market supply chains that count 'dark pools,' complex market making arrangements, and high frequency trading among their complex features.

Pushing his logic to the extreme in the opposite direction seems to add validity: the lower the confidence, the greater the creation of simple systems.

When confidence is lacking, people like to keep things simple.

Friday, August 30, 2013


When you hear this sound a-coming
And you hear the drummers drumming
I want you to join together with the band
--The Who

An acronym floating around w.r.t. the Syrian situation is 'R2P.' R2P stands for 'responsibility to protect.' A product of United Nations discussions, R2P posits that countries have a responsibility to protect its citizens against large-scale lethal movements such as war crimes and genocide, and that other countries have a responsibility to help a nation deliver such protection.

In the case of Syria whose citizens have been subject to sizable gas attacks by violent factions inside the country, this is construed by some to mean that the US and other countries are obligated to intervene in Syria's internal conflict by employing military force.

Several problems with R2P doctrine are readily apparent. First and foremost, it intrudes on the sovereignty of nations. Country borders are drawn because of differences. Human tendencies toward sovereign living space reflect natural conditions of self-interest, cooperative exchange, and social diversity. What appears to be unjust violence by outsiders may be viewed as just revolution by inhabitants of the country.

Sovereignty of outside countries is also challenged by R2P. Some countries, such as the United States, have internal processes for legalizing war that supersede collective wishes of other nations. Moreover, it is easy to envision external pressure being applied by the 'international community' to join interventionary action against a nation deemed to need military aid. Conceivably, this leads to the paradoxical situation where country A acts with aggression on country B because B refuses to join in on aggressive actions to 'protect' people in country C.

Determining the type and extent of internal violence that triggers response is another problem with R2P. Is shooting people OK but gasing not? How many people need to be killed before R2P provisions kick in? Do people need to be killed or does there need to merely be a threat of killing before intervention occurs? How big does that threat need to be? How do outsiders looking in even obtain reliable answers to such questions to begin with absent the use of some degree of force?

Finally, R2P situations are likely to be rife with opportunism. Because economizing is a fundamental feature of human action, countries are likely to employ R2P to further their own interests at the expense of others. This might involve using R2P as an excuse to gain favorable access to raw materials (e.g., oil), as a means to install regimes deemed to be friendlier to domestic pursuits, as a way to express certain religious beliefs, or some other motive.

Because government is legalized force, its role must be limited to helping people defend themselves against aggression. It is straightforward to view R2P doctrine as another mechanism for expanding government aggression rather as a tool for limiting government to its legitimate role as a facilitator of self-defense.

Thursday, August 29, 2013

UK Votes Thumbs Down

If I go there will be trouble
If I stay it will be double
--The Clash

UK Parliament has voted down military action in Syria. Given the unpopular sentiment here at home, hard to see how putting this war to a Constitutionally valid Congressional vote would not be even more lopsided than the British vote.

This leaves Obama flying solo on any potential assault. Hard to see how he comes out of this whole no matter what he does.

Explain Yourself, Mr President

"You took an oath, if you recall, when you first came to work for me. And I don't mean to the National Security Advisor of the United States. I mean to his boss--and I don't mean the President. You gave your word to his boss. You gave your word to the people of the United States. Your word is who you are."
--Admiral James Greer (Clear and Present Danger)

Some members of Congress appear to be upholding their promises by demanding that President Obama clearly explain his rationale for unilateral Syrian intervention. Boehner's letter includes the following passage:

"It is essential you address on what basis any use of force would be legally justified and how the justification comports with the exclusive authority of Congressional authorization under Article 1 of the Constitution."

Well said, and I might have stopped right there.

I may have added that failure to adequately respond will be grounds for legal action against the Commander in Chief.

Wednesday, August 28, 2013

"It's Coming. Be Worried. Be Careful."

"I spent the last twelve years of my life building rooms like this specifically to keep out people like us."
--Burnham (Panic Room)

Jim Rogers expects panic when realization hits that money printing is not facilitating prosperity. He thinks that powers to be are desperate for war. As these pages have observed, one lesson of past depressions is that politicians see war as a means for 'solving' protracted economic malaise.

JR expects stocks to go down big and commodities to go up big.

In a different interview, Rogers opines, "We've had perilous times and it's going to get worse...It's coming. Be Worried. Be Careful."

position in SPX, commodities

Sighting In Syria

It's years since you've been there
Now you've disappeared somewhere
Like outer space
You've found a better place
--Everything But The Girl

As various militaries proceed to sight in Syria, domestic stocks head south. Yesterday's ~2% loss puts the SPX near fish-or-cut-bait levels on the uptrend line marked by last year's pre-Thanksgiving lows.

Many of the commodity indexes that I follow have broken out to the upside as is oil trading up with the Middle East heat and even gold getting some mojo on (now comfortably north of $1400).

Meanwhile, Treasuries have rallied but not as much as one might expect given the geopolitical tension. Ten yr yields have yet to break down below resistance into the next lower 'box.'

Interesting set up that should be telling if/when missiles fly in the desert.

Risk and tensions are careful out there.

position in SPX, oil, gold

Tuesday, August 27, 2013

Empty Promises

Second time around
I'm still believing
The words that you said
--Naked Eyes

It goes without saying that this president does not have the Constitutional power to unilaterally authorize military action against Syria. Unfortunately, it has happened so many times in the past by so many other presidents that people must believe that what is going on here is legal.

Congress is complicit by not taking legal action to block the president's orders.

All of these people have taken oaths to uphold and defend the Constitution.

Empty promises once again.

Human Actors and Contracts

"It is my duty to myself and to any man who is working for me that he honor all his contracts. When you came here you found out that we always honor our work, even when it means taking a loss."
--James Duncan MacHardie (From the Terrace)

Social science inquiry necessarily places the behavior of human beings front-and-center. In studies of economic organization, cognition and self-interest are particularly important (Williamson, 2008).

Simon (1957) famously observed that human actors are intendedly rational, but only limitedly so. Because people are boundedly rational, all complex contracts will be limited in their completeness. There will be gaps, omissions, oversights, etc. Fortunately, however, people are also capable of foresight. They have capacity to look ahead, and can therefore craft mechanisms ex ante to deal with disturbances as they arise which facilitate continuity and mutual gain during contract implementation.

Self-interest is also axiomatic of human behavior. In the context of contracts, most people will do as promised and some will do more. However, particularly as conditions change and stakes increase, defection from the spirit of a contract, thereby forcing termination or renegotiation, cannot be ruled out. Once again human capacity for foresight comes in handy. Readiness to defect can be mitigated by introducing safeguards ex ante that deter ex post opportunism.

Problems and features of human behavior therefore make it attractive to take some economic transactions out of the market and to place them either under control of a single hierarchy or under joint control of inter-firm hierarchies by means of contracting.


Simon, H. 1957. Models of man. New York: John Wiley & Sons.

Williamson, O.E. 2008. Outsourcing: Transaction cost economics and supply chain management. Journal of Supply Chain Management, 44(2): 5-16.

Monday, August 26, 2013


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

In courts of law, people who have harmed others are sometimes ordered to pay 'restitution' to compensate victims for injury or loss. Restitution (to 'restore') is intended to make someone whole after their property (broadly construed) had been taken from them.

Properly applied, payment of restitution is consistent with property rights. What is unjustly taken from a person should be returned to that person.

However, for restitution to be just, the connection between a person's loss of property and someone else who has taken it must be specific and direct. For example, offspring of a parent who has taken someone else's property cannot be held liable for the parent's bad behavior.

Restitution is less likely to be just when it is lagged by significant periods of time. For example, children of a person who was robbed are unlikely to have legitimate claims for restitution to be paid by the grandchildren on the thief.

Doing otherwise creates a land grab mentality where people seek payouts from others who have done them no wrong.

Sunday, August 25, 2013


"Your focus needs more focus."
--Mr Han (The Karate Kid)

Today's second reading from Hebrews 12 notes the importance of discipline. Discipline can be viewed as internal focus that does not waver in the face of external 'noise.'

Achieving difficult goals requires discipline, lest we become distracted or give up.

Developing discipline is hard work and might require an individual to deal with considerable pain. Athletes, for example, might endure much physical discomfort in pursuit of disciplined training regimens.

But the pain associated with discipline may not be limited to the physical variety. Chastisement of others, temptation to reduce focus, and emotional letdowns from setbacks create mental anguish that could dwarf physical pain in many instances.

Paul tells us that the pain associated with discipline is worth it, for "later it yields the peaceful fruit of righteousness to those who have been trained by it."

It is easy to associate the lesson of the second reading with the question posed in today's gospel from Luke 13. Someone asks Jesus whether only a few will be saved. Christ replies that the door will be narrow. Make every effort to come in through the door, he advises, because many will try to enter and will be unable to do so.

Through discipline, we can become unwavering in our focus on making it through that door.

Saturday, August 24, 2013

Wanted: Facilitator of Denial

"I know what you're thinking, 'cause right now I'm thinking the same thing. Actually, I've been thinking it ever since I got here. Why oh why didn't I take the BLUE pill?"
--Cypher (The Matrix)

Wanted to reflect on an article that Fleck commented on yesterday. The piece was written by a columnist named Gillian Tett who writes for the Financial Times. It concerns choosing Ben Bernanke's replacement as the Fed chair is retiring soon. The title of the article reads "Central banking is about storytelling" with a subtitle "The next Fed chair must make us think in a manner that suits the bank's goals."

As Fleck noted, upon first glance, a reader is liable to view this as some kind of a spoof. But the writer is serious. Toward the end of the piece she writes:

"The next Fed chair also has to be a masterful storyteller and cultural analyst, who can read social sentiment, shape norms, (re)create trust and persuade us all to think in a manner that suits the Fed's goals, without us even noticing. Somebody, in other words, who can cast spells with both their spreadsheet and words. In short, what is needed is nothing less than a monetary shaman."

Like Fleck, I wanted to record this, as it is a priceless snippet on how far detached we have become from reality. What we need according to this writer is someone who can make us believe that reality is different than what it is. Someone who can weave the matrix and convince us that the emperor is indeed clothed.

People want the blue pill--a facilitator of denial.

Friday, August 23, 2013

Interesting Times

Soft and only
Lost and lonely
Just like heaven
--The Cure

Claims that we're approaching a make-or-break moment in this country and perhaps the world seem to be getting louder. But our moment is not unique. The history of mankind can be seen as an ongoing struggle between freedom and force. The right to live free is opposed by human desire to benefit off the backs of others.

Freedom has been under fire since Day One. No generation has lived in times that weren't 'interesting' - where some did not seek to take freedom from others.

There is a name for the situation where freedom is no longer threatened by forceful intervention by others.

It is called heaven.

Thursday, August 22, 2013

Heavy Govies

Plastic tubes and pots and pans
Bits and pieces and the
Magic from the hand
--Oingo Bingo

Treasuries continue to trade heavy. Ten yr yields marking new highs for the move once again.

Now within spitting distance of 3%.

Wednesday, August 21, 2013

Natural Direction of Prices

Feel it alright
It's the same with me too
There's something that's taken a hold of us
All that we say and we do
--Roger Daltrey

Suppose that all money to be used for exchange is created before economic activity begins. Furthermore, suppose that this money is completely durable and never wears out. Suppose that the total amount of money created is $10,000.

Economic activity begins. People engage in production and trade. In the first year, total output is 1,000 units. On average, the price of each unit of output is $10,000 / 1,000 = $10 per unit.

In the second year, productivity (defined as the amount of output produced per unit of input) improves 3% (not too far from the long term average annual change in productivity reported by the BLS). Total output in year 2 is 1,030 units. Average price per unit falls to $10,000 / 1,030 = $9.71 per unit.

In the third year, productivity improves 3% again. Total output increases to 1061 and average price per unit falls to $10,000 / 1,061 = $9.43.

If productivity improves 3% in year 4, then average price falls to $9.15 per unit of output.

It should be increasingly clear that in an economy with fixed money supply and improving productivity, the natural direction of prices is lower.

Yet, we have been conditioned to believe the opposite--that the natural direction of prices is higher.

But average prices can only rise when money creation outpaces production, or when productivity is falling. Neither of these conditions are "natural" and are unlikely to occur in an unhampered economy.

Make sure you understand what is going on here.

Tuesday, August 20, 2013

Wrong Rights and Real Bubbles

"Who's the more foolish? The fool, or the fool that follows him?"
--Obi-Wan Kenobi (Star Wars)

This president has made some laughable comments, but some recent ones are among his most ludicrous. He appears to be engaging in the classic propaganda tactic of linking terms that garner people's sympathies with wrong meanings in hope that, over time, people will reassign the wrong meaning to the term.

For example, in his weekly radio address last weekend that featured comments on his floundering Affordable Care Act, he proclaimed that "in the United States of America, health insurance isn't a privilege - it is your right."

Correctly defined, a right is something that simultaneously exists among all people and imposes no obligation on another - except that of non-interference. Americans are particularly sympathetic to the concept of rights through the writings of Jefferson and others who observed that rights come from our Creators or from nature rather than from government, and that government cannot legitimately revoke these rights (i.e., they are inalienable).

The 'right' that the president speaks of is not a right but indeed a privilege - a privilege that only government can provide by forcibly take resources from some for the benefit of others. People are treated unequally under the law in order to achieve some faction's vision of equally of condition. There is nothing natural or durable about this privilege as it could, as the president correctly observed in his speech, be revoked by a different regime that manages to get control of government's strong arm.

The president has also been voicing concern about financial bubbles in his recent speeches. On the surface, this is commendable. Once again, however, he appears to be appealing to people's capacity for fast rather than slow thinking in order to push an agenda.

For example, in a recent speech, he noted, "When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy." He coupled this with comments that narrowing the gap between rich and poor is "my highest priority."

As these pages have observed many times, income inequality, while being an essential feature of a thriving economic system, is driven to unnatural extremes by interventionary policy. This president has overseen policies that have widened, not narrowed, the divide.

Concentration of wealth does not inflate financial bubbles. But wealth can become more concentrated as a consequence of government policies that do blow bubble.

Mr Obama is presiding over policies that are and always have been at the root of bubble creation.

This president wants you to believe that he opposes financial bubbles and income disparity while in reality he has been a major architect of both.

Monday, August 19, 2013

Discrimination and Private Property

"My old man was just so full of hate that he didn't know that being poor was what was killing him."
--Agent Rupert Anderson (Mississippi Burning)

Generally defined, discrimination is the ability to recognize or discern differences. In social contexts, discrimination involves making distinctions in favor of or against people based on categorical features such as race, gender, social class, etc.

In a free society, private property entitles its owners to discriminate.  Because a dimension of freedom is the freedom to associate, people are free to elect who they associate with. This may be for better or worse, of course, as there are benefits and costs of inclusion and exclusion.

Take, for example, the owner of a hotel that decides to serve only those persons with a skin color similar to his own. Because he can rightly dispose of his property as he wishes, the hotel owner has the right to discriminate based on skin color.

Observe that he is not committing on act of aggression by doing so. He is not forcing his way into the interests of others. On the contrary, others would be acting with aggression against the hotel owner if they forced him to serve particular individuals against his wishes.

The owner may collect psychic income from his discrimination. He might gain satisfaction from having control over his property. He may gain feelings of superiority by serving only those people who like like him while turning away those who don't look like him.

However, one thing that the owner probably will not gain from his discrimination is economic income.By discriminating against particular customers, the hotel owner loses business. His productive assets are less well utilized. Rivals who choose not to discriminate gain business at the bigoted hotel owner's expense. The hotel owner's discriminatory policies weaken his economic position.

In unhampered markets, people are free to discriminate as they wish, as long as that discrimination does not forcibly interfere with the pursuits of others. However, if those discriminatory policies result in poorly serving consumers, then those policies will be punished by the market while others who choose more consumer-oriented policies will be rewarded.

Sunday, August 18, 2013


"A king may move a man. A father may claim a son. But remember that, even those who move you be kings or men of power, your soul is in your keeping alone. When you stand before God you cannot say, 'but I was told by others to do thus,' or that 'virtue was not convenient at the time.' This will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

Integrity is the accurate reflection in word and deed of what one knows to be true--done with complete fidelity, i.e., no deviations whatsoever.

Lack of integrity is easier to spot in others than in ourselves. For example, many debates find one side accusing the other side of having inconsistently employed a position or argument. These accusations usually possess some degree of truth because of how difficult it is for us to act with complete fidelity over time.

Acting with integrity requires knowing what one believes. What do I know to be right? What do I know to be true? If I do not pursue truth, then it will be impossible to develop capacity for acting in accordance with the truth.

As truth becomes more apparent, then I need to act with consistency according to what I know to be right. No duplicity. No being moved by others to suit their agendas.

When I inevitably stumble, I must learn from my mistakes and strive to improve my integrity going forward.

Saturday, August 17, 2013

World's Fair of Money

Oh sister, I can't let you go
Like a preacher stealing hearts
At a traveling show

Attended the World's Fair of Money yesterday in Chicago. As this is the largest coin show of the year, it had everything. Rare coins in certified holders, common cents in cardboard holders, $500K gold bullion bars, pocket watches, medallions, tokens, paper money foreign and domestic.

Although it was neat scoping out cool coins (think the most expensive coin I held in hand was a 1921 $20 Saint priced at $375K), most enjoyable for me was meeting many dealers that I've interacted with remotely over the years. Nice to put faces with names. Hard working bunch of folks. Save for a few shops, hard to see how most of these people stay in the black. You can see that it's a labor of love for most of them, as they still refer to coin collecting as 'the hobby' rather than as an investment or industry.

The structure of this industry is evolving, as a few big, well capitalized players like Heritage are exerting major influence on how business gets done. The Internet is also playing a huge role. A classic Old School vs New School competitive landscape has been forming.

The other takeaway is how small and seemingly undervalued this sector of the collectables market is versus, say, art. A few multi-millionaires looking to diversify their holdings could sweep up the entire supply of coin rarities on the market with relative pocket change. Former energy industry CEO and current owner of the Texas Rangers Bob Simpson is demonstrating what could happen here, as he has assembled a number of monster coin sets that on an value basis is tiny versus his wealth and compared to collections of fine art out there.

It would only take a few more people like this guy to radically alter the supply/demand dynamic of this industry.

Friday, August 16, 2013

Why Yields Are Rising

First there are kisses
Then there are sighs
Then before you know where you are
You're saying goodbye
--Boy George

Interesting missive by Peter Atwater on rising Treasury yields. While many attribute recent Fed 'taper' talk or a strengthening economy to recent rate rises, Atwater thinks that this thinking is misguided and misses the most obvious and profound story concerning Treasuries: demand has peaked.

Fixed income, he posits, is largely a confidence game, and he offers five factors that have driven a secular bull market in fixed income over the past 30 years. These factors range from increased confidence in the Federal Reserve to changes in asset allocation strategies.

This 'perfect storm' of confidence pushed bonds to bubble-like prices, culminating in a recent buying orgy with ten year yields at less than 1.5%.

Atwater thinks that the buying peak has now passed and the road to lower prices may be pretty steep. "Confidence takes a long time to form buy just moments to destroy," he observes. "I expect that the speed of the rate rise will be jaw-dropping."

The consequences of rapidly rising rates, rates that the Fed can no longer control and that everyone sees that the Fed can no longer control, are ominous.

Thursday, August 15, 2013

On Cue

There's no sense in pretending
Your eyes give you away
Something inside you is feeling like I do
We've said all there is to say
--Tom Petty

Right on cue, ten year yields popped thru resistance this am. Stock are selling off in parallel.

Will be interesting to see how the rest of this day trades.

position in SPX

Wednesday, August 14, 2013

Treasuries Knockin' Again

Mama, take this badge off of me
I can't use it anymore
It's getting dark, too dark to see
I feel I'm knockin' on heaven's door
--Bob Dylan

Ten year yields are once again doing work at the top of the channel. In technical analysis, each time price returns to a resistance (support) line it chews thru a bit more supply (demand), thereby weakening the tendency for hesitation at this point.

Also hard not to spy an inverse head-and-shouldersy pattern heading to completion.

Although I booked my Treasury short a couple weeks back, it would not surprise me if rates pierce resistance here for another leg higher. Thus far, stocks have shrugged off higher Treasury yields.

Will be interesting to see whether this ignorance continues should rates step up again.

position in SPX

One Quadrillion

But somehow I can't believe
That anything should happen
I know where I belong
And nothing's gonna happen
--Tal Bachman

Last week Japan's national debt topped one quadrillion yen. That's 1,000,000,000,000,000. The debt bubble has sensitized people to trillions. So why not add three more zeros to these nonsense numbers?

Nonsense in the sense that the only way this debt gets reduced is through default or more inflation.

Tuesday, August 13, 2013

Thou Shall Not Covet

She's the dollars
She's my protection
Yeah she's a promise
In the year of election

The Tenth Commandment is thou shall not covet. To covet is to want something that someone else has. It is central to evil. Covetousness leads to aggressive actions ranging from theft to welfare state programs (which, of course, can be argued to be one in the same).

While laws can be put in place to punish forceful living off of others, such laws cannot do away with the desire. Tendencies for always wanting more and seeking the most benefit for the least cost, are axiomatic to the human condition.

One way to combat covetousness is to develop an acute awareness of one's blessings. Each of us has been endowed in countless ways. Start with life itself. Life is God's most precious gift. Each day we breathe, we employ a gift that enables us to move forward and, as John Keating proposed, to make our lives extraordinary.

Try not to worry about how many blessings others have. If I appreciate the gifts that I've been given and make the most of them, then it will be difficult for covetousness to restrain me.

Monday, August 12, 2013

Coiled Gold

Your voice will sink
So stay off my back
Or I will attack
And you don't want that

Gold and silver getting up close and personal with the June gap this am. This market seems pretty coiled right here.

Should the metals pierce resistance directly above, we may see some fireworks. A ton of specs are short, and many have likely placed stops directly above.

positions in gold and silver

Sunday, August 11, 2013


He headed west 'cause he thought a change
Would do him good
See some old friends
Good for the soul
--Bob Seger

Am once again visiting the place where I spent many of my formative years. I still have trouble processing many of the changes I see. So much vibrancy has left the area. This is a community in transition and it is difficult to envision that what awaits on the other side is a better standard of living.

As always, the gem of the trip has been reconnecting with a special group of people that helped change the course of my life. They helped me strive to be the best that I could be. From them, I learned to take initiative when things needed changing. I learned the power of setting a good example--that consistent action done with integrity speaks infinitely louder than words.

When I left the area, the most difficult thing to do was to say goodbye to this group. Fortunately, through technology and annual visits, that goodbye was not permanent.

I think of these people often, and I'm fortunate once per year to see them in person.

Without this group, I would not be where I am today. I remain very grateful for their friendship.

Saturday, August 10, 2013

Non-Economic Buyers

"Start buying Anacott Steel in the offshore accounts--and keep it quiet."
--Gordon Gekko (Wall Street)

Buyers of securities in financial markets can be economic or non-economic in nature. An economic buyer is motivated by profit. Basically, he buys lower to sell higher.

A non-economic buyer is motivated by an agenda other than profit. For example, some may view stocks as cool to own or a status symbol. I know some people who bought stocks after 9-11 as a show of 'patriotism' rather than as an economically motivated endeavor.

Other non-economic buyers might have a larger agenda. They might believe that by buying assets and keeping prices higher than they otherwise would be, others will take those higher prices as a signal that the general environment is 'ok' and proceed to engage in other behavior that the non-economic buyer would like to see.

The Fed's QE programs are this type of non-economic buyer. Buying bonds keeps price high and rates low. Fed Chair Bernanke is on the record as trying to promote a wealth effect (a phenomenon which has little empirical support).

Like all buyers, non-economic buyers need money with which to purchase securities. They can use their own, of course. For example, a syndicate of bankers including J.P. Morgan began buying stocks with their own funds during the Crash of 1929 with the primary intent of supporting price and instilling confidence in the market.

But the personal pockets of non-economic buyers are only so deep. If the trade goes against them, they may run out of ammo to support his agenda. Moreover, knowing what we know about human nature, loss aversion is likely to run high even for those with non-economic motives.

For big agendas, non-economic buyers need other people's money (OPM) to express their desires. If losses are realized, well, that's the other guy's problem.

Once funds have been obtained, then buying can be done directly. The Fed can print money (the purchasing power of this money comes out of your pockets) and buy Treasuries on the NY Fed's bond desk. Everyone can see it. In fact, the Fed wants people to see it.

Covert buying is also possible. This might occur when a non-economic buyer doesn't want to alarm people that intervention has been seen as necessary, or when intervention is against the law.

By law, the Federal Reserve is prohibited from buying stocks (it is legal for central banks in other countries to buy stocks, btw, and they have been doing so). But this does not mean that the Fed is not doing so. It would be easy to disguise the buying. Create a labyrinth of offshore accounts or work with Goldman to park the buys. Off balance sheet...

This central bank has already shown that it will employ desperate measures in desperate times.

Before this is over, I would not be surprised to learn that the Fed was buyin' 'em during the present periods.

position in SPX

Friday, August 9, 2013

Bond Prices and Inflation

Saturday, wait
Sunday always comes too late
But Friday never hesitates
--The Cure

We've noted it before but let's say it again. Generally, bonds and inflation are positively, not negatively, correlated. Appropriately defined, inflation is an increase in supply of money. In the current system, money is primarily credit money. Credit money is created by fiat rather by saving, and generates dollars that are created linked to liabilities.

Credit money has been expanding in a big way for the last 30 years. This is because the interest rates associated with borrowing this credit money have been suppressed. Yields on 10 yr Treasuries have fallen from north of 15% in the early 1980s to below 2% earlier this year. As the interest rate on a bond falls, its price goes higher.

Get that? Bond prices have been rising for the past 30 yrs because of inflation.

The kicker is that cheap interest rates make it attractive to speculate with borrowed money. What do you suppose has been the go to asset class for carry traders? That's right, B-O-N-D-S.

Question: How much money would you borrow at 0% if you could invest in in Treasuries yielding 2%.

Answer: (provided by bankers and other carry traders worldwide) "As much as you can."

Thus, inflation provides a secondary kicker to bond prices due to the carry trade.

What stops this virtuous cycle? Risk aversion. Less willingness to lend or borrow. Higher borrowing rates from creditors.

When this occurs, bonds get sold, the value of existing debt goes down, and less new credit money is created. This is deflation. Credit money supply contracts.

In a monetary system that primarily creates credit money, then bond prices go up when more credit money is created (inflation). Interest rates go down during inflation, not up.

In deflation, bond prices go down when credit money is destroyed (deflation). Interest rates go up.

no positions

Thursday, August 8, 2013

Decide What You Believe

Louden Swain: Can 800 million people be wrong?
Tanneran: Frequently.
--Vision Quest

When asked recently at what point do market prices that conflict with an investment thesis cause him to accept his thesis as wrong and move on, Fleck replied, "When I think it IS wrong."

Fleck notes that listening to market action alone would have caused him to cave before major inflection points. The annals of market history are littered with stories of investors who had the story right but couldn't stick with their convictions and see the story through.

Crowds are frequently wrong. Relying on them to get it right seems a losing strategy over time.

Better to get your thought processes straight and to decide what you believe.

This lesson extends beyond financial markets.

position in SPX

Wednesday, August 7, 2013

Cost of Freedom

And when you've taken down your guard
If I could change your mind
I'd really love to break your heart
--Tears for Fears

It is often said that freedom is not free. If this is true, then where do the costs come from? Liberty is the inalienable right to pursue one's interests as long as that pursuit does not aggress upon the pursuits of others.

For example, I cannot rightfully advance my interests by holding a gun to your head and taking your wallet. I also cannot rightfully retain a government agent to hold a gun to your head to take resources from you for my benefit.

Unfortunately, many people do act with aggression in order to advance their interests. And this is where the cost of freedom comes from.

Remaining free requires some quantity of resources to protect one's interests against aggression. I can think of two categories of costs related to protecting one's freedom. Some costs pertain to building capacity for defense in the event of aggression. Individuals might allocate resources for self-defense training or weaponry, for example. People might outsource some or all of their self-defense capacity by hiring agents for protection.

The other category is monitoring costs. These are costs of scanning the environment for situations that suggest a possible threat. People might install security systems in their homes to warn of possible break-ins. People might hire agents or form neighborhood watch programs to monitor suspicious activity in their locale.

Because many people find it attractive to use the strong arm of government to aggressively intervene in the pursuit of others, the activities of government must also be monitored. The more expansive and remote the government, the more resources must be diverted to keeping an eye on what government is doing.

One reason why many opposed the central government design expressed in the Constitution was it would be more difficult to keep tabs of nefarious government activity when it was being performed so far away.

Quotes from two Anti-Federalists are worth noting in this context:

"Were the people always attentive, they could call unfaithful lawmakers home and send others. But they are not always attentive." (A Maryland Farmer)

"Virtue will slumber. The wicked will be continuously watching. Consequently, you will be undone."

The cost of freedom is the cost of defending against aggression. The opportunity cost is that other pursuits must be compromised in the name of defense.

Tuesday, August 6, 2013

Scarcest of All Resources

"The one thing that I learned in jail is that money is not the prime asset in life. Time is."
--Gordon Gekko (Wall Street: Money Never Sleeps)

We live in a world of scarcity. To survive and prosper, each of us must consume resources that are in short supply. Scarcity of many resources can be alleviated through production. By combining labor with materials and other productive resources, we can produce more so that we can further pursue our interests.

Production reduces scarcity, but does not eliminate it. This is because one or more inputs constrains production. Usually that resource is time. At any moment we can be in only one place, which limits what we can work on at a particular time.

Longitudinally our time is constrained as well. In the near term, factors like preference for leisure over work interests and fatigue limit how long we engage in production before doing something else. In the long term, our lives on earth are limited and death is certain.

Indeed, time may be the scarcest of all resources. Each second that we consume cannot be recovered.

Because we are practiced economizers, one of the more important questions we can constantly ask ourselves is, "Am I making the most of my time?"

Monday, August 5, 2013

Faceless Bubble

It's easy to deceive
It's easy to tease
But hard to get release
--Billy Idol

The root cause of all financial market bubbles is credit money. Unlike commodity money which is grounded in production, credit money is created out of thin air by banks and other institutions. Credit money fuels borrowing and speculation far beyond what is possible with commodity money.

Recent bubbles have been credit money that made its way into  highly visible economic sectors. In the late 90s, it was the 'dot com bubble.' In the mid 2000s, it was the 'housing bubble.'

This time around, however, the bubble has no real economy face. Trillion$ of credit money are not making their way into the economy--at least not yet. Instead, the credit money largely remains in the banking system where institutions are using it to bid stocks and other asset classes higher.

From a PR standpoint, policymakers can't like this. When credit was flowing into internet companies or real estate, officials could point to sectors of the economy where their policies were 'working.' It created a distraction, albeit temporary, from the underlying activity of money printing which, when laid bare, gets people thinking (always a bad thing for government).

There is no distraction this time. The credit money is manifesting purely in higher asset prices. And, as Gekko famously observed, "if you are not inside, then you are outside" when it comes to benefiting from this inflation.

The longer policymakers can't point to 'real world' benefits of their inflationary policies, the greater the likelihood that the public will push back at policies that are benefiting a privileged few.

Of course, if policymakers get their wish and the trillion$ of credit money begin making their way into the broad economy, then we'll witness an explosion in the price of goods and services like few Americans have seen.

Sunday, August 4, 2013


"We heard you was loading a ship without the assistance of bona fide union labor. Say it ain't so."
--Mikey (Eraser)

The National Labor Relations Act of 1935, also known as the Wagner Act, stated that a majority of workers can authorize a union to represent them, regardless of an employer's wishes. Wagner also legalized the 'closed shop,' in which employees at unionized workplaces must be members of the union as a condition of employment. Any employees not wishing to join the union still had to pay union dues.

The Taft Hartley Act of 1947 amended Wagner. It outlawed the closed shop, thereby making it illegal for an employer to force an employee to join a union. Taft-Hartley also authorized states to forbid agreements between employers and unions that required employees to pay the equivalent of union dues.

Over time, states have responded by passing 'right-to-work' laws (RTW) that regulate contractual agreements between employers and unions by essentially banning contracts that exclude non-union workers or require non-union workers to pay union dues.

On the surface, this seems to be a step in the direct of free markets by countering ill effects of compulsory unionization. Upon closer examination, however, RTW constitutes a further step away from free markets. RTW is an intervention piled on previous interventions in the market for labor.

In unhampered labor markets, both employers and employees are free to associate with whom they choose. But RTW prohibits employers from associating exclusively with unionized workers although it is their right to do so.

Although unions are often rightly associated with practices that impair free contracting, this does not have to be their primary objective. Rather than seeking monopolistic control of wage rates, unions could develop a brands that employers would want to be associated with. For example, unions could work to develop their members's skill sets so that employers are motivated to reduce their search costs by dealing with union members only--since they know they are hiring quality people.

One of the features of unions that I found particularly attractive during my industry years was their capacity to convey info to and from their membership. This was an attractive communication channel that would have been costly to develop for my company.

Stated differently, there are reasons why an employer an employer might prefer to require union membership. RTW takes freedom to contract in that manner away.

Parenthetically, we should note that the situation differs in the public sphere. Collective bargaining policies between government and public sector employees must be viewed differently because freedom of contract is the right of citizens but not the right of government officials who represent them. An agency problem exists.

The Wagner Act has restricted freedom. RTW further restricts it.

Saturday, August 3, 2013

Big Box Inflaton

Sometimes I never leave
But sometimes I would
Sometimes I stay too long
Sometimes I would

Operators of 'big box' stores are beneficiaries of inflationary policies. As inflation goes up, purchasing power goes down. To get more out of each dollar, consumers increasingly shun small mom and pop store in favor of large operators capable of creating high volume, low variety economies.

Stated differently, monetary policy has shifted demand away from the small toward the large.

Since the Federal Reserve was created 100 years ago, the purchasing power of the dollar has declined by more than 95%.

There can be little doubt that the structure of retail industries would look much different today had we not been engaging in policies that have destroyed the value of the dollar for the last century. Industries would be less concentrated and there would be more demand for goods and services sold by local, customer-friendly operators.

A compelling argument can be made that the extinction of the corner drug store and other small retailers is being driven not by market competition but by the force of monetary policy. This policy has been a form of corporate welfare for big box operators.

Remove this welfare and watch retail become more up close and personal.

Friday, August 2, 2013

Trading Freedom

"You know, I know this steak doesn't exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realize? Ignorance is bliss."
--Cypher (The Matrix)

Although freedom is an inalienable right that each of us is born with, some value it less than others. Because people value freedom differently, markets have developed where freedom can be traded for something else.

For example, debt markets are places where people can obtain higher standard of living today in exchange for less freedom in the future (since borrowers are obligated to work for the creditor to pay back debt). Some people are willing to sell  some or all of their freedom no matter how high the price (in this case interest rates).  Others are unwilling to sell any of their freedom regardless of terms.

We can think of individual preferences for freedom as lying along a continuum. At one end of the scale are people who value freedom highly and are unwilling to trade it at any price. Patrick Henry's "liberty or death" statement famously reflects the 'high taste preference for freedom' end of the scale pretty well.

On the other end of the scale are people who place little value on freedom and are willing to trade it all away permanently in exchange for something else. Perhaps they trade freedom for some perceived measure of safety, or to reduce personal pain or suffering, or for some other tangible or psychic good. Consider Cypher's story above, who traded all of his freedom for temporary feelings of comfort and pleasure.

What is your taste preference for freedom? How much of it are you willing to trade away? At what price?

Thursday, August 1, 2013

Political Wildfire

"Forgiveness is between them and God. It's my job to arrange the meeting."
--John Creasy (Man on Fire)

Judge Nap observes that there is a political wildfire spreading throughout the land. If not ignited, it was certainly stoked by Edward Snowden.

At first glance, the flames appear to be public backlash against the notion that the federal government can indiscriminately spy on the citizenry. Upon further scrutiny, the fire reflects pushback against the suffocating size and scope of central government.

It is spreading because more people are waking up to the reality of obtrusive government every day. They are waking up because it is their liberty that is being compromised in the name of State power.

The more this wildfire grows, the harder it will be for Statists to put out.

Truly, this blaze has to be the Statists' worst nightmare.