Loose Change

People talking
And they're saying that you're leaving
So unhappy
With the way that you've been living
--John Waite

Let's briefly review why central planners cannot outperform free markets in setting prices and allocating resources.

Viewed through a static lens, planners have to start out by correctly determining proper price and allocation quantities. But all of the PhD brainpower in the world has yet to effectively model economies and markets. Moreover, globalization, derivatives, and other innovations have increased complexity, further restricting cognitive grasp of what is going on. Counting on 'experts' to correctly 'answer' the price and allocation questions ignores the cognitive limits of man.

Free markets, however, rely on the cumulative decisions of many economic actors. Much like the concept of the central limit theorem in statistics, the large number of individual decisions, while most would prove 'incorrect' by themselves, sum to provide an estimate much closer to the 'correct' price and allocation quantities.

The more significant issue is that economic systems constantly change, meaning that the 'correct' answer for the price and allocation questions is a moving target. Central planners have very low capacity to revise decisions on a frequent basis. Instead bureaucratic behavior is famously rigid and maladaptive to dynamic conditions. They can't adjust quickly enough.

The real beauty of markets lies not in their capacity for getting things right at any point in time (although they are likely to crush planners in this regard). No, the power of markets is their ability to adapt.

Markets are vastly superior to bureaucrats in adaptive capacity--a requirement when coping with economic systems that are constantly evolving.

Pharm Land

Here come old flattop he come grooving up slowly
He got joo-joo eyeball he one holy roller
He got hair down to his knee
Got to be a joker he just do what he please
--Beatles

I'm probably seeing more than what's really there (a.k.a. talking my book or confirmation bias), but I continue to dig how Merck (MRK) is trading. Months of sideways action, followed by a challenge of the long term downtrend line and 50 day MA.


Should it push thru and then surmount $30 (can you see that key resistance level above30?), then I would construe that as quite bullish.

Pharma's generally been a house of pain for the past couple of years. It's interesting that names in this sector are trading firmer in the teeth of all the health care reform chatter.

position in MRK

No Saving Required

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

The 20 year uptrend in US personal spending has been broken from a technical standpoint. This likely reflects a secular (read: long term) trend change in spending behavior.

Given our debt-laden condition, such a condition should be welcome as folks seek to deleverage.

Unfortunately, government officials don't appear to see it that way. Bureaucrats seem determined to offset individual thrift with unprecedented public spending.

Regardless of individual actions to the contrary, government wants to keep us in the poor house.

Suburban Shrinkage

Vera Prescott: I hate all these trees. They soak up all the oxygen.
Brantley Foster: No, actually trees produce oxygen.
Vera Prescott: Who are you? Mr Wizard?
--The Secret of My Success

There is perhaps no greater factor that contributed to urban sprawl than cheap energy. Cheap gas made it feasible for folks to live way out in the stix and to commute 50 miles or more round trip to work. Moreover, low cost heating and cooling energy helped to facilitate the building of suburban McMansions.

My sense is that higher cost energy going forward will reverse the sprawl and drive social movement towards centralized, more efficient living. People will move back toward urban centers to reduce the cost of movement. Demand for smaller homes will rise.

Such a movement will be bearish for remote real estate and for SUV sized vehicles. It should be bullish for urban real estate and vehicles that facilitate local travel.

Social trends tend to overshoot. The last few decades have seen tremendous build out away from cities. More expensive energy may drive a secular trend in the other direction.

position in energy

Cap and Pain

There's a room where the light won't find you
Holding hands while the walls come tumbling down
When they do I'll be right behind you
--Tears for Fears

The in-process energy bill is a prime example of the role of government ineptitude in driving lower standard of living over time. Should this bill become law, we can confidently forecast a number of things:

-->energy production costs will increase

-->consumer energy costs will go up, as producers pass costs along ('companies' don't pay taxes, people do)

-->domestic jobs will decrease (not increase) as operating costs go higher

-->capital will be misallocated toward projects with little commercial viability

-->domestic energy capacity will decline

-->dependence on foreign producers will increase

Although bureaucrats can be counted on to periodically foray into value-destroying initiatives, it's hard not to marvel at the timing of this particular bill. We're experiencing a slowdown on par with the Great Depression. Yet, on the table is legislation guaranteed to significantly drag down economic activity. The timing suggests either utter cluelessness or an agenda dark enough for me to bite my toungue (for now).

It's hard to see how this legislation is not bullish for energy commodities. While firms may see their profits compromised by the new rules, supply destruction of the underlying commodities seems an obvious outcome.

Should it become more apparent to me that this bill will pass the Senate, I'll be increasing my position in the energy commodity space.

position in energy

Grand Illusion

But someday soon we'll start to ponder
What on earth is this spell we're under
We made the grade and still we wonder
Who the hell we are
--Styx

Anyone with eyes can see that most econometric series maintained by the government are biased in their data collection and/or reporting methods.

Even some of the mainstream media are noting problems.

The ramifications? GDP and its growth: lower than reported. Unemployment: higher than reported. Consumer prices and their increase: higher than reported.

If you're receiving social security or holding TIPs, your increases and coupons are less than they should be.

A nice site that tries to adjust for government manipulation of the data is John Williams' SGS site.

Always be skeptical of data collection methodology and values--particularly if generated by government.

Terror Trade

It brings you down
It's like a war
Who pays the price
If you want more
--INXS

What factors support terrorism in a country or region? Here are four that are not necessarily independent of one another:

1) Low education. Those who are less educated think less critically and are more prone to accept in an uncontested manner the one sided claims that terrorists spew.

2) Economic hardship. Out of desperation or perhaps envy, people who suffer economic hardship are more apt to view those who are economically better off as valid terrorist targets.

3) Culture/religion. Cultural or religious beliefs may prompt individuals to view terrorist causes as righteous.

4) Information assymetry. Individuals who are denied, or who do not have access to, information may draw faulty conclusions as they lack data necessary to form complete pictures.

Given these factors, we can propose certain economic, geopolitical environments as more likely to foster terrorist behavior. For instance, centrally planned economies tend to lower standard of living and promote economic hardship. Dictatorships tend to restrict information flow and education levels.

Using the current Iran situation as an example, a typical early step in action against countries that sponsor terrorism is the economic sanction. But restricting trade seems likely to increase the intensity of terrorist factors. Standard of living declines, pro-terrorist cultural and religious beliefs strengthen, and dictators play off the 'evil' nature of those participating in the embargo.

Concerned about the intensity of terrorist activity in a country or region? Trade freely with them and watch terrorist tendencies retreat.

The Show Goes On

What's the long face, what's all the crying for
Didn't you expect it, when you opened your door
--Bruce Hornsby & The Range

Some commentators are beginning to worry that the market's technical picture is rapidly turning dark. Could be, although perusing charts of major indexes doesn't suggest too much concern yet.

Bulls will offer that this is simple backing and filling. After all, markets don't head up or down in a straight line.

Bears counter that prices are failing at major moving averages. Moreover, formerly bullish head-and-shoulders patterns evident on many charts are now being dis-confirmed.

I myself am not doing anything new at this juncture. Just watchin' the show.

no positions

Under Study

Dr Peter Venkman: "Ray, pretend for a moment that I don't know anything about metallurgy, engineering, or physics, and just tell me what the hell is going on."
Dr Ray Stantz: "You never studied."
--Ghostbusters

So Barney Frank & Co are urging Fannie (FNM) and Freddie (FRE) to loosen lending requirements. Should this occur, then another key factor (in addition to cheap credit supply from the Fed) that drove the previous wave of this credit crisis would be back in play.

It's hard for me to conclude that this means that our congressfolk haven't learned. It's easier for me to conclude that this suggests that our congressfolk hope that we haven't learned.

no positions

The Second Hand Unwinds

Sometimes you picture me
I'm walking too far ahead
You're calling to me
I can't hear what you've said
--Cyndi Lauper

The video near the top of this page offers a decent description of the inflation vs deflation duel currently underway. To be sure, Mandel and Coy missed the lead up to our current problem by a country mile, so their credibility isn't all that great.

But the argument that increased money and credit supply by the Fed et al is being offset by a decrease in money and credit demand among individuals interested in saving and paying down debt is reasonable.

However, their 'bottom line' on what the Fed and policymakers should do about this situation--i.e., stay the course, create all the stimulus we need, and avoid deflation at all costs--is wrongheaded. Deflation is simply the market's response to wring out inflationary excesses. A cleansing process.

Morever, expecting the Fed et al to retract excess stimulus once things 'turn around' is pure folly. Bureaucrats chronically lag reaction-prompting stimuli.