Saturday, May 31, 2014

Less Inequality, More Envy?

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

Interesting proposition put forth here. The smaller the economic inequality, the greater the envy--and the more people will clamor for government to do something about it.

Counterintuitive at first blush. One would think that greater, not lesser, spreads in wealth would ignite envy.

The proposition here is that huge spreads in wealth, such as those that existed prior to the advent of capitalism, are deemed inactionable by the masses. As the gap decreases, however, people think that they can increase wealth by employing strong armed government agents to confiscate resources from those with more.

Envy rises because it becomes more actionable.

Peter Schiff argues that, in developed economies, living standards of the poor are generally closer to those of the rich than at most times in human history. As long as productivity improves, more wealth is created. Even if some benefit more than others, all generally benefit.

Rising production, of course, motivates a plausible rival proposition: the greater the pile of wealth, the greater the envy...

It may be difficult to disprove one in favor of the other. However, if either proposition is valid, then expect envy and the pathology of resentment to escalate as living standards advance.

Friday, May 30, 2014


Oh, there's no place to run
No one can save me
The damage is done
--Bon Jovi

COINTELPRO stands for COunter INTELligence PROgram. Unlike intelligence programs aimed at gathering information on entities, counter intelligence focuses on infiltrating, discrediting and disrupting politically-oriented groups.

Since its inception, the FBI engaged in domestic COINTELPRO operations in the name of 'national security.' This continued until 1971 when an expose resulted in official termination of COINTELPRO activities.

Although COINTELPRO officially ended in 1971, there has been ongoing suspicion that the federal government still engages in acts of domestic subversion. These suspicions are escalating with the recent release of Glenn Greenwald's book, No Place to Hide, which tells the riveting story of NSA whisteblower Edward Snowden.

In addition to his story, Snowden released his NSA files to Greenwald. Greenwald has indicated that he is holding back Snowden's files that spell out names of US citizens that have been targets of NSA spying. He said that, consistent with a policy of saving the best for last, he plans to reveal those names this summer.

This has to frighten the federal government to no end, as such evidence would inform the public about present day COINTELPRO operations--perhaps against Tea Party and other groups deemed by the government as hostile.

Jacob Hornberger suggests that the Obama administration should come clean about any COINTELPRO operations ahead of the Greenwald release. Preemptive truth-telling usually merits some degree of leniency.

Given the opaque history of this administration, such openness seems unlikely. Perhaps Greenwald is bluffing, the administration might think. Better to resort to habitual tactics of diversion and discrediting, it might conclude.

If the administration does not come clean and Greenwald does release information that reflects COINTELPRO misconduct, then JH suggests that it would be difficult to find a better example of high crime worthy of impeachment under Constitutional law.

Thursday, May 29, 2014

VHA as State Healthcare Prototype

If I could find a souvenir
Just to prove the world was here
And here is a red balloon
I think of you and let it go

Although the federal government generally exerts influence on the healthcare system rather than direct control, there are pockets where control does accurately describe the situation.

One such situation is the Veterans Health Administration (VHA). The VHA website promotes itself as "America's largest integrated health care system with over 1,700 sites of care, serving 8.76 million Veterans each year."

While US government-sponsored care for war veterans dates back to the early 1800s, sponsorship increased following the Civil War. Veteran healthcare has been a favorite program of most administrations since the Progressive Era.

Today, government-owned or sponsored VHA assets include hospitals, clinics, medical personnel, and associated information and bureaucratic infrastructure. In 2013, the federal government spent $139 billion on veterans benefits and services (Table 3.1). While not all of this was healthcare-related, some VHA-related costs surely spill over into other lines such as general health spending ($358 billion in 2013) and Medicare ($472 billion).

As such, the federal government does indeed control a sizeable chunk of overall healthcare resources via the VHA. Many people hope the federal government will take control of more of the market--perhaps even the entire healthcare system.

That is an unpleasant vision, as the VHA offers a prototype of what such a system would look like. Inefficient. Unreponsive. Low quality care. Few people who currently buy healthcare products and services through other channels dream of switching to the VHA channel.

The VHA is once again under congressional scrutiny--as if issues should be a surprise.

Sadly, the VHA system is certain to worsen as government influence in the overall healthcare system continues to increase.

Stated differently, the already unpleasant prototype of government-controlled healthcare is destined to become more unpleasant.

Wednesday, May 28, 2014

'Defending Freedom' Indoctrination

"A brilliant man would find a way not to fight a war."
--Admiral Yamamoto (Pearl Harbor)

I grew up one of the indoctrinated. As a kid, I saw the daily Vietnam body counts on the nightly news. Those soldiers were dying 'defending our freedom,' it was said. I watched gobs of WWII war movies. Again, the message was that US soldiers nobly died 'defending freedom.' I tipped my cap to Iraq I, Iraq II, and Afghanistan in the name of freedom.

Over the past few years I have finally seen thru the deception. The truth is that none of these were just wars. Freedom in the United States was never legitimately 'under attack' in these conflicts.

Sadly, hundreds of thousands died. But, by and large, these soldiers died in wars of aggression in remote lands. Rather than sentries of freedom, these people, by following orders, became instruments of empire.

This past Memorial Day weekend, there was perhaps no better reflection of our blind allegiance to militarism than the observances that took place at all Major League Baseball games on Monday. It included all players decked out in special camouflage-laden attire in honor of the battle colors of various branches of the armed services.

Predictably, the stated objective behind these activities was to recognize the military--those who 'defend and protect' us. My angst grew as I watched games throughout the day.

Like notorious empires of past, we are blindly celebrating militarism.

Capacity for force is not something to be recklessly brandished. It should be revealed reluctantly in legitimate self-defense situations.

Although developing self-defense capacity can be useful, truly free people are saddened when capacity for force is legitimately put to use. It means that voluntary cooperation failed in those instances.

Parading military capacity and deeds done in the 'name of freedom' indoctrinates minds to the misuse of force.

Tuesday, May 27, 2014

Healthcare Control vs Influence

I keep looking for something I can't get
Broken hearts lies all around me
And I don't see an easy way to get out of this
--Cutting Crew

Although it is tempting to say so, the US healthcare system is current not government controlled. Control implies ownership of property and decisions rights as to disposition of productive assets.

Currently, it is more accurate to say that, generally, the US health care system is under government influence. Influence implies capacity for swaying the property-related decisions of others in ways that would not occur in purely voluntary buying and selling relationships on the market.

It is also accurate to say that government influence in healthcare is significant and increasing. Although in motion earlier, trend trajectory increased in 1965 with the passage of the Medicare Act.

One of the easier prognostications in history was made by Ronald Reagan and others while the Medicare Act was still under development. As government influence in the healthcare system grows, RR et al posited, so will system bureaucracy. Healthcare system efficiency will decline.

This was an easy call because all one had to do was apply principles of socialism to the healthcare market.

At some point, of course, influence grows to the point where it becomes control. The prognostication associated with government control of the healthcare system is eventual chaos.

Monday, May 26, 2014

Following Orders

"A king may move a man. A father may claim a son. But remember that, even when those who move you be kings or men of great 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)

Memorial Day muse that posits three necessary factors for large-scale evil to flourish: surrender of autonomy, coercion by central authority, and willingness to follow orders.

The author observes that no matter how strong the first two factors, it is impossible for Big Evil to persist without the third. If people are unwilling to follow authoritarian command, then evil can at most skate by in isolated pockets that are unlikely to persist over time.

"Following orders" is not a valid reason for aggressing on others.

The State does not hang a man, the hangman does. Governments and their armies do not kill individuals, soldiers do.

Sunday, May 25, 2014

Great Moderation II

"For all my career, I've been trying to catch people after they do something horrible. For once in my life, I'd like to catch somebody BEFORE they do something horrible, all right?
--Doug Carlin (Deja Vu)

Nice follow-on (also another MV piece here) to our previous post on compression. A prior period of Fed-induced volatility suppression occured before the 2008 credit collapse. Many termed this period the Great Moderation.

Wanted to quote the author quoting a former Fed guy discussing the cause of the credit collapse:

"I have come to believe that the ultimate cause of the financial crisis in 2007-2009 was the great moderation. The financial system responds to volatility. When volatility declines the natural tendency is to use more leverage and to concentrate risk." [my emphasis]

What we are now experiencing is the Great Moderation II. The triggers will surely be different than last time, but when the system 'unmoderates' or decompresses, the observable characteristics will foster some deja vu. Deleveraging, vanishing liquidity, collapsing asset prices.

As a wise sage used to say during the first go-round, "Risk is high."

And getting higher with each day of compression.

position in SPX

Saturday, May 24, 2014

Legal Plunder

You are an obsession
I cannot sleep
I am your possession
Unopened at your feet

Well stated argument that Thomas Picketty's recent book is another apology for what Bastiat labeled 'legal plunder.' Legal plunder is using the strong arm of the State to take from some for the benefit of others. Government is the institutional agent of plunder.

Legal plunder appeals to the envious and resentful who relish in pulling down the successful and taking their wealth. Legal plunder also appeals to politicians who can employ this philosophy for political gain.

What these groups want to do is to institutionalize legal plunder, to legitimize it. They will want to label it something else to divert weak minds from the central notion that aggression is being applied to rob people of their property.

Friday, May 23, 2014


Yeah, a storm is threatening
My very life today
If I don't get some shelter
Lord, I'm gonna fade away
--Rolling Stones

As volatility continues to drip lower, Toddo notes that lack of price movement entices market participants to ratchet up leverage in order to magnify returns. Leverage can be increased by using margin to increase position size. It can also be done by 'selling vol' via derivatives.

Such actions build 'compression' into markets. Compression is like potential energy. Highly compressed markets have great potential for unleashing stored energy. As potential energy turns kinetic, large price movements occur.

The longer low volatility periods persist, the more market participants are tempted to mistakenly extrapolate current conditions far into the future. As they become increasingly convinced that the environment has changed for the long haul, investors take on increasingly more risk via levered positions.

When prices begin to percolate for whatever reason (e.g., exogenous event, reversal of herd direction, etc), these levered positions turn against investors. As they scramble to reduce risk by shedding leverage, prices move even more, creating a reinforcing effect that catapaults volatility higher.

The process continues until market forces rebalance and the system 'decompresses.' Decompression is manifest in the volatility storm that Toddo suggests is brewing.

position in SPX

Rid the Irritation

"It is so ordained."
--Bill Briggs (Patterns)

Interesting final section in Dr J's weekly missive. Addressing those who adamantly disagree with his work and find it a constant source of irritation, Hussman 'frees' all those who disagree with his point of view to buy equities with both hands at these prices--perhaps on margin. Take as much stock off the hands of other investors as possible.

Of course, it is possible that they have already followed his advice...

position in SPX

Thursday, May 22, 2014

Gabriel Kolko

With a little perseverance you can get things done
Without the blind adherence that has conquered some
--Corey Hart

Gabriel Kolko, a 'New Left' historian, passed away earlier this week. Among his influential works was The Triumph of Conservatism (1963).

I've always felt his title unfortunate, as this revisionist work was meant to explain the increasingly cozy relationship between big business and government that began to gain strength in the late 1800s and early 1900s. This phenomenon transcended political parties. For example, Teddy Roosevelt (R) was an early instigator and Woodrow Wilson (D) was a potent integrator.

The standard line is that antitrust movements of this period were the product of federal government efforts to reign in monopolistic businesses in banking, railroads, oil, etc. These monopolies, it is said, were hurting consumer welfare and government was coming to the assistance of the little guy. Using copious amounts of empirical data, Kolko argues that the opposite occurred. Entrepreneurial entrants were gnawing away at the franchises of the Morgans, the Vanderbilts, the Rockefellers and consumer welfare was improving as competition intensified.

Seeing the writing on the wall, Big Business went to the feds willingly and requested regulation--knowing full well that such regulation would raise barriers to entrepreneurial entry and thus protect incumbent franchises from competition. And, oh yes, the business barons graciously volunteered their own people to advise and sit on the regulatory commissions.

Fast forward 100 years and the proof is in the pudding. Industry concentrations have gone nowhere but higher in heavily regulated industries.

Consumers, rather than being protected, have been rooked out of countless productivity improvements that never saw the light of day because entrepreneurs chose not to hurdle the regulatory entry barriers.

Moreover, ties between Big Business and government have become increasingly fascist in nature.

Sadly, Kolko's work has not been able to significantly alter the false narrative spun to generations of Americans. It remains an important work nonetheless that may help move mountains yet.


Kolko, G. 1963. The triumph of conservatism: A reinterpretation of American history. 1900-1916. New York: The Free Press.

Wednesday, May 21, 2014

Spinning Information

This one, he got a princely racket
That's what I said now
Got some big seal upon his jacket
--Spin Doctors

To spin is to present information with slant or bias. The objective is to mislead--to obscure the truth in some manner.

Conceptually, spin can be seen as residing at the intersection of resource dependence theory and institution theory. Because they depend on outsiders for vital resources, organizations are prone to spin information in a manner that will help them obtain the resources that they need. And because they seek to persist (i.e., to become institutionalized), organizations will spin information in a manner that supports the institutional image that they seek to maintain in the public mind.

The larger and the older the organization, the more likely that it will engage in spin. It is also more likely that larger and older organizations will employ significant resources for spinning.

The implication is that significant resources are employed by organizations to mislead and obscure truth.

Tuesday, May 20, 2014

Declining Volume

You got me running, going out of my mind
You got me thinking that I'm wasting time

One strange characteristic in the market advance since 2009 is steadily declining volume. Unlike the previous advances from 2003-2007, volume has been dropping.

Yes, it has been dropping from a spike in volume the credit market meltdown, but bull markets usually invite gradual increases in volume.

Not so this time--at least so far.

position in SPX

Monday, May 19, 2014

Conservative Hypocrisy

The impression that you sell
Passes in and out like a scent
--The Fixx

Jacob Hornberger lists various ways that conservatives voice only lip service to principles of free enterprise, private property and limited government:

Support for the drug war, which prohibits people from buying and selling what they want, and creates a huge government apparatus to enforce the prohibition.

Public schooling, which hampers markets for educational services and expands the role of government into influencing what students learn.

Immigration controls, which impair free trade between individuals, impairs and confiscates private property, and once again expands the role of government into people's decisions to cross borders.

Tariffs, embargoes, sanctions which once again impair free trade between individuals. They also protect some at the expense of others.

Social security, Medicare, Medicaid, which are socialistice programs that force some people to care for others--a blatant violation of freedom.

Economic regulations, which, like tariffs et al., impair free trade and protect the franchises of some from competition.

Militarism and the nation security state, which employ government's core competence of force in nearly unlimited fashion.

As JH observes, add these up and you obtain a gigantic, omnipotent goverment that is about as far away from 'limited government' as you can get. How long will voters keep drinking this kool aid?

Sunday, May 18, 2014

Channel Stuffing

She's driving away
With the dim lights on
And she's making a play
She can't go wrong
--The Cars

Amazing pics of new, unsold cars parked by the thousands in various locations around the world. Making products and then either holding them in FGI or working deals with downstream distributors to hold them is affectionately known as 'channel stuffing.'

No industry stuffs channels better than the carmakers.

Saturday, May 17, 2014

Deficits are Negative Externalities

Inside, outside
Leave me alone
Inside, outside
Nowhere is home
--The Who

Nice reminder that government deficits are negative externalities. A negative externality occurs when A's actions impose costs on B without B's consent.

The late Ronald Coase was one of the first economists to formally consider the externality problem.

The oft cited negative externality is pollution. For example, a manufacturer dumps waste into a river that could have negative consequences for residents living downstream.

Deficits pose a similar situation. One generation purchases goods and services through government borrowing while imposing the cost of paying back the debt on future generations.

The solution to negative externalities is often thought to be 'more government.' Indeed, helping indviduals protect property rights infringed by negative externalities is a proper role for government.

However, as the deficit situation demonstrates, it is also possible for government to sponsor its own brand of negative externalities.

Friday, May 16, 2014

Peak Complacency

Talk about things that nobody cares
Wearin' out things that nobody wears

Nice review of measures of risk appetite and complacency. Many gauges are marking extremes--risk appetite and complency are high.

Complency measures like the VIX are not good timing mechanisms. But they reflect springs coiling tighter in advance of major trend reversal.

position in SPX

Thursday, May 15, 2014

Litany of Lies

Playing me deja vu
Like a radio tune
I swear I've heard before
--Duran Duran

Leveraging former Treasury head Tim Geithner's recently published allegations that officials asked him to mislead the public about the bankrupt nature of Social Security, Judge Nap elaborates the Obama administration's propensity to lie.

Some of the more noteworthy ones:

Obamacare. You can keep your doctor and your insurance plan, the president repeatedly stated.

NSA spying. "No sir," replied Director of National Intelligence James Clapper when asked by congressional officials whether the feds were engaged in large scale spying operations on American citizens.

Benghazi. "It was a spontaneous eruption over an American film," said former UN ambassador Susan Rice.

Transparency and fidelity to the law. "Transparency and the rule of law will be the touchstones of this presidency," said Mr Obama.

Quotes from the Fast and Furious gun running and the IRS Tea Party targeting scandals would add to the litany.

The judge notes that, unfortunately, the courts have ruled that government officials can legally lie. The primary remedy is to vote them out of office.

I do believe, however, that lies under oath are a different matter. Thus, when Obama administration officials are sworn in, we observe them pleading for the protection of the very Constitution that they regularly trample.

Wednesday, May 14, 2014

Art Bubble

"That painting cost $60,000 ten years ago. I could sell it today for $600,000. The illusion has become real. And the more real it becomes, the more desperately they want it."
--Gordon Gekko (Wall Street)

The art bubble has been expanding, particularly w.r.t. contemporary art. $84.2 million would have fetched you this baby:

Chinese buying has been particularly voracious.

Similar to tulipomania hundred of yrs ago, when this bubble pops, $84.2 million deflates toward $8.42.

Tuesday, May 13, 2014


Come out upon my seas
Cursed missed opportunities
Am I part of the cure?
Or am I part of the disease?

In networking theory, coupling is the extent to which nodes are connected. The 'tighter' the coupling, generally, the greater the influence that one node has on another.

Socially, coupling can be viewed as the extent to which people are connected to each other. Using a Facebook friends analogy, someone with 500 friends is more tightly coupled than someone with five friends.

Tightening one's coupling has some benefits. It satisfies human needs for friendship and relationship building. It can broaden perspective and provide quick access to news and information.

Tighter coupling also has drawbacks. It is more difficult to think for oneself due to frequent exposure to thoughts of others. It reduces time and attention that can be allocated to personal matters. It makes people more subject to influence and control by others.

Social networking technology has made it easy for people to increase their degree of coupling. It also seems likely that this technology has increased the likelihood that many people are more tightly coupled to their environments than they should be.

Monday, May 12, 2014

Where Discrimination Can't Flourish

John Cutter: Charlie, ever play roulette?
Charles Rane: On occasion.
John Cutter: Well, let me give you a word of advice. Always bet on black!
--Passenger 57

Prof Williams uses recent racist comments made by Donald Sterling, owner of the Los Angeles Clippers, to demonstrate a point made several times on these pages. Market forces impose serious economic penalties on for-profit enterprises when they make employment decisions on any basis other than worker productivity.

Although he talks like a racist, Sterling has made employment decisions as if he has been color blind. The Clippers' three highest paid players, who pulled down $46 million last season collectively, as well as 85% of the Clippers roster, are black. If Sterling was behaving in a manner consistent with his words, then he should be employing a lily white roster.

He couldn't do so and expect to profit, of course. Black talent has dominated the sport of basketball for years. Were he to pass up superior talent of any skin color, then competitors would scoop those players up, putting Sterling at a disadvantage. Chances are that if Sterling employed an all white team, then the Clippers record would plummet as would the franchise value.

Sterling knows this. We know that he knows because of his business decisions.

Unhampered markets punish discriminatory bias. The solution to discrimination is not more rules and regulation. The solution to discrimination is to make opportunity depend on one's productivity.

Capitalism is a bigot's nightmare.

Sunday, May 11, 2014

Motherhood and Opportunity Cost

"Darling, haven't you ever heard of a delightful little thing called boarding school?"
--Baroness Schrader (The Sound of Music)

A significant factor in gender pay differences is the choice made by many women to bear and raise children. Studies suggest that highly skilled women could surrender up to 33% of potential lifetime earnings if they mother children.

From an opportunity cost perspective, lost wages can be viewed as the value that women place on motherhood. Mothers trade potential to earn market income for the opportunity to raise children.

Because of the challenges associated with child bearing and child raising, it is sometimes difficult to view this as a worthy trade.

Like all humans, however, mothers are economic actors. In addition to psychic income that can accrue from the process, staying home to raise children can bring material benefit as well. For example, cooking, cleaning, teaching and other work necessary for raising children carry real economic value. If they were not insourced by stay-at-home moms (or dads), then these activities would need to be outsourced on the market.

While outsourcing to specialists allows for efficiency gains, taking child raising activities off the market and producing in-house offers better control over the process and reduces associated transaction costs.

When insourcing is chosen, it appears that the benefits of motherhood have been deemed worthy of the opportunity costs.

Saturday, May 10, 2014

Picketty's Problem

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

Critique of some major theoretical and empirical problems with Thomas Picketty's recent work. The book that houses this work, Capital in the Twenty First Century, has lit up media channels and has become an instant hit with the Left due to its central proposition that wealth grows faster than the general economy, and therefore the wealthy keep getting richer compared to everyone else.

I do not plan to read this book, as its thesis appears consistent with crank works dating back through Keynes to Marx and Engels. Once such drivel has been decisively refuted, revisiting it is a waste of time.

Notwithstanding criticisms such as those noted in the above article, to get me to seriously consider his work, Picketty would need to satisfactorally answer questions linked to basic assumptions that underpin his work, such as:

1) Why is economic inequality undesirable? If it flows from unhampered production and trade (a.k.a. capitalism), then wealth is created when producers reduce scarcity in a manner that serves the needs of others. The world is better off when this occurs, lest there would be no trade.

To turn my head Picketty must convincingly argue why such inequality is bad rather than merely a smokescreen for the greed and envy of some seeking to employ force to benefit from the work of others.

2) How are empirical trends toward greater economic inequality a product of capitalism? If he seeks to relate longitudinal data reflecting greater inequality today, then Picketty must convincingly explain how capitalism has been also been growing commensurately. In fact, it seems easier to argue the opposite--that capitalism has been on the decline for at least a century.

What has been increasing? Socialism--a trend which explains unnatural skew in economic wealth and income.

Friday, May 9, 2014


Break it down again
So these are my dreams
And these are my eyes
--Tears for Fears

Subsidiarity is the organizing principle of decentralization. Matters ought to be handled by the smallest, lowest, most local, least centralized authority possible. Central government is relegated to a 'subsidiary' function--handling only those things that cannot be effectively dealt with locally.

Our ancestral founders understood the principle of subsidiarity to be consistent with natural law. Because the individual is sovereign and is endowed with certain inalienable rights, decentralized government is preferred over central authority. Thus the federalist design of the framers, and a constitution that granted central government limited power.

The anti-federalists worried that the framers did not decentralize enough--that the design expressed by the Constitution would enable central government to consolidate power over time. Subsequently, many of the founders including Jefferson, conceded the anti-fed's worries to be justified.

When the principle of subsidiarity is not upheld, liberty declines.

Thursday, May 8, 2014

Next Banking Crisis

So many times, it happens so fast
You trade your passion for glory

One of the more thought provoking articles I've read in some time on the basis for the next banking crisis. Peter Atwater proposes that the next crisis will not driven by too little capital since banks have been busy shoring up their balance sheets since the 2008 credit market meltdown.

Instead, the next crisis will be grounded in where banks get their funding.

Because interest rates have been suppressed to uber low levels for a prolonged period of time, banks have been converting time deposits to transaction accounts (a.k.a. demand deposits)  in order to preserve interest rate margins. Because time deposits are costlier than demand deposits in terms of interest expense and other costs, this conversion has helped bank profits.

The problem is there is little lock-in with demand deposits. A deposit book that is heavily weighted toward demand deposits is susceptible to large, collective withdrawals by depositors (a.k.a. a 'run').

To keep depositors during turbulent times, banks will have to pay more to keep customers (i.e., raise interest rates). Atwater suggests that banks have not generally planned for a scenario where deposit costs are rising at the same time that longer dated Treasuries rates are falling due to a slower economy. Net interest margins would be compressed in such a situation.

Because their investment portfolios are so large today compared to deposits, banks might counter that they could weather this situation by selling or repo-ing securities to cover deposits. However, credit markets become less liquid during economic downturns, meaning lower prices for sellers. Moreover, investment banks carry less inventory today due to changing regs and lower risk appetites and will likely be less willing to trade with depositing institutions.

Atwater also suspects that bond funds will be sources of funds to meet redemptions, meaning that fixed income managers and bank treasurers will be correlated sellers (read: selling cascade).

In the end, Atwater comes full circle, proposing that today's higher capital ratios are a function of loan loss releases and higher fixed income asset prices. Take those factors away, and capital once again becomes dear--particularly during a lending strike.

From where he sits, Atwater thinks rollover risk will be central to the next banking crisis. It is in plain sight for those willing to open their eyes.

Wednesday, May 7, 2014

Heavy Banks

Only shadows ahead
Barely clearing the roof
--Crowded House

The banks continue to trade heavy. The BKX is toying with its 200 day moving average, something that it hasn't done since the Thanksgiving 2012 lows. Multi-year uptrend line lies a couple of points below.

Stiff head wind for the broader tape...

position in SPX

Tuesday, May 6, 2014

Hedonic Absurdity

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

Confusing NYT piece that discusses hedonic adjustments to government-reported inflation data in the plight of poor people trying to make ends meet.

Hedonic adjustments are downward revisions that bureaucrats make to pricing data to compensate for quality improvements over time. For example, although you may have actually paid $1000 for a computer, the government might say that the 'real price was only $800 because you get more for computing performance per dollar today compared to years ago.

Bureaucrats apply hedonic adjustments to product and service categories from ground beef to law services to grass seed.

On the one hand, the NYT article suggests that the poor would be worse off if the performance per dollar of goods and services had not improved over the years. On the other hand, the article also notes that poor people still struggle to pay for basic goods and services.

This lobs a softball-sized question toward the NYT reporter that, unfortunately, is never asked. Why should the poor be struggling to make ends meet if hedonics have pushed real prices of goods and services lower?

The answer, of course, is that real prices aren't lower. Actual prices paid for nearly all goods and services are much higher now than just a few years ago.

Hedonic adjustments are a ruse--a way for officials to manipulate the data to cloak rising prices. Prices are rising because $trillions are being printed out of thin air. The dollars in our pockets buy less now than before.

The group that is hurt the most by this inflation and the hedonics charade is the poor.

Monday, May 5, 2014

Not Working

Oh, that ain't workin'
That's the way you do it
Get your money for nothing
Get your chicks for free
--Dire Straits

Zero Hedge continues to be all over the decline in the labor force participation rate. The labor force participation rate is the fraction of working age persons who are employed or looking for work.

Historically, those people not counted in the labor force participation rate have been mainly students, homemakers, and early retirees.

All else equal, it is desireable for the labor force participation rate to be as high as possible. More workers mean more production. More production means more economic resources. More economic resources mean higher standard of living.

Conversely, less people working means that those who do work must work harder in order to support both themselves and non-workers--unless those non-workers amassed a hoard of resources to live from in advance of exiting the workforce (unlikely).

In the US, the labor force production rate continues to decline. And while headline job numbers deceptively improve, we are printing generational lows in workforce participation:

Conveniently, less people in the work force make headline job numbers look better. Not only are people leaving the workforce no longer counted as unemployed by current methods, but they also provide less near term competition for those looking for work:

Currently, more about 92 million working age Americans are not working:

Of the 'traditional' non-working groups noted above, it seems that only more early retirees could explain some of secular trend currently in motion.

The other obvious contributing group, one that media and officials are reluctant to mention, is the growing number of people who are on the dole.

Sunday, May 4, 2014

Bureaucratic Blizzard

"Thank God it's not a bullshit detector or none of us would get in."
--Susan Atwell (No Way Out)

Great article on the thousands of reports due to Congress every year--many if not most of which go unread. Here is a more detailed breakdown of various reports issued and a review of the Dog and Cat Fur Protection report highlighted in the article.

A couple of brief points:

Today's out-of-control paper blizzard situation was all too predictable back in 1792 when Congress requested its first report.

Some might argue that bureaucracy exists in all organizations, so its presence in government is nothing unique. Indeed, any organization is susceptable to bureaucratic bloat. In unhampered markets, however, the heat is always on to reduce bloat. Competitive environments drive organizations to squeeze out bureacracy in never ending pursuit of productivity gains. Wasteful practices can only persist where there is no pressure for productivity improvement. Government is one such place.

It is hard not to imagine what could be done with the resources squandered to satisfy Washington reporting requirements. The article cites a 1993 estimate of $100 million to prepare congressional reports. I would not be surprised if today's cost was 5+ times that amount--i.e., at least one half trillion dollars. This report on the Social Security Administration's annual printing activities takes nearly 100 employees 3 months to complete.

Those economic resources could feed a lot of people...

Saturday, May 3, 2014

Not Good

"It would be well for your government to consider that having your ships and ours, your aircraft and ours, in such inherently DANGEROUS."
--Jeffrey Pelt (The Hunt for Red October)

After dozens were killed yesterday after street battles erupted from pro-Russian demonstrations in Odessa, Putin's finger tightens on the trigger.

As the map above shows, his guns point squarely at Ukraine.

Increasingly difficult to imagine how pseudo war skirmishes don't morph into genuine war battles. Soon.

Friday, May 2, 2014


You forget I've seen you work before
Take 'em straight to the top
Leave 'em crying for more
I've seen you burn 'em before
--Pat Benatar

Although the Dow and SPX are testing all-time highs, not everything is in synch. The NASDAQ has been trading heavy, with traders rotating out of tech names in favor of big cap stability.

However, the banks are also weak. Hard to imagine a sustainable lift in SPX without these names.

Both the COMP and BKX charts also have a head-and-shouldersy look to them.

Technicians call situations where indexes do not trade in synch 'divergences.' Such inconsistencies suggest caution.

position in SPX

Thursday, May 1, 2014

Record Corporate Cash, er, Debt

The deception with tact
Just what are you trying to say?
--The Fixx

Pundits like to tout 'record cash' on corporate balance sheets. They ignore, however, a primary source of that cash: borrowing.

In this age of financial repression, voracious appetite for yield has pressed borrowing costs to epic lows. This, in turn, has sparked an orgy of corporate bond issuance.

Thus, while cash levels seem high, when judged relative to the amount of debt taken on to fund those cash levels, cash levels are at historic lows.

Corporate debt and leverage are at historic highs.

no positions