Friday, October 31, 2014

BOJ's Halloween Surprise

"It's the chocolate covered finger of a man named Clark!"
--Mary Sanderson (Hocus Pocus)

Bank of Japan's trick last night of announcing an added $10-20 trillion/yr purchase of bonds and other assets resulted in a treat for world financial markets. World stock markets howled higher overnight and investors hopped on their broomsticks to carry US equity markets to alltime highs.

Naturally, gold dropped to new lows for the move.

The question of what happens once the costumes are put away remains. Once confidence in central bank monetization policies recedes, then the real fright begins.

position in SPX, gold

Thursday, October 30, 2014

QE3 Beneficiaries

Everybody stop
Hey, what's that sound?
Everybody look what's going down
--Buffalo Springfield

The FOMC announced yesterday that its bond buying program known as QE3 would indeed end this month. Who has benefited most from this program? The big banks--both domestic and foreign.

Since the onset of QE3, bank reserves have increased by $1.3 trillion. This is money printing, pure and simple.

Most of this has flowed to the big banks.

There was no room at the inn, it seems, for smaller banks. Their competitive position has been weakened w.r.t. the big guys as a result of QE3.

How this form of corporatism remains invisible to the general public continues to amaze.

Wednesday, October 29, 2014

Six Sigma Days

Bits of my creation
Is it real?
--Oingo Bingo

For me, six sigma days are those where so many things stray from normalcy or expectations that the probability or likelihood of their joint occurence seemingly approaches the six sigma level of .00034% (3.4 parts per million).

Yes, variety is the spice of life.

Of course, chaos can be seen as the ultimate experience of variety...

Tuesday, October 28, 2014

Robot Fallacy

The problem's plain to see
Too much technology
Machines to save our lives
Machines de-humanize

Another refutation of what might be called the 'robot fallacy'--i.e., the wrongheaded proposition that machines installed to improve productivity will permanently displace workers.

Versions of this theory have been floated for hundreds of years and have been put down for hundreds of years.

What I like about this particular refutation is its focus on entrepreneurial calculation. Entrepreneurs constantly seek to employ capital in manners that will return more than the capital's cost. Thus, entrepreneurs constantly look for new ways to satisfy customers.

If customers believe that they will be satisfied, then they will trade with the entrepreneur. Customers trade portions of their income, obtained thru productive effort (of their own or of someone else's) for the goods and services offered by the entrepreneur.

However, this exchange can only occur if customers have been sufficiently productive to generate income for trade.

The robot fallacy basically proposes that the aggregate decisions of entrepreneurs to install machines to boost productivity will lead to a situation where the entrepreneurs will possess capital that is essentially worth nothing because there will be few buyers willing to afford the goods and services produced by robot-laden processes.

This is unlikely.

Because capitalism is a self regulating process, if their incomes are falling because customers are not buying their products, then entrepreneurs will cease allocating capital to processes that are not providing adequate returns on investment. Entrepreneurs will not purchase and install equipment to produce products for which there is no market.

Instead, as environmental uncertainty grows, it seems likely that entrepreneurs will employ more humans to do work. Human labor is far more versatile than machinery, and it can move rapidly in response to greater opportunities in turbulent times.

What bothers me is that we are seeing continued capital investment in many industries despite rising levels of environmental uncertainty that would seemly discourage high fixed cost investments. Capacity continues to climb at rates that outstrip demand, causing secular decline in capacity utilization.

The self regulating mechanism does not seem to be working properly. My sense is that interventionary forces are throwing off entrepreneurial calculation. In part, these interventions create moral hazards. Entrepreneurs take more risk than they should when they think that their behavior is being subsidized or insured.

Robots can be over-employed only in hampered markets that distort entrepreneurial calculation.

Monday, October 27, 2014

Failing Rallies

Dr Alexander Denny: You know you don't have to do this.
Doug Carlin: What if I already have?
--Deja Vu

Interesting analysis by John Hussman of the rigorous rallies that often follow initial technical breakdowns of secular trends and major subsequent declines. He shows the failing patterns at work in 1929, 1972, 1987, 2000, and 2007.

We'll see whether history once again rhymes in the present case.

position in SPX

Sunday, October 26, 2014

Info Tech and Invasion of Privacy

"There goes the Fourth Amendment...or what's left of it."
--Carla Dean (Enemy of the State)

Last Friday's Blue Bloods episode included a scene where a waiter secretly videotapes a conversation Henry Reagan is having with an old friend, and then posts it on the YouTube. Because the conversation includes some politically incorrect anecdotes, the elder Reagan is later chastised by the NYPD PR guy for his lose lips in a public place.

Henry countered that what was done amounted to an illegal wire tap--invasion of a private conversation.

He's right. Technological advances do not give an individual the right to peer into (and share) a conversation between two people that is meant to be private--even if that conversation is held in a public place. No different than tapping phones or peeping Toms.

This is a fourth amendment issue. Convict one YouTube poster (or one NSA agent) and info tech becomes less harmful and more helpful.

The right of all individuals to be secure in the person and possessions is insecure until then.

Saturday, October 25, 2014

Economics for Youngsters

They're seeing through the promises
And all the lies they dare to tell
Is it heaven or hell?
They know very well

Some lessons in economics for youngsters offered by the late great Leonard Read. Not sure I'd pick the same items, but the notion of structured lessons in elementary economics and finance seems essential.

The young generation is going to need all of the economic and financial literacy it can assimilate to right the wrongs being done by adult generations.

Friday, October 24, 2014

Today's Stock Pools

"To be normal, to drink Coca-Cola and eat Kentucky Fried Chicken, is to be in a conspiracy against yourself."
--Jerry Fletcher (Conspiracy Theory)

Back in the 1920s groups of speculators joined together in 'stock pools' to manipulate stock prices. These syndicated operators sought to push prices around in order to attract uniformed investors--particularly trend followers. Ultimately, the goal was to 'fade' naivety, meaning selling when the uninformed were buying or vice versa.

I wonder whether stock pools might not be with us again. Rather than being groups of private investors, however, might today's stock pools be government-led syndicates?

The government-network would seek to operationalize non-economic agendas. For example, the goal could be to levitate security prices under the assumption that people view higher stock prices as indicators that economies (and government policies aimed at improving them) are ok. Stated differently, the goal would be to prop up public confidence using methods that could be viewed as unconventional propaganda.

Government officials could operate stock pools directly, or work via networks of carefully selected agents.

The key question, of course, is how such pools would work. A number of key parameters would have to be met. For example, presumably, these operations must be covert lest the public would see the naked emperor.

Hopefully, we'll entertain this question in future posts.

position in SPX

Thursday, October 23, 2014

Dollar v Gold

We're talking 'bout the dollar bill
Now what are we all to do
When the money's got a hold on you?
--Simply Red

Many have been blaming the US dollar's recent rally for weakness in gold. The idea is that gold is the 'anti-dollar.' As the value of the dollar drops, then more are required to buy an ounce of gold.

For perspective, I pulled monthly charts for the USD and gold since 1990.

One can see that the dollar rally, which began earlier this year, merely brings the USD toward multi-year resistance in the 87ish zone. However, the USD remains on the lower end of its range since 1990.

Gold, on the other hand, has pulled back about 40% from a hyperbolic move that ended in 2012. Yes, much of that move corresponded to the dollar's decline from high to low between 2002 and 2008. And that will have an outsized influence on statistical correlations calculated between the two series. But eyeing these two charts clearly suggests that other factors have influenced gold price besides the changes in the USD.

Stated differently, viewing gold's movement as the function of dollar movement presents an incomplete picture of the dynamics at play.

position in gold

Wednesday, October 22, 2014

The Fed Crutch

When the good times never stay
And the cheap thrills always seem to fade away
When will we fall?
When will we fall down?
--Toad the Wet Sprocket

Read this piece to gain a sense of the moral hazard created by Fed policies. Increasingly, market participants think that the Fed has their backs in the event of price declines. This causes market participants to take more risk than they would in 'uninsured' markets.

The author suggests that the "emergency is over" and Fed policies to backstop investors are no longer necessary. If the Fed does not withdraw these policies, "markets will never stand on their own feet again."

Because markets have been leaning on the Fed crutch for years, taking the crutch away will likely cause markets to fall a few times before they learn to stand on their own.

Tuesday, October 21, 2014

Economic Malpractice

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

Prof Walter Williams discusses the epidemic of economic malpractice related to minimum wage laws.

What these pages have frequently viewed as basic ECON 101 principles, Prof Williams calls the first fundamental law of demand. The higher the price, the lower the demand, and vice versa. The higher the price, the less people will buy, and the lower the price, the more people will buy.

This law is grounded in basic axioms of the human condition.

Thus, we know that when the price of jewelry, cars, houses or any other scarce resource capable of satisfying human needs and wants increases, demand will decrease.

Yet, the argument put forth by proponents of minimum wage laws is the opposite. Raising the price of labor will not change employer demand--in fact it might even increase it.

To any reasoning mind, such a proposition should ring hollow. After all, if raising labor prices slightly prompts no reduction in worker demand, then why not raise wages to the moon? Why stop at the current legal minimums if buyers will take the same amount of labor or more at higher prices?

The train of thought is silly, of course. Meanwhile, proponents of minimum wage laws scratch their heads and demonize employers that implement automation and/or move jobs offshore in response to laws that raise minimum wages. These individuals either don't understand or simply ignore the reality that minimum wage laws constitutue compulsory unemployment.

As Prof Williams observes, economists who contend that the first law of demand doesn't apply to wages are engaging in economic malpractice.

Monday, October 20, 2014

Worldwide Ebola Cases

Crossing that bridge with lessons I've learned
Playing with fire and not getting burned

Graphic shows current number of confirmed Ebola cases worldwide. Judging by current intensity of media coverage, my guess is that most people would be 'over' if they were asked to estimate how many cases currently existed.

Not to downplay the severity of the epidemic. Worldwide death toll has topped 4500, and mortality rate for those infected is 70%.

Moreover, am scheduled to fly to Tampa via Atlanta in about a month for a conference. The thought of imposing a personal airline travel ban has crossed my mind more than once.

Sunday, October 19, 2014

Fountain of Youth

They put a parking lot on a piece of land
Where the supermarket used to stand
Before that they put up a bowling alley
On the site that used to be the local Palais
--The Kinks

Interesting pic of Fountain Square circa 1962. View is looking south across Fifth Street. Where the Albee Theater once stood the Westin Hotel stands today. The bottom of the Carew Tower can be seen at the far right at the corner of Fifth and Vine. The fountain itself, of course, has been moved multiple times over the years.

The Albee Theater, which opened on Christmas Eve 1927, was razed in 1977. On a grade school class field trip, I visited the Albee to see a show. Can't remember the show, but I remember how grand the building looked both inside and out.

Have to agree with the caption. I like the look of Albee-backdropped Fountain Square compared to the post-modern current one.

Saturday, October 18, 2014

Seated Liberty Half Dollar, 1839-1891

"It's a giant of a human thing."
--Paul Scott (The Valley of Decision)

Commencement of half dollar production in the United States began with the Flowing Hair series, followed by the Draped Bust and Capped Bust half. As he tinkered with the Capped Bust design in the late 1830s in light of new steam power mint technology, engraver Christian Gobrecht grew restless for new designs that he could develop on his watch.

Between 1837 and 1840, Gobrecht's influence became apparent. Inspiration for a new half dollar came from noted portraitist Thomas Sully, who had fashioned a neoclassical design originally intended for silver dollars, but subsequently adapted for lower denominations as well.

1856-O Seated Liberty Half Dollar PCGS AU55 CAC

The obverse featured a head-to-toe rendition of Ms Liberty seated on a rock. Her right hand rests on a shield and her left hand grasps a staff topped by a Liberty cap--a symbol of preparedness and freedom. Thirteen stars surround the top and the date appears at the bottom.

The reverse is essentially the same design developed by Gobrecht for the final Capped Bust 'reeded edge' variety. A shielded eagle looking left holds an olive branch in one talon and three arrows in the other. UNITED STATES OF AMERICA surrounds the top, and HALF DOL. below.

Diameter: 30.6 mm
Weight: 13.36 g
Composition: .90 silver; .10 copper
Edge: Reeded

In 1853 the weight of the Seated Liberty half was decreased slightly to 12.44 grams to conserve silver. Diameter and silver/copper composition remained the same. To signify the change, coins minted in 1853 included small arrowheads on either side of the date on the obverse, and rays above the eagle on the reverse. The 'Arrows and Rays' variety was born.

1853 Seated Liberty Half Dollar PCGS AU58 Arrows and Rays

The Arrows and Rays variety was shortlived, however, because circulation wear on the reverse rays was deemed excessive. In 1854, the reverse rays were removed although the obverse rays remained.

1854-O Seated Liberty Half Dollar PCGS AU58 Arrows

In 1856, the arrows were removed, presumably because the reduction in coin weight had become common enough knowledge that the special designation was no longer necessary. The design reverted back to the original 'No Motto' look.

It remained that way until 1866 when IN GOD WE TRUST was added to the reverse. The motto appears in a scrolling ribbon above the eagle. The motto remained on the Seated Liberty half for the remainder of the series.

1880 Seated Liberty Half Dollar PCGS PR63 CAM

In 1873, the weight of the The Seated Liberty half was increased from 12.44 grams to 12.50 grams. The increase was signified once again by adding arrowheads on either side of the date. The 'Arrows' variety lasted two years. In 1875 the arrowheads were removed, and the design remained constant until the series ended in 1891.

1874 Seated Liberty Half Dollar PCGS AU53 Arrows CAC

Save for collectors, the Seated Liberty half seems an obscure coin. After all, it was minted before any American living today was born. However, this series enjoyed a run unequaled among United States half dollars with high silver content. Struck from 1839 to 1891, it circulated from Antebellum thru Civil War and Reconstruction periods. It facilitated commerce during times of spectacular growth in industrial production and standard of living.

The tenure of the Seated Liberty half dollar spanned one of the most remarkable periods in American history.

Friday, October 17, 2014

Household Net Worth

Oh it's too easy to live like clockwork
Tick tock watching the world go by
Any change would take too long
So dry your eyes

Taken from this article, the below chart plots US household net worth (HNW) since the early 1950s. Fairly stable at around 350% of GDP until the late 1990s, when HNW began increasing toward 500% in fits and starts.

The obvious question: How is it possible for households to gain wealth in increasing proportions to overall production? Generally, real productivity improvements should increase output and wealth simultaneously. Plausibly, higher savings rates might generate proportionately more wealth as those savings are invested in productive capital. But we know that US savings rates have been going down, not up.

The answer is that this isn't about changes in real wealth. It is about paper wealth gains. Inflationist policies have distorted the asset side of balance sheets--i.e., assets appear more valuable than they really are.

Overlay a chart of the SPX on the HNW line since the mid 1990s and you'll get the picture.

You can be certain that policymakers get the picture as well.

position in SPX

Thursday, October 16, 2014

Pavlovian Bail Out Cries

You've gone too far this time
But I'm dancing on the Valentine
I tell you somebody's fooling around
With my chances on the danger line
--Duran Duran

No market has likely been more laden with moral hazard than the present one. One indicator of this is constant chatter among market participants and pundits about fresh intervention by the Fed whenever prices meaningfully weaken.

"Prices are lower, give us a bail out."

This has been a reflexive response, similar to the Pavlovian bell, learned and reinforced from numerous cycles of price declines and subsequent interventions.

Consequently, market participants have ratcheted up their risk profiles under the assumption that policy-makers have their backs.

The higher the risk profile, the quicker the Pavlovian response to lower prices and losses.

Wednesday, October 15, 2014

Contagion and Moral Hazard

"You can't make a dead person sick."
--World Health Organization Doctor (World War Z)

Another reason why government is not very capable at containing infectious disease: moral hazard. Many people believe that it is indeed government's role to protect them against infectious disease. They believe that government is acting on their behalf to keep them safe, and that those actions will be effective.

Because they believe that government has their back, people take more risk than they otherwise would w.r.t. actions that might expose them to harmful pathogens. "If it wasn't safe," people reason, "authorities wouldn't permit the action." And, "Government will let me know what to do."

So people think less critically on their own and act more foolishly, thereby raising the probability that they will become infected.

Stated differently, confidence in government causes people to take more risk, which likely exacerbates contagion.

Liberty for Disease Control

"Somewhere in the world, the wrong pig met up with the wrong bat."
--Dr Erin Mears (Contagion)

Ron Paul argues that it is liberty, not government, that is capable of containing infectious diseases such as the Ebola virus. Countries plagued with infectious disease are usually marked by strong central governments and chronic war. Such countries lack the capital necessary to build strong healthcare infrastructure.

Sadly, US foreign policy has tended to prop up dictatorships and promote militarism in these countries. Moreover, President Obama's recent move to send US troops to West African countries to help contain the Ebola disease was done without Congressional approval for this overseas military deployment. Once again, no specifics were provide as to the duration, cost, or even Constitutional basis of this mission.

The people of Liberia and other afflicted nations would be better off if the US government let these countries alone. This does not mean that people around the world should ignore this problem. Instead, it means that private capital and other assistance in the form of industry and charity should be free to voluntarily mobilize to address the problem.

Private investment and trade would help develop strong healthcare infrastructure. Airlines would be free to protect passengers from disease (lest the carriers lose business) while providing safe means of transport for people seeking treatment in the US (which removes incentive for refugees to lie about exposure to the disease). Experimental medicines should not be hindered by regulatory barriers such as those erected by the FDA's cumbersome approval process.

Limiting goverment is the best way to protect and improve health both here and abroad.

Tuesday, October 14, 2014

Resource Dependence Theory

You can't always get what you want
But if you try sometimes you just might find
You get what you need
--Rolling Stones

Resource dependence theory (Pfeffer & Salancik, 1978) posits that organizations engage in exchanges with other entities in their environment to obtain important resources. And because few organizations are self-sufficient with respect to such resources, this situation leads to conditions of interdependence. Interdependence occurs when one actor does not control all conditions necessary for achieving an action or desired outcome (Handfield, 1993).

Faced with external uncertainties, organizations will seek to create negotiated environments (Cyert & March, 1963). When acquisition of important resources is questionable, organizations will reduce uncertainty and manage dependence by structuring exchange relationships in a manner that establishes formal and informal links with other entities (Pfeffer & Nowak, 1976).

These links can often be seen as means for increasing the extent of coordination between exchange partners. In a sense, organizations seek closer ties to obtain 'collaborative advangage' (Kanter, 1994). Organizations operating in more uncertain environments have greater need for closer relationships with suppliers (Pfeffer, 1972).

Organizations might use various strategies for managing their resource environments to reduce uncertainty (Pfeffer, 1972). These strategies include cooptation (absorbing representatives of powerful groups into the organization), long term contracts, illegal collaboration (e.g., price fixing, conspiracies), joint ventures, and using the power of the state (e.g., obtaining subsidies, entry barriers, price floors/ceilings), and mergers.

It should be noted that dependencies that must be managed extend beyond material resources. For example, status, reputation, and legitimacy are vital resources that must be acquired from external sources as well (Eisenhardt & Schoonhoven, 1996).


Cyert, R.M. & March, J.G. 1963. A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice-Hall Inc.

Eisenhardt, K.M. & Schoonhoven, C.B. 1996. Resource-based view of strategic alliance formation. Organization Science, 7: 136-150.

Handfield, R.B. 1993. A resource dependence perspective of just-in-time purchasing. Journal of Operations Management, 11: 289-311.

Kanter, R.M. 1994. Collaborative advantage. Harvard Business Review, 74(4): 96-108.

Pfeffer, J. 1972. Merger as a response to organizational interdependence. Administrative Science Quarterly, 17: 382-394.

Pfeffer, J. & Nowak, P. 1976. Joint ventures and interorganizational dependence. Administrative Science Quarterly, 21: 394-418.

Pfeffer, J. & Salancik, G.R. 1978. The external control of organizations: A resource dependence perspective. New York: Harper & Row.

Monday, October 13, 2014

Didn't Take Long

Stop playing with my heart
Finish what you start
When you make my love come down

The battle of SPX 1900 didn't take long. After an early sell-off reversed toward green mid-day, the bulls perhaps thought that they had carried the day.

However, the bears mounted a counter offensive in the afternoon. Selling returned and then accelated with markets closing on their lows once more. SPX 1900 gave way easily, again on escalating volume.

Previous support now becomes future resistance. Frankly, given the market's straight-up move since November 2012 (when the SPX traded at 1350), there are no compelling technical support levels between here and there. Best I can find is marginal support at 1750ish.

As Fleck noted tonight, given the technical damage, "the door to the downside is now wide open, as the pressure on the bulls begins to ratchet up."

position in SPX

Rationalizing State Aggression

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

Statists are people who believe in using the strong arm of government to take from some and give to others. This is aggression.

Since most people do not like to view themselves as proponents of violence, this aggression must be rationalized away. Statists employ various rationalization strategies.

One is to simply ignore the truth. Some statists rationalize that they are proponents of peace, and their actions are not violence of any kind. Perhaps the fact that statists employ strong armed agents to do their bidding, rather than engaging in acts of aggression directly, serves to perpetuate this delusion.

Another is self-defense. Statists justify their use of force as defensive in nature. They are 'protecting' people who have less against those who have more. This rationale ignores, of course, the fact that those who have more are not aggressing on those who have less.

Finally, there is the 'good aggression' rationale. Yes, the state engages in aggression. But it is for the 'greater good.' Offensive force is necessary in order to maintain civility.

These rationalizations institutionalize state aggression in society.

Sunday, October 12, 2014

Beta Bust

You gotta fast car
Is it fast enough that we can fly away?
We gotta make a decision
Leave tonight or live and die this way
--Tracy Chapman

In the daisy chain of financial markets, the weakest links are the first to go. In 2000 it was the dot coms. In 2007 it was sub prime mortgages.

This time around the harbinger may be small cap stocks. After being the fast cars on the way up for years, they are now being sold the hardest.

The Russell 2000 Index is more than 10% off its highs and has broken numerous technical support levels.

Beta going bust appears to be leading to the downside.

position in SPX

Saturday, October 11, 2014

Savings Story

Maybe someday, saved by zero
I'll be more together
--The Fixx

Irwin Schiff, father of Peter Schiff, authored one of the best economics books ever the form of a comic book. The book, How an Economy Grows and Why It Doesn't, centers on the role of savings in improving prosperity.

Built around the lives of three boys trying to live on an island, the story is a familiar one to these pages. Saving, a.k.a. abstaining from consumption so that resources can be allocated to productivity improvement projects, is vital to living better. Saved economic resources provide capital. In fact, there is no other way to generate capital. When the boys in the story save, a virtous cycle for prosperity is set in motion.

Schiff also explains how interventionist policies destroy this virtuous cycle. Envy and greed increase when someone takes a risk (less consumption, investing savings) and improves productivty. Greater stock of wealth becomes an opportunity for some to get more for less. Taxes, redistribution, and other forms of legitimized theft rob the system of savings and use it for consumption rather than for investment purposes. When capital is consumed, the virtuous cycle slows to a halt. Plus, legalized theft provides disincentive for savings.

Prosperity is reversible. Without savings, it is possible to return to the hand-to-mouth existence of the three boys in the Schiff's story.

Friday, October 10, 2014

And Here We Are

Don't you know we're playing with the fire
But we can't stop this burning desire
--Donnie Iris

Volatility continued today with futes deep red then bought to green. Once stock markets opened the happy face was sold and then bought such that the Dow and SPX were green.

But then selling commenced in the afternoon and was steady for the remainder of the session, with indexes closing on the lows. Volume again escalated.

And here we are. The SPX is toying with the aforementioned 1900 level and perched on its 200 day moving average.

Short term stochastics suggest an oversold bounce. If it doesn't arrive early next week, then things could get ugly...

position in SPX

Climate Conflict

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

Just another in a growing pile of work that questions conclusions viewed as 'fact' by the mainstream global warming crowd. The mainstream crowd, of course, ignores these and all contradictions that stress their paradigm. Confirmation bias at its finest.

Thomas Kuhn would be proud.

Thursday, October 9, 2014

Whippy Trippy Vol

"One minute you're up half a million in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley."
--Louis Winthorpe III (Trading Places)

Been a while since we've seen three consecutive days like this. Dow down 270, then up 270, then down 330. Increasing volume too.

Vols this whippy often portend big moves--particularly in the form of big trend reversals. The intuition is that markets may be in the process of shaking off a long prevaling sentiment--which in this case has been wildly bullish for years.

SPX 1900 remains the important technical bogey below.

position in SPX

Confidence in the Fed

I met my be-bop baby at the union hall
She could dance all night and shake the paint off the walls
But when I saw her smile across the crowded room, yeah
Well I knew we'd have to leave the party soon
As the band began to play out of tune

Important piece by Fleck that should be read multiple times by those seeking viewpoints on how a significant market decline could coalesce from here.

Central to his thesis is that confidence in the Fed and other central banks is currenly high, and declining prices would destroy investor confidence.

Confidence can be seen as faith in someone or something. In the Fed's case, confidence can be viewed as faith that the Fed knows what it is doing and that its actions will help deliver long term prosperity.

Surely, many of those currently invested in financial markets have confidence in the Fed.

However, there are surely also many invested in financial markets who have little confidence in the Fed. They have no faith that the Fed knows what it is doing or that it can deliver long term prosperity.

Why, then, are these folks invested in financial markets? Because they believe that Fed's inept easy money policies, while potentially ruinous to markets and economies over the long term, are a source of profits in the near term. They are employing the Chuck Prince strategy of dancing as long as the music is playing.

The confidence of this group manifests not in the Fed, but in their ability to exit the dance before the music stops.

The combination of both groups reflects moral hazard writ large--likely in epically large font.

From a timing standpoint, it seems that loss of exit confidence seems likely to precede loss of confidence in the Fed.

position in SPX

Wednesday, October 8, 2014

Tone May Be Shifting

Don't think sorry's easily said
Don't try turning tables instead
You've taken lots of chances before
But I'm not gonna give anymore
--Alan Parsons Project

Tone of the tape continues to feel as if it may be shifting. Slowly. From buying dips to selling rallies.

Technicians will surely be eyeing SPX 1900, which roughly corresponds to both the 200 day moving average and the long term uptrend support.

A decisive break of this level would put Hoofy on the defensive.

position in SPX

Monday, October 6, 2014

Defining Demand

Do what they say
Say what they mean
One thing leads to another
--The Fixx

It is often said that "supply follows demand." Seems intuitive. Producers sense demand for a particular good or service and then act appropriately.

However, to engage in trade, production must precede demand. Individuals must produce something of value that can be offered in exchange for goods and services desired. So, seemingly, "demand follows supply."

Seemingly, demand has to be defined more precisely to rectify these two positions. Demand can be seen as 'want.' Because human desires are axiomatically insatiable, demand in this sense is pervasive, which gives credence to the "supply follows demand" aphorism. Suppliers need to determine what demands rest on top of consumers' buying lists.

Demand in the "demand follows supply" sense reflects more of a 'readiness for trade.' To be ready for trade, a prerequisite--production--is necessary in order to create a tradable position.

Zimbabwe Vision

Well, we barely made the airport for last plane out
As we taxied down the runway we could hear the people shout
They said, "Don't come back here Yankee!"
But if I ever do, I'll bring more money
'Cause all she wants to do is dance
--Don Henley

Patrick Barron suggests that the US is heading toward a Zimbabwe moment. We're printing dollars to cover obligations that cannot be covered out of income. The effect of this money printing is delayed because the USD is the world's reserve currency, and central banks worldwide have been purchasing money of these dollars in the name of beggar thy neighbor mercantilist policy.

I would also add that the transmission mechanisms for much of this inflation, QE money laundering and the credit creation ponzis, have largely confined the new money to the financial system where it has thus far inflated only financial security prices.

This Cantillon effect cannot last forever. When dollars make their way into everyday markets for goods and services, it is likely that price increases for goods and services will be quick and steep.

Sunday, October 5, 2014

Era of Economic Ignorance

"We're entering a new age, pal."
--Gordon Gekko (Wall Street)

Interesting interview with Jim Grant. Two points to note here. One is his early observations is aligns with what we have noted on these pages--that the natural direction of prices is lower--not higher. As productivity improves, more output is created per dollar, which means unit prices decrease.

That people generally believe otherwise reflects the poor economic education delivered in this country. Entire generations appear to have been duped.

Later in the interview Grant suggests that we are currently in an era of 'central bank worship.' Confidence in what monetary bureaucrats can do to 'save' or 'help' economies is at epic levels.

Perhaps a better label for this period is era of economic ignorance.

Saturday, October 4, 2014

Anti-Gun Irony

"The biggest arms dealer in the world is your boss--the president of the United States."
--Yuri Orlov (Lord of War)

The anti-gun crowd is not anti-gun. Rather, the anti-gun crowd needs guns in order to advance their agenda. The anti-gun crowd needs to arm government agents with guns, lest its agenda could not be enforced.

The anti-gun crowd wants to create a monopoly on gun use.

Thursday, October 2, 2014

Complacency and Moral Hazard

Time are tough now
Just getting tougher
This old world is rough
Just getting rougher
Cover me
--Bruce Springsteen

NYU professor Nouriel Roubini discusses complacency of investors in the midst of risky market environments. He concludes that market participants have generally never been adept at pricing in low probability but high impact events (a.k.a. 'tail risk).

He's correct. We're not all that great at risk management for low probability events.

However, Professor Roubini ignores the influence of moral hazard in today's markets. Investors have learned that governments tend to come to their rescue when prices significantly decline.

If you believe that someone has your back and will cover your losses in the event of a decline, then you will take more risk than you otherwise would. And you would skimp on purchasing insurance to cover downside risk. After all, why self-insure when someone else is willing to insure you?

The problem, of course, is that the other entity may not have the capacity to cover your losses in the event of decline.

Moral hazard invites excessive risk taking followed by excessing loss taking.

position in SPX

Wednesday, October 1, 2014

Declining Savings

Hans Gruber: Who are you, then?
John McClane: Just a fly in the ointment, Hans. The monkey in the wrench. The pain in the ass.
--Die Hard

The monkey in the wrench of any current secular economic growth story continues to be declining savings. Present policies encourage consumption over savings. This is the worst thing we could do given our chronically low and shrinking savings position.

Savings are the lifeblood of economic improvement. Without savings there is no capital for productivity improvement. We are currently engaging in capital consumption rather than capital formation.

Poor countries are not poor because they lack formal education. Know how can be transferred informally. In fact, formal education requires savings and capital.

What poor countries lack is savings that can be applied toward productivity improvement (increased wealth generation).

We are becoming a poor country.