Monday, February 29, 2016

FBI vs Apple

"The government's been in bed with the entire telecommunications industry since the forties. They've infected everything. They get into your bank statements, computer files, email, listen to your phone calls. Every wire, every airwave. The more technology used, the easier it is for them to keep tabs on you. It's a brave new world out there--at least it'd better be."
--Brill (Enemy of the State)

Ron Paul discusses the FBI's demand that Apple provide a back door passcode to allow the feds to access the iPhones of suspected terrorists. Any liberty lover recognizes this for what it is: an attack on property and privacy rights as elaborated by the Fourth Amendment.

Apple has built its business in part on the superior security features of its products. Government wants the company to compromise its competitive position by weakening its secure systems. The damage to both Apple and to individuals seeking to secure their person and possessions from unwarranted search and seizure should be obvious.

Safety is not a natural right; liberty is. Government's proper role is not to keep us safe from terrorists. It's proper role is to help us maintain our liberty.

The cancerous spread of government aggression against liberty in the name of national security must be stopped before the condition becomes terminal.

Sunday, February 28, 2016

Song of Survival

I'm singing this note 'cause it fits in well
With the way I'm feeling
There's a symphony that I hear in your heart
Set's my head a reeling
--The Who

Yesterday I went to see Song of Survival, a play about women imprisoned during WWII in Southeast Asia by the Japanese. The performance was put on by my niece's high school. My niece played the role of Sylvia and had one of the larger speaking parts.

The play tells the story of how hundreds of women coped with years of captivity under conditions of extreme scarcity. Scarcity, of course, is the fallback condition of the planet. When people are free to improve their situation, however, they are prone to do so thru voluntary cooperation--i.e., thru production and trade.

By definition, confinement in prison restricts that freedom. This was particularly so for these women because their Japanese captors severely limited access to resources that would help the ladies improve their situation. For example, Red Cross packages containing food and medicine were confiscated by the prison guards.

Although starvation and disease claimed hundreds lives, many women endured years of these conditions until the war ended in the summer of 1945. How did they do it?

Well, despite their restricted environment, they still managed to engage in production and trade.

They traded physical goods. Although economic resources were in extremely short supply, the women still found opportunities for mutual exchange. A piece of cloth for some grass tea. Tidbits of food for some string or ribbon. Although we would surely consider most of what was traded as 'worthless,' these women clearly found such exchange valuable.

More importantly, the women traded intangible 'goods' such as encouragement and optimism. They comforted each other. They told each other that they would make it. That the war would end soon. And they sang to each other. Beautiful songs and performances that even won gratitude from some of their captors. Absent being able to exchange sources of psychic income, it seems unlikely that most would have endured.

The story nicely demonstrates how markets spontaneously arise even in the harshest of circumstances to the mutual benefit of those involved.

Economic lessons aside, the feeling that overcame me during the performance was one of desperation. I desperately wanted to help the women escape. I wanted to pass them my knife, take out some guards, blow a hole thru the prison fence. My mind raced to devise ways get those ladies out of there so that they could be free.

Meanwhile, they were getting sick and dying left and right. I hated that feeling because I was unable to help them. When the end of the war was announced, I was thankful that the theater was dark so that no one could see my tears.

I must also admit that I was in awe of my niece up on stage. Speaking and moving gracefully, singing beautifully. So grown up. As did characters in the play, I found myself leaning on past memories while navigating the present.

She was wonderful as was the entire experience.

Saturday, February 27, 2016

Advancing Lawlessness

"And, when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat?"
--Sir Thomas More (A Man for All Seasons)

As Donald Trump continues to gain ground in Republican primaries, progressives are becoming increasingly uneasy about the spectre of a Trump presidency. Al Sharpton, for example, claims that if Trump wins then he will leave the country because Trump would "probably have me deported anyhow."

The lawlessness that progressives envision under a Trump presidency would only be an extension of the lawlessness that they have condoned under the Obama administration. Unfortunately for them, it would not be their brand of lawlessness.

Therein lies the problem with discretionary rule. Things are fine when it's your guy ruling by fiat. But when your guy is replaced by someone with a different view of the world, then you're in trouble.

Justice, they say, is blind. So is true law. True law does not care who sits in the oval office because a president could not bend it to suit his or her wishes.

Friday, February 26, 2016

Ban the Benjamins

"Here ya go, rookie...c-note."
--Marv (Wall Street)

NYT joins the drumbeat to ban cash by calling for elimination of one hundred dollar and higher bills. "There is no need for large-denomination currency...There are now so many ways to pay for things, and eliminating big bills should create no problems."

Typical authoritarian stance coming from the so-called paper of record.

Meanwhile US citizens who supposedly have no need for large-denomination currency continue to stash c-notes in safes, lock-boxes, and, of course, coffee cans.

Thursday, February 25, 2016

NIRP and Savings

We are, we are, we are
Rather helpless
Take us forever
A whisper to a scream
--Icicle Works

One proposition of NIRP is that charging depositors to keep funds inside banks will cause people to save less and spend more, thereby increasing economic activity in the present. This author suggests that the opposite will occur.

As interest rates on bank deposits go negative, people will save even more because they recognize the likelihood that they will need to live off of principal instead of interest. Thus they will hoard cash and other stores of value such as gold rather than spend.

This is consistent with observations by John Hussman and others that money velocity has been slowing as interest rates have fallen.

The author asserts that NIRP represents a Hail Mary pass by central bankers--a desperate toss from their own end zone in hopes of preserving a failing financial system.

A counterargument to this authors' NIRP = more saving proposition that NIRP is merely an extension of the financial repression thesis. As they recognize that they can't live off of interest rates gleaned from money resting in deposit vehicles, people will plow their money into investment vehicles that carry more risk as they scrounge for more yield and capital gains to make up their losses. Essentially, investors throw a Hail Mary pass of their own out of desperation.

My sense is that it is this proposition of NIRP--that investors will increase their purchases of risky securities like stocks and bonds to compensate for lower yields on cash--on which policymakers are hanging their hats. Stated differently, policymakers need higher asset prices in order for financial systems to remain solvent in a leveraged world.

This proposition, of course, is also doomed to failure.

position in SPX, gold

Wednesday, February 24, 2016

Paying Banks to Risk Deposits

"And I hate to tell you this, but it's a bankrupt business model. It won't work. It's systemic, it's malignant, and it's cancer."
--Gordon Gekko (Wall Street: Money Never Sleeps)

If a bank was merely a 'money warehouse,' i.e., a place where you stored your money to keep it safe and accessible, then you would pay the warehouser a fee to do so. In exchange for the fee, the warehouser would give a receipt or claim check that would allow you to withdraw your funds on demand.

In fact, this was the original function of banks. They provided a secure environment for valuables and were paid to do so.

But safe storage is not the primary function of banks today. Instead, banks are leveraged lending machines, pyramiding deposits many times over to increase return on investment. Ironically, it is a bankrupt business model in that the leverage employed prohibits all funds to be returned to depositors at the same time (which is what precipitates bank runs).

In unhampered markets, there is nothing inherently illegal about this approach. However, depositors (who are really lenders) must understand the risks involved and be prepared for the possibility that their loans to banks may not be paid back.

Naturally, lenders to banks will rightly want to be appropriately compensated for such risk. The greater the risk, the greater the 'interest' paid by banks to depositors in order to attract capital. This is why banks should pay you for the privilege of taking in (and lending) your money. In a free market, banks could fail and you would not get your deposits back.

Of course, the modern day 'innovation' of deposit insurance backed by the government has distorted the risk assessment capabilities of depositors immensely. When the FDIC sign hangs on the door, depositors give nary a thought about how much risk their banking institution is taking with their funds. btw, the FDIC itself happens to be chronically underfunded in the event of widespread bank failures.

Because depositors have basically checked their brains at the door, central bankers think that NIRP has a chance of succeeding. The proposition is that depositors will be willing to pay banks a fee so that the banks can borrow deposits for leveraged lending purposes.

Absurd, I know, but with financial literacy so low, policymakers have reason to believe that people do not understand that they are lenders to banks who should demand compensation for putting their deposits at risk.

Tuesday, February 23, 2016

Miners vs Metal

Help I'm steppin' into the twilight zone
The place is a madhouse
Feels like being cloned
--Golden Earring

During the recent run in gold, mining shares have been outperforming the metal. How long has it been since such outperformance has been secular (long term) rather than short term?

A while. A decade, in fact.

Some attribute miner underperformance to the onset of ETFs such as GLD that now offer investors direct exposure to the precious metal itself. Investors have consequently dumped the miners, a notoriously difficult business, for the 'safer' metal, so the theory goes.

There is likely some truth there. But there is also the classic risk:reward tradeoff, and miners represent leveraged plays on gold. If the selling has been overdone, then perhaps a secular trend favoring the miners is in the works.

position in gold, miners

Monday, February 22, 2016

Ingsoc and Socjus

"Power is tearing human minds apart and putting them back together in new shapes of your own choosing."
--O'Brien (1984)

Analogy suggested between Ingsoc, newspeak for the English Socialist party of George Orwell's 1984, and Socjus, the parallel dubbing for today's 'social justice' movement. Both authoritarian, collectivistic, and self-righteous.

In the end, the author wonders whether the intuitive response to Socjus is rebellion grounded in the idea of individual liberty.

This movement, of course, already has a name.

Sunday, February 21, 2016

Marvin Harrison

Everybody calls me the quiet one
You can see but you can't hear me
Everybody calls me the quiet one
You can try but you can't get near me
--The Who

Belated shout out to Marvin Harrison for his recent selection to the pro football hall of fame. His stellar career stats (including #3 all time in pass receptions and #7 in receiving yards) largely accumulated as Peyton Manning's #1 receiver for the Indianapolis Colts, speak for themselves.

What stands out most to me about Marvin Harrison was his quiet demeanor (increasingly rare in pro sports) and how much he got out of his small frame (6 foot, 175 lbs is small for an NFL player).

I loved watching him play the game, and often imagined playing the game like he did.

Saturday, February 20, 2016

Desperate Bankers

Don't your feet get cold in the wintertime
The sky won't snow and the sun won't shine
It's hard to tell the nighttime from the day
And you're losing all your highs and lows
Ain't it funny how the feeling goes away
--The Eagles

Steve Roach suggests central bank policies reflect escalating acts of desperation. First ZIRP, then QE, now NIRP.

"Central banking, having lost its way, is in crisis. Can the world economy be far behind?"

Should loss of confidence in the Fed et al become pervasive, then their house of cards collapses.

Friday, February 19, 2016

Compassionate Totalitarians

"Anyone's guilty who lets these things happen and pretends like it isn't."
--Agent Alan Ward (Mississippi Burning)

In a timely follow-up to our recent post, Prof Williams reviews the origins of progressivism in the US, including its racist foundation. This foundation was laid not only by two early progressive presidents, Woodrow Wilson and Theodore Roosevelt, but a string of publications by intellectuals of the day claiming a scientific basis for racism.

While today's progressives share the same contempt for the Constitution as their predecessors, Williams hopes that they don't share the same racial vision (although results indicate that perhaps they do). He suggests that black voters ought to demand that, at minimum, progressives disavow their racist past.

Williams submits that progressives should re-label themselves. His suggestion: compassionate totalitarians.

Thursday, February 18, 2016

Textualism and Originalism

"I think that when statesmen forsake their own private conscience for the sake of their public duties, they lead their country by a short route to chaos."
--Sir Thomas More (A Man for All Seasons)

In a tribute to his friend Antonin Scalia, Judge Nap notes as have these pages that Scalia was "the most aggressive and consistent defender on the Supreme Court of the primacy of the text of the Constitution in the post World War II era.

Prior to WWII, this approach was regularly observed in high court rulings. Opinions written by the "Four Horsemen," for example, can be interpreted in this manner. Once FDR was able to pack the court in his favor, however, adherence to the Constitution when judging matters of law became passe and nearly non-existent under some courts (e.g., the Warren regime).

Scalia's powerful arguments over the years helped turn the tide such that today even ideological opponents on the Supreme Court feel obligated to pay lip service to the Constitution as a backstop for legal decisions.

Theories of interpreting the Constitution according to the plain meaning of the words go by two names: textualism and originalism.

Textualism is grounded in the assertion that the Constitution means what it says. Because it says that it is the supreme law of the land, and that American judges take an oath to uphold it, then judges are bound by the text rather than interpreting it as they wish. Thus, "no law" means no law, "due process" mean fair process due to all, and constitutional guarantees are real guarantees.

If the text is ambiguous, then it is the duty of judges to ascertain the original meaning of the words that form the ambiguity. This is originalism. Originalism often requires a study of history but, thanks to the founders, the historical record is ample.

Rejecting this line of thinking opens a Pandora's Box of discretionary rule. Judges are permitted to interpret the Constitution in novel and creative ways according to their own ideologies and interests.

There are several reasons that we KNOW that textualism and originalism were intended by the framers. Federal judges were specified to have lifetime tenure because they were meant to be the anti-democratic part of central government. Their insulated, institutional role was to preserve constitutional norms, structures, and guarantees from interference by branches of government subject to popular election (and thus favor). It can be argued that the framers were naïve in their belief that federal judges could remain insulated from political influence and kept beyond reproach, but there seems little doubt that a grant of lifetime tenure was intended to preserve, rather than dismantle, the constitutional framework that the framers toiled over.

Inclusion of the constitutional amendment process also is consistent with textualism and originalism theory. If the supreme law of the land could be subjectively interpreted, then there would be no need for a meticulous amendment process that required supermajority votes for change. Interpreting law using a "living Constitution" approach or other discretionary means clearly negates the need for any amendment process as law can be legislated from the bench.

If constitutional laws need to be changed, then it is role of neither the legislative, executive, nor judicial branches to do so exclusively. Instead, the amendment process must be followed. Difficulty in changing the law in this fashion is demonstrated by the fact that so few amendments to the Constitution have been passed using this process over the past 200+ years.

Healthy distrust of government guided the framers' hands when crafting the supreme law of the land. The Constitution can easily be viewed as a straightjacket for government, one that the framers knew was necessary to restrain constant attempts at overreach. Distrust of government is a timeless, not an outdated, concept. The role of a properly functioning judicial branch is to advocate that distrust in defense of individual liberty.

Textualist and originalist approaches helped Justice Scalia play his jurist role well.

Wednesday, February 17, 2016

Common Tragedy

If you leave
Don't look back
I'll be running the other way

The tragedy of the commons is an extension of the rationale behind property rights. As Aristotle observed long ago, people hold what they directly own in greater regard than what is collectively owned.

This is an economic argument, not a moral one (although good moral arguments can be made). Scarce resources are best conserved and developed under conditions of private ownership.

Also add to the explanation of why socialism is an inferior choice for economic organization than capitalism.

Tuesday, February 16, 2016

Progressivism and Socialism

The deception, with tact
Just what are you trying to say?
You've got a blank face, which irritates
Communicate, pull out your party face
--The Fixx

Recently, MSNBC commentator Chris Matthews posed what might be the most lucid question of his career to various Democrats: What is the difference between a socialist and a Democrat?

Hillary Clinton predictably did not answer the question directly. Instead, she claimed that she was a 'progressive Democrat' rather than a socialist.

During a recent Democratic presidential debate, however, self-proclaimed 'democratic socialist' Bernie Sanders claimed that he was the progressive candidate while Hillary Clinton wasn't.

Part of the confusion involves the mixing of terms--something commonly done in politics. Socialism is a form of economic organizing. Property and associated decision rights are in the hands of the State. Government decides what to produce and how production is distributed.

The opposite of socialism is capitalism, where property ownership is in private hands. With capitalism, consumers tell producers what to make and how to distribute.

Progressivism is a political philosophy for achieving conditions of socialism. It is a gradualist mentality that views 'progress' as achieved by slowly involving the State in more and more actions previously done by voluntary cooperation among individuals in unhampered markets.

Stated differently, progressivism is a means for achieving a socialistic end. Ironically, progressivism does not reflect progress at all.

Monday, February 15, 2016

Bench Jockeying

How many years can some people exist
Before they're allowed to be free?
How many times can a man turn his head
And pretend that he just doesn't see?
--Bob Dylan

After Justice Scalia's sudden death, attention turns to who his successor will be. As always, it will be a battle between natural law and positivism. Opinions of judges grounded in natural law are durable. Opinions of judges grounded in positivism are discretionary--they blow with the wind.

Special interests favor positivist judges. Special interests realize that the keys to the vault often rest with the Court. Appoint a friendly and special interests have a Court ruling to mobilize strong armed government agents in their favor.

All under pretense of 'the law.'

Which side will win this battle? The answer, my friends, is likely blowin' in the wind.

Sunday, February 14, 2016

Antonin Scalia

"The world must construe according to its wits. This court must construe according to the law."
--Sir Thomas More (A Man for All Seasons)

Justice Antonin Scalia died in his sleep early Saturday morning. He was 79. Scalia was appointed to the Court by President Reagan in 1986.

Until my 'awakening' to the notions of liberty and truth, I had little interest in Supreme Court rulings and could not name one sitting justice (or past one for that matter). This, of course, has changed as a search of these pages demonstrates.

I have consumed dozens of Supreme Court opinions during my journey. The writings of no contemporary justice has stood out more to me than Antonin Scalia's. Although he occasionally strayed from the mark, his opinions aligned closer to natural law as expressed by the Constitution than any other sitting justice.

Personally, I thought Scalia was at his best in his dissents, where he was not afraid to skewer his colleagues for their negligence in the law (see, for example, immigration and Obamacare). His 'SCOTUScare' dissent, aimed primarily at Chief Justice Roberts, is a classic screed on the consequences of judicial activisminterested courts, and rewriting law from the bench.

In 1840, Abel Park Upshur wrote that an interested court would be the icing on the cake that destroys the checks and balances designed by the Framers to protect liberty. With Justice Scalia's passing, the Supreme Court has lost much of what little checking and balancing capacity that it had left.

Saturday, February 13, 2016

NIRP, Deflation, and Gold

I'll move myself and my family aside
If we happen to be left half alive
--The Who

Gold appears to have bottomed alongside recent central bank actions. The December FOMC rate hike corresponded to THE recent bottom in gold prices. Then gold took off like a scalded (yellow) dog after the BOJ announcement of NIRP.

What is particularly interesting here is that these central bank actions are inherently deflationary. What? "I get how raising rates is deflationary," you say. "But how is NIRP deflationary? Isn't the idea to push people out of cash and into spending?"

Perhaps, Grasshopper, but NIRP should cause less funds to be deposited with financial institutions. With less funds on deposit, there is less opportunity for banks to pyramid credit which is the essence of inflation classically defined.

While common wisdom is that gold is a hedge against inflation, it is better viewed as a bet against disorder. NIRP may be the ultimate monetary disorder--one with decidedly deflationary character.

Gold is a way to keep assets out of the system and side step disorder.

position in gold

Friday, February 12, 2016

Debt Perspective

There used to be a graying tower alone on the sea
You became the light on the dark side of me

Nice perspective on the size of US debt.

$19 trillion in federal debt + $70 trillion in unfunded liabilities = $90 trillion. GDP of the world currently ~ $18 trillion.

If the analysis was expanded to include all world debt and unfunded obligations, then Lady Liberty and those NYC skyscrapers would look awfully small.

Thursday, February 11, 2016

Remaining Above the Law

"Gentleman, whenever you have a group of individuals who are beyond any investigation, who can manipulate the press, judges, members of our Congress, you are always going to have in our government those who are above the law."
--Nico Toscani (Above the Law)

Evidence now shows that Hillary Clinton routinely swapped emails classified as top secret with various aids, which suggests the possibility that those aids could be indicted alongside Clinton.

Judge Nap remains confident that recommendations to indict are pending from the FBI.

Those recommendations would then go to the Department of Justice and the Attorney General. Of course, since the AG was appointed by President Obama, there is a better than average chance that the DOJ will seek to whitewash the issue (see lack of follow-thru on the IRS/Tea Party scandal for an example).

The judge feels that even if the AG rejects an FBI recommendations to indicts, "the repercussions against Mrs Clinton will be, in my view, as catastrophic to her political career as if she'd been indicted."

Meanwhile, what we are observing is a textbook case of a political official struggling to remain above the law.

Breaking Bad

I've never seen you look like this without a reason
Another promise fallen through
Another season passes by you
--Big Country

Markets down a bone or so out of the gate after heavy market action overseas last night. That put major indexes below recent lows.

Meanwhile, gold is up $40.

Has the feel of a meaningful day...

position in SPX, gold

Wednesday, February 10, 2016

Lehman Analog

"Last February, we were at $66 a share. Lehman Brothers is NOT Bear Stearns. We have a great business. Real estate will come back. I am not fucking giving this company away!"
--Richard Fuld (Too Big To Fail)

Overlaying Deutsche Bank on Lehman's stock price in its final days looks like this:

The Lehman squiggles denote big short term moves higher in a general downtrend. Until LEH was gone, of course.

Expect the same with DB.

position in SPX

Crash Course

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

Last Friday Fleck wrote the following:

"I continue to be somewhat surprised that all the destruction that has occurred in the stock market thus far hasn't led to a wide open break, but the pressure continues to build and I think a big dislocation is as close to a certainty as those things can ever be. I realize that is a pretty bold statement on my part, as such events are quite rare, but in this case it is a virtual slam dunk, for reasons I have reiterated many times."

Sure feels that way to me also. People have been lulled into a slumber that tells them that there's no way that 'they' will let that happen.

All the while more hand grenades roll across the trading floor.

position in SPX

Tuesday, February 9, 2016

Gator Update

Chance Boudreaux: Do you still have that thirty-ought-six - the one I gave you for your birthday?
Douvee: No, a gator ate it. But I still got your shot gun.
--Hard Target

Todd Harrison has been watching the hungry alligator pattern. Here's his recent update:

Plenty of bite remaining.

position in SPX

Super Story

"My whole life, people have been telling me what I could do and couldn't do. I've always listened to them, believing in what they said. I don't want to do that anymore."
--Rudy Ruettiger (Rudy)

It was a pleasure to watch the Denver Broncos and Peyton Manning win Super Bowl 50 last Sunday. A six point underdog, the Broncos were viewed as unlikely winners due to their lack of offensive capacity. In fact, the Broncos were underdogs much of the season and were one loss away from being eliminated from playoff contention with a couple of weeks left in the regular season.

The pregame storyline contrasted the aging Broncos versus the upstart Carolina Panthers with the two quarterbacks serving as microcosms of the narrative. The 39 yr old Manning, a 5 time league MVP viewed by many as perhaps the best the game has ever seen, is clearly in the twilight of his career and spent the season modifying his role from centerpiece to contributor in the Bronco's scheme.

Twenty six yr old Panther QB Cam Newton, on the other hand, plays with the epitome of youth. Big and fast, with the strongest arm I have ever seen on a quarterback, Newton, who was named this year's league MVP the night before the Super Bowl, attracts attention both on and off the field with his brash style.

The primary story of Super Bowl 50 was Denver's defense. The Bronco front brought relentless pressure, sacking Newton six times and forcing critical turnovers. Denver linebacker Von Miller won the game's MVP award, but the award could have easily gone to the entire defensive crew.

The most enjoyable thing about football from where I sit, however, is observing how teams adapt. All pre-game preparation is done under the assumption that those plans will require modification as the game unfolds. At the professional level, the winner is usually the team that can improvise the best during the game. Clearly, the Broncos won the day from this standpoint. They were able to counter a strong Panther defense and smother all attempts by Newton et al to break the Bronco's vice grip on the Panther offense.

It also felt good to watch Peyton Manning win a Super Bowl in what was likely (and hopefully) his final game. Possessing only a fraction of his former physical skills, Manning demonstrated how to adapt individual style to fit the team's needs. Manning built his reputation on an extraordinary work ethic and on ambassadorship for the game. Winning Super Bowl 50 as a contributor rather than star would constitute a fitting close to a storybook career that has earned the respect of insiders and outsiders alike.

Monday, February 8, 2016

Sprechen Ze?

Ninety nine dreams I have had
In every one a red balloon
It's all over and I'm standing pretty
In this dust that was a city

Deutsche Bank (DB) continues to be the poster child for growing stress in the banking system. The stock is now marking lower than in 2009.

Zero Hedge reports that DB, with $50 trillion in gross notional derivative exposure, is now issuing public statement to sooth concerns about its payment capacity.

Of course, it won't take much movement in derivative prices to push this puppy into insolvency.

position in SPX

Fiddling About

Commodus: Have I missed it? Have I missed the battle?
Marcus Aurelius: You have missed the war.

Heads of state often say foolish things and the president's annual State of the Union address is a veritable launching platform of foolery. Nested in the silliness of President Obama's most recent address were comments about the strength of the economy and criticism of those who fail to admit that the economy is booming.

It does not take an economics PhD to argue otherwise. As a wise sage once told me, "If you have eyes, see. If you have ears, listen."

Fiddling while Rome burns is what heads of state tend to do.

Sunday, February 7, 2016

Why Are Spreads Widening?

Once I rose above the noise and confusion
Just to get a glimpse beyond the illusion

Why are bank credit spreads blowing out? Unlike 2008, when the causes of widening spreads were a mile wide and easy to see (i.e., mortgage-related derivatives), this time around I'm having trouble pinpointing the cause.

One theory surrounds plummeting oil prices and the strain this places on junk-rated oil and gas operators (and their leveraged bank creditors). While certainly contributing to domestic bank woes, this theory does not satisfactorily explain the global nature of the credit spread wides.

Instead, I'm pondering a theory surrounding the growing implementation and impact of negative interest rates (NIRP), a central bank policy that once again caught limelight recently when the Bank of Japan suddenly went negative.

Essentially, NIRP imposes a tax on creditors and depositors. Depositors must pay banks for the privilege of placing their funds with the institution. All else equal, this will motivate depositors to deposit less or, worse yet, pull their deposits. No big deal perhaps when banks were simply money storage facilities. But today, banks are leveraged investment machines that pyramid deposits 10:1 or more. Can you say 'bank run?'

John Succo adds that NIRP also imposes costs on carry traders. In 'normal' times reducing interests from, say, 1% to zero, traders would borrow the low interest rate currency and sell it to finance investments in other countries. Selling the low interest rate currency causes it to weaken while pushing higher the currencies of countries receiving carry trade investments.

In a NIRP world, however, borrowers must pay a fee to hold proceeds on deposit, thereby reducing incentive to put on carry trades. Moreover, NIRP currencies are less likely to devalue when carry traders don't/can't sell them. Policymakers hoping that NIRP will cause currencies to devalue in beggar-thy-neighbor fashion are likely to have their hopes dashed.

As the world awakens to these NIRP realities, perhaps that is why bank credit spreads are blowing out.

Perhaps that is also why gold is on the move.

position in SPX, gold

Saturday, February 6, 2016

Paper Ceiling

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

Apt portrayal of the debt ceiling fantasy.

When the enablers go away, and they always do, then the paper ceiling of debt collapses.

Friday, February 5, 2016

Bank Credit Spreads

"It's clear as a bell to those who pay attention. The mother of all evil is speculation--leveraged debt. The bottom line: it's borrowing to the hilt. And I hate to tell you this, but it's a bankrupt business model. It won't work. It's systemic, malignant, and it's cancer."
--Gordon Gekko (Wall Street: Money Never Sleeps)

Hard to ignore trends in credit default swap (CDS) and other derivative prices indicating investor concern about global financial institutions.

Acute in names like Duetsche (DB).

Definitely getting some '08 vuja de.

position in SPX

Anti-Social vs Anti-Political

Sir Thomas More: If we lived in a state where virtue was profitable, common sense would make us saintly. But since we see that abhorrence, anger, pride, and stupidity commonly profit far beyond charity, modesty, justice, and thought, perhaps we must stand fast a little - even at the risk of being heroes.
Margaret More: But in reason! Haven't you done as much as God could reasonably want?
Sir Thomas More: Well, finally, it isn't a matter of reason. Finally, it's a matter of love.
--A Man for All Seasons

Lew Rockwell observes that politics is an anti-social endeavor. It relies on mechanisms of force rather than on mechanisms of voluntary cooperation among individuals.

Free markets, on the other hand, are anti-political. They are grounded in peaceful production and exchange rather than on aggression or its threat.

Unhampered markets are expressions of social power as opposed to state power.

Thursday, February 4, 2016

Mine Field

My brain's been battered
Splattered all over
--The Rolling Stones

The 'easy' trade at many desks has been shorting gold and the miners. The lower they've gone, the more readily traders have jumped on top of them to press them lower.

Given the macro environment that we're living in, that seems pretty dangerous. Like hunting for nickels in a mine field.

We're witnessing explosions now. Metal and miner prices are jumping as shorts blow up. Many miners are up 50%+ in a week. Most have cleared their technically significant 200 day moving average benchmarks.

Of course, we won't know if THE bottom has been put in until well after the fact. But this action reflects what often happens as shattered shorts become initial casualties of war.

position in PAAS

Wednesday, February 3, 2016

Leaving the Race

"It is a kingdom of conscience. Or nothing."
--Balian of Ibelin (Kingdom of Heaven)

Today Rand Paul announced that he is leaving the presidential race. He was by far the individual most consistent with first principles of liberty and non-aggression among major party candidates.

Similar to his father, Paul's message currently does not resonate with special interest blocs intent on controlling the strong arm of government to enforce their brands of political favor. As these pages have frequently noted, democracies tend to push out peace in favor of violence.

More conscience has left the election market.

Tuesday, February 2, 2016

Winning, Politics, and Conscience

"Power is not a toy we give to good children. It is a weapon. And the strong man takes it and uses it. If you don't go down there and beat Joe Cantwell to the floor with this very dirty stick, then you've got no business in the big league. Because if you don't fight, the job is not for you. And it never will be."
--President Art Hockstader (The Best Man)

During the Bengals meltdown a few weeks back, I found myself pulling for the team despite many actions by players and fans that were obviously 'below the belt.' I was willing to overlook them, however, because I wanted the team to win so badly.

It was the human inclination to win no matter what. To be associated with a winner. To look the other way. To subscribe to the theory that the ends justify the means.

No place in life exhibits this tendency more than politics. I've heard it said to the effect that a person who enters politics should expect dirty play because, well, that's how it works. "Whatever it takes..."

Politics, it seems, can't be bothered with conscience. Present fields of candidates merely reflect that mindset.

Monday, February 1, 2016

Insured Behavior

"Moral hazard is when someone takes your money, and is not responsible with it."
--Gordon Gekko (Wall Street: Money Never Sleeps)

As 19th century English insurance firms observed, individuals tend to change their behavior once that behavior is insured. When people realize that their actions and their potential negative consequences are being subsidized, they will spend more of other people's money and take more risk.

This is known as moral hazard. Moral hazard runs rampant today as government programs in areas such as finance, education, and healthcare grow more intrusive.