T-Bills Not So Quiet

Lord I've got to say
It's no disgrace
I'm in no hurry
--Quiet Riot

Following up on the previous post, we should note that although the long end of the Treasury curve has been quiet, the short end has been, um, less so. New T-bill auctions have not been well-bought, and yields on 3 month bills have lifted north of 0.3%.

While certainly not huge on an absolute basis, these yields are more than 10x higher than they were on new auctions held just a couple months back. Plus, they constitute levels last seen during the 2008 melt-down.

no positions

Quiet Treasuries

"Quaffable but...far from transcendent."
--Miles Raymond (Sideways)

Am finding the sideways action in the ten year interesting given the government shutdown and debt ceiling contexts.

Seems unlikely that this quiet time lasts much longer.

no positions

Inheriting Squalor

Another night in any town
You can hear the thunder of their cry
Ahead of their time
They wonder why
--Journey

The old generation, the one that is in the process of dying, has generally been a group of savers. They eschewed debt, preferring instead to limit their consumption (a.k.a. standard of living) to a fraction of their incomes while putting the remainder aside for the future. People in the old generation were also early beneficiaries of federal welfare programs. In any ponzi scheme, those who get in early benefit off of those who get in later. Because they have realized far more in entitlement benefits than they have paid into the system, the old generation has been able to keep more of their savings into old age.

The mature generation constitutes those people in their prime to latter working years. This group has preferred a lifestyle that has required more resources than their incomes have brought in. Moreover, this group has been funding the old generation's welfare program. As as result, this generation has borrowed heavily and has little set aside in the future. Low interest rate policies of the Federal Reserve have enabled this generation to take on their debt to extraordinary levels.

The mature generation does have an ace in the hole, however. They are inheriting the sizable nest egg that the old generation leaves behind. Undoubtedly, many in the mature generation are counting on this inheritance to help make them whole. While their inheritance will help the mature generation get closer to even, this group's lifestyle preferences plus their transfer payments to the old generation reduce the likelihood that they will have much savings into old age. Therefore, the mature generation is also counting heavily on the welfare system to bail them out as they get older.

This leaves the young generation. These are young adults in their early work years plus the children. This generation faces a difficult situation. Many who have entered the work force cannot find work that seems commensurate for their level of schooling. They struggle to pay their bills. Some are already deep in debt.

This should not be surprising. The mature generation's profligate lifestyle coupled with requisite transfer payments to previous generations have robbed the system of savings. With less savings, there is less capital. With less capital, there is less investment in productivity improvement. With less investment in productivity improvement, there are fewer good paying jobs. Standard of living stagnates, then declines.

The young generation also bears the burden of paying for the mature generation's welfare draw. In classic ponzi fashion, this welfare draw is likely to be orders of magnitude higher than the draw of the old generation.

Unfortunately, the young generation will have little inheritance to fall back on. The current set up suggests that the mature generation is likely to die largely penniless, leaving the young generation with an inheritance of squalor.

Fool's Paradise

Well, you're looking for another end
Anytime
But you still can't turn away
--Ric Ocasek

Jim Rogers encourages investors "to know that you're in a fool's paradise. Be careful."

His concern is grounded in his observation that central banks worldwide are acting in unprecedented, synchronized fashion. They are suppressing short term interest rates near zero and creating money out of thin air to buy assets from bank balance sheets. Governments are also borrowing at epic levels. And central bank bond buying is facilitating the process because it provides a non-economic buyer for $trillions of sovereign debt issuance. This is what is known as 'monetizing debt.'

These activities have floated the world "on an artificial sea of liquidity" which has in turn artificially boosted asset prices. Someday the artificial sea is going to disappear, he says, and "when it does, the catastrophe will be even worse."

Despite his bearish view, Rogers is hesitant to act on it here. He's not buying shares, but he's not selling either, "because I am concerned that this might turn into a huge bubble. So I'm sitting and watching."

He says if markets go up big from here over the next few months, then he might begin selling short. But the unclear path between 'right now' and 'ultimately lower' has him sitting on his hands for now.

JR thus joins a group of 'big picture' bears that are hesitant to act now on what they believe to be a high probability outcomes--although they seem confident that they will be able to recognize the right time to act in the future (presumably ahead of others).

I increasingly wonder whether that will be possible. One thing that is certain: all will not be able to elude the moral hazard that has been placed in this market.

position in SPX

Conservative Hypocrisy

And all my instincts
They return
And the grand facade
Soon will burn
--Peter Gabriel

Jacob Hornberger wonders why conservatives, who frequently claim to support free markets and limited government, are currently fixated on repealing Obamacare. If they truly supported free markets and limited government, then why aren't conservatives going further to repeal the entire socialized health care system which includes Medicare and Medicaid? After all, these programs have long been the elephants in the room when it comes to federal spending and escalating future liabilities.

Conservatives might counter that you can't transform the system in a day. You have to start somewhere and build a stream of compromises toward a longer term goal. The ends justify the means...

A counter to that argument is that there is little evidence that previous compromise approaches have been effective. There is an equally if not more compelling argument that the compromise strategy is prone to move in the other direction--i.e., away from freedom and toward the institutionalization of State programs however poorly conceived and implemented.

The evidence suggests that, going back at least to Lincoln and the early days of the Republican Party, conservatives, while often talking a good game, are prone to act similar to the statists that they claim to oppose.

Productivity and Minimum Wage

"You know what, Mrs O'Rourke? You don't know me at all. I broke up with my girlfriend this year. I lost my job at All American Burger and two other places. I wake up at 5:30 to go to work at Mi-T-Mart. Then I go to school and go back to Mi-T-Mart. My grades aren't that bad. And you're telling me the fun is over. Man, I'm still waiting for the fun to start!"
--Brad Hamilton (Fast Times at Ridgemont High)

We have frequently observed that minimum wage laws amount to compulsory unemployment. This video employs a productivity argument to demonstrate.

California's recently passed minimum wage law does not require employers to pay at least $10/hr to every worker. It forces employers to pay $10/hr to every worker they choose to keep. Workers who are laid off, or who never get hired in the first place, get $0/hr.

For example, an owner of a hamburger restaurant hires workers perceived as being sufficiently productive. Productivity equals output / input. The primary objective of an operation is to produce output that is worth more than the input. This is not just a self-interested entrepreneurial goal. It is in society's best interests as well, because production that results in the opposite--output that is worth less than input--squanders scarce resources. Society is worse off when scarce resources are inefficiently employed.

Suppose the restaurant owner hires three workers of varying abilities (i.e., the productivity of each worker is different) to flip burgers. Workers A, B, and C produce 110, 120, and 90 burgers per hr respectively. If the owner makes $0.10 on each burger sold before paying workers, then A, B, and C produce $11, $12, and $9 per hour in pre-labor expense value to the owner.

Suppose that the owner pays each worker $8/hr. After paying the workers, the owner makes $3, $4, and $1 per hour per respective employee.

An important point to make is that, despite differences in individual workers productivity, the owner is motivated to retain all workers that generate a profit for the owner. In fact, the owner is motivated to look for additional workers whose productivities can generate even more profit.

Now let's inject California's recently imposed $10/hr minimum wage law. Productivity of A, B, and C doesn't change, meaning that they still produce $11, $12, and $9 per hour of pre-labor expense value. However, the owner is now forced to pay $10/hr to any worker that is employed at the restaurant. If the owner pays the three workers accordingly, then the owner makes $1, $2, and -$1 per hour per respective employee.

C no longer generates a profit for the owner; he generates a loss. The owner would be $1 per hour better off if C was fired.

A and B are better off. They now earn $2/hr more than before. But if C is fired, he is now $8/hr worse off. In relative terms, A and B each gain 20%, but C loses 100%.

And unemployment has just increased by one person.

As the video observes, one way to view the impact of minimum wage laws is that they benefit more productive workers at the expense of less productive workers. But is a minimum wage law even necessary to help more productive workers? After all, owners are motivated to raise the wages of productive workers because if they don't, competitors are motivated to hire those workers away to improve their own situations.

Meanwhile, marginally productive workers such as C who are willing to work for lower than the legal minimum wage are forced to the sidelines.

While they may be well intentioned, minimum wage laws exert the most pain on those people that the laws are purportedly intended to help.

Transaction Cost Theory in Motion

Now's the time
That we need to share
So find yourself
We're on our way back home
--Supertramp

Nice discussion of Microsoft's (MSFT) recent purchase of Nokia (NOK) assets in the context of transaction costs and contracting, including some snippets from Ronald Coase.

Transaction costs are costs associated with using the market pricing mechanism. Examples include negotiations, drawing up of contracts, and arrangements for settling disputes.

Coase's key contribution in the 1930s was his observation that these transaction costs are often greater than zero and significant. This may seem obvious to us today but it challenged the zero transaction cost mindset that dominated economics at the time.

As transaction costs escalate, it is increasingly tempting to take the associated exchanges 'off the market' and put them into a managed hierarchy anticipated to reduce the cost of exchange.

The article cites file sharing difficulties in one particular MSFT/NOK alliance that likely was part of the motivation for MSFT's buyout. By exerting more control over the transaction via direct ownership, MSFT thinks that it will be able to reduce the hangups that made trades less efficient.

Transaction cost theory helps explain why buyouts, mergers, and vertical integration happen.

no positions

Shrinking Government

"Shut it down. Shut it down NOW."
--Telco Supervisor (Die Hard)

It should be apparent by now that Mitt Romney's statement last year understated our dependence problem and its various enablers. The circus taking place in Washington is instructive in that regard. Both sides of the aisle and the president himself are busy pointing fingers of blame for the federal government 'shutdown.' No one wants to be the seen as the one who shuttered any part of the State apparatus--however temporary it is likely to be in this case.

They think that you and I will nod our heads in agreement like robots. Making the federal government smaller is bad, we drone mechanistically, because we would rather be ruled than be free.

I long for the day when we see the opposite. When politicians no longer apologize for shrinking the size of government. Instead, they trip over themselves to take credit for permanently disposing of another portion of the State. And you and I, no longer willing to trade our liberty away, cheer.

We cheer because we know that we are transferring another increment of power from the State back into the hands of the people.

Throw It Off Here and Now

Ben Gates: You know, of all the ideas that became the United States, there's a line here that's at the heart of all the others: 'But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.'
Riley Poole: Beautiful...I have no idea what you just said.
Ben Gates: It means the if something's wrong, those that have the ability to take action have the responsibility to take action.
--National Treasure

If you did not previously realize the extent to which Statism infects the GOP, then you should now be more informed. Conservatives have come out of the woodwork declaring that Republicans should not stand in the way of raising the debt ceiling or defunding Obamacare because the public will blame the GOP.

Others claim that they are with the Tea Party in principle, but not in tactics.

Right...and totally predictable years ago.

One proposal floated by Old School conservatives is that Republicans should just stand back and let Obamacare unfold. As the trainwreck piles up, people will realize that Democrats created the disaster and will consequently bear the brunt of people's wrath.

But this is just another variant of Statist thinking. Obamacare is a program of aggression. Standing back and letting it unfold makes you a party to force being applied to others. This is wrong.

Moreover, expecting that a poorly designed and implemented government program will be reversed once people see how bad it is seems extremely naïve. My guess is that some original opponents of the income tax, Social Security, Medicare, and other socialist boondoggles had similar thoughts--let's just let it happen and they'll get the blame when their program falls flat.

The problem, of course, it that, once put in motion, bad government programs rarely get reversed. Instead, they become institutionalized. Once implemented, government programs become bottomless money pits, attracting ever more resources to protect and grow the institution.

No, the right thing to do is to do one's best to throw it off here and now.

Debt as Solution to Debt

"It's a basic principle of the universe that every action will create an equal and opposite reaction."
--V (V for Vendetta)

Only statists can rationalize that the solution to our debt and spending problem is more debt and spending.

Of course, statists can also rationalize that our debt and spending problem is not a problem...