If I told you what it takes
To reach the highest high
You'd laugh and say nothing's that simple
--The Who
My sister and I were chatting last night about the conclusion, drawn by many, that 'free markets' are the cause of our economic and social problems.
To assess the validity of this conclusion, we first need to define what free markets are. Free markets are social phenomena where people engage in unencumbered economic exchange.
Exchange is the result of contracts between buyers and sellers, and there is no outside interference on who contracts with whom. Sometimes the contracts are implied and informal, such as in the instance of the purchase of a pack of gum from a grocery store. Julie agrees to give one dollar to Krogers (KR); KR agrees to give one pack of Wrigley's Spearmint gum to the Julie.
Sometimes the contracts are explicit and formal, such as in the instance of the purchase of a home mortgage from a bank. The Smiths and a Wells Fargo (WFC) representative co-sign an elaborate set of documents in which the Smiths agree to pay 4.75% interest annually over 30 years to WFC; WFC gives the Smiths $200,000 today so that the couple can buy their dream home today.
Government's primary role in free markets is to preserve individual property rights, particularly as expressed via the contractual agreements between buyers and sellers.
The other key feature of free markets is capitalism. In capitalistic systems, productive capacity is privately owned. The owners decide what and how much to produce. Government has no say in the matter as long as property rights are not violated.
A common misperception about free markets is that the balance of power is tilted towards the producers--and in particular 'big business.' It is thought that capitalists can exploit the system since they control the means of production.
In free markets, however, the real power rests with consumers, not producers. Consumers, through their daily purchasing decisions, send signals to producers on what constitutes value. Producers must respond, or be driven out of business by others who satisfy buyers' needs with better products priced more efficiently.
It is therefore not monopolistically-minded producers nor government planners that determine the structure of production in free markets. Instead, it is consumers who solve society's basic economic problem of how scarce resources are allocated.
Freedom of choice, the bedrock of liberty, drives free market systems.
Unfortunately, the system described here exists in construct only. It is likely that few of us have experienced truly free markets on a large scale in our lifetimes.
All modern markets are interventionist in nature. Outside entities, primarily in form of government agencies, interfere with the contracting and production mechanisms to produce outcomes that, by definition, differ from those that would be obtained by free market actors.
Those who blame our problems on extant economic configurations are correct. But these configurations are not based on freedom. Instead they are based on interventionist measures that are driving us into the ground.
More the flawed nature of interventionism in future missives.
no positions
Monday, January 19, 2009
Saturday, January 17, 2009
Common Sense
You're the kind of person
You meet at certain dismal dull affairs
Center of a crowd, talking much too loud
Running up and down the stairs
--Rolling Stones
Many folks don't care for Peter Schiff because he just lays out there--well reasoned thoughts with little concern for politics. Of course, that's why I like him.
He saliently observes that a healthy economy does not depend on credit. Rather, it depends on savings. In the long run, credit is limited by the stock of savings.
Since U.S. savings have been pathetically low, is it any surprise that credit has been drying up?
So policymakers continue to noodle over how to jam more credit into a system with no savings to back it up. And how to increase government's role in 'fixing' things.
Look out below.
You meet at certain dismal dull affairs
Center of a crowd, talking much too loud
Running up and down the stairs
--Rolling Stones
Many folks don't care for Peter Schiff because he just lays out there--well reasoned thoughts with little concern for politics. Of course, that's why I like him.
He saliently observes that a healthy economy does not depend on credit. Rather, it depends on savings. In the long run, credit is limited by the stock of savings.
Since U.S. savings have been pathetically low, is it any surprise that credit has been drying up?
So policymakers continue to noodle over how to jam more credit into a system with no savings to back it up. And how to increase government's role in 'fixing' things.
Look out below.
Thursday, January 15, 2009
Reach for the Sky
And I ran, I ran so far away
I just ran, I ran all night and day
I couldn't get away
--Flock of Seagulls
Given the bizarre nature of our present economic situation, I've thought to myself several times, "Jeez, you couldn't write fiction this good."
However, I think Ayn Rand did just that over 50 yrs ago.
Recent WSJ piece citing Atlas Shrugged has me (finally) putting this book in the queue. Observations in this article seem spot on to me, btw.
I just ran, I ran all night and day
I couldn't get away
--Flock of Seagulls
Given the bizarre nature of our present economic situation, I've thought to myself several times, "Jeez, you couldn't write fiction this good."
However, I think Ayn Rand did just that over 50 yrs ago.
Recent WSJ piece citing Atlas Shrugged has me (finally) putting this book in the queue. Observations in this article seem spot on to me, btw.
Sunday, January 11, 2009
Toll Road
"I'm sorry, Mr President. I don't dance."
--Jack Ryan (Clear and Present Danger)
President-elect Obama outlined his economic stimulus plan in a speech at George Mason University last Thursday. The venue strikes me as ironic since George Mason was a staunch Anti Federalist who refused to sign the Constitution out of concern that it granted too much power to central government.
Current estimates size the plan at about three quarters of a trillion dollars but rest assured this won't cap the cost.
You can reflect on the words separately, but I did want to highlight a couple of passages here [emphasis mine].
"There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit in the short term. But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy. It is true that we cannot depend on government alone to create jobs or long-term growth, but at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy - where a lack of spending leads to lost jobs which leads to even less spending; where an inability to lend and borrow stops growth and leads to even less credit."
The notion that we can borrow and spend our way out of a borrowing and spending problem is, of course, folly. The only-government-can-get-us-out-of-it claim elevates the imprudence.
Perhaps the most noteworthy passage is near the end [again, emphasis mine]:
"That is why the time has come to build a 21st century economy in which hard work and responsibility are once again rewarded. That’s why I’m asking Congress to work with me and my team day and night, on weekends if necessary, to get the plan passed in the next few weeks. That’s why I’m calling on all Americans - Democrats and Republicans - to put good ideas ahead of the old ideological battles; a sense of common purpose above the same narrow partisanship; and insist that the first question each of us asks isn’t 'What’s good for me?' but 'What’s good for the country my children will inherit?'"
If we truly had our kids' best interest in mind, then we would not be borrowing from their future by levering up the risk today.
By following the path of government intervention under the belief that it will lead us to the solution of our problems, we can be confident of this: Our children will surely pay the toll for our misdirection.
--Jack Ryan (Clear and Present Danger)
President-elect Obama outlined his economic stimulus plan in a speech at George Mason University last Thursday. The venue strikes me as ironic since George Mason was a staunch Anti Federalist who refused to sign the Constitution out of concern that it granted too much power to central government.
Current estimates size the plan at about three quarters of a trillion dollars but rest assured this won't cap the cost.
You can reflect on the words separately, but I did want to highlight a couple of passages here [emphasis mine].
"There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit in the short term. But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy. It is true that we cannot depend on government alone to create jobs or long-term growth, but at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy - where a lack of spending leads to lost jobs which leads to even less spending; where an inability to lend and borrow stops growth and leads to even less credit."
The notion that we can borrow and spend our way out of a borrowing and spending problem is, of course, folly. The only-government-can-get-us-out-of-it claim elevates the imprudence.
Perhaps the most noteworthy passage is near the end [again, emphasis mine]:
"That is why the time has come to build a 21st century economy in which hard work and responsibility are once again rewarded. That’s why I’m asking Congress to work with me and my team day and night, on weekends if necessary, to get the plan passed in the next few weeks. That’s why I’m calling on all Americans - Democrats and Republicans - to put good ideas ahead of the old ideological battles; a sense of common purpose above the same narrow partisanship; and insist that the first question each of us asks isn’t 'What’s good for me?' but 'What’s good for the country my children will inherit?'"
If we truly had our kids' best interest in mind, then we would not be borrowing from their future by levering up the risk today.
By following the path of government intervention under the belief that it will lead us to the solution of our problems, we can be confident of this: Our children will surely pay the toll for our misdirection.
Thursday, January 8, 2009
Phase Change
"You're afraid of our fleet. Well, you should be. Personally, I'd give us one chance in three. More tea anyone?"
--Captain Marko Ramius (Hunt for Red October)
Are the probabilities shifting from deflation towards severe inflation? For some time now, I've assigned greater chances of deflation than extreme inflation. The massive debt overhang from the popping of a worldwide credit bubble has favored prolonged credit contraction.
However, one can't ignore the gargantuan amount of monetary stimulus being created by central banks around the world aimed at reversing the deflationary trajectory. The coordinated nature of this action, designed largely to prop up asset prices (and thus mute the mother of all margin calls), is truly unprecedented and must be respected.
What's on my mind today is the lagged cause and effect nature of monetary intervention. Typically, when monetary policy is altered, it takes 6-18 months for economic effects to be realized. As such, just because we haven't observed inflationary effects from all this intervention yet doesn't mean we won't. Because the printing presses weren't really ripping till last Fall, we shouldn't expect significant consequences of these actions till this Spring at the earliest--and perhaps much later.
One thing's for sure. Financial markets will sniff building inflationary pressures out ahead of their material appearance.
In my personal forecast of macro conditions over the next couple of year, I'm dialing up the chances of extreme inflation:
extreme inflation 50%
'normal' inflation 20%
deflation 30%
I'm rebalancing my portfolio accordingly to better reflect inflationary possibilities. Mainly, I've been decreasing cash and adding to commodity positions. Given the sector's pounded down nature--and it's increasingly attractive (in my view) fundamentals, I've been particularly focused on energy-related commodities, using ETF and ETN instruments such as DBE, DBO, and RJN.
The idea is to boost chances of preserving purchasing power in a world that's tilting more towards a fiat money confetti-fest.
position in DBE, DBO, RJN
--Captain Marko Ramius (Hunt for Red October)
Are the probabilities shifting from deflation towards severe inflation? For some time now, I've assigned greater chances of deflation than extreme inflation. The massive debt overhang from the popping of a worldwide credit bubble has favored prolonged credit contraction.
However, one can't ignore the gargantuan amount of monetary stimulus being created by central banks around the world aimed at reversing the deflationary trajectory. The coordinated nature of this action, designed largely to prop up asset prices (and thus mute the mother of all margin calls), is truly unprecedented and must be respected.
What's on my mind today is the lagged cause and effect nature of monetary intervention. Typically, when monetary policy is altered, it takes 6-18 months for economic effects to be realized. As such, just because we haven't observed inflationary effects from all this intervention yet doesn't mean we won't. Because the printing presses weren't really ripping till last Fall, we shouldn't expect significant consequences of these actions till this Spring at the earliest--and perhaps much later.
One thing's for sure. Financial markets will sniff building inflationary pressures out ahead of their material appearance.
In my personal forecast of macro conditions over the next couple of year, I'm dialing up the chances of extreme inflation:
extreme inflation 50%
'normal' inflation 20%
deflation 30%
I'm rebalancing my portfolio accordingly to better reflect inflationary possibilities. Mainly, I've been decreasing cash and adding to commodity positions. Given the sector's pounded down nature--and it's increasingly attractive (in my view) fundamentals, I've been particularly focused on energy-related commodities, using ETF and ETN instruments such as DBE, DBO, and RJN.
The idea is to boost chances of preserving purchasing power in a world that's tilting more towards a fiat money confetti-fest.
position in DBE, DBO, RJN
Wednesday, January 7, 2009
Tax Back Act
Should five per cent appear too small
Be thankful I don't take it all
'Cause I'm the taxman, yeah I'm the taxman
--The Beatles
Having never met a tax cut I didn't like, I'm hesitant to criticize President-elect Obama's tax cut proposal.
But people should be questioning whether this plan is really a tax cut. From where I sit, the definition of a tax cut should be government returning wealth to individuals--wealth that was rightfully each individual's in the first place. Lacking those funds, government should subsequently reduce its spending in kind.
In President-elect Obama's case (and in cases previously such as President Bush's various tax rebates), government does not intend on reducing spending. On the contrary, proposed 'stimulus' plans aim at dramatically stepping up outlays. These programs cannot be funded from the deeply red current budget.
So, to fund the proposed $300 billion in tax cuts, government has to either a) borrow money, or b) print it.
The result is more debt or currency debasement--neither of which returns wealth to the citizenry.
Until tax cuts are paired with commensurate reduction in government spending, it's hard to objectively view such initiatives as much more than programs of inflation.
Be thankful I don't take it all
'Cause I'm the taxman, yeah I'm the taxman
--The Beatles
Having never met a tax cut I didn't like, I'm hesitant to criticize President-elect Obama's tax cut proposal.
But people should be questioning whether this plan is really a tax cut. From where I sit, the definition of a tax cut should be government returning wealth to individuals--wealth that was rightfully each individual's in the first place. Lacking those funds, government should subsequently reduce its spending in kind.
In President-elect Obama's case (and in cases previously such as President Bush's various tax rebates), government does not intend on reducing spending. On the contrary, proposed 'stimulus' plans aim at dramatically stepping up outlays. These programs cannot be funded from the deeply red current budget.
So, to fund the proposed $300 billion in tax cuts, government has to either a) borrow money, or b) print it.
The result is more debt or currency debasement--neither of which returns wealth to the citizenry.
Until tax cuts are paired with commensurate reduction in government spending, it's hard to objectively view such initiatives as much more than programs of inflation.
Monday, January 5, 2009
Saving Grace
When it's all mixed up
Better break it down
In the world of secrets
In the world of sound
--Tears for Fears
Mr P reminds us that we can't get out of a debt problem by taking on more debt. While self-evident, it seems we're constantly in need of this reminder.
Standard of living improves over time by investing capital towards productivity improvement and innovation. This capital comes from saving a portion of real income.
The progression works like this:
savings->investment capital->productivity improvement->higher standard of living
Current government 'stimulus' programs that require borrowing from others or simply printing money to fund projects have no place in this progression because they are not savings.
Until we save, we'll lack true investment capital and standard of living will consequentially suffer.
Don't get distracted by eloquent arguments to the contrary. It's really that simple.
Better break it down
In the world of secrets
In the world of sound
--Tears for Fears
Mr P reminds us that we can't get out of a debt problem by taking on more debt. While self-evident, it seems we're constantly in need of this reminder.
Standard of living improves over time by investing capital towards productivity improvement and innovation. This capital comes from saving a portion of real income.
The progression works like this:
savings->investment capital->productivity improvement->higher standard of living
Current government 'stimulus' programs that require borrowing from others or simply printing money to fund projects have no place in this progression because they are not savings.
Until we save, we'll lack true investment capital and standard of living will consequentially suffer.
Don't get distracted by eloquent arguments to the contrary. It's really that simple.
Saturday, January 3, 2009
Pyramid Plunder
All the old paintings on the tombs
They do the sand dance don't you know
If they move too quick
They're falling down like a domino
--Bangles
Ponzi schemes have scored lots of mainstream media attention recently due to the ongoing Madoff saga. The idea behind a Ponzi, or pyramid, scheme is that early members are 'funded' by newcoming contributors who at some point are left holding the bag. It's a way to commit fraud.
At purportedly $50 billion, the Madoff scheme is being billed as the largest Ponzi in history. It's not even close. The size of the Madoff fraud pales in comparison to many government-run Ponzis.
The classic example is Social Security. Like Madoff and his early 'investors,' current Social Security recipients are being funded by taxes taken from today's workers (who resemble the latecomers to Madoff's scheme). There are no 'reserve' Social Security assets as these have previously been withdrawn and spent elsewhere. As more and more folks seek to draw from Social Security in the future, there is no way that there will be enough fresh inflows from new contributors to cover all users. At some point, late arrivers to the system will be screwed.
So, while government officials howl that the Madoff situation 'obviously' suggests that markets need more oversight, hopefully the irony is not lost on you.
For these same bureaucrats preside over the largest Ponzi portfolio in the world.
They do the sand dance don't you know
If they move too quick
They're falling down like a domino
--Bangles
Ponzi schemes have scored lots of mainstream media attention recently due to the ongoing Madoff saga. The idea behind a Ponzi, or pyramid, scheme is that early members are 'funded' by newcoming contributors who at some point are left holding the bag. It's a way to commit fraud.
At purportedly $50 billion, the Madoff scheme is being billed as the largest Ponzi in history. It's not even close. The size of the Madoff fraud pales in comparison to many government-run Ponzis.
The classic example is Social Security. Like Madoff and his early 'investors,' current Social Security recipients are being funded by taxes taken from today's workers (who resemble the latecomers to Madoff's scheme). There are no 'reserve' Social Security assets as these have previously been withdrawn and spent elsewhere. As more and more folks seek to draw from Social Security in the future, there is no way that there will be enough fresh inflows from new contributors to cover all users. At some point, late arrivers to the system will be screwed.
So, while government officials howl that the Madoff situation 'obviously' suggests that markets need more oversight, hopefully the irony is not lost on you.
For these same bureaucrats preside over the largest Ponzi portfolio in the world.
Break Lights
Ain't got no regrets
And I ain't losin' track
Of which way I'm going
Ain't gonna double back no
--Lou Gramm
Looks like we've achieved resolution on that flag pattern. Friday's strong new year's opening session found major market indexes breaking out.
The S&P 500 Index (SPX) appears to have some upside running room. Looks to me that next meaningful resistance is SPX 1000ish.
no positions
And I ain't losin' track
Of which way I'm going
Ain't gonna double back no
--Lou Gramm
Looks like we've achieved resolution on that flag pattern. Friday's strong new year's opening session found major market indexes breaking out.
The S&P 500 Index (SPX) appears to have some upside running room. Looks to me that next meaningful resistance is SPX 1000ish.no positions
Thursday, January 1, 2009
Goal Tender
All is quiet on New Year's Day,
A world in white gets underway
--U2
While 2008 was a rough year from a financial perspective, I was fortunate to accomplish two personal goals. All remaining non-mortgage debt, including credit cards and car loan, was extinguished. There are few better feelings than paying off loans. Debt reduces freedom.
I was also able to build a significant cash reserve--enough to cover more than a year's living expenses. While it doesn't yield much, cash is king in a deflationary environment. It doesn't go down like risky assets do. Those with high cash positions get relatively richer during deflationary events, plus they are better able to take advantage of fire sale asset prices.
It's my view that many people don't have enough cash on hand to fund current needs and opportunities. Instead, folks pour excess cash into deferred retirement accounts, or into illiquid assets like housing. Then, if something comes up, people have no money. So they resort to, yep, borrowing and debt. Cash facilitates freedom and flexibility.
When setting financial goals for a new year, I avoid setting numerical net worth or ROI goals. I'm not a fund manager who needs to report quarterly results to shareholders. Thus, there is no need to live and die by results that in the short term are subject to market vagaries.
The financial goals I can control are those related to saving and asset allocation. Here are three primary goals for 2009.
Mortgage. One outstanding loan stands between me and total debt freedom: my mortgage. I want to pay off my house by the end of 2011. For 2009, the goal is to reduce my mortgage by 25%. I commenced juiced up mortgage payments last November.
Cash. As late as a couple weeks ago I intended to continue building cash at a rigorous pace in '09. Listening to Jim Rogers over and over now has me hesitant to build dollar reserves too aggressively. Government printing presses are in overdrive trying to stem the deflationary tide. If (big if, perhaps) they are successful, then we may witness inflation unlike anything we've seen in our lifetimes. The dollar would be eviscerated in this scenario. Soooo, I'm setting a modest goal of 15% increase in cash in 2009. Excess cash will be applied towards the mortgage paydown project, or towards more hard assets like gold--particularly at sub $1000 bullion.
Commodities. Again, Jim Rogers' relentless message has colored my thinking. Potential for a weakening dollar and commodity supply shortages has me wanting to increase my exposure in 2009. My primary vehicle along these lines has been gold, but giving the recent collapse in industrial commodities, I want more exposure here--particularly to oil and energy. I started adding commodity ETFs late last year. Currently, my non-metal commodity exposure stands at about 5% of liquid assets. In 2009, I'd like to get this to 10%.
Happy New Year to all and best of luck in '09.
positions in gold, oil
A world in white gets underway
--U2
While 2008 was a rough year from a financial perspective, I was fortunate to accomplish two personal goals. All remaining non-mortgage debt, including credit cards and car loan, was extinguished. There are few better feelings than paying off loans. Debt reduces freedom.
I was also able to build a significant cash reserve--enough to cover more than a year's living expenses. While it doesn't yield much, cash is king in a deflationary environment. It doesn't go down like risky assets do. Those with high cash positions get relatively richer during deflationary events, plus they are better able to take advantage of fire sale asset prices.
It's my view that many people don't have enough cash on hand to fund current needs and opportunities. Instead, folks pour excess cash into deferred retirement accounts, or into illiquid assets like housing. Then, if something comes up, people have no money. So they resort to, yep, borrowing and debt. Cash facilitates freedom and flexibility.
When setting financial goals for a new year, I avoid setting numerical net worth or ROI goals. I'm not a fund manager who needs to report quarterly results to shareholders. Thus, there is no need to live and die by results that in the short term are subject to market vagaries.
The financial goals I can control are those related to saving and asset allocation. Here are three primary goals for 2009.
Mortgage. One outstanding loan stands between me and total debt freedom: my mortgage. I want to pay off my house by the end of 2011. For 2009, the goal is to reduce my mortgage by 25%. I commenced juiced up mortgage payments last November.
Cash. As late as a couple weeks ago I intended to continue building cash at a rigorous pace in '09. Listening to Jim Rogers over and over now has me hesitant to build dollar reserves too aggressively. Government printing presses are in overdrive trying to stem the deflationary tide. If (big if, perhaps) they are successful, then we may witness inflation unlike anything we've seen in our lifetimes. The dollar would be eviscerated in this scenario. Soooo, I'm setting a modest goal of 15% increase in cash in 2009. Excess cash will be applied towards the mortgage paydown project, or towards more hard assets like gold--particularly at sub $1000 bullion.
Commodities. Again, Jim Rogers' relentless message has colored my thinking. Potential for a weakening dollar and commodity supply shortages has me wanting to increase my exposure in 2009. My primary vehicle along these lines has been gold, but giving the recent collapse in industrial commodities, I want more exposure here--particularly to oil and energy. I started adding commodity ETFs late last year. Currently, my non-metal commodity exposure stands at about 5% of liquid assets. In 2009, I'd like to get this to 10%.
Happy New Year to all and best of luck in '09.
positions in gold, oil
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