Mind & Market

Getting Religion?

2012-02-11T12:03:00.000-05:00

Archbishop of NYC: Officially, the church won't take any position on the religious implications of these phenomena. Personally, Lenny, I think it's a sign from God, but don't quote me on that.
Dr Peter Venkman: I think that's a smart move, Mike.
--Ghostbusters

Two weeks after mandating that Catholic organizations would not get an exemption from requiring employees to pay for contraception, the Obama administration reversed course. Instead, insurance companies will be required to provide 'free' contraceptives to employees who ask.

While Catholic organizations might congratulate themselves for sidestepping some direct costs, the ruling does nothing to address the constitutional issue. The opening phrase of First Amendment reads:

"Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof."

Exempting Catholic organizations clearly does not make the ruling constitutional. Pro-life Catholic managers and shareholders of insurance companies are still being forced to provide contraceptives to their customers. And, of course, these 'free' contraceptives are ultimately being funded by taxpayers, many of whom will be forced to part with economic resources to fund programs against their religious beliefs as well.

btw, Catholic organizations are being hypocritical if they bless this current ruling yet do not object to government forcing others of Catholic faith to comply.

The abortion/contraception issue is but one aspect of health-care-by-government-force that is so very against the Constitution and natural law. Authoritarian health care follows a path to squalor rather than to utopia.

Freedom Watch Cancelled

2012-02-10T14:38:00.001-05:00

He said shut up, he said shut up
Oh god, can't you keep it down?
Voices carry
--Til Tuesday

Viewers of Freedom Watch know that Judge N blasts the Big Govt Right as much as the Left. It appears the Right leaning Fox could no longer take it. Yesterday, the network announced that it was cancelling Freedom Watch.

Freedom Watch is the only nightly show dedicated to Constitutional liberty on Big Media. It would be a shame to dump it.

Tom Woods notes that ratings were good for the show, which airs in the competitive 8-9 pm prime time slot. He includes some email addresses and links to some petitions. Take action if you're so inclined.

Have to think that old school Republicans see the Judge similar to Ron Paul--a divisive threat to the party in a presidential election year. As we noted two years back, there would come a time when the Big Right would quit riding the Tea Party's coat tails.

That time is now.

Buffett's Gold Bubble

2012-02-09T18:53:00.000-05:00

Help I'm stepping into the twilight zone
Place is a madhouse, feels like being cloned
My beacon's been moved under moon and star
Where am I to go now that I've gone too far?
--Golden Earring

In a preview of his annual letter to Berkshire Hathaway shareholders to appear in FORTUNE, Warren Buffett disses bonds and gold in favor of stocks. He suggests that gold's huge rise over the past 10 years resembles bubble like proportions. As in the past, he refers to gold as a 'non-productive' asset. It pays no dividend. It does no work.

Very true. But what he does not address is gold's function in since the beginning of economic exchange as a store of value. Buffett goes to some length seeking to demonstrate gold's overvalued nature versus 'productive' assets such as cropland and Exxon (XOM). But gold's value is not, as Adam Smith called it, 'value in use.' Gold's value is tied up in 'value in exchange.'

Buffett says that he would rather have all of US cropland +16 Exxons + $1 trillion USD rather than the total world's supply of gold (currently worth about $9.6 trillion). Stated differently, gold seems overvalued to him.

To others, of course, the opposite seems true. If all the gold in the world can buy only 16 large oil companies and one country's worth of crop land, then there is not enough gold in the world to pay for all other productive assets in the world.

Stated differently, perhaps US cropland and XOM are over valued. There are good arguments to be made here, with the market cap of XOM north of $400 billion. If this is indeed the case, then either the price of productive assets needs to come down, or the price and/or quantity of gold must go up.

One other point is that 'productive assets' like those represented by stocks require capital. But in today's debt-laden world, where more and more resources must be allocated toward debt service, real capital available for productive investment is vanishing.

Capital has been consumed rather than saved.

Printing paper money will not alleviate this capital shortage. With less capital, productive assets cannot function fully. If productive assets cannot function fully, then their value declines.

Then perhaps gold will be worth US, EU, and South American farmland, and 300 Exxons.

position in gold, agriculture, SPX

Bulls Rush In

2012-02-08T12:00:00.002-05:00

Fools rush in
Where angels fear to tread
--Elvis Presley

Toddo notes a couple more big name pundits jumping into the bull side of the boat, which is already getting crowded. One of those is Nouriel Roubini, affectionately known as Dr Doom for his prognostications related to the housing bubble.

Perhaps Dr Doom is now Dr Bloom.

Hey, he may be correct. But like Toddo, my contrarian antennae are starting to get pretty active.

position in SPX

Been There, Done That

2012-02-07T18:47:00.001-05:00

"For all of 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. Can you understand that?"
--Doug Carlin (Deja Vu)

Yes, I recognize the deja vu. About one year ago I began reallocating assets to reflect a more inflationary posture. That posture lasted only a few months. Last summer's debt ceiling debate coupled with the EU debacle squelched my incremental inflationary expectations, and I peeled off risk positions in favor of a more balanced posture.

Fast forward to now. Once again I find myself adding long exposure in lieu of a tape that seems to be taking the Fed's "0% till 2014" promise to heart.

Will this action once again prove temporary in a world that's drowning in a debt bubble that wants to deflate? Not sure, but currently my actions need to express a perceived uptick in the odds of Big Inflation on the horizon.

position in SPX

Jefferson and Judicial Review

2012-02-06T12:03:00.001-05:00

Cromwell: I have evidence that Sir Thomas, when he was a judge, accepted bribes.
Duke of Norfolk: What? Goddammit, he was the only judge since Cato who didn't accept bribes! When was there last a Chancellor whose possessions after three years in office totalled one hundred pounds and a gold chain?
--A Man for All Seasons

Interesting talk by Tom DiLorenzo on how the Constitution has been dismanteled over the years. I found the real nugget of this discussion at ~21 minutes on the legitimacy of judicial review.

Judicial review is a principle established from the Marbury v. Madison ruling. It states that the Supreme Court has the power to determine whether a law is constitutional or not. This ruling is typically held up among freedom lovers as wholly consistent with natural law.

Apparently, Thomas Jefferson did not see it that way. Citing an 1819 letter, DiLorenzo notes that Jefferson discounted the Supreme Court's claim of judicial review. Jefferson did not view the Supreme Court's opinion of constitutionality as any more legitimate than that of the legislative or executive branch. Or of the people in the states.

Jefferson viewed the Tenth Amendment as the cornerstone of the Constitution. The Tenth Amendment states that all powers not expressly delegated to the federal government are retained by the people and the states. DiLorenzo suggests that the Jeffersonian view was that it was insanity to rest the interpretation of law on the shoulders of 5 lawyers given lifetime high court appointments. Would the colonists fight a bloody revolution only to put the fate of liberty in the hands of five tenured people on the high court? Particularly when it was well known that courts throughout history had proven themselves generally incapable of remaining disinterested judges of the law?

This is an OUTSTANDING observation. I have long considered the framers' 'assumption' that the high court would provide a last and durable line of defense for the Constitution's limited government design as deeply flawed--with benefit of hindsight, of course.

But perhaps this is because that was not the framers' assumption at all. The Constitution itself does not grant the Supremene Court power to interpret constitutionality. The opinion of chief justice John Marshall (who subsequently demonstrated in his rulings to be partial to the Hamiltonian big government view) in Marbury v. Madison did that.

It can certainly be construed from the Constitution as written that all stakeholders had jurisdiction on what constituted constitutionality (!). And if people in various states felt that law was being unjustly interpreted by the federal government, then it was their right to walk away from the union.

Rather than depending on an interested court, which history suggested would be likely at some point, the people would retain the ultimate power themselves.

Yes, indeed.

Progressive Income Tax: Unequal Treatment Under the Law

2012-02-05T13:39:00.001-05:00

"Hope is a good thing, perhaps the best of things. And no good thing ever dies."
--Andy Dufresne (Shawshank Redemption)

Nice review of the history of progressive income tax in US. As the article notes, the founders entirely rejected the notion of income tax, as they had just fought a war in part to end a tax holocaust with Britain. The framers clearly saw taxes in light of uniformity (Article 1/ Section 8), later to be reinforced by the Fourteenth Amendment with the notion of equal protection of citizens.

We can be certain that the founders would not approve of today's progressive income tax--one specifying that the more you earn, the more you pay.

During the first 130 years following the Constitution, the federal government complied with the founding principles of uniformity and equal protection--with two exceptions. Lincoln instituted a progressive income tax to help pay for the Civil War. This was repealed in 1872.

The other exception was news to me. Congress passed an income tax law in 1994 aimed at the top 2 percent of all wealth holders. Subsequently, the Supreme Court put this law down as unconstitutional. Justice Stephen Johnson Field penned a prophecy as part of his opinion, stating that even a small progressive income tax "will be but the stepping stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich."

Marx and Engels (1848) knew this all too well, which is likely why instituting a progressive income tax was near the top of their list of actions necessary to overthrow a free society.

Field's prophecy would get in motion 20 years later with the passage of the Sixteenth Amendment. The progressive income tax opened a major pipeline of resources for use in the market for political favor.

The Sixteenth Amendment stands out as wholly inconsistently with the rest of the Constitutional framework. It violates the principles of equal treatment under the law and due process expressed by the Fifth and Fourteenth Amendments.

It replaces rule of law with discretionary rule of men.

My sincere hope is to witness the repeal of the Sixteenth Amendment in my lifetime. Absent its repeal, my fear is that we will instead engage in civil war in my lifetime.

Corporatism

2012-02-04T10:33:00.000-05:00

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

As we've noted many times on these pages, US (and world) economic systems have been moving away from the free market ideal for some time.

This article notes that our system resembles corporatism. The wording is somewhat unfortunate, because uninformed minds connect corporatism to corporations. As originally put forth, however, corporatism refers to a system where large groups (companes, non-profits, labor groups, environmentalists, etc) uses its size and influence to gain favor from political process.

Stated differently, corporatism is the market for political favor, where special interest groups trade with politicians.

Corporatism is only possible when the scope of government extends into wealth redistribution (socialism). Otherwise, SIGs would have no incentive to trade.

Want to stop corporatism? Then eliminate government's ability to forcibly control economic resources.

This article also points out that concentration of wealth increases under corporatism. SIG who can buy political favor get richer off the backs of others.

The Economic Establishment and Gold

2012-02-03T18:01:00.003-05:00

There's a room where the light won't find you
Holding hands while the walls come tumbling down
When they do
I'll be right behind you
--Tears for Fears

The University of Chicago recently surveyed economists at big name institutions about their views on a gold standard. Specifically, they asked whether a gold standard would promote better price stability and employment outcomes for average Americans.

Out of 40 respondents, 100% said no.

Not sure why I should have expected anything different from the economic establishment, but I must confess that these findings raised an eyebrow. Perhaps this was due in part to the novel reporting format, which permits inspection of each respondent's vote and any comments that they included.

First reaction to these findings: time to ratchet up the probability of a total monetary collapse a few more percentage points (assuming there's still room below 100%, of course).

Second reaction to these findings: I don't have nearly enough gold.

position in gold

Negative Externalities and the Public Domain

2012-02-03T10:16:00.000-05:00

Magically bored on a quiet street corner
Free frustration in our minds and our toes
Quiet stormwater, m-m-my generation
Uppers and downers, either way blood flows
--The Who

In our previous discussion of externalities, we observed that negative externalities can be viewed as failures of government rather than as failures of free market operations. Government is the agency charged with enforcing individual property rights in free market systems. If individual property rights were enforced, then it would be difficult for negative externalities to persist in market systems.

Rather than the private sector, it is the public domain that seems a more likely breeding ground for negative externalities. In economic systems that have been socialized to some degree, ownership and control of some productive assets are moved from private to public hands. Private property rights have been outlawed to some extent.

Consider the case of public property. Suppose that chemical runoff from privately owned farms kills fish in a nearby river. The river is public property. Many individuals that use the river may be negatively affected--fishermen, boaters, etc. Since none of these people owns the river and its contents, however, they have no direct claim on the damages, and they are in no position to negotiate with the farmers for satisfactory resolution.

It is common for government to represent the collective in pursuing remedies in situations such as this. Unfortunately, the preferences of the individuals in legal negotiations are likely to be varied, while government is likely to pursue a monolithic objective. This implies that some individuals represented in the collective will not realize satisfactory resolution.

Moreover, since individual lack property rights to negotiate solutions that 'internalize' the externalities, the externalities are likely to persist in the face of costly bureaucratic regulatory processes. It is not at all clear that social welfare has been advanced in this case.

Note that this problem largely goes away if public property was privatized. Privatization would put negotiating power in the hands of individuals who could use local knowledge to permit adequate internalization of the negative externalities.

The public domain is also likely to foster negative externalities in public works projects. In the United States, the notion of public works can be traced at least as far back as the Whig's American System, which proposed government-sponsored 'internal improvements' to enhance general welfare. Canals, roads, dams, tree planting, space travel, green energy, et all have all been posited to benefit the general public.

If true, then the beneficial spillovers would make public works projects a case of positive, rather than negative, externalities. Naturally, government officials would like you to believe this to be the case for any program that government is involved with. Indeed, President Obama's state of the union speech last week was full of such claims (here is a critical review of one of these claims related to government and nat gas).

Unfortunately, it is difficult to reason in favor of positive externalities for public works. This is because public works projects are funded by resources forcefully taken from private hands. Obviously, private owners had other plans for those resources, otherwise no government programs would be necessary. While some individuals may certainly benefit from the government project, we know with certainty that other individuals--those who had their capital forcefully expropriated--were harmed.

Moreover, long run spillovers of public works projects may not be positive either. While public works infrastructure such as roads and dams may seem beneficial, what is unknowable is what might have happened if that capital had remained in private hands and been invested using risk/reward heuristics. Quoting Mises (1949):

"The gullible masses who cannot see beyond the immediate range of the physical eyes are enraptured by the marvelous accomplishments of their rulers. They fail to see that they themselves foot the bill and must consequently renounce many satisfactions which they would have enjoyed if the government had spent less for unprofitable projects. They have not the imagination to think of the possibilities that the government has not allowed to come into existence." (655)

There seems little difference between viewing public works projects as negative externalities and viewing those projects as applications of the Bastiat's broken window fallacy (Hazlitt, 1946).

References

Hazlitt, H. 1946. Economics in one lesson. New York: Harper & Brothers.

Mises, L. 1951. Human action. New Haven: Yale University Press.

Of Cups and Handles

2012-02-02T16:13:00.001-05:00

You can never understand
We can always be like water
Flowing on to find our way
Just get on with the game
It's a game
What a game
--Tarney Spencer Band

Am noticing lots of cup-and-handle patterns in many large cap equity charts. Some of the patterns span a few days while others are multi-month in nature.

Moreover, the action 'feels' bullish. The tape is consistently bid. Weakness is being bought regardless of news.

Feels too risky to be net short here. As such, I've been adding some long side exposure to balance things out. I've been buying some of my fave blue chip names (CSCO, JNJ, PG). Today I added a little commodity exposure via DBC.

To be clear, I'm in 'rent' rather than 'own' mode here. But I want to reposition my near term stance in this bullish tape. I'm now a coupla percent net long.

position in CSCO, DBC, JNJ, PG, SH

Drop Zone

2012-02-01T11:58:00.000-05:00

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

Nice article detailing bipartisan nature of bailouts in the US. Author notes what anyone with a brain should have picked up during last week's State of the Union address. In one segment President Obama pledged to do 'no bailouts, no handouts,' etc while in another segment he took ownership of the auto bailout and promised more green energy investing.

Consistency, of course, is a characteristic not to be detected in most politicians.

One issue I do have is with the $125 billion estimate for corporate welfare. That number seems waaaay too low. If one factors in systemic interventions that are friendly to corporations, then the $trillions printed by the Fed alone amount to a huge gift to corporations.

University Endowment Trends

2012-02-01T11:00:00.001-05:00

Watch me clinging to the beat
I had to fight to make it mine
That religion you can sink in neat
Just move your feet and you'll feel fine
--Culture Club

This paper is somewhat dated (2008), but it still points out interesting trends in university endowments over a decade or so. Note big difference in endowment size between private (especially Ivy) and public. This really sticks out when examining endowment/student.

Asset allocation shows movement out of fixed income in favor of alternative assets. Some stats (medians):

2005 Overall

n = 726
endowment size = $72 million
return = 9%
AA equity = 59.6%
AA fixed income = 20.4%
AA alternative assets = 7.6%

Interestingly, Ivy League AA in 2005 was 38.1% equity/13.0% fixed income/37.1% asset allocation.

Of course, we now know that those increased allocations toward alternative assets were a source of pain during the credit meltdown of 2008-2009. Many alt investments, particularly illiquid ones, were crushed when bid/ask spreads fell thru the floor.

Still, the attractive characteristic of many alternative assets is that they can be less correlated with other asset classes, which makes them useful for diversification purposes.

position in SPX

Externalities

2012-02-01T09:52:00.003-05:00

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

Externalities (a.k.a. external economies or external costs) involve situations where the outcomes of A's activities impact B. These impacts on B, sometimes termed 'spillovers,' are usually regarded as indirect, perhaps even unintentional, outcomes of A's actions.

Spillovers that are beneficial to B are called positive externalities. For example, innovation that creates new products and industries can generate large positive externalities.

Spillovers that are costly to B are called negative externalities. For example, air pollution spewing from a factory smokestack can generate negative externalities for those living in nearby communities.

A complaint often levied against free market designs is that they ignore the problem of negative externalities. Polluting producers, it is posited, are motivated to think narrowly and act myopically in their own self-interest. While their situation improves, those producers harm others.

Early interventions to address this perceived market deficiency involved taxes and regulation intended to penalize or reduce the negative externalities. However, monitoring costs (read: bureaucracy) of these approaches are high, and may even offset the benefits incurred from reduced externalities. Moreover, these interventions bypass the voice of consumers, who in free markets demonstrate thru their buying actions what they truly value. Absent free trade where buyers and sellers can express their preferences thru voluntary exchange, estimating the costs of externalities by fiat is merely guesswork and subject to significant error (Rothbard, 1956).

Coase (1960) theorized that as long as property rights are clearly defined and transaction costs are low, then A and B can privately negotiate a solution that 'internalizes' the externality. Thus, if people living in nearby communities have a property right to 'clean air,' then the factory will have to negotiate with them in order to rightfully discharge waste thru the people's property.

There seems a compelling argument to be made that, rather than a failure of free market designs, cases of negative externalities can be seen as failure of government, whose purpose in a free market system is to enforce individual property rights against subtle forms of invasion. In the case of smoke control, the proper free market remedy is not the creation of a State bureau to prescribe smoke control regs. Rather, the appropriate remedy is judicial action to punish pollution damage to the person and property of others (Rothbard, 1962).

An additional advantage to the 'property rights' solution to negative externalities is that both A and B are motivated to determine ways to reduce the costs, which benefits social welfare over time.

Of course, market pressure alone may limit externalities. Those seeking organic foods, for example, vote with their wallets for produce that does not encourage negative externalities associated with chemical additives. Producers who do not follow the market's signal are penalized with declining trade.

References

Coase, R.H. 1960. The problem of social cost. Journal of Law and Economics, 3: 1-44.

Rothbard, M.N. 1956. Toward a reconstruction of utility and welfare economics. In M. Sennholz (ed.), On freedom and free enterprise: Essays in honor of Ludwig von Mises. Princeton, N.J.: D. Van Nostrand.

Rothbard, M.N. 1962. Man, economy, & state. Princeton, NJ: D. Van Nostrand.

The 'Risk Out' Scenario

2012-01-31T16:18:00.001-05:00

I don't want to wait for our lives to be over
I want to know right now what it will be
I don't want to wait for our lives to be over
Will it be yes or will it be...sorry?
--Paula Cole

Interesting proposition by Peter Atwater that the ultimate indicator that a secular bottom has arrived may not be one where individuals have moved out of more risky financial assets and into less risky assets. Instead, perhaps it will be a 'risk out' situation, where market participants flee securitized financial assets altogether.

There is, of course, a decent argument to be made that the probability is non-zero of a systemic meltdown that chases participants away. With systemic leverage thru the roof and issues of re-hypothecation raised by last year's blow-up of MF Global, it isn't that difficult to envision a scenario where the financial system ceases to function. Cascading bank failures, sovereign debt defaults, and other contagious events could bring the system to its knees.

Indeed, a good case for owning physical gold or other 'hard assets' is that they are tangible and outside the 'paper' financial system.

I'm going to keep Peter's proposal in mind. Perhaps the time to 'buy the list' is not when people are selling the list, but when both buyers and sellers have gone home en masse.

position in SPX

Fed Leverage Update

2012-01-30T10:38:00.001-05:00

Nothing's so loud
As hearing when we lie
The truth is not kind
And you said neither am I
--Toad the Wet Sprocket

By my math, Federal Reserve balance sheet currently sports leverage of 54:1. That's higher than Fannie, Freddie, Bear, Lehman prior to the 2008 credit implosion.

Indicator of how risk has been socialized, meaning that risk has been transferred from private to public balance sheets.

position in SPX

Portugal Debt Hammered Again

2012-01-30T10:13:00.002-05:00

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

Portugal credit spreads are widening significantly this am. Ten yr CDS now pricing in over 70% chance of default.

For better or worse, I kicked much of my long exposure (mostly precious metals) last Friday and entered today's session about 10% net short via equity index ETFs.

position in silver, SPX

Double Taxation of Dividends

2012-01-29T14:26:00.002-05:00

If you drive your car, I'll tax the street
If you try to sit, I'll tax your seat
If you get too cold, I'll tax the heat
If you take a walk, I'll tax your feet
--The Beatles

The Left is once again fixating on dividend income and its tax characteristics. Since 2003, ordinary dividends have been taxed at 15% for individuals in that marginal tax bracket or higher. Although set to expire in 2010, the 15% dividend tax rate was extended thru 2012 by legislation signed into law by the Obama administration.

Liberals detest the 15% dividend tax rate because wealthy individuals who receive dividend income often realize an effective tax rate significantly lower than the current 35% top bracket. This is the gist of Warren Buffett's absurd argument that his secretary pays less tax than he does. Although the reality is that wealthy people pay the lion's share of all taxes in the US, with nearly 50% of all people paying next to no income tax, those on the Left want...more.

In a back-and-forth Facebook thread on this issue that I was observing the other day, someone noted that, while the tax rate on dividends is 15%, dividends are double taxed--once at the corporate level and then a second time when shareholders receive dividend checks. If corporations pay a 35% rate, then total taxes paid on dividend income amount to a 50% rate.

A second contributor, obviously sympathetic to the notion that dividends are undertaxed, subsequently offered two arguments in attempt to refute the double taxation observation. One argument was along the lines of: 'all income is taxed multiple times, so double taxation of dividends is nothing special.' He suggested that a store owner, for instance, could not avoid paying taxes on dollars received from patrons even though the patrons had presumably already paid income taxes on dollars used to purchase goods or services in the store.

This argument is in error.

Income is defined as an individual's rightful share of output gained thru productive effort. Prior to the inception of money, income was measured in terms of tangible production. If I chopped wood for a living, then my income was a fraction of the cordage produced by me that I could rightfully claim as my own.

Although income is commonly measured in units of currency today, it still reflects production claimed as personal property. Since passage of the Sixteenth Amendment in 1913, government can legally tax a fraction of that production claimed as individual income.

The error of the second contributor's claim lies in viewing the transaction between store owner and patron as a one sided transfer of resources. If a patron purchases a box of ceral for $4, the patron plainly does not 'give' after tax income to the store owner. Instead, the patron exchanges his/her income for a quantity of product/services rendered by the store owner.

In addition to the cereal, the patron might pay for the convenience of the store's location, or for the selection that the store offers. Indeed, such service attributes is how retail establishments commonly add value.

The important point is that the store owner has generated new production, The proprietor has provided goods and services that were previously unavailable to the market. The $4 represents the price of the store owner's output in terms of the resources that the patron was willing to trade to get that output. After accounting for costs of business, the store owner hopes to generate a positive income--i.e., his own fraction of output to be claimed as personal property that, under our current system, will be subject to income tax.

As such, this situation describes already taxed resources owned by someone being traded for newly produced resources owned by someone else that have yet to be taxed. There is no double taxation here.

The second argument offered by the second contributor was that taxes on dividends do not constitute double taxation at all. Companies pay taxes, then individuals pay taxes when companies send them dividends. Two different owners, two different taxes.

This is argument is also misguided, as the owners are the same in both instances.

Shareholders are the owners of corporations. When dividends are declared, shareholders receive the payouts. Those payouts typically come from earnings realized from the company's activities. Corporate income is subject to tax when reported. Because shareholders have a rightful claim on corporate earnings streams, any corporate income tax paid is effectively taxing shareholders, because there is now less income available for subsequent distribution to the owners.

To further grasp the impact of corporate taxes on shareholders, suppose that the corporate tax rate was 100% . In this case, corporate shares would be worthless since no cash generating capacity would be available to owners.

Higher taxes reduce income available to shareholders.

Should the company declare a dividend subsequent to paying corporate taxes, then those earnings declared as dividends are once again subject to tax. Currently this is the 15% levied on dividend income.

Dividends are indeed double taxed, because shareholders have ownership claims on earnings taxed at corporate rates as well as dividend payouts taxed at individual rates.

Unfortunately, history suggests that reason is unlikely to sway the minds of liberals in pursuit of a cause. The cause in this case is a redistribution of resources among people using government force, a cause that is at odds with nature.

Taxation of dividends is but one of a litany of rationalizations recited by the Left seeking to legitimize the taking of life, liberty, and property at gunpoint.

Fairness by Force

2012-01-28T11:18:00.000-05:00

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

In another round of 'what if,' the Judge asks, "What if the government persuaded a majority to think that somehow its theft of your property was in pursuit of 'fairness.'"?

Those who value freedom increasingly recognize that when politically motivated people discuss the notion of 'fairness,' then it is time to guard one's wallet.

It takes no genius to reason that a government which forcefully takes from some and gives to others in the name of 'fairness' is the epitome of discretionary rule. Who defines fairness? The king? The majority?

Unless all agree on what 'fairness' means and how it should be enacted, in which case of course government force would not be necessary, then some person(s) will be the subject of aggression.

Fairness by authoritarian rule. Fairness by force.

Capitalism We Have Not

2012-01-27T17:02:00.000-05:00

Too many shadows, whispering voices
Faces on posters, too many choices
If, when, why, what?
How much have you got?
--Pet Shop Boys

Nice rejoinder to escalating claims that our current economic system is 'capitalism.' The author also observes that, contrary to popular belief, capitalism is not based on 'rugged individualism' in dog-eat-dog fashion. Instead, capitalism is grounded in voluntary social cooperation.

What we have now is a system increasingly driven by political force.

Debt Ceiling Quietly Increases

2012-01-27T15:19:00.002-05:00

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

And just like that, the debt ceiling goes up by $1.2 trillion. The new upper bound is now $16.4 trillion. Rick Santelli is correct. Not much noise from the media this time around.

Coping with Variation in the Human Condition

2012-01-26T16:05:00.003-05:00

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

A fundamental axiom of nature is variation. In terms of the human condition, variation is expressed in the differing capabilities and interests among people. It is also expressed in the differing situations in which people are born--some environments being more favorable than others.

Why this occurs is unknown and perhaps unknowable. If you believe in God, then the answer rests in the mystery of the Creator. If you don't believe in God, then the answer rests in the mystery of secular humanity.

Two primary belief systems have evolved in modern times for coping with variation in the human condition. One belief system accepts this variation as part of life. People employ their resource endowments, whatever their nature, to advance their interests. Capacity and resource position can be enhanced thru self-development or thru voluntary exchange with others. Individuals are free to pursue their interests, which of course may include charity and outreach, as long as these pusuits do not forcefully intrude on the pursuits of others.

A second belief system views variation in the human condition as unacceptable. It is unjust that some have been endowed with less resources than others, and it is unfair for those with less to have to work harder to achieve what gifted people might accomplish with less effort. The equitable solution is to even up resources among people--to level the playing field in terms of resources and opportunities. Doing so requires forceful intrusion on the pursuits of others to obtain the resources deemed necessary to even things up.

It should be clear that the first belief system is grounded in the concept of personal liberty. People have a right to pursue their dreams unencumbered by forceful intervention by others. Each person's resource endowment, large or small, is but a starting point for growth based on free choice. This system is also grounded in the principle of non-violence. Individuals engage in peaceful, voluntary exchange with others when it is deemed mutually beneficial. Force is employed only to protect each person's life, liberty, and property from expropriation by others.

The second belief system is grounded in the concept of collective submission. Individual pursuit of happiness is subservient to the interests of others. Those endowed with less are viewed as unlikely to succeed unless they are provided resources. Voluntary dependence is a consequence. Because the resources given to the poor must be taken from the rich, a dominant principle of this belief system is violence--made legitimate thru government agency. Force is required to reduce variation inherent to the human condition. To keep people from pursuing their own interests, authoritarianism must rule.

It should be readily apparent which belief system is in harmony with nature.

But if the second belief system is so unnatural, then why does it predominate society? Perhaps it is because the drivers of freedom and peace conflict with another axiom the pervades human behavior: the urge to satisfy needs using the least amount of effort possible.

The spectre of getting something for nothing has been driving forceful conquest since the beginning of time.

Low Fed Rates till 2014 Sparks Gold

2012-01-25T18:00:00.002-05:00

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

In today's FOMC announcement, the Fed signaled that they will be keeping rates ultra low thru most of 2014. Wow, that even raised my eyebrow...

This news put some giddy-up into gold, which vaulted about $50 this afternoon on the FOMC news.

I used this leap to sell my GLD position. It's up about 10% from its lows, price is now filling the gap, and stochastics are getting twisty in the overbought zone.

Am also concerned about the re-hypothecation issues surrounding these metal ETFs on the back of the MF Global situation last fall.

Selling this position puts me just about 0% net long (long metal and ag commodities against short equity index). Feels about right given the current field position of various asset classes.

position in commodities, SPX

Technology and Voluntary Workforce Attrition

2012-01-25T12:10:00.000-05:00

Welcome back my friends
To the show that never ends
We're so glad you could attend
Come inside, come inside
--Emerson, Lake & Palmer

The title of this missive suggests another piece on technology crowding out labor in the workplace. Instead, the author is more focused on the effect of emerging information technologies such as social networking on propensity to work.

The author posits that the decline in labor force participation is due to people, particularly young people, having more of their needs satisfied by info technology. This in turn is proposed to reduce peoples' need to work to obtain resources, and to reduce the need for products that would otherwise be necessary if people were commuting to, and doing more, work.

While there is some novelty to this argument, the empirical data that he provides do not support it. Jobless and participation rates have been falling for periods longer than Facebook and Twitter have been around, with primary inflection points on/around tech bubble poppage--the beginning of early deflationary action.

Moreover, the proposition that technology makes leisure more attractive compared to work might make more sense if standard of living were high with few obligations to care for. Currently, however, general standard of living is stagnating and debt load is high.

This means that, absent a windfall of innovation that permits efficient payback of debt, people will need to work more in the future in order to approach today's standard of living while paying back what they owe.

While they might lighten the workload a bit, info technologies like social networking seem unlikely to drive large amounts of voluntary attrition from work.

Income Mobility vs Wealth Mobility

2012-01-24T14:56:00.000-05:00

The world was on fire and no one could save me but you
It's strange what desire will make foolish people do
--Chris Isaak

In a Facebook thread initiated by my sister, a contributor noted that defining 'rich' in terms of 'wealth' (stock of resources) is more appropriate than defining rich in terms of 'income' (flow of resources).

Indeed. But the reality is that 'rich' and 'income' enjoy popular association, as evidenced by the piles of income inequality pieces published in the mainstream press (one dated but still instructive example here by the NYT).

The contributor also discounted the use of income mobility studies to discern the extent that 'the rich stay rich,' arguing that incomes can vary wildly from year to year for individuals. And, to be sure, a rich person could own a stock of resources that generates little income.

I can't be sure, but I believe this person was implying that 'wealth mobility' measures would be more accurate measures of the durability of 'richness' over time.

I am not familiar w 'wealth mobility' studies in kind, but my sense is that they too would reflect significant temporal change. Those who own equities, for example, see big changes in net worth when markets move. And because wealthier people own more equities as well as other risky securities, it stands to reason that top wealth brackets are pretty volatile.

For those unsatisfied with current distribution of wealth, let me submit that the most nefarious activity that favors 'the rich' is the immense government intervention in markets that serves to prop up asset prices. Government intervention in markets clearly benefits the wealthy and helps them stay 'rich.'

The NYT data noted above provide some empirical support. Overlay, for example, a chart of the S&P 500 since the 1970s over the timelines shown and you'll find a pretty good correlation.

Remove monetary, fiscal, and regulatory stimulus that is propping up markets worldwide, and watch the gap between rich and poor narrow.

position in SPX

Public School Daze

2012-01-24T13:45:00.000-05:00

We are matching spark and flame
Caught in endless repetition
--The Fixx

Retrospective analysis of spending/achievement trends in US public schools K-12. Not sure anything could have been more predictable yrs ago than the state of State run schools today.

Yet, we keep throwing more resources down the hole.

Own to Rent

2012-01-24T13:17:00.000-05:00

When it feels like the world is on your shoulders
And all of the magic has got you going crazy
--DeBarge

A couple weeks back we noted increased govt activity in the housing markets. More today, as plans circulate to get the Federal Housing Finance Authority (read: taxpayers) to provide incentives for investors to buy properties foreclosed by Fannie and Freddie and then rent them out.

More central planning for the housing industry. It does seem pretty clear that we will never learn...

no positions

Non Bank Vaults

2012-01-23T10:34:00.000-05:00

"Fact is, all lies, all evil deeds, they stink. You can cover them up for a while, but they don't go away."
--Dalton Russell (Inside Man)

Interesting comment in this missive by James Turk on storing gold in vaults. Turk suggests using non-bank vaults. Banks are in the business of lending. Non-bank vaults (presumably places like Brinks) are in the business of storing. As such, safe-guarding assets is likely to be a more important part of non-bank vault operator business model.

Interesting thought.

Wickard v. Filburn

2012-01-22T14:18:00.002-05:00

So true
Funny how it seems
Always in time
But never in line for dreams
--Spandau Ballet

Roscoe Filburn was an Ohio farmer who was growing wheat on a 12 acre parcel of his farm. He was not selling the wheat; he was growing it on his own land for personal consumption--for baking bread for his family and for feeding his chickens.

The federal government told Filburn to stop growing wheat, claiming that he was producing wheat in excess of the amount permitted under the Agricultural Adjustment Act of 1938. A previous version of the AAA had been ruled unconstitutional by a prior Supreme Court. However, emboldened by turnover in the Court beginning in 1938 that permitted FDR to handpick successors, the FDR administration was at it again.

Filburn sued, claiming that the federal government could not control what he did on his own land. The Commerce Clause granted the government no power in this case, Filburn argued, because no commercial and no interstate activity was taking place.

Incredibly (or perhaps not given that these were FDR's judges), the Supreme Court ruled against Filburn. The court ruled that if farmers were allowed to grow any amount of wheat that they wanted, then their actions in aggregate would affect wheat prices which would, in turn, affect interstate commerce.

Such an interpretation, of course, implies that government could extend regulatory power to no end. Which is precisely what has occured since. Parenthetically, the real issue here is the AAA's power to fix prices, which is totally outside the boundaries of the Constitution and of natural law.

The recently passed healthcare law is grounded on such a broad interpretation of the Commerce Clause. As this case will shortly be before the high court, the issue is whether the judges return to first principles of natural law.

If not, then our system careens farther off the rails.

Eminent Domain, Unjust Power

2012-01-21T14:25:00.000-05:00

We are matching spark and flame
Caught in endless repetition
Life for life we'll be the same
I must leave before you burn me
--The Fixx

Eminent domain is power claimed by government to take real estate from owners. The argument is that the land has a 'public benefit' that is greater than the benefit realized by the individual owner.

In the last decade, eminent domain power has been expanded by court cases such as Kelo v. City of New London (2005), where the Supreme Court ruled that homeowners can have their property taken from them by local government and transferred to a private entity deemed to be a jobs creator and tax generator.

Eminent domain in no way can be construed as a just power of government. Just power is power possessed by individuals and delegated in whole or in part to government. Police power is a just power, for example. People have the right to protect themselves, so they can delegate this power to government.

However, people do not have the right to condemn their neighbor's property, no matter how good the intentions. Lacking the power to expropriate property themselves, people cannot delegate the power to government.

Silver Strength

2012-01-20T18:08:00.001-05:00

While my imagination's running wild
Yeah, things are getting clearer
--Bryan Adams

The technical picture for silver continues to improve.

With today's +5% jump, white lightning knifed thru its 50 day moving average and left little doubt that it has officially left behind its multi-month downtrend line.

One would think that further upside progress from here will be more difficult--given the damage done on the way down late last year. Using SLV as a proxy, 34ish should serve as significant resistance.

That said, silver is quietly up about 20% from its late December lows.

position in SLV

Soaking the Poor

2012-01-20T12:14:00.000-05:00

"I have to believe that when things are bad, I can change them."
--James Braddock (Cinderella Man)

Frank Chodorov explains how incomes taxes work to soak the poor. Using social security as an example, he demonstrates that those who partake in social welfare programs lose thru increased dependence and thru the inevitable inflation that the State must use to pay entitlements.

Do you know what an interesting comparison would be? Examine the progress made in reducing poverty from the country's founding until 1913. Then look at the progress in reducing poverty since then.

Which period was more effective in reducing poverty?

Getting Sentimental

2012-01-19T18:00:00.001-05:00

Don't you know promises were never meant to keep?
Just like the night, they dissolve off into sleep
--Rolling Stones

Wanted to record that Jason's sentiment indicators are getting pretty stretched toward bullish extremes--both near term and long term.

When sentiment gets lopsided, then a trend reversal often approaches.

Couple that with Demark indicators at or near trend exhaustion levels on multiple timeframes, and it seems time to get cautious.

Personally, I added a bit to my index short positions today.

position in SPX

Armageddon Postponed?

2012-01-19T17:40:00.000-05:00

"Hey, you guys wouldn't happen to tell us who actually killed Kennedy, would ya?"
--Harry Stamper (Armageddon)

Jim Rogers observes that there are 40 major elections worldwide in 2012. To him, this means big time money printing and stimulus by governments this year in order to buy votes.

Perhaps markets are already betting accordingly...

JR suggests that Armageddon may be postponed until 2013-14--after the buzz wears off.

position in SPX

The Original Tea Party

2012-01-19T12:42:00.000-05:00

"These rustics are so inept. It nearly takes the honor out of victory. Nearly."
--Lord General Cornwallis (The Patriot)

Interesting background on the original Boston Tea Party staged in late 1773. The TP was a response to British attempt to monopolize tea trade w/ the colonies via the East India Company, and to exact taxes from this restricted trade. Predictably, a black market quickly formed w/ Dutch tea, which threated the British position.

As a response, the Tea Act was enacted on top of the previously implemented Townshend Acts to collect duties on all tea entering the colonies. Chatter circulated among the colonies that this was but one small step toward comprehensive tax tyranny by the British government.

The Tea Party occured in Boston because this was the only tea port where colonists could not strong arm colonial consigners into withdrawing from reselling tea for the East India Company.

An interesting tidbit is that the Tea Partiers were careful to destroy only the tea. They were mindful of other private property on the boats.

Following the Tea Party, Britain enacted the Coercive Acts (called the Intolerable Acts by colonists) in 1774. These acts sought to more forcefully exert British rule over the colonies. But these acts of force only strengthened colonial resolve against authoritarian rule.

The Last Lifeguard

2012-01-18T13:28:00.000-05:00

When it feels like the world is on your shoulders
And all of the madness has got you going crazy
--DeBarge

Peter Atwater wonders if the IMF represents the last lifeguard. Whether we're talking about $500, $2 trillion, or even $10 trillion (rumored) in lending capacity, we are still talking about laying more debt on top of a debt problem.

Stubborn Yields

2012-01-17T14:27:00.001-05:00

Confusion nevers stops
Closing walls and ticking clocks
--Coldplay

Usually, when market participants are ready to take on risk, they sell bonds and buy stocks. When bonds get sold, their yields go higher. Thus, higher stock prices and bond yields are often positively correlated.

Not this time--at least so far.

As stocks have lifted over the past few weeks, bond yields have not done the same. Ten yr Treasury yields are approaching mid December lows at ~1.8%.

This suggests that there is still lots of deleveraging behind the scenes--investors are swapping risky assets (perhaps assets grounded in Europe) for the safety in US Treasuries.

Stock bulls will argue that this is a positive. "Imagine what will happen to stocks when this pocket of 'de-risking' is past. Demand for stocks will swamp supply!"

Stock bears will argue that this is a negative. "Imagine what will happen to equities when this pocket of stock buying is past. Supply of stocks will swamp demand!"

And so it goes...

position in SPX

Can Markets and Socialism Coexist? Denmark's Case

2012-01-16T10:33:00.000-05:00

So hold on, here we go
Hold on, to nothing we know
--The Motels

Cato's Dan Mitchell considers the solid economic performance of Denmark despite major policy contradictions.

On the one hand, Denmark has very free markets as measured by the Heritage Economic Freedom Index, scoring highly in legal structure that protects property rights, lack of regulation, free trade policy, et al. On the other hand, Denmark has stifling fiscal policies, with tax burdens and government spending levels that exceed 50% of GDP.

Mitchell concludes that the only way that the Denmark model 'works' here is that the free market environment pulls an otherwise untenable fiscal situation out of the economic abyss. Were Denmark to reduce market freedom, then the model would collapse.

He also suggests that Denmark moved towards more socialization only after free markets had created large amounts of wealth. This has been the progression in nearly all Western countries: get rich, then expand government. The rich country/big government relationship is sometimes referred to as Wagner's Law.

We should note that Sweden, whose situation we pondered recently, has a similar set-up to Denmark's.

One thing that nags me about these conclusions is that they are based on an assumption that freedom can be categorically managed. Keep market freedom high in order to offset low fiscal freedom. Over time, it is hard for me to see how this can be maintained. Government spending at these levels seem certain to engulf freedoms of all kinds, including those involved in exchange. Indeed, it can be argued that market freedoms are already severely compromised if taxes exceed 50% of GDP.

Measures that comprise the Economic Freedom Index illustrate the contradiction. Mitchell notes that Denmark's free market score is strengthened by country practices that preserve property rights. But taxes exceed 50%! How can property rights be respected when government takes more that half of national income under conditions of force?

This is a nice example of the problems evident with the Economic Freedom Index as measured.

In sum, Mitchell's conclusions seem reasonable on a static basis and assuming that the data employed are valid. On a more dynamice basis, however, it is hard to see how the arrangement currently practiced by Denmark (and Sweden) is stable over time.

Bullish Resolve

2012-01-15T13:09:00.004-05:00

But anything I could have said
I felt somehow that you already knew
--Til Tuesday

The bullish reverse head and shoulders pattern forming recently in the equity indexes such as the S&P 500 (SPX) has indeed resolved to the upside.

The action hasn't been voracious out of the set up, but the tape has a persistent 'buy the dip' tone. Now that SPX 1280 has been cleared, this move technically 'works' to 1360.

I remain slightly net long (long commodity ETFs against short equity index). Should commodities continue to lift with stocks, I'll look to piece out of long exposure and perhaps become net short.

position in commodities, SPX

Heritage Economic Freedom Index

2012-01-14T11:33:00.000-05:00

I would like a place I could call my own
Have a conversation on the telephone
Wake up every day that would be a start
I would not complain of my wounded heart
--New Order

For years the Heritage Foundation has published its Index of Economic Freedom. The Index is meant to capture levels and trends in economic liberty on a country by country basis.

The index of economic freedom is determined by assessing ten components of economic freedom spread across four categories:

Rule of law (property rights, freedom from corruption)
Limited government (fiscal freedom, government spending)
Regulatory efficiency (business freedom, labor freedom, monetary freedom)
Open markets (trade freedom, investment freedom, financial freedom)

For each component, quantitative and qualitative data are used as the basis for a 0 to 100 score. The ten component scores are weighted equally and averaged to get a country's overall economic freedom index.

The just issued 2012 index finds the US sinking lower. The 2012 value of 76.3 marks the third consecutive year that the US economic freedom index has come in below the 80 benchmark deemed to reflect a 'free' condition. The US also slipped from 9th to 10th in the overall economic freedom rankings.

There is much to question about the Heritage assessment methodology. The grading scales have an element of subjectivity as are the data sources chosen as information sources. The resulting measures, therefore, may lack validity. For instance, the scores for business, labor, and monetary freedom seem way too high at first glance. The various components are not independent either. For example, monetary policy is likely to spill into a variety of areas such as limited government, regulation, and open markets.

However, my biggest problem is the equal weightings policy. It is unlikely that each of the ten components contributes equally to the economic freedom construct. Some almost surely matter more than others.

My sense is that the Heritage approach may overstate the true level of economic freedom in the US and understate the true degree of decline.

That said, the Heritage index is one of the best known indexes out there and the general trends are certainly consistent with what is going on.

US economic freedom is in decline.

Radical Responses to the Great Depression

2012-01-13T15:41:00.001-05:00

You tell me it's the institution
Well, you know
You better free your mind instead
--The Beatles

Interesting U of Michigan exhibit on docs associated with labor, social justice movements during the Great Depression. As I have been doing a fair amount of self-study of this period, many of the names served up here are now familiar to me.

One lesson that I have learned from other studies, and reinforced by this exhibit, is how organized various flavors of socialism were in the United States by this time. Labor was the primary conduit, but other areas of public policy were in play as well.

I do find the title interesting: "Radical Responses to the Great Depression." Indeed, 'radical' or 'revolutionary' have often been associated with socialistic movements.

But what is so radical about using government to force some to cater to others' needs? This idea is as old and pervasive as human society.

The truly revolutionary idea remains that people should govern themselves. And that individuals should be able to pursue their interests unencumbered by the State.

An Economic Program for American Democracy

2012-01-13T12:36:00.001-05:00

We've always had time on our sides
Now it's fading fast
--OMD

As the New Deal foundered with a new Depressionary leg lower following the election of 1936, FDR was running out of options and rationale for continued government spending. Four years after amassing record deficits and instituting myriad economic programs, the federal government had little to show for the effort. Moreover, the Supreme Court had been striking down various New Deal programs such as the NIRA and the AAA.

Then along came a pamphlet sized book, An Economic Program for American Democracy, written by seven Harvard and Tufts economists in 1938. The book grew from meetings in Cambridge among various instructors and students on the direction of economic policy.

While the academic affiliations lend of air of legitimacy to this work, the actual content is pure drivel. The book cheerleads FDR's New Deal efforts. They probably felt it necessary because the actual results of the New Deal were not laudable by unemotional analysis.

The book's basic thesis was that capitalism in its pure form was over. The capitalism phase was marked by Westward expansion and technological advancements that drove a capitalistic engine of investment. Unfortunately, the frontier was now closed and there were few new technologies (!) to absorb new investment. Absent new investment, the capitalistic system becomes dysfunctional. The authors proposed that the stock market crash in 1929 signified the end of capitalism in America.

To pick up the slack from lack of investment, the author proposed that it was government's role to borrow and spend. This could be done indefinitely in their view because there was no need to pay back the debt. Bondholders, they proposed, are happy as long as they got their coupon payments. In the event that they wanted to sell their holdings, bondholders would be happy as long as the market was liquid.

This process--funding ever more economic intervention thru deficits and debt, could go on forever, the authors said. A mechanism for utopia.

As laughable as this thesis is, FDR and his administration embraced it. Subsequently, they fired up federal government financing operations on a scale previously unseen. Various of the authors of the book, plus the two broad champions of this policy, John Maynard Keynes (the originator) and Alvin H. Hanson (domestic proponent, Harvard), were brought to Washington to advise/implement the program.

Thus, ever growing defictis became institutionalized in the US.

Reference

Gilbert, R.V., Hildebrand, G.H., Jr., Stuart, A.W., Sweezy, M.Y., Sweezy, P.M., Tarshis, L., & Wilson, J.D. 1938. An economic program for American democracy. New York: The Vanguard Press.

Return of Fannie & Freddie

2012-01-12T11:41:00.001-05:00

They gave you life
And in return you gave them hell
As cold as ice
I hope we live to tell the tale
--Tears for Fears

Fannie Mae and Freddie Mac were at ground zero in the mortgage market meltdown. These government sponsored entities (GSEs), with their implicit backing from the federal government, helped push borrowing rates below market and foster risk taking on a broad scale.

That all came crashing down in 2007-2008 when market forces began correcting the excesses.

In late 2010/early 2011, it appeared bureaucrats had a rare moment of clarity, with many Congresspeople floating proposals to wind down the GSEs.

That moment was fleeting, however. The end of 2011 found Congress taking steps to increase, not decrease, the Federal Housing Authority's influence on the mortgage market. Increased revenue streams from Fannie/Freddie fees, increase in max FHA loan size, and expiry of tax deductions to private mortgage insurers are all likely to push more biz toward the GSEs.

Moreover, the FHA has been stepping in to back more mortgages. The volume of FHA backed loans has more than tripled over the past 4 years.

When Fannie and Freddie collapsed, each was carrying more than a $trillion in assets against a sliver (~$20-30 billion) in equity. With that much leverage, housing prices did not have to decline much to render the GSEs insolvent and push them into government receivership.

These new actions finds federally sponsored housing entities levering up again.

You can bet that, once again, when these institutions inevitably lock up again, the feds will surely be pointing fingers at the other guy.

position in SPX

Big Government and Republicans

2012-01-11T11:22:00.000-05:00

We are strong
No one can tell us we're wrong
Searching our hearts for so long
--Pat Benatar

Enjoyed this convo between the Judge and Jon Stewart. JS notes the hypocrisy among most Republican presidential candidates.

Of course, this is not news. Stewart suggests that the divergence between 'small govt' ideals and Republican party behavior has beengrowing for 40 years.

It has been a lot longer than that. In fact, the Repulican party was founded on a big gov't platform called the American System. The American System escalated under the Whig party precedent and became Lincoln's mantra in the election of 1860.

Yes, the Barry Goldwater years offered a rare detour toward small government ideals among Republicans. But the only elected Republican president in the 20th century that embodied the small government ideal in his behavior to a large degree was _____. (fill in the blank)

Nope, not Ronald Reagan. RR certainly waxed poetically about small government but acted otherwise when the rubber hit the road.

Instead, Calvin Coolidge was probably the most hands-off president of the 20th century.

As the Judge observes, there is only one Big Govt party today with two wings that are more the same than different.

There is only one candidate still in the race that differs...

Why the Wealthy Own Gold

2012-01-10T17:21:00.003-05:00

I may not now what you're going through
But time is the space
Between me and you
--Seal

Straightforward explanation of why wealthy people own gold. The key point here is that the primary reason to own physical gold (in physical form) is not to speculate in near term price moves.

Instead, wealthy people own gold to preserve their wealth against problems like inflation, bank collapses, and aggression.

Viewed thru this lens, owning gold is less of a 'buy-and-hold' investment strategy and more of a buy-and-will-to-the-next-generation family wealth preservation strategy.

Scarcity and Economic Tradeoffs

2012-01-10T12:08:00.000-05:00

Just a little more time is all we're asking for
'Cause just a little more time could open closing doors
--Corey Hart

Most of us have heard the truism that life is full of tradeoffs. This is indeed a truism because nearly every resource necessary to pursue happiness is in short supply. People must choose between alternatives under these axiomatic conditions of scarcity, lest the resources run dry. The heuristic is an economizing one--consume scarce resources in an order that maximizes satisfaction.

Pervasive scarcity thus drives people to be predominantly 'economic' in their behavior, trading off one thing in order to obtain something else deemed to possess more utility.

A class in economics is not necessary to learn this. Pursuing our dreams demands that we learn about making tradeoffs (i.e., economizing) in our daily decision-making.

Misleading Signals from Economic Indicators

2012-01-09T12:42:00.002-05:00

I was half in mind
I was half in need
And as the rain came down
I dropped to my knees and prayed
--Style Council

John Hussman offers one of the more thoughtful analyses of leading economic indicators (LEIs) that you're likely to come across. Based on his data, he's pessimistic that recent anecdotal evidence (i.e., downticks in unemployment, upticks in purchasing managers index) are sounding 'all clears' with respect to recession chances.

In fact, Dr J's assessment suggests the opposite: recession appears likely within the next 6 months.

One point I found particularly interesting is that some factors used in LEI analyses tend to 'look good' right up to commencement of a recession. For instance, Dr J notes (see below graph) that payroll growth tends to be positive in 80% of the months where recessions begin! Moreover, payroll growth in the 'recession month' tends to be higher, on average, than the three preceding months.

Obviously, unadjusted payroll growth is not a good standalone predictor of recesssions. Indeed, from the above graph, payroll growth appears to be a lagging indicator of recessions.

Bottom line: be careful what you absorb from the popular press concerning economic indicators and recession potential.

McCulloch v. Maryland

2012-01-08T14:02:00.003-05:00

I may not know what you're going thru
But time is the space
Between me and you
--Seal

Marbury v. Madison established that the Supreme Court possessed authority for judicial review--a principle wholly consistent with the Constitution's basis in natural law. However, the downside to Marbury was that it gave the Court huge trumping power. Judges with federalist visions could sway law in favor of expand centralized government thru their 'interpretations' of the law.

An early case that demonstrated the court's power to expand federal government was McCulloch v. Maryland in 1819. At issue was whether the United States could charter a bank (polically desirable to inflate away war debts). McCulloch was an employee in the Baltimore branch of the federal bank who refused to pay state taxes that were being levied on federal bank employees. Maryland claimed that the federal bank was not an instrument of the United States because the power to establish a bank is not listed in Article 1, Section 8.

McCulloch (the feds) claimed that the power did exist under the infamous Necessary and Proper clause trailing the end of A1S8. The Supreme Court, still headed by John Marshall of Marbury fame, sided with the feds. The crucial difference between Marbury and McCulloch is that in the former, judicial review was necessary to keep the federal government from expanding, while in the latter, judicial review was applied to expand the scope of federal government.

Marshall's reasoning was flawed on many levels. Marshall argued that the Constitutional Convention created a social compact between the federal government and individual citizens. States, Marshall claimed, do not represent a check on Congress. Marshall's argument was clearly erroneous, as the ratification process itself was state driven, requiring at least 9 state conventions to ratify the Constitution before the documents became the supreme law of the land.

Marshall also argued that, while the Constitution did not explicitly authorize the charter of a federal bank, the Necessary and Proper clause granted Congress implied powers. In his view, Congress has the right to choose any means not expressly prohibited by the Constitution to carry out its powers. This of course violates principles of natural law and the clear intent of the Framers who were clearly suspicious of large central governments. If passages such as the Necessary and Proper clause can be interpreted to empower the federal government with virtually unlimited options, then why go to great lengths to draft a Constitution to begin with?

Marshall's ruling in McCulloch paved the way down the slippery slope toward expanding central government power and contracting local power.

The Three Fifths Compromise

2012-01-07T12:03:00.003-05:00

"Why should I trade one tyrant 3000 miles away for three thousand tyrants one mile away? An elected legislature can trample a man's rights as easily as a king can."
--Benjamin Martin (The Patriot)

In a previous missive we modeled the impact of freedom under persistent conditions of political compromise. The Constitution itself was a document of compromise. While the overall framework is consistent with the workings of natural law, its was political compromise that contributed to many of the Constitution's imperfections.

By far the most glaring imperfection is evident right away in Article 1, Section 2. This is the infamous Three Fifths clause, which declared that slaves were property rather than people, thus denying these individuals of their natural rights. This passage is so far off the rails from the ideas in Jefferson's Declaration that even casual observers have to wonder how it ever made it into the Constitution.

In short, compromise.

The Three Fifths clause resulted from a battle for political power between representatives of Northern and Southern states. It is commonly inferred that Southern states did not want slaves to 'count' wholly. In reality, it was Northerners who fought for having slaves count for less than a entire person. That way, Congressional votes would be weighted in favor of Northern states.

To get a deal done, those who were adamant about abolishing slavery, such as Benjamin Franklin, compromised. Imagine how the history of the United States would have altered had those people on the side of freedom stuck to their guns. Imagine no slavery in the US beginning in 1787. Imagine no Civil War nearly 100 years labor that claimed more than a half a million lives and destroyed over 1/3 of US property. Imagine no Reconstruction period that embittered the South and inflamed Jim Crow behavior.

When freedom is given up as part of political compromise, natural forces build distortions into society that are ultimately straightened later at considerable cost.

When freedom is compromised, it is never good.

Closing Thoughts on Left Turn

2012-01-06T16:44:00.000-05:00

Look in the mirror
And see how you've been taken
You won't surrender
But now you heart is breakin'
--John Waite

Groseclose's Left Turn (2011) closes with some ideas on how to approach a more biased media. Because mainstream media is overwhelmingly biased toward the Left, the 'obvious' solution is to inject more conservatively minded journalists. The problem, of course, is that this commodity is in short supply.

Beyond that, Groseclose suggests that liberal journalists would be more objective if they expanded their network to include more independents and conservatives. This would provide better perspective from which to approach reporting.

I would not be optimistic about this idea, as confirmation bias suggests likes hang with likes. It's psychologically easier to do that.

Finally, Groseclose suggests that media outlets could provide more information to viewers as to the biases of their staff. Reported might report how they voted in past elections. Groseclose mentions that he's piloting a database of media political quotients (PQs) that journalists would voluntarily participate in. Outlets could also collect and report detailed descriptions of the political views of all its journalists.

Historically, when journalists have been asked to disclose their political biases, they are reluctant to do so. "I only report the news as it is." They say. "My political opinions do not influence how I report it."

As Groseclose has demonstrated, however, nothing could be further from the truth.

Imagine that when asked about their stances on gun control or deficit spending, Barack Obama, John Boehner, or Harry Reid replied, "I'm not going to tell you about my position. If I did, it would impair my ability as an objective lawmaker."

Such a response would incite ridicule from voters, most of which would question whether such a politicians was worthy of office.

Why should similar standards not apply to the media, asks Groseclose? Good question to ponder...

Fringe Benefits

2012-01-06T15:53:00.002-05:00

I can hear you coming
We know what you're after
We're wise to you this time
We won't let you kill the laughter
--Red Rider

More on the AAII sentiment data, this time showing some historical perspective. Note the general behavior in the SPX as this series hits extremes.

As noted yesterday, just one piece of the puzzle, but a piece worth noting...

position in SPX

Can't Wait for Recess

2012-01-05T18:43:00.002-05:00

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

Yesterday President Obama made several high profile appointments, including a czar of the newly created Consumer Financial Protection Board. Per Article 2, Section 2 of the Constitution, the Senate must confirm these appointments. However, a law has since been written (unsure whether it has been challenged in the courts) that gives the president authority to make unconfirmed appointments during Senate recess. Of course, presidents have been exploiting this loophole for years.

The eyebrow raiser here is that yesterday's recess appointments come in conjuction with increasingly loud presidential rhetoric that Obama is willing to bypass Constitutional process to enact his agenda. Indeed, using a I-can't-wait-for-them tone, the president rationalized his appointments yesterday, stating, "When Congress refuses to act and as a result hurts our economy and puts people at risk, then I have an obligation as president to do what I can for them."

As I am currently engrossed in a few books discussing the Great Depression and the New Deal, the president's rhetoric and actions have a deja vu feel to them, harkening back to FDR's eagerness to circumvent the Constitution whenever necessary.

We're still paying for those interventions today.

Sentimental Stretch

2012-01-05T10:19:00.000-05:00

I can't turn to the left or the right
I'm too scared to run and I'm too weak to fight
But I don't care
It's all pschobabble rap to me
--Alan Parsons Project

Sentiment measures seek to reflect to extent to which market participants are optimistic (bullish) or pessimistic (bearish). When sentiment indicators reach extremes, they often suggest turning points. For example, if sentiment indicators suggest most market participants are bullish, then perhaps most of the buying has already occured, and supply/lower prices may be around the corner.

There are many measures of sentiment. The prudent market participant usually watches a bunch of these indicators for general trends rather than focusing on a single measure.

That said, the recent weekly AAII sentiment index numbers, which measures bullishness/bearishness of a group of individual investors, suggests extreme levels of bullishness versus historical levels.

As noted, only one piece of the puzzle. But one suggesting that optimism, at least among a particular category of investor, is getting stretched.

position in SPX

The Year of the Dragon

2012-01-04T11:20:00.005-05:00

Sybilla: What becomes of us?
Balian: The world will decide. The world always decides.
--Kingdom of Heaven

Was emailing with a friend the other day about prospects for the new year. There are sizable problems out there to overcome, to be sure. But one small thing that we may have going for us is that 2012 is the Year of the Dragon.

The dragon occupies the fifth position in the 12 year cycle of animals that constitutes the Chinese zodiac. It is the only animal in the cycle that is imaginary, and is often viewed as the most powerful.

Now, lest you think that I'm coming out of the closet as an astrologer or mystic, let me say upfront that devination and the occult are not my bag. You will not find me pouring over daily horoscope pages nor drawing tarot cards.

The path I have travelled, however, has led me past legends of the dragon, particularly in Eastern cultures. While folklore paints dragons in both protagonist and antagonist lights, I have personally gravitated toward positive symbols that flow from dragon legends. For instance, the dragon is often portrayed as exercising good judgment during times of stress and conflict.

As such, I find myself drawing from dragon symbology periodically as a source of inspiration.

The last time the dragon made its appearance in the Chinese zodiac was the year 2000. Very fitting, it seemed to me, that the dragon's number came up at the changeover to the new millennium. The year 2000 was personally special in many ways. For instance, I completed graduate school that year. It was also the year that my niece was born who, along with my soon-to-be-born nephew, has graced my life in ways too extraordinary for words.

So, as we ring in the new year and face a mountain of challenges, I once again plan on tapping my serpentine friend for occasional inspiration.

If the dragon can help a few of us muster more strength, wisdom, and positive action in the face of difficulty, then it seems the prospects for 2012 have gotten that much better.

First Hand Ante

2012-01-03T16:57:00.000-05:00

Luck and intuition play the cards with spades to start
And after he's been hooked I'll play the one that's on his heart
--Lady GaGa

The first trading day of the year saw some upside resolution to the reverse head and shoulders pattern forming over the holidays--although a late day pullback drained a bit of glory from the gains.

Would think technicians are eyeing the late October highs of 1285ish as a more definitive indicator that a new leg higher is underway.

By early afternoon, pundits predictably started trotting out the old saws about how the first few trading days of the year often 'forecast' the tape's annual performance. One tidbit I've picked up over the years: Don't succumb to early year urban legends designed to whip the masses into a bullish frenzy.

position in SPX

The Unusual Society

2012-01-03T10:31:00.001-05:00

Benjamin Martin: May I sit with you?
Charlotte Selton: It's a free country. Or at least it will be.
--The Patriot

In 1776 two ideas built on previously percolating thought were published that shaped the future of what became the United States. Adam Smith published his economic treatise An Inquiry into the Nature and Causes of the Wealth of Nations. Throughout the ages, it was generally assumed that government regulation of economic activity was an absolute must. It was widely believed that economic chaos would result if government did not direct the economy, and that the poor would be especially hard hit without an umbrella supplied by the State.

The dominant economic design in effect in the 1770s was mercantilism. Government regulated economic activity at the most granular level. Price/quantity controls, tariffs, laws prohibiting speculation, no middlemen permitted in commodity trade, taxes, licenses granting monopoly status to the priviledge few, etc.

Much of this intervention was rationalized in the name of helping the poor. Standard of living was pathetic, with average life expectancy in the 20s. It is also important to note that standard of living, particularly near the bottom of social pyramid, had largely been stagnant with little improvement for centuries. Big families were common--in hopes that out of, say 12 children born, a few would survive to advance the family's progress.

Adam Smith concluded that the squalor which had persisted for centuries was caused in large part by the heavy hand of government. Smith posited that general standard of living would advance much more rapidly if government got out of the way, and let the 'invisible hand' of individual buyers and sellers acting in their own best interest drive economic progress.

Stated differently, Smith was suggesting that a primary reason why people remained mired in poverty was government's war on poverty! This was a revolutionary thought at the time which, frankly, remains revolutionary today. In 1776 Smith's work greatly influenced the Framers who were already envisioning a nation where people could pursue their interests unencumbered by the State.

The other idea was published in Jefferson's Declaration the same year. The conceptual basis for Jefferson's work was not exactly new; it had been percolating for more than 100 years via the work of Enlightenment scholars such as John Locke and in pamphlets/writings such as Cato's Letters. As British rule tightened on the colonies in the late 1600s and early 1700s, oppressed colonists became increasingly receptive to the notions of natural law and self-determination. By Jefferson's time, these ideas had been widely diffused in Colonial America.

The ideas that Jefferson wrote into the Declaration, that man's right to life, liberty, and pursuit of happiness came from nature and not from government, and that people were justified in throwing off governments that trampled on these rights, were radical only that they were published in a document that set the course for a new nation. Locke et al's thoughts were no longer theory. They were being operationalized on a truly revolutionary scale.

By the time the Constitution called the federal government into existence in 1787, these two ideas, one economic and one political, had gripped the hearts and minds of the American people.

Thus was birthed a most unusual society. One where it was envisioned that people would manage their own lives with minimal government intrusion. One in which the powers of centralized government were explicitly limited. One in which the principle of individual liberty trumped collective security.

Such a sight the world had never seen.

Economic Liberty and the Constitution

2012-01-02T15:56:00.000-05:00

I was halfway home, I was half insane
And every shop window I looked in just looked the same
--Style Council

Here is a well written series on economic liberty and the Constitution, with an emphasis on important Supreme Court decisions that first upheld, then supressed free market principles in the United States.

I plan to summarize some of the cases in other missives, as they dovetail nicely with other works that I have been reading.

The author's overall conclusion is similar to the one reached by Judge Andrew Napolitano's (2005) book Constitution in Exile. For the first 150 years of the United States, the High Court upheld (with a few notable exceptions such as Slaughterhouse 1872) economic liberty as central to the Natural Law concepts embodied in the Constitution.

However, this all came tumbling down during the FDR administration. A court that was barely able to stem mounting socialist sentiments in a series of 5-4 rulings in favor of economic liberty lost it when a swing justice, Owen Roberts, turned his hat around and began siding in favor of New Deal legislation that was constantly making its way thru the courts.

The opinions written by the socialist majorities of the court are truly comedies in flawed reasoning. The opinions written by the dissenting 'Four Horsemen' read like masterpieces in the understanding of natural law and original intent. They would also prove quite prescient in their forecasts of what the New Deal rulings would lead to--as we now know today.

It's essentially been a one way street to depostism and its spoils since.

IP and Scarcity

2012-01-02T12:30:00.000-05:00

Watch me clinging to the beat
I had to fight to make it mine
That religion you could sink in neat
Just move your feet and you'll feel fine
--Culture Club

The author makes a cogent point early in this missive. Laws that protect property rights are only necessary if property is scarce. Taking scarce property away from the owner denies the owner the use of the property.

Tangible goods fit this requirement. If an infinite amount of a particular good existed, or if a machine were present to infinitely reproduce the good, then the scarcity problem disappears along with the need for laws that protect property.

Intellectual property does not meet the scarcity requirement, as IP can be infinitely reproduced. All the while, that infinite reproduction does not deny use of IP by the owner (or originator).

Laws that grant monopoly power over ideas and their expression limit progress, and can even be seen as a form of censorship.

IP laws restrict emulation and improvement of ideas--a central mechanism in improving standard of living for all.

Slip Slidin' Away

2012-01-01T14:06:00.000-05:00

We work our jobs
Collect our pay
Believe we're glidin' down the highway
When in fact we're slip slidin' away
--Paul Simon

2012 leads off with the president signing into law the NDAA act--despite his "serious reservations." Almost lost my lunch on that one...

The threat to liberty posed by this bill first birthed Thxgiving weekend is now reality. Due process, I knew thee well.

As we slip further into tyranny as we open 2012.

2011 Personal Finance Review

2012-01-01T13:09:00.001-05:00

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

Some reflection on progress toward personal finance goals set early in 2011.

My number one goal in 2011 was to build current assets. I regard current assets as financial securities and physical assets that can readily be converted into cash. In my case, this rules out the house and various tax deferred (i.e., IRA, 401k) accounts. For me, current assets include immediate sources of cash (checking, money market accts) as well as 'close' sources of cash (securities held in taxable brokerage accounts, plus precious metals).

Fortunately, current assets increased substantially in 2011. The primary driver behind this was being debt free, a condition in place since paying my house off in late 2010. The influence of being debt free in standard of living and building wealth cannot be overstated. Cash that was previously siphoned off to pay down debt is instead allocated toward consumption, saving, and investment needs in the here and now. From where I sit, one of our Creator's greatest gifts to us was the capacity to be free. Extinguishing debt, for me, was like throwing off chains of bondage. I hope to God that I never carry debt again.

In building current assets in 2011, my original focus was on increasing cash. Cash is the most liquid of all financial assets and promotes maximum flexibility to cope with life's challenges and opportunities. About halfway thru the year, however, it became more obvious to me that central banks around the world are increasingly likely to debase currency in attempt to stave off systemic collapse (with the EU at ground zero). In such a situation, risk associated with holding cash goes up because the purchasing power of cash goes down.

This found me swapping cash for stocks and metal. My general foray into stocks didn't last long, however. After catching some nice moves in stalwarts like JNJ, INTC, MSFT, and CSCO, it became increasingly difficult for me to hold stocks given general valuations and the macro state of the world. By late in the year I had drained most of my brokerage holdings of stock in favor of a blend of precious metals and cash.

I also set a goal to 'trade opportunitistically' in 2011. This was also done with some measure of success. The first half of the year found me long various stocks and commodities to express what initially seemed heightened chances for significant inflation. I also thought that a number of blue chip stocks were showing decent value.

Minds can change with the winds, however, and they did in my case by mid year. My constructive view on valuations turned pessimistic, and I unloaded most of my equity risk over the course of the next few months. The bigger issue were macro ones. Summer found Congress unable to cut spending and debt (both were raised), and the EU coming apart at the seams.

By late July I had a pretty big short side book that worked well when prices started cascading lower. I built and pared this 'hedged' position several times over the next few months as markets heaved to and fro. What I learned is that I could be much more patient with significant long and short exposure when these positions were more or less equally paired. Lower prices were times to lighten up the shorts and take on some longs, while higher prices allowed for the opposite.

The effectiveness of this approach waned some late in the year as my long exposure in commodities underperformed the SPX substantially, causing performance to bleed a bit into the final bell. All in all, though, I liked how this approach performed in the volatile environment that we have been facing, and I plan to carry over this approach into 2012.

Finally, my other 2011 goal was to increase precious metal holdings. Most of my activity here came in the second half of the year in conjunction with my increasingly bearish outlook for fiat currency and financial system stability.

In a future missive, we'll sketch some objectives for 2012.

position in CSCO, SPX

Origin of Society and Government

2011-12-31T11:49:00.000-05:00

If I'm losing control, will you turn me away?
Or touch me deep inside?
And before this gets old, will it still feel the same?
There's no way this will die
--Pat Benatar

Excerpt from Frank Chodorov's (1959) The Rise and Fall of Society, which remains one of the best books on liberty and society that I have read. The basic question on the table in this excerpt is why humans socialize and form government.

There is a preposterous train of thought that society and goverment precede the individual. Lincoln, in fact, used such a rationale in his defense of authoritarian federal rule during the Civil War. Indeed, this twisted thought process forms the basis for socialism in all of its flavors--communism, facism, et al.

In reality, societies precede governments. And individuals precede societies. The question then becomes what motivates individuals to socialize and to form governments?

Chodorov reasons that there is one constant in human behavior that can be observed wherever we encounter people: they are always and everywhere concerned with making a living. 'Making a living' is broadly construed to mean the process of satisfying needs, be those needs physical or psychological.

Various truths accompany the process of making a living. Human needs are never fully satisfied. People always reach for more. Moreover, the basic condition of our planet is one of scarcity. In order to satisfy needs, resources in non-consumable form must be converted into consumable form through productive effort. However, people have a general preference for less effort rather than more, and to satisfy their needs sooner rather than later.

Thus people constantly search for ways to economize effort. Economy may be obtained thru various approaches. People can set aside some resources today to develop tools that increase productivity tomorrow. Higher output per hour relieves conditions of scarcity and improves standard of living. This approach is central to capitalism--the development of labor saving devices thru capital investments that increase abundance.

Economy may also be gained by division of labor. Specialization in a particular line of work improves productivity through repetition. Learning by doing increases efficiency. Because there is less changing between tasks, switching costs are also reduced.

To realize the fruits of specialization, however, people must engage in trade. Trade permits people to broadly satisfy their needs with more economy. More can be obtained per unit of effort when people specialize in their production and then trade.

Here we have the basic answer to why individuals socialize. Societies are a natural expression of the human desire to satisfy needs. These needs can be better satisfied through voluntary exchange with others than by people working in isolation. The key word here is voluntary, for if an individual does not like the terms offered in societal exchange then that individual can choose a more self-sufficient condition, albiet at a lower living standard perhaps.

Because man has an aversion to labor, and prefers satisfying needs using the least amount of effort possible, there will be those in society who covet the output produced by others. As such, individuals engaged in societal cooperation institute government to help protect property from expropriation by others. As long as the scope of government is limited to the protection of individual property rights, then individuals and society prosper.

Unfortunately man's aversion to effort in the pursuit of ever more satisfaction finds him seeking a broader scope for government. "Because government is an instrument of force," he reasons, "perhaps it can be employed to deliver into my possession economic resources that I won't have to work for." Government thus becomes a strong armed agent for a thieving principal.

When the scope of government moves beyond the protection of property to the expropriation of property, then prosperity is lost in societal arrangements.

It should be evident, therefore, that society and government are constructs--institutions that individuals create in their lifelong pursuits of making a living. The institutions assist in man's endeavor to get more for less.

The problem, of course, arises when these institutions reduce the voluntary cooperation necessary for increasing prosperity, and instead fester forceful invasion of one individual on another.

Time Tunnel

2011-12-31T10:09:00.001-05:00

There's a crazy mirror showing us both in 5-D
I'm laughing at you, you're laughing at me
There's a room of shadows that gets so dark brother
It's easy for two people to lose each other in this tunnel of love
--Bruce Springsteen

Decent demo of the slippage or tracking error that occurs when holding leveraged ETFs over time. While these vehicles may be useful for trading, the tracking error erodes long term returns, making them undesirable for investors with long time horizons.

no positions

Ownership and Socialism

2011-12-30T11:44:00.002-05:00

You don't know how desperate I've become
And it looks like I'm losing this fight
In your world, I have no meaning
Though I'm trying hard to understand
--John Waite

Am starting once again Mises' (1951) Socialism. An important point made early relates to ownership. There is economic ownership and legal ownership. They are not necessarily equivalent.

In economic terms, ownership is the power of disposal. In the case of first order, or consumer, goods, the individual who can direct consumption of the good owns it. Thus, a thief who steals bread from a supermarket owns the bread from an economic standpoint because the thief is in control of its disposal. This state of ownership is true despite the fact that the thief does not have legal title to the bread.

Under the auspices of Natural Law, rightful ownership equates to individual property rights. Broadly construed, property includes an individual's life, his/her wherewithal to produce, and the fruits obtained from production. Natural Law declares that property is the dominion of the individual who can dispose of it as desired as long as the individuals does not forcefully interfere with the pursuits of others while doing so.

Socialism endeavors to expropriate property from the individual to the collective. It seeks to do this by empowering an institution, government, as a 'legal' agent for expropriation. Direct and forceful transfer of property from individual to states, as well as forceful limitations placed on the rights of individual property owners, are means of socialization.

From Mises:

"If the State takes the power of disposal from the owner piecemeal, by extending its influence over production; if its power to determine what direction production should take and what kind of production there should be, is increased, then the owner is left at last with nothing except the empty name of ownership, and property has passed into the hands of the State." (p. 56)

Reference

Mises, L. 1951. Socialism: An economic and sociological analysis. New Haven: Yale University Press.

The Roosevelt Myth

2011-12-29T12:29:00.003-05:00

"Unfortunately, no one can be told what the Matrix is. You have to see it for yourself."
--Morpheus (The Matrix)

Finally completed Flynn's (1954) The Roosevelt Myth. Flynn believed that mainstream history was giving FDR a free pass and he wanted to set the record straight. As such, Flynn's work parallels that of Garrett, Lane, Hazlitt, et al who sought to record and analyze what others were ignoring during the 1920s-1940s.

Flynn was a well known journalist who wrote for Harper's, Collier's, and others. By the 1930s he became one of the best known political commentators in the United States.

His perspective is particularly interesting because was a Democrat with populist inclinations who voted for FDR in 1932. However, it did not take Flynn long to realize that FDR was veering far away from his original campaign promises (which amazingly enough centered on reducing government, balancing the budget, and keeping the US out of war!).

The book, which is well cited, is divided into sections that chronologically follow FDR's three and a fraction terms (FDR died in April 1945 shortly after his inauguration for a fourth term).

An overarching question that Flynn considers is what motivated FDR to do the things he did during his presidency? The evidence suggests that Roosevelt was not motivated by strong ideology. By his second term beginning in 1936, opponents were accusing him of being a Marxist or at least someone of Communist persuasion.

While it is true that FDR had begun populating his administration with people of those colors from the outset, it appears that FDR was no more loyal to collectivist ideals than to any other idea that could earn him votes. Indeed, it was during the FDR administration that the market for political favor exploded in size. Prior to FDR, special interest groups were largely limited to big business. FDR made markets for political favor across the spectrum, picking up the poor, labor, old people, and any other category that sensed that they could get something from government in exchange for their vote.

The Roosevelt family itself was not immune to graft. For example, Roosevelt's wife and two sons made fortunes by exploiting White House ties during this period.

FDR displayed little discipline toward self-study and self-expertise. Instead, he surrounded himself with 'The Braintrust,' i.e., so called experts on economics, sociology et al who had opinions that FDR could use. And use them he did, flittering about like a moth in a light bulb factory from one government program to the next. During his first two terms, more than 100 government agencies reporting to the executive branch were created.

Flynn astutely observes that it was the practice of Congress writing blank checks to FDR for his spending whims, and the practice of FDR then using those funds to enact policy thru his vast agency reach, that elevated presidential power far beyond the intent of the Framers. The result is the Statist model that continues to escalate today.

Although FDR's behavior can be seen as politically rather than ideologically motivated, there is little doubt that many in his administration were sympathetic to socialist causes. And those administrators knew how to manipulate FDR in manners that advanced their agendas. It is unlikely that FDR would have been re-elected in 1940 or 1944 without the support of union and other special interest groups with Communist ties. One of Flynn's contributions is to elaborate those linkages and their impact on FDR's behavior.

When he began his second term in 1936, FDR was engaged in some end zone dancing about the economy, patting himself on the back that his New Deal programs had slain the Depression monster. Within a year, however, deflation returned and unemployment quickly recaptured Depression era highs above 20%.

Desperate to kick-start the economy, FDR eyed military spending and, gradually, military involvement as a means for breaking the back of the Depression. Flynn makes it clear that Russian interests played in role in US military policy decisions before, during, and after WWII. Stalin was clearly the dominant figure in policy decisions during the war, walking right over FDR in nearly every way possible.

It is quite likely that FDR's policy decisions, which can be seen as increasingly inept by late 1939, were partly due to his deteriorating health. Flynn makes a strong case that there was broad concerted effort to deceive the American people as to FDR's true state of health, and that this deception was successful enough to push Roosevelt over the top in the 1944 election. All the while, politically motivated interests were using FDR as a puppet to express their desires.

Flynn's portrayal of FDR as a purely political animal with modest intellectual capacity who oversaw a morally bankrupt regime is the antithesis of popular accounts. It demonstrates the power of the Matrix to slant, and the capacity for truth if the Matrix is cast aside.

Reference

Flynn, J.T. 1948. The Roosevelt myth. New York: The Devin-Adair Company.

Melted Butter

2011-12-28T17:43:00.000-05:00

Dream of better lives the kind that never hate
Wrapped in a state of imaginary grace
I made a pilgrimage to save this human's race
Never comprehending the race had long gone by
--Modern English

Action in precious metals continues ugly. New lows for the move today. Peering thru a longer time horizon lens, however, finds the yellow metal just now touching its multi-year uptrend line--a defined risk set-up for bullish traders.

One apparent takeaway from a macro perspective is that gold is not buying the thesis that the financial system is reliquifying--particularly w.r.t. the EU. Instead it is behaving like a wave of deleveraging, deflation in in the cards.

position in GLD

Under the Euro Surface

2011-12-28T11:14:00.001-05:00

We mention the time we were together
So long ago, well I don't remember
All I know is that it makes me feel good now
--The Motels

Am continuing to pick up chatter like this that the situation in Europe is worse than appears. The EU version of TARP, the Long Term Refinancing Operations (LTRO), has seen a commensurate jump in bank funds with the ECB Deposit Facility to a record high half trillion euros.

The implication is that interbank lending in Euro is largely frozen. Banks are instead choosing to keep funds w/ the central bank.

Deja vu pangs here, as this is very reminiscent of the risk averse behavior we saw stateside in 2008.

Which probably shouldn't be surprising. After all, the situations are largely the same. Risk seeking behavior and easy credit ran up massive debt and leverage. Now risk appetites are waning. And price declines threaten leverage systems with insolvency.

position in SPX

Rogers Outlook

2011-12-27T12:41:00.000-05:00

"My prediction? Pain."
--Clubber Lang (Rocky III)

Jim Rogers checks in w/ his thoughts on 2012. He is not optimistic, but does note that markets could be propped up as gov'ts print and spend ahead of big elections in order to buy votes.

Also thought this extended interview w/ Glenn Beck was interesting. It is easy to see why Beck left the mainstream media system. He can now ask questions that he could not have when under the control of someone else.

JR does not mince words. But what is interesting here is that Beck's format made JR perhaps let is guard down even more and let it fly. He obviously foresees a rough road ahead.

He pulled a couple of 1 oz gold coins out of his pocket that he picked up on his way to the interview. He shows a Canadian Maple and a Chinese Panda.

His favorite commodity sector continues to be ags, and he says that he buys the Rogers ag index.

position in RJA, gold

Media Bias and Distortion Effects

2011-12-26T12:20:00.001-05:00

Message just keeps getting clearer
Radio's on and I'm moving 'round the place
I check my look in the mirror
I wanna change my clothes, my hair, my face
--Bruce Springsteen

One implication of of Crawford and Sobel's (1982) model of strategic information transmission is that politically motivated information sources are likely to exaggerate their messages in order to influence less biased consumers of information.

Cai and Wang (2006) subsequently conducted experiments to estimate the amount of information and the degree of bias.

In an average state of the world that was 5.0, senders sent a message of 5.894. On average, then, senders sent a message that was biased by 0.894 units from the truth.

The receivers, even though they know that the average state of the world would be 5.0, chose an average policy of 5.282. Thus, receivers were 'fooled' into choosing a policy that was 0.282 units higher than the truth.

The results demonstrate that the typical person underestimates the degree to which other prople are strategic. In the context of media bias, consumers of information are more 'trusting' of news sources than they should be.

Such findings do not support a rational choice theory basis for media consumption. Instead, the results argue for a 'media effects' explanation.

Even when consumers are on guard for bias in the information that they receive, bias emanating from media sources is still prone to distort the beliefs of information consumers.

References

Cai, H. and Wang, J.T. 2006. Overcommunication in strategic information transmission games. Games and Economic Behavior, 56: 7-36.

Loan Ranger

2011-12-24T10:38:00.000-05:00

Step right up, and don't be shy
'Cause you will not believe your eyes
--The Tubes

After more than a year in court, the Fed has finally released data on its bank lending programs during the credit market meltdown in 2008/2009. Some mind numbing numbers. $1.2 trillion in loans plus a pledge to backstop about $7 trillion on bank liabilities. Bloomberg estimates that nearly 200 banks participating in the Fed's programs could have made nearly $13 trillion by investing the Fed's loans that they took.

Many people continue to pat themselves on the back that these measures averted a system meltdown. The numbers above should tell you that we printed our way out of this episode. Those hurt go beyond taxpayers, as anyone holding dollars now has less wealth in hand. Not to mention the elevated moral hazard...

It continues to amaze me how people keep pointing to the banks and the rich as the 'cause' of widening income differentials in this country...

Political Karn Evil

2011-12-23T12:36:00.000-05:00

Welcome back my friends
To the show that never ends
We're so glad you could attend
Come inside! Come inside!
--Emerson, Lake & Palmer

President Obama's speech yesterday on the importance of extending the payroll tax cuts two more months, while a critical number of House Republicans were holding out to extend the cuts thru 2012, was the height of political carnival. The president trotted out stories of the hardships that people would have to burden without the two month extension. One person he cited, for example, claimed that he would have to forego nights out for pizza with his daughters if the extension were not passed.

Seriously.

Of course, the president did not take the time to explain why two more months of pizaa with the kids was superior to the 12 more months of pizza with the kids that House Republicans were proposing.

The portion of the bill (which passed this am) which received nearly no media attention the extension, once again, of benefits for the unemployed.

Those who slurp this stuff up deserve the despotism being heaped upon us.

Gold, Silver, and the Spectre of Systemic Collapse

2011-12-22T18:12:00.001-05:00

Fate, it seems, is not without a sense of irony
--Morpheus (The Matrix)

Interesting take (part 1, part 2) on whether precious metals would really 'work' if we get a systemic collapse. The author is careful to state upfront that he is considering the worst case scenarios in the spectrum of chance.

He concludes those seeking power in a vacuum of collapse will likely demonize holders of gold, blaming them for 'causing' the collapse. Because most people will not have acquired precious metals for protection, the masses will likely jump on board this bandwagon in hopes that they will be able to get something for nothing.

He posits that metals markets will come under strict control with limited ability to convert metal into anything other than new script. Conversion rates may penalize metal holders, forcing them to give back much of the gains realized during the runup.

Silver, in his view, may have more utility than gold as a medium of exchange. It may be subject to less oversight, plus it is practically divisible into smaller units conducive to barter and routine trade. For this purpose, the author highlights the merits of US 90% silver coins minted 1964 or earlier.

The potential superiority of silver in this scenario is consistent with conclusions I've reached with my 'inner circle.' Gold is better viewed as a store of value to be passed along to future generations. Silver has more value as a medium for barter or exchange.

The other thing I found valuable in the author's work is his assertion that a powerful few, likely those with great influence in the current system, will try to reclaim control in the 'new' system. If that is the case, then the prudent question to ask is how will these people seek to preserve their weath across the transition? If there is a reasonable answer to this question, then perhaps individuals should allocate some resources in that direction as well.

I find it unpleasant to dream inside such a scenario. But prudent risk management requires exploring those scenarios far out in the tails of probability--where chances of occurence are small but the consequences of occurence are large.

Patterns of Optimism

2011-12-22T11:30:00.001-05:00

So glad we've almost made it
So sad they had to fade it
--Tears for Fears

Back in early November technicians were eyeing the pennant patterns forming in the major indexes, and largely opining that the resolution of that pattern was likely to be higher. As we now know, the bulls were fooled as prices moved lower.

Now, technicians are eyeing a forming inverse head and shoulders pattern with similar optimism.

Will Hoofy's heros bring home the bacon this time? That seems to be the growing consensus.

Personally, I'm not playing it that way. There is far too much macro overhang for my tastes, not to mention overvaluation at the micro level, to merit holding a bunch of long equity risk.

Am currently about 10% net long, but that long exposure is in commodities. It is offset not quite one for one with an index equity short. This hedged position has not proven to be as effective this time around because of recent weak commodity performance relative to stocks.

Currently, however, my MO remains the same. Use price to my advantage to a) add exposure at lower prices and b) unload exposure at higher prices. All the while, I want to maintain sizeable dry power (read: cash and short term fixed income).

position in commodities, SPX

Re-Hypothecation and Precious Metal ETFs

2011-12-21T14:58:00.000-05:00

"Unexpected this is. And unfortunate."
--Yoda (Return of the Jedi)

Zerohedge has been suggesting that the re-hypothecation issues faced by MF Global could spill over into precious metal ETFs such as GLD and SLV.

Further, ZH has posited a conspiracy theory that the metal ETFs were created to lure unknowing investors into instruments of paper gold and out of mining shares. Banks and other parties interested in getting control of the tangible gold supply chain could thereby acquire mining shares on the cheap. At some point, investors holding GLD et al will discover that they're holding worthless claims while the banks wind up holding the tangible gold assets.

Quite the Jedi Mind Trick...

While the conspiracy theory doesn't do much for me, the ETF re-hypothecation issue does. ZH builds its case around a lawsuit brought by a unit of HSBC on behalf of a client against the legal trustee of MF Global in charge of settling bankruptcy claims. The client (apparently using MF as his broker) was holding $850,000 in physical bullion at HSBC as collateral for underlying commodity contracts w/ MF. Following the MF bankruptcy, the client instructed HSBC to transfer the bullion to his Brink's account. Before the metal could be shipped, the MF trustee wrote HSBC claiming that the bullion was 'customer property' and not the client's.

In the lawsuit, HSBC is asking the court to rule on who is the rightful owner of the bullion.

If MF Global re-hypothecated physical bullion held in client accounts, then it is possible that the plaintiff no longer has legal custody of the bars.

The ramifications for ETFs like GLD are straightforward. These ETFs have gone to great lengths to demonstrate that the funds are actual in possession of physical metal, including publishing lists of bar serial numbers, positioning video cameras in the vaults that show the gold, and taking commentators on guided tours of the vault gold.

However, as the MF case demonstrates, measures that indicate metal on hand do not equate to ownership. The vault metal could be re-hypothecated or leased to someone else. When a counterparty somewhere in a daisy chain of trades fails to uphold its side of a contract, multiple parties might claim ownership.

Not exactly the situation that an investor wants with a 'safe haven' investment...

It is easy to file this situation under the general category of 'counterparty risk' that an investor takes on when buying any 'paper' form of a physical asset. I must admit, however, to being influenced by the re-hypothecation argument.

If you believe, as I do, that today's market prices are built on mountains of paper claims and leverage, then one has to question the validity of a security claiming to represent a physical asset that has no proof of clean title. As Zerohedge suggests, the metal ETFs can be seen as synthetic collateralized debt obligations (CDOs) that provide the illusion of investing in physical gold.

As such, I'm currently looking at lightening up my positions in GLD and SLV, and perhaps exiting them entirely--particularly if we see a relief rally after the recent carnage.

Am also getting the sense that Central Fund of Canada (CEF), while not perfect, is a more valid expression of physical bullion than either GLD or SLV.

position in GLD, SLV, CEF

Natural Law and The Constitution

2011-12-20T11:10:00.000-05:00

"Knights, the gift of freedom is yours by right. But the home we seek is not in some distant land. It's in us, and in our actions on this day! If this be our destiny, then so be it. But let history remember that, as free men, we chose to make it so!"
--Arthur Castus (King Arthur)

What made the Constitution remarkable was that it was the first government design grounded in natural law. Yes, prior governments such as Rome incorporated features of natural law into its design. But the Constitution of the United States was the first (and only) attempt to express natural law as articulated by Locke et al across the scope of government.

However, the expression of natural law in the Constitution is not perfect. Several parts of the Constitution are obviously inconsistent with natural law, suggesting that the Framers either did not fully grasp what natural law was about or that they compromised their ideals. The latter seems more likely given what we know about the process that defined the Constitutional Convention of 1787.

The most glaring deviation from natural law is what today is known as the Three Fifths clause, evident right away in Article 1, Section 2. I want to reflect more on this in a later post, but right now it is worth noting that if there was ever an argument against compromise in political processes, then the Three Fifths clause provides it. The Three Fifths clause treats certain individuals as property and denies them their natural rights. It took the country nearly 100 years to reverse it in writing, and a century more to broadly enforce it.

The Constitution strays from natural law in some other ways. In Article 1, Section 8, the Constitution grants the federal government monopoly power over money. The history of the world suggests that governments will always find a way to devalue money, thereby expropriating property from the citizenry.

The Constitution also empowered Congress to grant monopoly power to people deemed by the government to possess innovative inventions and ideas. While this was done with the stated goal 'to promote the Progress of Science and useful Arts,' distibuting legal monopolies shields individuals from market competition, and opens a market for political favor between those seeking special privilege and government officials who can grant it.

One item in the Constitution originally consistent with natural law but has since been bastardized was the muted taxation power of the federal government (Article 1, Section 9). The original design severely limited the federal government's capacity for direct taxation of individuals. This is wholly consistent with the notion of property rights which forms the basis for natural law. The Sixteenth Amendment changed this, granting the federal government with essentially unlimited power to appropriate personal property via income taxes.

Because government officials largely ignore the Constitution today, the extent to which the Constitution aligns with natural law seems unimportant. But that is precisely the point. Our tenuous condition today can be explained by our divergence from natural law which was well, but not perfectly, articulated by the Constitution.

Until/unless we reverse this course, we are destined to meet the same fate as all nations who came and went before us.

Hyper-Hypothecation

2011-12-19T15:55:00.000-05:00

All the old paintings on the tomb
They do the sand dance, don't cha know?
If they move too fast
They're falling down like a domino
--The Bangles

On top of hypothecation and re-hypothecation, there is also hyper-hypothecation. Hyper-hypothecation is basically the re-hypothecation process done multiple times between various trading partners.

HH creates systemic counter-party risk in a leveraged system. If one trading partner in a chain fails to make good on a contract, then the entire system freezes up because there is not enough capital to meet all the margin calls.

Conceivably, prices may be in error if participants fail to understand the counterparty risks that cascade thru a market system. Once those risks are understood, prices are likely to drop...significantly.

This pretty much describes our ponzi-esque condition...

Hypothecation and Re-Hypothecation

2011-12-19T12:25:00.001-05:00

"The mother of all evil is speculation. Leveraged debt."
--Gordon Gekko (Wall Street: Money Never Sleeps)

The MF Global meltdown has brought the words 'hypothecation' and 're-hypothecation' to the forefront. Hypothecation is the relatively common situation where a buyer pledges collateral to secure a debt. The borrower retains ownership of the collateral, but in the 'hypothetical' case that the borrower defaults, then the creditor can take possession of the collateral.

In the US, the right of a creditor to take ownership of collateral if the debtor defaults is called a lien.

The lion's share of home mortgages reflect hypothecation. The home 'buyer' pledges the property to be purchased as collateral to secure a mortgage from a lender. Until the house is paid off, the creditor retains the right to take possession of the property if the borrower fails to keep up with mortgage payments.

Re-hypothecation occurs when financial entities pledge collateral that has already been posted by clients to support their own borrowing and trading. If a broker dealer such as MF Global puts up assets held by clients in 'margin accounts' as collateral to, say, speculate in Euro sovereign bonds, then this broker dealer would be engaging in re-hypothecation.

The immediate consequence of re-hypothecation is that it increases systemic leverage. More assets can be borrowed and controlled with less amounts of underlying equity.

As we noted many times on these pages, leverage becomes problematic when price moves against you. The higher the leverage, the smaller the change in price necessary to wipe you out.

Thus, when Euro bonds tanked over the past few months, MF Global was wiped out.

In the case where leverage is built on re-hypothecation, then the question becomes one of property rights. Whose property is lost when MF Global was wiped out? If re-hypothecation is in fact a legal aspect of a contract (e.g., a client of MF Global agrees that a condition of maintaining a 'margin account' at the firm is that holdings can be re-hypothecated for MF's own trading endeavors), then it is the client, not the firm, that is on the hook.

Thus, clients of MF Global may be out billions of dollars...

Rational Choice Theory and Media Effects

2011-12-18T14:37:00.000-05:00

Hey, everybody plays the fool sometimes
--Aaron Neville

There is a theoretical argument against media bias having any effect on individual perception. Rational choice theory argues that people adjust for the bias of information streaming from particular outlets. Thus, a moderate who is listening to Rush Limbaugh would process information thru a filter that would strip out bias.

Ironically, rational choice theory suggests that listening to Rush Limbaugh drives moderates to become more liberal when processing information rather than more conservative.

In the opposite direction, assume that the average voter understands that the media, on average, are biased left. In previous missives, we have noted that politically motivated journalists will slant their message to a greater extreme in order to sway the voter. Thus, media messages are biased more extremely to the left.

Rational choice theory posits that, because the average voter recognizes the biased message, then the voter process the information with a conservative filter in order to 'sterilize' the message.

However, advances in research cast doubt on the validity of rational choice theory in the realm of media. It appears that significant 'media effects' are present when consuming information presented by politically motivated media. Stated differently, voters can be systematically fooled into thinking and voting against their natural tastes and values.

More in upcoming missives...

Freedom Watch

2011-12-18T13:00:00.000-05:00

"Your victories, and your losses, are shared by more than you know. Stay with us. Stay the course!"
--Col Harry Burwell (The Patriot)

Over the past few yrs, I have undertaken significant personal study to better understand the Constitution, its development, and subsequent events that have diminished its influence in American life. Until recently, mainstream media was a worthless resource in this regard.

Fortunately, Judge Andrew Napolitano has shouldered responsibility for delivering nightly analysis and commentary that can help anyone better understand current events in the context of the Constitution and liberty. Here, the judge recaps some of highlights of 2011 and sets the stage for 2012.

I pray for this guy--that he has the stamina to continue in an environment that is hostile to Constitutional context. It does appear that he possesses indominable spirit that will help him press ahead.

Hopefully that indominable spirit rubs off on others in the upcoming period.

Bass Voice

2011-12-17T11:59:00.001-05:00

My world's on fire, how about yours?
That's the way I like it and I'll never get bored
--SmashMouth

A couple of interviews w/ Kyle Bass that I have yet to chew fully thru. Similar themes to recent commentary. The end of ponzi in Japan, EU on fire, dysfunctional US govt. One new dimension was his bullish take on Canada--which is tempered by his bearishness elsewhere which will spill over in a negative way to the Knucks.

Interesting stat: value of bank assets worldwide: $87 trillion. Value of bank assets in Europe: $40 trillion. Euro bank balance sheets are 3x levered as the US.

When asked why ECB won't just print the debt whole, Bass said "Your question should be do they print before or after they default. In my opinion, they have to just print afterward because the number that they're going to have to print is so large that they all know this going in."

Not sure I understand what he's saying here. Perhaps the transcript that I'm reading is out of context, and I'll know more once I watch the actual interview.

Fooled Again

2011-12-15T16:46:00.002-05:00

And the men who spurred us on
Sit in judgment of our own
They decide, and the shotgun sings the song
--The Who

Remember SB 1867--that stealth Senate bill that removes due process from US soil in favor of the discretion of authorities? No way it could pass the House, they said. And if it did, the president would veto it, they said.

It passed the House late yesterday and President Obama has withdrawn his veto threat. Indefinite detention without due process is now in play in this country.

This outcome was hardly in doubt. The State continues to amass power in the name of 'security.' When done in this manner, and in measured increments, it appears that the people will get fooled again.

Totalitarianism by gradualism.

Eject Button

2011-12-14T12:55:00.001-05:00

"Ice, I got your MIG dead ahead."
--Pete 'Maverick' Mitchell (Top Gun)

Sold my small UUP call position this am into this morning's spike higher in the dollar.

Resistance is approaching dead ahead. Plus possible double top.

Just tradin' 'em...

no positions

Fractional Reserve Folly

2011-12-14T12:16:00.000-05:00

There's a room where the lights won't find you
Holding hands while the wall come tumbling down
When they do
I'll be right behind you.
--Tears for Fears

Nice overview of the Corzine/MF Global dynamic. As the author points out, the borrowing and levering of client assets is at the heart of this problem. And it is nothing new. Banks do it every day.

The leverage in a fractional reserve system means that the system is fragile. Fragile to small downward moves in price. Fragile to declines in confidence.

He's right. MF Global seems a chirping canary.

position in SPX

Buy Light Zone

2011-12-14T10:28:00.001-05:00

There's a storm on the loose, sirens in my head
I'm wrapped up in silence, circuits all dead
I cannot decode
My life spins into frenzy
--Golden Earring

Buying some gold and silver this am into the continued smeltage. Support is coming up fast. Stochastics getting there as well. Stated differently, risk/reward is getting more attractive.

Nothing crazy, just some incremental adds. Truth be told, would welcome lower prices for more substantial buying.

position in GLD, SLV, CEF

Believing vs Knowing

2011-12-13T12:44:00.000-05:00

Dr Richard Kimble: They killed my wife.
Deputy Marshall Samuel Gerard: I know it, Richard. I know it.
--The Fugitive

Mises discusses the causes of blind adherence to socialism.

"People do not ask for socialism because they know that socialism will improve their conditions, and they do not reject capitalism because they know that it is a system prejudicial to their interests. They are socialists because they believe that socialism will improve their conditions, and they hate capitalism because they believe that it harms them. They are socialists because they are blinded by envy and ignorance."

Editorial/opinion pages seem to be aggregators of the envious and the ignorant. People head to these places to either gain comfort that others hold similar beliefs, or to battle those with differing opinions. At the end of the day, these people are rarely closer to the truth. They maintain their envy and ignorance.

Truth comes from shedding envy and ignorance. It is an intentional, persistent journey in pursuit of what is--wherever it leads.

When truth is grasped, a person no longer looks to others for validation of what he/she thinks or believes. Instead, that person knows.

Hussman's Hard Negative

2011-12-12T12:06:00.002-05:00

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

Another weekly letter by John Hussman that contains several nuggets of insight. Right off the bat, he makes it clear that conditions have turned decisively negative, in his view.

The current situation is "characterized by an extremely unfavorable ensemble of conditions across valuations, sentiment, economic factors, and other conditions. Current conditions cluster with periods such as May 1962, October 1973, July 2001, and December 2007, all of which produced 10-20% market losses in extremely short order."

Dr J notes the increasing disparity between the leading indicators that his firm and ECRI tracks, which now signal an extremely high probability of US recession, and the prognostications of mainstream forecasters and pundits.

He notes some exchange between a Bloomber interviewer and ECRI's, Lakshman Achuthan:

Bloomber interviewer: [ECRI recently made] a recession call. What happened?
Achuthan: It's happening.

Suggests some serious cognitive dissonance out there regarding recession chances.

He also notes that the EU summit last week did (and can do) little to avert the central condition of credit crisis: solvency. Solvency is a shortfall between money owed and the resources needed to credibly repay it. Emphasis on 'credibly.' Printing money to pay back debts in devalued currency is not a credible strategy--at least in the eyes of creditors...

John suggests that perhaps one credible means for relieving stress in the EU is for countries to issue convertible sovereign bonds as they roll debt. The bonds would be convertible into the currency of the issuer at the option of the issuing government. Those countries with shaky fiscal houses would be required to pay a significant premium in order to compensate bond buyers for the commensurate risk.

Over time, John suggests, convertible debt might relieve the acute pressure that has built in the EU system. EU members would need to achieve sufficient financial credibility to remain in the EU system, lest they be subject to huge premiums on debt issued. The need for questionable bureaucratic enforcement mechanisms would be reduced. John suggests, "If the system can be saved, it will be saved" under such an arrangement.

One problem, of course, is that the significant discount that many EU countries currently enjoy by issuing debt under the implicit backing of the EU umbrella would vanish. Those countries would be forced to pay up and/or get their fiscal houses in order.

Market forces hate moral hazard...

position in SPX

Dark Gold

2011-12-12T10:42:00.000-05:00

Dark side's calling now
Nothing is real
She'll never know just how I feel
From out of the shadows
She walks like a dream
Makes me feel crazy
Makes me feel so mean
--John Cafferty & the Beaver Brown Band

Never got off a comment last week on the head-and-shoulders (bearish) pattern setting up in gold. This morning gold is down nearly $50, which essentially validates the 'dandruff.'

Why the thrust downward in the yellow metal? Not sure, cookie, as there is no 'obvious' gold-related news on the tape. Over the weekend, however, there were some rumblings that last week's EU summit outcomes 'did not go far enough' in resolving the debt crisis. Swap spreads are generally widening today, with Greek spreads crossing the 10,000 bps mark--implying a 100% chance of default.

Am starting to sense that gold may be a leading indicator of another round of 'risk off' in the markets. Added to my short equity position this am, and may do more in the upcoming sessions depending on how things unfold.

position in GLD, SPX

Beck and Call

2011-12-11T14:04:00.000-05:00

We both know we're headed for disaster
Our minds say no
But our hearts are talking faster
--Donnie Iris

Interesting chat with Glenn Beck. I like GB because he's not afraid to speak his mind. His thought processes continue to strengthen.

Like many of us, he began studying our situation with novice-like capability. But he has stuck with it, seeking out new sources and more information in search of the truth.

This interview is the first time I've seen video of Beck since he left Fox. What I noticed right away is an air of calm about him. He replies to the judge's questions with little hint of any need for acceptance or validation. Like many of us, he appears to understand that his thought processes have grown during the journey. He knows that he is closer to truth to previously.

When approaching truth, there is no need to seek affirmation of others. Reason provides the validation.

Quest for truth leads to similar conclusions offered by GB here. That the socialist model of the last 100 years is coming apart. That, because Europe was ahead in implementing the socialist model, the EU is likely to disintegrate ahead of us. That Tea Partiers increasingly fear the system as unfixable. That there exists only one political party in the US, the Big Government Party.

For those who been'working the system,' does it remain worthwhile to try to proactively reverse our course? Or is time better spent preparing for what increasingly seems to be apocalytpic meltdown?

Media Bias Research and the Endogeniety Problem

2011-12-10T12:46:00.001-05:00

Color me your color, baby
Color me your car
Color me your color, darling
I know who you are
--Blondie

The endogeniety problem is often present in studies seeking to establish relationships between media outlet exposure and erroneous views on issues.

The hypothesis goes like this. I suspect that outlet X misinforms its viewers. So if I survey viewers of various media outlets about their knowledge of a particular 'fact,' and viewers of X are more 'incorrect' on the fact than the viewers of other outlets, then I can conclude that X is misinforming its viewers in a politically slanted way.

Before we get to the endogeniety problem here, studies like this one have other obvious issues. Take, for example, the 'facts' that are employed in the study. One must come up with 'facts' that are not contestable, which is harder than you might think. Just because something is claimed as true by a group of people, e.g., George Bush lied about WMD in Iraq, does not make it a fact. Moreover, one would think that samples of media stories surrounding such facts require similar exposure across media outlets, lest the issue could plausibly relate to programming choices by outlet managers rather than distortion of facts actually presented.

Even if the researcher was able to compensate for the 'fact factors,' the endogeniety problem remains. People who view X may do so because they prefer the X's content and how it is delivered. Viwers may be attracted to X because they have particular beliefs and views of the world, and X's output may confirm those beliefs (this is the confirmation bias mechanism at work). These beliefs and views may cause large numbers of viewers of X to interpret information differently than those with other beliefs and views.

Because viewers self-select X, it will be difficult to discern whether subjects our hypothetical study significantly differ in their grasp of 'facts' because of the X treatment, or because of some other factor endogenous to the subjects that influences their intrepretive mechanisms.

If/when such studies are published, they should raise more questions than answers.

The Endogeniety Problem

2011-12-09T11:39:00.001-05:00

Inside, outside, leave me alone
Inside, outside, nowhere is home
--The Who

Lots of empirical research is tainted with an endogeniety problem. Suppose that you are a medical researcher, and you suspect a relationship between consumption of soy and the onset of cancer.

So you commission a survey study, asking people whether they have ever had cancer and also asking if they consume products with soy in them. The test seems straightforward. If soy consumers have a higher occurence of cancer than non-soy consumers, then the results seemingly show a relationship between soy and cancer.

However, there are other factors that might influence the onset of cancer besides consumption of soy products. Age, genetics, exercise, other dietary factors, etc. If people who are prone to contract cancer by these other factors are also likely to consume soy, then your study is plagued by a selection effect. Soy consumers are not a cross section of the population and may be more susceptable to cancer.

Consequently, your survey will take on two effects. It will reflect the possibility of a positive relationship between soy consumption and cancer as hypothesized. But it will also reflect the possiblity of contracting cancer due to other peculiarities of the sample. Thus, your survey is likely to overstate the true relationship between soy and cancer.

Because the subjects were allowed to choose the treatment, the treatment choice is 'inside' or part of the study. This is the endogeniety problem.

One way to avoid the endogeniety problem in survey research is to divide subjects into control and trial groups. This may be done by flipping a coin. Another way is to divide subjects according to whether they were born on odd or even days of the month.

The priniciple is to not permit subjects to self-select into the treament and control groups. Instead, it is best to have nature choose for them. In survey research, the key to avoiding the endogeniety problem is to conduct a 'natural' experiment.

Fairness Folly

2011-12-08T11:00:00.000-05:00

"Unfortunately, no one can be told what the Matrix is. You have to see it for yourself."
--Morpheus (The Matrix)

The Judge observes that in his 'Teddy Roosevelt' speech a couple days ago in Kansas, President Obama sought to justify the heavy handed role of government, forcefully taking from some and giving to others, in the name of 'fairness.'

Fairness is a favorite positive substitute symbol for propogandists, as it evokes warm feelings from people while the underlying meaning of the word is gradually changed. Thus, spending is said to be 'investing.' And mob rule is said to be 'democracy.'

Now, the president seeks to frame the taking of resources from people at the point of a gun (commonly defined as robbery) as 'fairness.'

As the Judge notes, it is the responsibility of government to treat all people fairly--a.k.a. equal treatment under the law, or the rule of law. This is Jefferson's 'all men are created equal' statement. All are naturally born to be treated equally under the law. None are born to be treated favorably.

What the president is espousing is unequal treatment under the law--a.k.a. discretionary rule or the rule of man. The rule of man is arbitrary, and subject to personal discretion. My definition of fairness may be different from yours. But if I am in power then I can force my definition of fairness on you.

Will the American people slurp the latest version of fairness blather down? History would suggest yes, as precedents go back to Teddy R himself. The numbers are also favorable, as the majority of people like to employ the concept of fairness to rationalize why they should be permitted to forcefully take liberty and property from minorities in the name of 'democracy.'

Like the Judge, I am hopeful that enough people are waking up to these thinly veiled attempts seeking to alienate us from our natural right to freedom.

The Black Swan of Cairo

2011-12-07T10:56:00.001-05:00

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

During his recently profiled presentation, Kyle Bass recommended that people in the audience read "The Black Swan of Cairo" (Taleb & Blyth, 2011). The paper is co-authored by Nassim Taleb of previous 'black swan' fame.

Bass is right. This is an insightful piece.

Although written in light of the political unrest taking place in Egypt earlier this year, the article is essentially an argument against the suppression of volatility and an argument for letting natural systems breathe with the inevitable ups and downs that are inherent to them.

The mortgage meltdown in 2007-8 and the current political upheaval in the Middle East share a common trait--they both follow prolonged periods of artificial suppression of volatility by policy makers in the name of 'stability.' Taleb and Blyth (2011) argue that such suppression pushes unobserved risks further into the tails of probability distributions. As the tails 'fatten,' the chances of extreme events grow--although things appear calm on the surface. At some point, however, the highly constrained system explodes in a massive blowup as pent up potential energy turns kinetic.

Paradoxically, actions taken seek to suppress naturally occuring volatility, while possibly well intended, tend to exacerbate volatility in the long run. Some examples:

Living in a super sterile environment...increases potential for disease.
Interest rate manipulation by central banks in the name of price stability...increases potential for big price swings.
Supporting a dictatorship...increases potential for political blowups.
Increasing regulation to reduce risk...motivates people to take more risk (moral hazard).

I find this model very intuitive as it is wholly consistent with principles of natural law. The authors quote Rousseau: "A little bit of agitation gives motivation to the soul, and what really makes the species prosper is not peace but freedom."

A nice insight toward the end of the piece: variation is information. Where there is no variation, there is no information. Thus, an intelligence apparatus seeking to distill info from political behavior in other countries will have a rough go of it when those countries have been manipulated by policies aimed at reducing variation.

The authors wrap it up nicely:

"With freedom comes some unpredictable fluctuation. This is one of life's packages: there is no freedom without noise - and no stability without volatility."

Another way of articulating the fundamental tradeoff between safety and freedom.

Reference

Taleb, N.N. & Blyth, M. 2011. The black swan of Cairo. Foreign Affairs, 90(3): 33-39.

Come Undone: Kyle Bass Redux

2011-12-06T17:46:00.001-05:00

Oh, it'll take a little time
Might take a little time
To come undone now
--Duran Duran

After a very interesting exchange last year, Kyle Bass returned for another insightful panel discussion this year (the actual discussion starts about 3 mins in).

I follow my fair share of macro discourse. I find the thoughts presented here as among the most interesting that I've heard. Bass' grasp of the sovereign debt and leverage situation is on a different level than most.

He is convinced that a EU crack up is imminent. From a silver lining standpoint, he suggests that, after observing the pending Euro collapse from front row seats, US policymakers might actually be stunned enough to proactively reverse course. Interesting thought.

On the other hand, he notes that capital flight into US Treasuries might lull policy makers into thinking that there is actually no crisis in our future.

In any event, this 1+ hr dialogue is worth your time. Personally, I plan to take it in a couple more times in the next few days.

position in USD, SPX

Lollipop Guild

2011-12-05T12:42:00.001-05:00

"You have no power here. Begone, before somebody drops a house on you too!"
--Glinda, Good Witch of the North (The Wizard of Oz)

Another sage letter by Dr J. In the front half he makes a compelling argument for a recession given the position of his forward looking indicators.

In the back half he discusses the EU situation given last week's 'coordinated' move by central banks. He reminds once again that the issue is one of solvency rather than of liquidity. Last week's coordinated dollar swap program is a short term measure aimed at boosting liquidity.

To remedy the solvency problem, it is likely that either banks fail or non-bank holders of EU debt must take haircuts. Thus far, no one wants to do that.

John ends with a section called "We represent the Lollipop Guild." His thoughts here are so wonderfully collected that I want to capture them here in their entirety:

"Frankly, I am concerned that Wall Street is becoming little more than a glorified crack house. Day after day, the sole focus of Wall Street is on more sugar, stronger sugar, Big Bazookas of sugar, unlimited sugar, and anything that will get somebody to deliver the sugar faster. This is like offering a lollipop to quiet down a 2-year old throwing a tantrum, and expecting that the result will be fewer tantrums.

"What we have increasingly observed over the past decade is nothing but the gradual destruction of the ability of the financial markets to allocate capital for the benefit of future growth. By preventing the natural discipline of the markets to impose losses on the poor stewards of capital, and to impose interest rates high enough to force debtors to allocate the capital usefully, the world's policy makers are increasingly wrecking the prospects for long-term economic growth. The world's standard of living (what we can consumer for the work we do) is intimately tied to its productivity (what we can produce for the work we do). That productivity requires scarce savings to be allocated to productive physical capital, and to productive human capital (primarily education).

"Nietzsche famously said, 'What does not kill me makes me stronger.' The corollary is 'What constantly rescues me makes me weaker.' The world will only stop looking for bailouts when policy makers stop handing them out."

Re-read until you understand.

A Simple Model of Compromise

2011-12-04T14:08:00.002-05:00

"A strange game. The only winning move is not to play."
--Joshua (WarGames)

Let's say you that value liberty. You believe that all individuals should be free to pursue their interests without forceful interference from others.

Others in the society in which you live, however, believe in forceful interference. They recruit government as an agent of force in order to coerce others to do what they want.

However, because those who believe in forceful interference like to view themselves as 'civilized,' they usually don't unleash their government agents until first 'negotiating' with you. Of course, the best outcome for you would be a negotiation where you give up no freedom. The worst outcome would be where you give up all of your freedom and assume the role of a serf.

The spectrum of outcomes can be pictured as follows:

0% free<------------------------->100% free

Those who believe in interference have already told you that they are seeking a compromise. In negotiations, compromise is seen as meeting a counterparty somewhere 'in between.' On the scale above, a compromise would result in a negotiated level of freedom somewhere between 0 and 100 percent. For the sake of our example, let's define a negotiated compromise as meeting the counterparty exactly halfway between on the freedom scale above.
At the bargaining table, then, you face one of two choices: 1) walk away from the table and retain 100% of your freedom, or 2) compromise and give up 50% of your freedom.

If you compromise, your freedom is now 100*.5=50% of the original level.

Down the road, if there is a second negotiation and you compromise again, then your freedom is 100*.5*.5=25% of your original level.

If there is a third negotion and you compromise, then you have 100*.5*.5*.5=12.5% of your original freedom.

The general form of this model where you compromise in each round becomes: % freedom maintained = 100*(0.5)^n where n = number of times that freedom is negotiated.

After seven rounds of negotions, your freedom is less than 1% of its original level.

When negotiations involve the level of freedom that you maintain, compromise results in loss of freedom. In negotiations with multiple rounds, compromising in each round results in a loss of freedom the declines geometrically with the number of rounds.

What If Rx

2011-12-04T11:11:00.000-05:00

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

The judge plays what if. Of course, he describes no make believe scenario. We are losing freedom by the day. And have been doing so for decades.

My greatest hope is that more people being to see through the Matrix. Right now, far too many have chosen the blue pill...

Oath Keepers

2011-12-03T12:14:00.002-05:00

"When your friends betray you, sometimes the only people you can trust are strangers."
--Danny Roman (The Negotiator)

Related to the previous post, meet the Oath Keepers, a group of cops who have sworn an oath to uphold the Constitution even if ordered to do differently by superiors.

Imagine the situation when Oath Keepers are ordered by higher ups to disarm or detain US citizens.

Disappearing Act

2011-12-03T11:59:00.000-05:00

"These people can make us disappear."
--Nina Chance (Murder at 1600)

While US citizens were enjoying Thanksgiving leftovers last weekend, representatives of the US Senate led by John McCain (R, AZ) and and Carl Levin (D, MI) were secretly crafting additions to the National Defense Authorization Act (S 1867) that would declare the United States a battlefied and permit the military to intervene in domestic situations deemed a threat to national security. This intervention would include the detaining of US citizens indefinitely without due process.

The bill quickly swept thru Senate this week by a vote of 93-7.

The judge discusses the situation prior to the Senate voted with one of the few subsequent nay voters, Rand Paul (R, KY).

Once again, we have a clear example of Congress people who took an oath to uphold the Constitution crushing it into the ground beneath their feet.

The last time US troops regularly walked US streets was under the Lincoln regime. Should this bill pass the House and get signed into law by the president, the United States may become a perpetual state of martial law.

Spill and Spoil

2011-12-02T15:49:00.000-05:00

Watching I keep waiting still anticipating love
Never hesitating to become the fated ones
--Berlin

US markets gapped higher this am on more optimism over a resolution of the EU situation coupled w/ a brighter than expected payroll number. About mid-day, however, stocks started leaking and sovereign bonds spreads begans blowing out.

The culprit: chatter that Congressional Republicans were at work to block IMF bailouts of EU countries.

Wow. Should that be true and come to fruition, it would be the first responsible action this group would have taken in some time. Using US taxpayer dollars to bail out the excesses of other countries is clearly unconstitutional.

But I'm not holding my breath...

position in SPX

The Fox Dynamic

2011-12-01T11:46:00.000-05:00

There is freedom within
There is freedom without
Try to catch the deluge in a paper cup
--Crowded House

With the overwhelming majority of media distorting messages to the left, it should be no wonder that Fox appears so different than the rest. In the late 1990s, Fox positioned itself to the right of other large media outlets and has been hugely successful since.

Why it took so long for a major outlet with a conservative slant to come about is perplexing. After all, there is a large conservative market out there--as verified by Fox's big viewership. It is also mystifying why there have been few 'me too' followers seeking some of the pie that Fox has been gorging in.

My best answer is that the supply of conservative journalists has been chronically low, meaning that there has been a deaarth of the most critical supply necessary for generating right leaning content. We know the general tendency for left-minded people to 'self-select' into journalism careers. Moreover, newsrooms full of liberal reported create a hostile environment for those who are not like-minded.

Now that Fox is in the mix, the dynamic appears to be shifting. Fox commands such a large market share that left leaning outlets now fight over a smaller piece of economic pie. Lacking the economic resources they once enjoyed, many of these outlets have been driven to the brink of failure. Opportunities for left-minded journalists are therefore shrinking.

As such, it is easy to understand why left-leaning media and their supporters despise Fox. Control of the media mechanism has been taken away from the Left, and it is doubtful that it will returned.

The big opportunity instead appears to be on the conservative side--particularly for enterprising outlets seeking to cut in on Fox's success. Quoting Fox's Brit Hume in Groseclose (2011):

"[If you are willing to pursue stories that traditional, liberal reporters aren't interested in,] it gets to be like picking up money off the street."

That money will remain easy pickings until competition intensifies.
no positions

Bazooka Time

2011-11-30T21:30:00.000-05:00

Lieutenant Briggs: Suppose they panic and start shooting?
Harry Callahan: Nothing wrong with shooting if the right people get shot.
--Magnum Force

As noted in this morning's post, central banks got out the bazookas today in an attempt to blow away systemic deflationary forces that are driving Euro and US banks toward insolvency.

On the surface, the concerted central bank actions are clearly inflationary.

This post on zerohedge w/ Peter Schiff comments captures it well. The snippet at the end of the post REALLY captures it well:

"...this is merely the beginning as more and more inflationary actions have to be undertaken by central banks to save banks from being crushed by untenable debt loads. Whether they succeed in overturning the deflationary tsunami is unknown. What is certain is that they will bring fiat currencies to the [brink] of viability (and beyond) in trying."

As the snippet notes, the big question is whether this collective action will work. In late 2008, the Fed got out the fire hose of liquidity to stem the Lehman blowup. After a sharp relief rally on the news, however, markets resumed their downward path as the deflationary forces were not to be denied.

Hard not to wonder whether the same set up might not be in play here. Yes, the collective bazooka exceeds the power of the Fed's firehose. But the deflationary forces are more global in nature this time around.

Peter Schiff suggests that this is the time to load up on gold. That may turn out to be the case. Heck, gold popped 40 handles today.

But the other side of the trade is that the market forces pressing against the intervention are deflationary in nature.

And it's generally not nice to fool Mother Nature.

position in SPX, gold