Fairness Folly

"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

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

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

"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

"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

"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

"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

"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

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

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.
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