Government Motors

Been away so long I hardly knew the place
Gee it's good to be back home
Leave it till tomorrow to unpack my case
Honey disconnect the phone
--The Beatles

President Obama provided a taste of what it's like under a socialist economic system when he spoke of stepped up measures to keep US auto makers afloat. Recall once more that the definition of socialism is state control of economic resources, production, and distribution. At the other end of the scale lies capitalism, where economic decisions are in private hands.

The new plan includes many provisions, including the mandated firing of GM CEO Rick Waggoner and some board members. But two lines in particular grabbed my attention. One was the president's statement that, to maintain confidence in domestic autos, that "the United States government will stand behind your warranty."

President Obama also highlighted his obligation to auto industry workers, promising that "I will fight for you. You are the reason I am here today."

Feel free to ponder those statements on your own...Meanwhile, this intervention is shaping into a textbook example of resource misallocation under the hand of the state. When economic resources are misallocated, standard of living declines.

As such, we're picking up the pace towards a destination of squalor.

no positions

Lock and Load

"Come on, lock up, baby, lock up."
--Maverick (Top Gun)

I inked a contract to purchase a new house this past week. We're scheduled to close in early May. I'm doing a 15 yr fixed mortgage and my paperwork is done. However, I've yet to lock in my interest rate. Currently, price is 4 3/4% with a 45 day lock. If I could wait another week or so, a 30 day lock stands at 4 5/8%.

Mortgage rates are near generational lows, but the Fed is acting aggressively to buy rates lower in attempt to juice a housing-led economic recovery. There is no guarantee that rates will go lower because the Fed must print money in order to buy bonds (a.k.a. 'monetizing debt'). This is clearly inflationary and at some point rates are likely to reverse higher. Already, long bond rates have retraced about 50% of the move after the Fed's monetization announcement a couple weeks ago.

So, do I play it safe and lock in a quite respectable 4.75 on Monday, or do I roll the dice a bit longer hoping that the Fed's near term firepower shaves another eighth or quarter point in the next week or so?

I could always short some govies in the interim as a hedge...

Rock, Paper, Metal

I keep looking for something I can't get
Broken hearts lie all around me
And I don't see an easy way to get out of this
--Cutting Crew

Over the past month or so, I've been unwinding my 'paper' positions in the precious metals, namely my positions in GLD and SLV. A few reasons for this. One is that I'm stepping up to a nicer, more expensive house and as I sink more of my net worth into real estate, it felt prudent to take off some risk in a another 'hard asset' category.

There are some questions about counterparty risk with owning these precious metals ETFs. Although they purportedly buy physical gold, exactly where the physical stands related to 'long only' warehouse stock versus leased to others is confusing and...unaudited by the charter of these securities.

If metals prices really go crazy, there is some chance that the government would slap some controls on the bullion ETFs since they move such big volumes of metal. I don't want to be there for that.

Instead, I'll be more comfortable adding to my physical bullion stock over time. Should gold get hammered towards $600 or lower (as some predict), I'll look to step up my bullion purchases.

My metals ETF exposure has gone from 25-30% of liquid assets down to 4-5%. I'll likely be totally gone from GLD and SLV on any further liftage. Hopefully we'll get another pop here, although the technical set-up looks head-and-shouldersy just as GLD hits uptrend support.

Am getting that 'book 'em if you got 'em' feeling...

positions in GLD and SLV

Save Haven

The news slows
People forget
The shares crash, hopes are dashed
People forget
Forget they're hiding
--The Who

Newsweek recently ran a cover story entitled "Stop Saving Now." The article draws on Keynesian 'Paradox of Thrift' theory, which postulates that during tough times, if individuals become risk averse and save, then the overall economy will decline and everyone will be worse off. The Keynes remedy is government sponsored intervention to motivate more risk taking and spending.

This theory is misguided in that it assumes that economic progress depends on consumption and spending. We've heard political leaders claim that 'credit is the lifeblood of our economy' and the like.

No. The lifeblood of an economy is capital formation. Capital is invested in processes that improve productivity and raise standard of living over time. Capital formation requires abstaining from the consumption of some resources in the present, and putting them aside for the future (read: saving).

During the past few years (decades), we've been consuming more resources than we've earned in income. By consuming more than we've earned, we've not only squandered capital that should have been invested in our future, but we've borrowed and consumed resources from others. Living large in the present has compromised our future: we're both under-invested plus we owe others. Consequentially, future standard of living is almost certain to decline.

Individuals are starting to figure this out, and they are correctly changing their behavior towards paying down debt and saving. While this results in a lower standard of living in the near term, it will help rebuild capital stock over time.

By promoting another round of borrow-and-spend, bureaucrats are pointing us towards a state of irreversible squalor. Let's hope that individuals have the fortitude to overthrow this movement.

Death Certificate

Sara Sidle: "Clothing, $85. Earrings, $30. Latte, $4. Getting away with murder..."
Gil Grissom: "Priceless."
--CSI: Crime Scene Investigation

During commercial breaks from the box monster last nite, I surfed thru a couple of President Obama's press conference comments on the economy. The snippets I heard were downright laughable. One of them was that the US dollar is 'extraordinarily strong' because investors are confident in the economy.

Not quite. During fat times the entire globe was short trillions of dollars while engaging in a carry trade. Investors borrowed dollars at a cost held artificially low by the Fed. They then sold (read: shorted) the dollar to buy speculative assets of all shapes and sizes (stocks, bonds, real estate, derivatives). This was a great trade as long as prices increased. However, prices have been declining over the last 6-18 months, prompting investors to sell these speculative assets and then buy back dollars to cover their leveraged bets. It has been this massive short squeeze that has juiced the dollar higher.

For those in doubt of the ultimate consequence of all this government intervention, Mr P and Minyan Peter weigh in on this week's Private Public Investment Partnership (PPIP). Fil Zucchi sketches the downstream outcomes of last week's debt monetization scheme.

Don't take what politicians say at face value. Think it through. When you do, you may conclude that, while the dollar may rally more in weeks or months ahead, the crime scene suggests a case of premeditated murder.

position in USD

Monkey Business

Cover me, when I sleep
Cover me, when I breathe
You throw your pearls before the swine
Make the monkey blind
--Peter Gabriel

Current economic problems have unleashed calls for increased government regulation. Presumably, the penalty of economic loss levied on market participants for taking imprudent risk in free market systems is not enough. Some degree of control is deemed necessary. This control transfers authority for production and distribution decisions from private hands to the State. State ownership and control of economic resources and their allocation is known as socialism.

Cries for increased regulation always coincide with periods of dramatic declines in market prices and economic activity, which should tell us something about the behavioral motives behind regulatory campaigns. These cries are usually grounded in the argument that people are prone to irrational extremes when making economic decisions. Regulators are charged with clipping those extremes in order to temper boom and bust cycles.

Such arguments, of course, are quite circular, because individuals charged with oversight hail from the same species who purportedly makes foolish buying and selling decisions in market environments. Who oversees the regulators when pangs of foolishness taint their decision-making processes?

The fact is that we currently spend more on government oversight and regulation than at any time in our economic history. Yet, examples abound of regulatory 'failures' (e.g., Madoff, CDS, front running, etc.).

Regulation is a form of inspection. A fundamental axiom of Total Quality Management is that control programs dependent on high levels of inspection are rarely effective. Research suggests that inspectors generally miss about 20% of all defects present (Juran 1988: 18.86). Inspection errors may be due to cognitive constraints, or they may be more political in nature.

Meanwhile, market participants who think they are 'covered' by regulatory programs are prone to do less due diligence when making buying and selling decisions. Less due diligence means more risk taking. As such, regulation is a breeding ground for moral hazard.

Before blaming free markets for current problems, intellectually honest individuals should try testing a hypothesis that excessive regulation and accompanying moral hazard are root causes of our economic hardships.

References

Juran, J.M. 1988. Juran's quality control handbook, 4th ed. New York: McGraw-Hill.

Upwardly Mobile

What you need is a big strong hand
To lift you to your higher ground
--Madonna

News of a government plan to buy $1 trillion+ of distressed bank assets ignited a huge Monday rally, with the major indexes gaining about 7%. The bank index (BKX) rallied nearly 18%, which should be no surprise as this program would effectively take non-performing assets off bank balance sheets and replace them with 'safe' dollars.

Anyone with a brain can see that this plan is inflationary, and that it gives institutions that made a boatload of poor decisions a free pass to make more of the same. Even before today's announcement, financial institutions have been gorging on the bailout feast.

Just another in a long line of government interventions seeking to solve a debt and spending problem with more debt and spending.

Long term implications aside, markets appear ready to view this news as positive. Over the past two weeks, major indexes are up over 15%. While near term resistance looms, it appears to me that markets have room to run. SPX 975-1000 seems doable.

Keep in mind the ferocious nature of bear market rallies, as exemplified by the post-crash market action from 1929-1932.

no positions

Let It Bleed

Well I'm talking about the midnight gambler
The one you never seen before
--Rolling Stones

Yesterday the Fed announced its intent to purchase over $1 trillion in treasuries and agencies. Their objective is to suppress interest rates and breathe some semblance of life into the housing market.

Lest you were unaware, the Fed will create those trillion+ greenbacks out of thin air.

Our central bank has now put the destruction of our currency front and center. Foreign dollar holders are now on notice that the greenback is going down.

Predictably, the dollar was smoked on the news. Just like that, it fell now sits on intermediate term support.

Gold did an about face as well. Yesterday morning it was trading drekky around $880. Today it closed at $960.

If the dollar knifes thru USD 81-82 with relative ease, then things could unravel rather quickly.

position in gold

Make It Count

"I saw my whole life as if I had already lived it. An endless parade of parties and cotillions, yachts and polo matches. Always the same narrow people, the same mindless chatter. I felt like I was standing at a great precipice, with no one to pull me back, no one who cared... or even noticed."
--Rose Dawson (Titanic)

Today we suddenly lost someone who helped A LOT of people. At Minyanville, we like to say we're a community where people watch each other's back. When one of us goes down unexpectedly, it's especially painful.

I'm feeling it, Bennet.

I know your passing is reminding us to make it count. I intend not to let you down, my friend.

Hope Chest

When it will be right, I don't know
What it will be like, I don't know
We live in hope of deliverance from the darkness that surrounds us
--Paul McCartney

Fed chairman Ben Bernanke was on 60 Minutes claiming that the recession will be over inside of one year. This is making headlines this morning and markets are up nicely.

Perhaps the recession will end quickly and heaven knows markets have been looking for an excuse to rally.

If you're basing your investment decisions and outlook on the prognostications of Mr Bernanke, you'd be wise to first consider his track record. The Fed chief has presided over the largest credit bubble in the history of the world and its subsequent poppage. Not once did he foresee the problem--at least on the record.

Chances of his ability to suddenly be able to forecast accurately seem pretty small.