First Down

I made a pilgrimage to save this human race
Never comprehending the race had long gone by
--Modern English

Domestic stock markets saw their first 1%+ down day in months. European markets fared worse, with many bourses down more than 3%.

Technically the near term uptrend in many major indexes can be regarded as broken. Also, we are back below the 1360 level - previous support now becomes resistance.

If this selloff gathers steam, then downside milestones include SPX 1320 (50 day MA) followed by support at 1290. Below that, 1260 appears substantial support. That would constitute an 8% decline from last weeks highs if/when.

My growing sense is that the highs for the move have been put in. However, a bounce that retraces much of today's downside in the next couple of days would not surprise me (knee jerk dip buyers plus frustrate the shorts). Should that occur, I'll be looking to trim long exposure and add short exposure. Currently net long to the tune of about 5%.

position in SPX

The National Public Education Channel

"His brain has not only been washed, as they say. It has been dry cleaned."
--Dr Yen Lo (The Manchurian Candidate)

Rothbard draws an excellent analogy about the problem of compulsory education. Instead of using newspapers, I will employ 'public media network' to better reflect today's choices.

Suppose that the federal government proposed using taxpayer money to create a nationwide public media network and compelled all children (or all people for that matter) to view/read/listen to them. The government would also outlaw all private outlets that did not comply with standards set by a government commission on what children ought to be exposed to.

As Rothbard observes, the American people would likely regard such a proposal with horror. And yet, this is precisely the sort of regime that the government has established in the sphere of educational instruction.

Education: Free and Compulsory

We don't need no education
We don't need no thought control
No dark sarcasm in the classroom
Teacher, leave them kids alone
--Pink Floyd

This monograph by Rothbard should be required reading for all 'educationalists' and others who believe in the folly of government run schools and compulsory education (pdf here). This would never happen, of course, because of the psychic pain that would be inflicted upon proponents of forced education would be hard to endure.

The flow of this monograph is consummate Rothbard. He first deduces rationale for education, the various options available (parent vs outsource, etc), and the theoretical problems with the outsourcing option when it comes to knowledge building and freedom. He then reviews the history of publics schools and compulsory education beginning in the 1500s with Martin Luther in Germany and John Calvin in Geneva. I found this excellent perspective.

The purpose of the present missive is not to provide a book report. The interested reader can chew thru this work in an hour or so.

Here, I would like to present some propositions or predictions that should follow from instituting public schools and compulsory education. Stated differently, imagine that you could forecast the potential consequences of compulsory education overseen by the State before it became operational in the US. What would you forecast, based on the logic and deductions that Rothbard presents--primarily in the first half of his monograph?

-->desire for 'equality' will set classroom pace and performance at average level, reducing development of variety among individuals. Dullards 'too fast' and gifted 'too slow' will get discouraged; average will get discouraged as they observe performance of the gifted. Any attempts to compartmentalize thse groups will exacerbate the effect.

-->reasoning and individualism will be repressed in favor of groupthink and collectivism.

-->market for alternative education processes that specialize/tailor to particular learner segments and interests will be underdeveloped.

-->parents will become less responsible and engaged in education of their children when State takes control over the process.

-->there will be ongoing movements for standardized curricula and evaluation methods.

-->curricula will include content and techniques for inculcating reverence to the State. Thought control.

-->public schools will prove unable to differentiate and respond to particular tastes like private school alternatives.

-->private school alternative will be positioned at high end of educational spectrum. Private alternatives for dullards will be less likely because public schools will have monopolistic position of this segment.

-->students will fear making mistakes, which in turn will reduce their learning capacity and erode joy of learning.

-->social stigma associated with home schooling will increase.

-->collectivist groups such as labor unions will rise in support of public schools.

-->mandatory teacher certification increases groupthink among instructors and impair entry of novel thoughts and educational processes.

-->critical thinking and reasoning capacities will be underdeveloped in society.

-->people will prefer opinions of experts or majority opinion rather than thinking for themselves.

-->general performance on standardized tests on core competencies (e.g., three R's) will stagnate or perhaps decline over time.

-->gradeflation or calls for grade abolishment will increase.

-->propaganda movements touting the importance of compulsory public school education will increase.

-->costs will rise, facilities will fall into disrepair, innovation will stagnate - predictable to all State run bureaucracies.

-->proponents of public schools will continually seek the strong arm of government to expropriate more and more economic resources from taxpayers.

Have not all of these propositions garnered empirical support?

Reference

Rothbard, M. 1999. Education: Free and compulsory. Auburn, AL: Mises Institute.

Inequality and Progress

I break tradition
Sometimes my tries are outside the lines
--Natasha Bedingfield

Some great lines from a great little book written by George Harris in 1897. Like many cogent works from this period, this book could have been written yesterday. Written yesterday in that it addresses misconceptions and popular tripe about 'equality' that persist to this day.

Just a couple of passages:

"The rudimentary societies are characterized by the likeness of equality; the developed societies are marked by the unlikeness of inequality or variety. As we go down, monotony; as we go up, variety. As we go down, persons are more alike; as we go up, persons are more unlike...equality is decline toward the conditions of savagery...variety is advance toward higher civilization.

"Every step of progress means the addition of a human factor that is in some way unlike all existing factors. The progress of civilization, then...must be an increasing diversification of individuals that compose society."

Reference

Harris, G. 1897. Inequality and progress. Cambridge, MA: Houghton, Mifflin and Company.

Financial Illiteracy

"This is US history. I see the globe right there."
--Jeff Spicoli (Fast Times at Ridgemont High)

Just one more study to toss on the pile of evidence showing that kids are financially illiterate. Similar findings have been reported for years with little improvement trend.

Billion$ of resources have been thrown at this problem over the last decade. But few 'educators' seem to realize that financial markets are complex social systems likely to render traditional pedagogical techniques ineffective for skill building. This is because skills required to navigate complex social systems rely on tacit knowledge that is difficult to codify. Building decision-making skills via traditional classroom methods is unlikely to work well.

Learning platforms that immerse learners in the complex environment are likely to make more progress. Experiential learning is one approach. Learning by doing. One downside of employing this approach for developing economic and financial skill is that the cost of mistakes can be high. Tuition is steep.

An alternative is observational, or vicarious, learning. Here, students learn by watching the behavior of role models. This is essentially the apprenticeship model where learners 'shadow' experts while they do their thing. This model is a time tested way of building complex skills. It has been around for thousands of years.

Once hard to do in many school environments, technology is now available to put students in front of experts over long distances. I've been involved with research suggesting that it is indeed possible to employ web-based technologies for improving financial literacy (e.g., Ford, 2006; Ford et al., 2007).

The biggest problem we may face in this regard is locating appropriate experts. It is not like kids have a ton of role models to observe and learn from when it comes to appropriate financial decision making.

Ironically, the federal government, which continues to role out programs aimed at improving national financial literacy, provides the worst possible example when it comes to prudent financial behavior. It is the classic 'do as I say but not as I do' situation.

When someone asks you why our kids are financially illiterate, one of the best answers you can give is: "Because the adults are."

References

Ford, M.W. (2006). Outside the lines: Exploring student use of web-based vicarious learning about financial markets. Journal of Business and Leadership, 2(2): 325-333.

Ford, M.W., Kent, D.W. & Devoto, S. (2007). Learning from the pros: Influence of web-based expert commentary on vicarious learning about financial markets. Decision Sciences Journal of Innovative Education, 5(1): 43-63.

Shoulder Work

"You know what we get to do today, Brooks? We get to play baseball!"
--Jimmy Morris (The Rookie)

Premature for sure, but gold may be tracing a reverse head and shoulders pattern dating to the late summer meltdown last year.

Work on the right shoulder could have commenced with last week's mini 'flash crash.'

Should such a pattern be in play, and should the right shoulder seek 'symmetry' with the left shoulder, then gold could melt another $100 or so from here into the $1600ish level.

After a long abstinence, am warming to the miners for playing the gold trade. Part of this shift relates to the re-hypothecation issues possible w/ the precious metal ETFs. With the miners, property rights are better established. Have established small positions in GDX and NEM, and am awaiting further developments.

position in gold, GDX, NEM

There Ain't No Bears in There

Did you ever sleep in a bear pit
With apple cores and mice along?
Did you ever lay on ice and grit
Or search for a place where the wind was gone?
--Pete Townshend

Analysis of Rydex asset levels. The Rydex Asset Ratio ((Bear assets+ MMF assets)/Bull assets) is at a 10 year high. Bearish assets are at a 10 yr low.

Historically, high points in the Rydex Asset Ratio have decent correspondence with market tops.

position in SPX

Stimulus Tax

Don't ask me what I want it for
If you don't want to pay some more
--The Beatles

The other day, Juan Williams waxed poetic about the economic stimulus enacted under the Obama administration. He failed to consider the effect of the $trillions of money/credit created by the Fed and other central banks worldwide.

Stated differently, he does not account for inflation. Since 2009, base money (above) has more than tripled. This is inflation as classically defined: expansion of the supply of money/credit above the pace of productivity improvement.

Lew Rockwell astutely notes that inflation is a tax. This tax is typically 'invisible' to Everyman because value degrades slowly; it does not get taken out of each paycheck like withholding to the IRS.

Lew also observes that the current inflation remains largely trapped in our financial system. If/when that money leaks into peoples' wallets, then prices of goods and services (the popular metric of inflation today) will surely surge.

Make no mistake, the 'tax cuts' that Juan Williams touts as part of the 'successful' Obama stimulus have been more than offset by the $trillions in purchasing power lost by the govt printing press.

The Fed's Performance Review

Caught up in circles
Confusion is nothing new
--Cyndi Lauper

Presentation by UGA prof George Selgin that analyzes Fed performance against its own stated goals (full employment, stable prices, etc). Prof Selgin demonstrates that the Fed fails miserably on its own performance review criteria.

He also notes that bureacrats, economists, and other allies of the Fed continue to espouse that the Fed is achieving its goals--a position that is completely unsound.

He suggests that those who formed the National Monetary seeking monetary system reform on the back of the Banking Panic of 1907 should be disappointed at the fruits of their efforts. More than a century after the Fed's creation, the data suggest that the objectives behind the establishment of this institution are not being met. In fact, conditions have likely declined.

This assumes, of course, that the stated objectives of the Fed are in fact the real objectives of the designers. This assumption is certainly constestable.

Of Dice and Men

"Mess with the bull and you get the horns, you know what I'm sayin'?"
--Watts (Some Kind of Wonderful)

Confidence seems to be growing that there's no way the present administration will take its foot off the stimulus pedal in an election year. It follows, therefore, that the path of least resistance for stocks should continue to be up.

People have short memories.

Similar bravado was voiced in early 2008, the last year of the previous administration. They'll pull out all stops to keep things going thru the election, it was asserted.

The Bush administration gave it the Harvard try, of course. As in the fairy tale, though, all the king's horses couldn't keep things from coming apart.

Sure, politicians can and will try to move heaven and earth in order to stay in power. It often works for a while, of course. That's why politicians of all colors head to the stimulus casino.

The Obama administration is betting big that it can keep markets propped up thru November. Perhaps accompanying that bet is a prayer that the dice roll doesn't come up snake eyes like it did for the previous administration.

position in SPX