Repos and QT

Then the door was opened
And the wind appeared
The candles blew
And then disappered
--Blue Oyster Cult

Interesting WSJ article suggesting that declining reserves stemming from the Fed's 'quantitative tightening' (QT) program poses a significant threat to financial markets. 

QT is the reverse of quantitative easing (QE). In QE, the Fed printed money out of thin air to buy bonds from banks. That printed money became 'reserves' that the banks have deposited with the Fed. Unsurprisingly, reserves have rocketed higher given the $9 trillion of bonds that the Fed now holds on its balance sheet via QE. 

Bank reserves serve various purposes. They can be used to settle trades with other banks. Reserves are also kept to satisfy regulatory requirements, which have generally been ratcheted higher since 2008, to provide some margin of safety in the event of another systemic credit event.

Reserves can also be used for investment purposes. One popular avenue toward this end is the repo market. Repos are contracts where one party sells securities to another party in exchange for cash. The buyer (who is engaging in what is called a 'reverse repo) promises to sell the securities back to the original holder at some future (usually near term) date and at a set (usually higher) price.

These pseudo loans help the pseudo borrowers manage short term cash obligations while providing the reverse repo pseudo lenders with quick profits.

When reserve levels are high then the 'interest rates' governing repos are low and usually in line with the Fed Funds Rate. However, when reserves decline, repo rates are prone to rise because there is less capacity for reverse repo 'lenders' to employ. 

As the Fed embarks on QT, reserves are beginning to fall. Although there are no signs yet of stress in the repo markets, there is belief that it is only a matter of time before problems surface. 

Indeed, in 2019, the Fed had to inject emergency shots of liquidity into these markets after previous QT programs resulted in skyrocketing repo rates that threatened to seize up money markets.

Given the size and centrality of money markets to contemporary market functioning, it may once again be time to fear the repo.

Remote Work and Lower Productivity

I was standing
You were there
Two worlds collided
And they could never tear us apart
--INXS

For more than a year, I've been wondering when the negative productivity effects of remote workplaces encouraged by pandemic regulations would show up. Coase's seminal work told us that organizations exist to reduce the transaction costs inherent to individual contractors trading on the market. 

Stated differently, productivity tends to increase when people work together.

CV19 pulled workers apart. Consequently, transaction costs should go up and productivity should go down.

It appears that the data are finally starting to reflect this reality. For Q1 and Q2 of 2022, non-farm business labor productivity has printed in negative territory (FRED graph here). Parenthetically, the FRED graph seems to paint a more positive picture than the actual BLS data series, which currently indicates 4 negative prints in the last 8 quarters, including huge -7.4 and -4.6% YOY declines thus far this year. Not sure why the difference.

Some commentators are attributing lower productivity to increased 'sloth' associated with employees being able to get away with goofing off when working remotely. There is certainly some truth to this, as one way to cope with agency problems is increased monitoring. Monitoring is a type of transaction cost, one that certainly increases when distance between employee and supervisor increases.

But the larger point is that costs of trade among workers endeavoring toward the same end go up when they are not working in close proximity.

We're witnessing a large-scale example of this currently.

Return or You're Fired

Come on and let me know
Should I cool it or should I blow?
--The Clash

Unlike many CEOs who have been pussyfooting around the issue, Tesla (TSLA) CEO Elon Musk has made it clear. Come back to the office in person or seek employment elsewhere.

Musk seems to understand the productivity decline likely from remote work.

btw, lower productivity exacerbates inflation...

Burying Liberty...Again

"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)

Judge Nap rails against the unconstitutional seizing of Russian property, the freezing of Russian bank accounts, and the barring of contractual trade with Russian partners--all done under the guise of sanctions imposed after the Ukraine invasion. These sanctions violate both the Fourth Amendment, which requires warrants specific to place and person before property can be detained, and the Fifth Amendment, which requires due process before property can be expropriated.

A common response to charges such as these is that the Constitution only protects US citizens and not foreigners. This is wrong. The wrongheadedness of this line of thought is revealed by considering the Constitution's conceptual basis.

The formation of the United States is grounded in natural law. Natural law posits that all men are created equal at birth, meaning that we all have equal rights to life, to the freedom to pursue our interests as long as we do not forcibly intrude on the pursuits of others, and to the property that our pursuits might generate.

These natural rights are granted to each of us by our creator and as a condition of our humanity. They are unalienable, meaning that we are free to exercise our natural rights unencumbered by government interference. This is the founding principle of liberty. 

Government's sole just purpose is to protect our natural rights. It can only interfere in an individual's pursuits when it is suspected that a person has forcibly compromised the natural rights of someone else. However, government must carefully follow just legal processes including those specified by the Fourth and Fifth Amendments.

If the natural law basis of the Constitution is to be upheld, then it makes no sense to limit its application citizens of the United States. Americans were not the only people born to the 'self-evident' truth that all men were created equal. All have been endowed with the same set of natural rights. When government tramples on the natural rights of any individual, it has done wrong.

As the Judge notes at the end of his column: "War is the health of the state and the graveyard of liberty." Actions of the US government taken under the auspices of the Ukraine conflict demonstrate once again America's lack of leadership in championing the very principles upon which our nation was founded.

War finds the United States burying liberty once again.

Administrative Overhead

Brantley Foster: What's this department? What do they do here?
Fred Melrose: Who knows? This place is a zoo. Nobody knows what anybody else is doing.
--The Secret of My Success

Administrative staffing (a.k.a. 'overhead') generally increases with organizational size. Small organizations are characterized by decision-makers who wear 'many hats.' A manager might make a production decision one minute, then an HR or accounting decision in the next.

As organizations grow, it usually makes sense to divide up decisions among specialists. Specialists focus on a narrow functional domain, such as R&D or marketing, which increases their decision-making productivity as they benefit from learning effects and lower switching costs. 

Moreover, sheer size and complexity makes large organizations difficult for any one person to understand. The number of decisions that must be made on a daily basis could number in the tens of thousands and easily exceed any single decision maker's capacity for rendering them. 

There are technical reasons, then, why we should expect more staff and administrative overhead as organizations get larger. More staff can improve productivity.

However, staff could also grow for social reasons. Because they seek to maintain or improve legitimacy in their institutional environments, organizations seek to score points with external social entities. Stated differently, organizations might add staff to 'look good' rather than to 'do better.' 

Coercive social pressures might drive organizations to hire regulatory or compliance personnel. Think environmental, safety, and legal departments. 

Social pressures might also be normative in nature, motivating organizations to staff in manners that signal awareness and caring about particular social issues and causes. For instance, many organizations have recently staffed departments of diversity and sustainability in response to those popular movements.

Meyer and Rowan (1977) seminally observed that administrative additions of this type may not be accretive to the organization's technical core at all. Adoption of staff for legitimacy reasons is instead largely ceremonial in nature. It is meant to satisfy the social needs of outsiders rather than the economic needs of buyers.

This is the price to be paid for increased social standing. More resources that could be invested toward productive ends, such as process and product development, are allocated bureaucratically for the sake of appearance. 

Some have argued that organizations must strengthen their legitimacy in the eyes of others in order to acquire the resources necessary to achieve greater economic performance. However, it is straightforward to theorize that excessive attention paid to looking good robs resources from the technical core, thus decreasing the likelihood that socially conscious organizations will do better and survive over time.

Perhaps this pathology increases with the strength of the institutional environment.

Reference

Meyer, J.W. & Roward, B. (1977). Institutional organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83: 340-363.

One for Two

I'm falling down a spiral
Destination unknown
Double crossed messenger
All alone
--Golden Earring

Yesterday the Supreme Court blocked the federal government's vaccine mandate for large employers while upholding the mandate for health care organizations receiving federal funding.

The judges were one for two.

Private employers, i.e., those with no strings attached to government, should be able to set the terms for using their property. If those terms include a requirement for employees to be vaccinated against a particular pathogen, then private employers are within their rights as property owners to do so. 

Stated differently, employers should be allowed to discriminate as to how their property is utilized. They can discriminate between vaccinated and unvaccinated individuals--just as they should be able to peacefully discriminate on any other factor--including race and skin color. If this discrimination is ill-advised, then markets will punish their poor decision-making.

It is, of course, completely within worker rights to discriminate as well. Individuals can discriminate against producers with vaccine mandates by not seeking work with these employers, or by resigning when their employers pass distasteful policies. 

While private enterprises can establish their own internal health care mandates, the state has no standing to forcibly impose its own mandates or interfere with the rules governing private labor market transactions. 

Of course, it is questionable whether many 'private' enterprises are truly private anymore. When businesses receive resources from government (e.g., government contracts or subsidies), or are subject to favorable regulatory treatment, then they are by definition receiving government support or sponsorship. The more beholden organizations are to government, the more likely they are to do the bidding of government in exchange for political favor.  

This brings us to the second part of yesterday's ruling. The high court declared that health care facilities that receive federal funding must comply with federal vaccine mandates. Health care organizations that receive federal funding are poster children for organizations that are beholden to the feds.

Because of their dependence on federal government resources, health care organizations are extensions of the federal government acting as de facto government agencies. 

The Bill of Rights gives such federal agencies far less leeway to discriminate compared to private entities. Whereas a private employer can justly create policies that favor particular groups, federal government entities cannot. Doing so would violate individual rights to religion, speech, assembly, association, privacy, et al--all of which are expressly protected from federal government interference under the Constitution.

Thus, a federal mandate that requires vaccination for employees of organizations beholden to the federal government is blatantly illegal and unjust, regardless of what six high court justices claim.

More Government, Less Peace

There will be no isolation
In our secret separation
--The Fixx

Most people view themselves as peaceful. They claim that they detest violence. 

However, many of those same people are proponents of a strong state. The core competence of the state is force. When people contract with the strong arm of government to get something that they want, they are not acting peacefully. They are principals of violence, collaborating with agents to act aggressively against others.

Truly peaceful people seek to influence others through persuasion. They don't coerce.

A valid gauge to the innate peacefulness of a society is the size of its government. The larger the government, the less peaceful the citizenry. 

Further, because government is viewed institutionally, the larger the government, the more violence has been legitimized. 

Face of Freedom

You must have tried and defied belief
Maybe buried your head in insular grief
I need your hunger, you need mine
A million mouths can swallow up time
--Pete Townshend

Nice article the negatives associated with masks. The author reviews the ineffectiveness of masks from a technical standpoint. There remains no compelling scientific evidence in favor of masks. In fact, and this is me not the author, one would think that proponents of masks so convinced of the 'science' behind masks would be conducting studies, including random controlled trials (RCTs) by the dozens--or hundreds--that present incontrovertible theory and evidence in support of masks. 

But they haven't (and can't). Stunningly, the Denmark study remains the only large numbers RCT investigation of masking that has been published. To the consternation of the pro-mask crowd, the study found no significant difference in CV19 infections in masked vs unmasked groups. That, after 18+ months, no further such analysis has been conducted by public health agencies worldwide goes a long way toward explaining the 'science' of masking.

That said, the author's best contribution is his discussion of the social consequences of masking. Beyond discomfort and lack of hygiene associated with covering one's face, masks offend social sensibilities. Facial appearance and expression contribute to individual uniqueness and value. Faces, through their various expressions, efficiently convey information that is difficult, and in many cases far more costly, to obtain through other means. 

People, especially children, rely on facial expressions for their ongoing development. Indeed, Darwin (1872) observed that the face is "the chief seat of expression." A recent article in Forbes questions school masking policies primarily along this line of reasoning.

Masks erode communication and understanding. They compromise human interaction and reduce quality of life.

Why aren't public health officials being challenged to present their evaluation of the costs associated with policies that force people to mask?

Banning Vax Mandates

Say that you'll never, never, never, never need it
One headline, why believe it?
Everybody wants to rule the world
--Tears for Fears

Interesting development in South Dakota where Governor Kristi Noem, the most ardent opponent of lockdowns during the CV19 pandemic among state governors, refuses to back Republican-led legislation that would ban vaccine mandates by employers inside the state. 

On the surface, this may seem inconsistent. Opposing lockdowns but not opposing vax mandates? However, her position is actually well reasoned and consistent.

Noem has in fact banned vaccine mandates for state and local government workers under constitutional requirements that guarantee individuals the right to pursue their persons interests free of government interference without probable cause and due process.

However, those constitutional restraints do not extend to private businesses. Employers and employees are free to negotiate terms. Noem clearly recognizes this and does not want to set a dangerous precedent.

Her position demonstrates very good insight that, unfortunately, is very uncommon nowadays.

I do think that, to be thorough and completely transparent, Noem needs to address an issue that we have recently considered and one raised by one of the GOP legislators in the article behind the anti-vax mandate bill. Are 'private' businesses, especially larger ones, truly private?

There is an argument to be made that many companies are beholden to government for resources of some type, and thus subject to government influence. They are essentially government sponsored entities.

If this is the case, then there is an argument to be made that, by implementing vaccine mandates, these companies are doing the bidding of government. This is unconstitutional

As strong as her position is, an even more constitutionally consistent revision to Noem's position might be to ban vax mandates in corporations where it can be demonstrated that they are dependent on the government for resources of any kind. 

If companies want to be free to impose mandates on their employees, then they should first show that they free from government influence that might shape their decisions in ways that truly unhampered markets would not.

Government Sponsored Sectors

"Ain't nobody clean. Be nice to get clean, though"
--Tripp (Glory)

Which industrial sectors do substantial trade with the federal government, both in terms of economic resources and influence (contracts, subsidies, tax breaks, monopolistic grants, favorable regulatory treatment, etc), thereby making them government sponsored sectors? It would probably be quicker to list those sectors that have not received such treatment. 

But let's list some of the largest:

military/defense

healthcare

education

We've noted those before. Perhaps think of them as the Big Three. But there are others:

finance

utilities

transports

media, particularly social media

housing/real estate

law

accounting

agriculture (e.g., corn/ethanol subsidies)

energy, greens in particular

There are others. Recently in the news: automotive working w feds on electric cars, computer chip industry getting government support for domestic factory capacity adds.

When you think about it, few sectors are truly free and clear of government influence.

Homesteading

"Do you mean to tell me, Katie Scarlett O'Hara, that Tara, that land, doesn't mean anything to you? Why, land is the only thing in the world worth working for. Worth fighting for. Worth dying for. Because it's the only thing that lasts."
--Gerald O'Hara (Gone With the Wind)

Today, if you want to own some land, then you generally have to buy it from someone who already owns it. But how did it work back in the day when land was not yet owned? Could you be like Christopher Columbus and just claim it? Finders, keepers?

That's often how it starts--claiming ownership of large tracts of land in your own name or in the name of someone else if you're that someone else's agent.

But claiming ownership by fiat is difficult to sustain for long periods of time. You have to defend the land against intruders. You have to maintain it. Most importantly, you'll likely want to elevate your standard of living by production on that land. 

You'll need guards, workers. You'll need tools and other resources. How to fund it? You'll probably have to peel off property to fund your interests. Those who receive land in payment have similar goals and needs. They undertake a similar process.

It may take a bit of time, buy hopefully you see where this leads. Gradually, apportionment of land approximates the ability to use it productively. Owners with too much unproductive land have to surrender some until they reach a scale that they can manage efficiently. The allures of specialization and trade drives even finer apportionment.

This early process is called homesteading. Land is apportioned according to productive capacity of the owners.

After the primary markets of homesteading wane, land begins to trade in secondary markets (like today).

However, in unhampered markets, the relationship between productivity and land ownership remains. The amount of real estate owned tends to be proportional to the owner's productivity.

Capex and Institutional Uncertainty

"Just one chance in a hundred to make one improvement in a hundred."
--Don Walling (Executive Suite)

Classic example of organizational response to institutional uncertainty. US Steel (X) decided to shelve a job creating plant expansion in the face of a hostile regulatory environment. Perhaps the company will play wait-and-see. Maybe it will pursue a similar project in a region of the world friendlier to capital investment. 

Of course, the project may be gone for good.

Any way you slice it, an opportunity for domestic productivity improvement has been squandered by a hostile regulatory regime.

Social Cost of Masks

I went back to the doctor
To get another shrink
I sit and tell him 'bout my weekend
But he never betrays what he thinks
--The Who

Thomas Massie notes another problem with masks. In addition to doing nothing from virus protection standpoint, masks impair social exchange. 

Being masked up, and being locked down for so long, has caused us to look at each other differently. The sooner we get this economy back open, and the sooner we get these masks off and become human again, the sooner we may start treating each other like human beings again.

— Thomas Massie (@RepThomasMassie) September 30, 2020

When faces are masked, we learn less about, and from, others.  Transaction costs increase. Social power declines.

That's what statists want.

Vine and Whine

"Sure don't look none too prosperous."
--Tom Joad (The Grapes of Wrath)

When Christ speaks in parables, God's wisdom is revealed as if a brilliant light had just been switched on. He tells the story and, click, we suddenly see.

We have recounted several parables previously, including the Parable of the Talents, the Lost and Found Parables, and the Parable of the Rich Fool. In today's gospel, we are treated to the Parable of the Laborers in the Vineyard (Matthew 20:1-16).

Jesus tells us that the kingdom of heaven is like a landowner who goes out at dawn to hire laborers for his vineyard. After agreeing with the workers on the wage to be paid at day's end, the landowner sets them to work in the fields.

Several times during the day, the landowner finds groups of people standing around town and not being productive. He tells them to go to his vineyard and work, and that at the end of the day he will pay them what is just.

At the end of the day, the landowner told the foreman to pay the laborers in reverse order starting with those workers who had arrived latest in the day. To their surprise, the late arrivers were paid a full day's wage. When they saw this, those who started working at the beginning of the day anticipated a bonus because they had arrived first and had worked more hours than the late arrivers. 

To their disappointment, however, they were also paid a full day's wage like the others. They complained to the landowner, whining that, although they had worked longer and harder than the late arrivers, they were paid the same daily wage. The landowner then replies,

"My friends, I am not cheating you. Did you not agree with me for the usual daily wage? Take what is yours and go. What if I wish to give this last one the same as you? Or am I not free to do as I wish with my own money? Are you envious because I am generous?" [emphasis mine]

Christ concludes, "Thus, the last will be first, and the first shall be last."

What do you see when the light switches on? I see God's message of helping idle people become productive late in life, the divine nature of contracts and property rights, the danger of envy and covetousness, and the chasm between earthly and heavenly notions of 'fairness.'

Defunding Police

Poets, priests, and politicians
Have words to thank for their positions
Words that scream for your submission
And no one's jamming their transmission
--The Police

Cascading from the protests and riots over the past two weeks have been leftist calls to 'defund the police.'

Police provide security services. There are also private firms that offer such services. If public funding channels were in fact shut off, then demand would shift to the market, where individuals and groups interested in purchasing more security would begin contracting with private firms to do so.

Privatizing security offers some advantages over publicly funded police. For example, police brutality, similar to the instance that sparked the current round of riots, would probably be reduced because 'bad cops' would have no unions or other institutional shields to hide behind.

It is doubtful, however, that this is what progressives have in mind with their 'defund the police' chant. In fact, it is difficult to follow their logic at all. Because leftist doctrine is entirely authoritarian, it is difficult to see how any of their policies could possibly be implemented without a state-sponsored groups of strong armed agents to enforce their rules.

Consider the recent lockdowns. How far would state governors be able to get if their draconian orders where not enforced by police? In some instances, of course, we saw local police refuse to enforce the orders which weakened the legitimacy of the lockdown.

How long would lockdowns last if there was no threat of sanction by police?

Leftists need police to do their bidding. Without strong armed agents, authoritarians get nowhere.

Transaction Costs and Regulation

David Larrabee: It's all beginning to make sense. Mr Tyson owns the sugar cane. You own the formula for the plastics. And I'm offered as a sacrifice on the altar of industrial progress.
Linus Larrabee: You make it sound as if the son of the hotdog dynasty had to marry the daughter of the mustard king.
--Sabrina

Oliver Williamson passed away last week. Professor Williamson was a giant in the field of transaction cost economics. Building on the pioneering work of the late Ronald Coase, Williamson sought to explain why we see different organizational forms in the marketplace.

On one extreme we find granular trade between small independent contractors producing narrow ranges of output and trading with each other with little or no organizational overhead. Lots of 'outsourcing.' On the other extreme we find huge corporate hierarchies that do much of production and exchange internally rather than on the market. Lots of 'insourcing.'

What factors drive markets versus hierarchy?

Williamson theorized that a primary factor was contracting cost--i.e., the costs associated with governing transactions between parties. When contracting costs are low, then trade tends to happen between granular entities on the market as portrayed in many introductory economics textbooks. As contracting costs increase, more organizational hierarchy becomes necessary to govern trade. At some point, the bureaucratic costs of governing exchange become so high that firms will look to take those transactions off the market and manage them internally.

One source of transaction costs is regulation. For instance, if traders are required to pay a tariff, or meet mandated product or process requirements before a market transaction can be consummated, then entities will consider alternatives such as engaging in production themselves if regulatory costs can be reduced. Of course, these efficiency gains must be weighed against efficiency losses from less specialized/more diversified production.

Currently, regulatory burdens imposed by COVID-19 'regulators' are certain to drive transactions off the market. For example, if goods and the transportation modes that move them must be sanitized before they change hands, then that increased cost of trade will reduce volume associated with contracting out.

Consumers will behave similarly. For instance, if masks are required to go to a gym, restaurant, or sporting event, then that increased cost of trade will motivate some consumers to stay at home and become more self-sufficient.

If regulatory burdens do not lift, then Oliver Williamson would likely agree that motivation for outsourcing will continue to decline, and motivation for insourcing will continue to rise.

Trading Away God's Gifts

For freedom Christ set us free. So stand firm and do not submit again to the yoke of slavery.
--Galations 5:1

Here is what I believe. Because God created each of us in his image, his most important gifts to us are life and freedom (God is perfectly free). Freedom in this sense is the right to pursue one's interests peacefully--i.e., without forcibly interfering with the rights of others to do the same.

His gifts of life and freedom are not mutually exclusive. Choosing to live life according to God's will necessarily requires the freedom to do so. Just as Jesus was free to walk the path to the cross, so too are each of us free to choose our paths.

Indeed, Easter is the consummate celebration of life and freedom. Christ's resurrection reminds us of the sanctity of life--eternal life--that can only be obtained through free will.

Because life and freedom come from God, no one on this earth can rightfully take them from us. It follows, then, that we are obligated to steward these sacred gifts to the best of our ability. We should not squander them in worthless trades, and we must defend them if need be when they are forcibly threatened.

Yet, we often fail to protect our freedoms (and the life that is necessarily connected to them) when they are endangered. We live stark examples of this failure whenever we obediently bow to earthly proposals or edicts that would have us trade or surrender essential freedoms for modicums of safety.

It is hard to imagine a deal the devil would like more, for Satan knows that it is a free life rather than a secure life that leads us to God.

Yet I fear this is precisely the trade many have been making over the past several weeks. Draconian 'lockdown' orders from policymakers that infringe on liberty in the name of safety are being met largely with acquiescence rather than pushback. People by the millions are conceding, often gladly, personal freedom in exchange for what amounts to participation in government-backed programs proposed to provide some measure of protection against a perceived health threat.

Judge Nap articulates the unconstitutional nature of these policies as only he (with God's grace, of course) can do. But the problem lies not just with policymakers. Their programs could not be implemented without a general willingness among the people to make the trade. The Judge warns liberty, once surrendered to government, is difficult to claw back.

The irony, then, is this. Trading freedom for security proposed to preserve life today may do anything but in the long run.

Make sure you understand the consequences of this trade before you make it.

Institutionalized Compliance

"These walls are funny. First you hate 'em. Then you get used to 'em. Enough time passes, you get so you depend on them. That's institutionalized."
--Ellis Boyd 'Red' Redding (The Shawshank Redemption)

Although many of the draconian measures imposed to counter COVID-19 appear unconstitutional, the vast majority of US citizens are complying. One would think that, at the very least, gross infringements on personal liberty such as 'stay at home' orders and forced shutdowns of 'non-essential' businesses would spark public protests and perhaps outright rebellion.

By and large, however, Americans are not only complying with COVID countermeasures, but they have become zealots in promoting them. In fact, some locales have established tattletale systems for reporting non-compliance to authorities.

Why are Americans so willing to accept infringements on their liberty that they famously fought so hard for in the past?

One explanation is fear. As these pages have noted, conditions of threat drive reactive, fast thinking processes less capable of reason. When we are afraid of what a novel virus strain might do to us, we find it difficult to 'think straight,' making us more likely to bow to central authorities that promise safety.

Another, perhaps more comprehensive explanation can be found in institutional theory. Institutions are cognitive, normative, and regulative structures and activities that provide stability and meaning to social behavior (Scott, 1995). Although we often refer to them as people, places, or dates (e.g., President of the United States, courts, prisons, markets, holidays, 'institutes of higher learning'), institutions are better thought of as the laws, customs, and other norms produced, practiced, or symbolized by those agencies.

When viewed in this manner, institutions constitute an approach for managing environmental uncertainty. Because uncertainty threatens to upset resource flows necessary for survival, people create 'negotiated environments' laden with governance mechanisms to regulate transactions in the name of stability (Oliver, 1991; Pfeffer & Salancik, 1978).

Institutions support the stability motive by specifying 'rules of the game' in social settings; their primary role in society is to reduce uncertainty by establishing stable structure for human interaction (North, 1990).

Individuals and organizations can seen as operating in 'fields' that exert institutional pressures for sameness (a.k.a. 'isomorphism') through various mechanisms (DiMaggio & Powell, 1983). These mechanisms can be coercive ("Do this or you'll go to jail"), normative ("This is the proper thing to do"), or mimetic ("Let's copy what they're doing"). Individuals and organizations that adopt the rules are rewarded with resources and legitimacy that enable survival and prosperity. Those who do not adopt are sanctioned.

The general proposition is this: The greater the environmental uncertainty, the greater the institutional pressure exerted by the field to stabilize the situation.

The COVID-19 pandemic has caused perceptions of environmental uncertainty to shoot through the roof. Witness, for example, the spike higher in the measure of economic policy uncertainty pictured above.

We should expect, therefore, greater imposition of institutional rules aimed at quelling the threat to resource stability posed by the COVID-19 situation. Indeed, we've seen the complete range of institutional mechanisms at work: coercive (mandatory business shutdowns), normative (social distancing standards), mimetic (NBA shutdown quickly cascades to all active professional and amateur sports).

Sanctions for noncompliance are currently so strong that few are tempted to break the rules.

However, if people begin to perceive less acute uncertainty (e.g., "the virus threat has passed" or "the virus threat is less than we originally thought") or if they perceive that newly imposed institutional rules create uncertainty in other areas (e.g., "COVID countermeasures might tank the economy"), then isomorphic pressures exerted by the field must be revised. Ineffective rules must be rescinded or replaced. Otherwise, extant institutions will be seen as creating more instability than they suppress, and rebellion to topple those rules will intensify.

We may be entering such a situation now.

References

DiMaggio, P.S. & Powell, W.W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48: 147-160.

North, D.C. (1990). Institutions, institutional change and economic performance. Cambridge, UK: Cambridge University Press.

Oliver, C. (1991). Strategic responses to institutional processes. Academy of Management Review, 16: 145-179.

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

Scott, W.R. (1995). Institutions and organizations. Thousand Oaks, CA: Sage Publications.

Working Orders

I got something now to think about
I'll work all day but not to pay it out
--Pete Townshend

Pension buyout funds were deposited into my rollover IRA yesterday. I look forward to allocating these resources primarily toward dividend paying stocks and precious metals/miners. However, with stock markets at all time highs and the metals complex in rally mode, it is difficult to do a lot right here as prices are stretched to the upside.

Instead, I plan to spread out my buys over time. By 'working' my buy orders, I accumulate shares at various prices which, given the extended nature of the tape, increases the likelihood that my cost basis will be lower than if I purchased an entire position all at once right around here.

In the 'olden days,' working orders in small increments was uncommon. When brokers served as investment agents for most investors, those agents rarely had the time or patience to piece out trades for clients. Moreover, the transaction fees associated with trading in small quantities made trading in small size cost prohibitive.

Now, however, individual investors have the operational resources trade on their own behalf. And with brokerage commissions largely a thing of the past, it makes little sense to make big trades in risky situations--such as our present overbought condition.

So I'll work my orders by buying small and scaling in.

Organization Size, Slack, and Regulatory Uncertainty

"Better get under cover, Sylvester. There's a storm brewing...a whopper!"
--Professor Marvel (Wizard of Oz)

Not a huge gap compared to pre-tariff war period, but it does appear that shares of smaller companies have increased less than their larger share brethren over the past couple of years.

Micro-caps hit hardest since #TradeWar began@DataArbor pic.twitter.com/DbEFl0PiIw

— Liz Ann Sonders (@LizAnnSonders) December 10, 2019

Many factors could be involved outside of trade, of course. But to the extent that there is a significant relationship with policy uncertainty, then what is the underlying explanation?

One is that larger organizations carry more slack. Slack is a pool of excess resources that can be brought to bear during uncertain times to help weather the storm. Slack can be employed to either a) insulate the organization from external forces or threats (e.g., inventory, excess capacity, staff that can contract for better deals), or b) help the organization change in a way to better adapt to the turbulent environmental conditions (e.g., R&D processes, resources for lobbying for institutional change).

Because they possess less slack, smaller organizations are more subject to the vagaries of regulatory uncertainty. Perhaps investors have been pricing this in.