My Place

In a big country dreams stay with you
Like a lover's voice fires the mountainside
--Big Country

Many people have a place--a special place where they find solitude and reflection. For many years my place was a park that wound along the Wisconsin River. I loved to walk the trail and watch the  tamarack-stained river peacefully flowing by.

There was one point in particular with a westward view of the river sloping toward the pineries. In the evenings, as the sun went down, I would reflect on the past, and hope and pray for the future.

Although I left Central Wisconsin long ago, I think of my place when I am in a reflective mood. Sometimes I look at pictures. Sometimes I imagine being there.

Now and then, I am fortunate to return to the area and visit old friends. I had hardly arrived last evening when I heard my place calling. Although it was getting dark, I dropped my things in my room and headed to the park.

Once again I am walking the path of dreams, giving thanks for all of my good fortune, and gazing at the horizon of hope.

Undone

Now we'll try to stay blind
To the hope and fear outside
Hey child, stay wilder than the wind
And blow me in to cry
--Duran Duran

Interesting thing about social systems. They often stay stuck in one mode for the longest time, impervious to any forces trying to counter or rebalance the system.

Then, the resistance lets go, and the in-place regime is toppled by the slightest breeze.

Resist, resist, resist. Then come undone in an instant.

Capital Controls

Birds fly in the eyes of the faithless daughter
Broken at the bitter end
Wasted sacrificed for a new nirvana
Night time sends us on our way
--Icicle Works

This missive posits that the greatest risk racing those who own financial assets is not the risk of a bad investment. Instead it is exposure to political risk--primarily in the form of capital controls.

Capital controls are legal restraints placed on moving and trading financial assets. They include outright confiscation.

Evidence is offered of growing interest in capital controls among public officials. Personally, it was the Cyprus situation early last year the heightenend my awareness of this risk.

While managing such risk is not easy, going thru the exercise is a prudent one. One day you could wake up and find some or all funds confiscated from your bank account.

Volume and Not Playing

"A strange game. The only winning move is not to play."
--Joshua (War Games)

We have noted the declining volume phenomenon in previous missives. This article offers interesting perspective on what is happening.

First, a couple of graphs.  Long term volume trend in SPX intact until official end of Great Recession. 

Declining volume is not just a stock thing, however. Bond volume also tapering off since official end of last recession.

The author posits that declining volume reflects public souring on capital markets. Professionals and retail investors are turning their backs. Why? Because they perceive them as increasingly manipulated by policymakers.

People are voting with their feet. They are disgusted with this state of affairs and deciding not to play.

position in SPX

Less Thinking is Fast Thinking

"You don't have time to think up there. If you think, you're dead."
--Pete "Maverick" Mitchell (Top Gun)

Thomas Sowell laments an increasing trend in the lack of thinking reflected in many current policies and their defense. To the extent that a trend does in fact exist, Kahneman might suggest that the trend does not reflect lack of thinking, but an increasingly dominant role of System 1 (fast) thinking over System 2 (slow) thinking.

What might explain a trend toward more fast thinking? A few possibilities:

People are more pressed for time. System 1 is fast and renders judgment quickly--even if it is subject to error and bias.

People feel more threatened today. System 1 is a product of our evolution, when fast thinking was necessary for survival.

Popularity and shock value. In today's interconnected world, people are anxious to self-brand. They are more likely to take biased positions and make wild statements to gain attention and collect followers. System 1 makes this happen.

Schools are less prone to help children develop their System 2 thinking skills. When kids become adults, they have underdeveloped reasoning capacities.

People feel that they have more to lose today. System 1 is inducing a classic endowment effect.

Feeling Heat

The shadow's high
On the darker side
Behind those doors
It's a wilder ride
--Glenn Frey

Right around this time three years ago Greece and the rest of Europe starting sliding. Global markets were sucked into their last significant decline.

Increasingly getting the feeling that we could be on the cusp of another big move. Could be a false alarm, of course. But am not the only one who feels the heat.

Be careful out there.

position in SPX

Sam the Bald Eagle

"Tower, this is Ghostrider requesting a fly-by."
--Pete "Maverick" Mitchell (Top Gun)

A few days ago Sam the Bald Eagle made is fifth and final landing of the season at Great American Ballpark.

F-16 flyovers can be pretty cool.

But they can't top Sam.

Diversions and Government

Take that look of worry
I'm an ordinary man
They don't tell me nothing
So I find out all I can
--Phil Collins

Going back to Sun Tsu and further, a fundamental tactic of warfare is to create diversions--to distract the enemy.

Because government is legitimized force that is often used aggressively, governmental actions can be seen as waging war on the citizenry--seeking to take property using methods of aggression.

As tacticians of the governmental apparatus, politicians are well versed in creating diversions. To distract the citizenry from an important issue that might damage the political machine, politicians create other events for the media to highlight instead.

Gullible citizens take the bait and get taken.

Don't permit yourself to be distracted. Stay focused. Separate signal from noise.

Doing so counters diversionary government tactics, rendering them less effective.

High Yield Spreads

'Cause when the feeling's right
I'm gonna run all night
I'm gonna run to you
--Bryan Adams

Related to the last post, where are junk credit spreads currently? Spreads are blowing out (note spread scale is inverted):

Six month wides. Long term, however, high yield credit spreads average 6 -10%.

The implication, as noted earlier, is possible trend change in risk appetite.

position in SPX

Junk Yard

Now Leroy's, he's a gambler
And he like his fancy clothes
And he like to wave his diamond rings
In front of everybody's nose
--Jim Croce

Continue to watch junk bonds as a harbinger for risk aversion. And junk continues weaken. Near term picture is ugly:

Longer term, weekly prices are just now peaking thru mult-year support:

If support decisively breaks, then there's alotta room lower without much support.