Upper Bound

Here comes the rain again
Raining in my head like a tragedy
Tearing me apart like a new emotion
--Eurythmics

Russell observes the bullish technical setup in the miners. Saw the same thing yesterday and scooped some of the Market Vectors Golder Miner ETF (GDX). Over the past few months I've been assigning more chance to the deflationary scenario but that's not what the charts are saying.

As Russell notes, countries around the world are in debt up to their eyeballs and continue to engage in policymaking certain to destroy the value of paper currency over time. Gold does indeed seem the riskless currency given the situation.

positions in GDX, gold

Jury Duty

"It's always difficult to keep personal prejudice out of a thing like this. And wherever you run into it, prejudice always obscures the truth. I don't really know what the truth is. I don't suppose anybody will ever really know. Nine of us now seem to feel that the defendant is innocent, but we're just gambling on probabilities--we may be wrong. We may be trying to let a guilty man go free, I don't know. Nobody really can. But we have a reasonable doubt, and that's something that's very valuable in our system. No jury can declare a man guilty unless it's SURE."
--Juror #8 (12 Anrgy Men)

A couple of nites back I watched the classic film 12 Angry Men. Henry Fonda plays a juror who, unlike his eleven peers, does not believe that a murder verdict is a slam dunk in their particular case. Instead, he argues that the accused has a right to equal treatment under the law, and that members of the jury, despite their biases, are responsible for carefully considering the evidence vis a vis the law.

One premise that grounds our legal system is that an individual is innocent until proven guilty. The accused is not required to say a word in his/her behalf. Instead, it is the responsibility of the prosecution to make the case.

Another premise is that the basis for determining guilt is careful consideration of the evidence versus the law. The law is the reference standard for right vs wrong. The evaluation is done by a jury. Once the evaluation is completed, the jury votes on whether the accused is guilty or not.

Perhaps the most compelling feature of this process is that a guilty verdict cannot be rendered unless the jury vote is unanimous in that direction. Presumably, this reduces the probability of an error interpreting the evidence versus the law, which could occur even when the evaluation is done objectively--i.e., an 'honest error.' It also reduces the chance of subjective bias, particularly one held by the majority of jurors, can tilt the vote.

How would this process differ if a guilty verdict was based on a democratic, or majority, vote? The movie certainly suggests the consequence that many more guilty verdicts would be rendered--and rendered based on personal bias rather than on objective comparison of the evidence versus the law.

My sense is that most people, if asked, would not want demcracy in this process. "In matters of the law, we want to be as sure as we can," might be the rationale.

Yet, how can we reject democracy for rendering judgement on the law if the underlying law has been developed democratically? Are not the same individual biases present when we develop law as when we interpret law? How can we ensure that the law itself provides for equal treatment if a majority vote can inject the whims of the many against the few?

Many of the Founders expressed concerns about democracy for this reason. In the Constitution, the primary explicit safeguard against this was a required 2/3 'supermajority' in passing laws that had been previously vetoed by the president. However, no such supermajority was specified for 'first pass' legislation.

Why the inconsistency in the Constitution? The best answer I can produce is that the Founders were betting that judicial review would check bad bills produced from bad legislative (and executive) process from becoming law. That check disappears, however, when the court possesses interest.

As it stands, I'm not sure how true justice can be rendered when the underlying basis for legal interpretation, the law, is written by mob rule.

Skin Graft

"Watch money. Money is the barometer of society's virtue. When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed."
--Ayn Rand

Nice review of the rise of state run health care by a keen observer who was on the ground during much of the period. Germany, under Bismark, has to be considered the early 'pioneer' in this area.

Key takeway is that socialized medicine has always been driven by desire for more political power.

Fixer Upper

Maybe someday
Saved by zero
I'll be more together
Stretched by fewer
Thoughts that leave me
--The Fixx

Interesting comparison of US versus Japan monetary response early in the game. One thing not discussed is how much of the money created so far in the US is actually making it into credit system where it can be pyramided.

If, as proposed in the article, the difference between US and Japan outcomes thus far is one of savers vs debtors, then if former users of credit in the US are no longer borrowing but saving instead, then the end result may be the same no matter how much 'money' is created.

Make no mistake, however, the huge money creation is benefiting one entity: the banks. Getting money free from the Fed, then investing it in bonds, is a pure carry trade gift.

That said, I must admit that I've been upping my chances of the inflationary scenario a bit. Perhaps risk seeking behavior increases again and credit does significantly expand. There's anecdotal evidence, for instance, that house flippers are back. Moreover, econometrics continue to improve toward a 'recovery' theme. And bullishness continues to escalate.

Boo is saying the setup is perfecting for tipping a one sided boat. Sentiment and demark indicators are getting pretty extreme. And if somehow we get another wave higher in borrowing and risk taking, then the decline that follows will likely make the recent downleg look tiny.

I hear you my ursine friend. But I'm adding a bit of upside exposure just in case. My vehicles of choice are the commodity ETFs. I see no value in stocks here. In a world of currency debasement, the better bet is likely hard assets and their proxies.

positions in DBA, DBC, GLD, SH

Blue Pill Blues

"Experience should teach us to be most on guard to protect liberty when the goverments' purposes are beneficent. Men born to freedom are naturally alert to repel invasion of their liberty by evil-minded rulers. The greatest dangers to liberty lurk in insidious encroachments by men of zeal, well meaning but without understanding."
--Justice Louis Brandeis

Two nice observations here by sociologist Robert Nisbet. The first is the proposition that the primary vehicle for driving increases in state power over the past century has been largely invisible. It is found thru the labyrinth of commissions, bureaus, oversight bodies largely charged with humanitarian directives (oxymoron?). Provides a Matrix-like effect that folks have trouble seeing thru.

The second is that strong positive relationship between the 'ethic' of equality and centralization of power. Nisbet cites a number of writers who 'saw' this clearly by the 18th century. Tocqueville, for example:

"The foremost, or indeed the sole, condition required in order to succeed in centralizing the supreme power in a democratic community is to love equality or to get men to believe you love it. Thus, the science of despotism, which was once so complex, has been simplified and reduced, as it were, to a single principle."

btw, there are two primary definitions of equality. One is sameness under the law. No favorites or bias. The law has no 'interest.' This is the definition implied by Jefferson ('...all men are created equal'). All can pursue happiness under law that grants favor or that burdens some at the expense of others.

The other definition of equality is one of sameness of result. Leveling of income, for instance. This is the type of equality the Nisbet treats here. Under a democracy, a drive for equality of income consolidates State power in attempts to make it so.

Liberty is negatively correlated to such a progression.

Salad Days

If you leave I won't cry
I won't waste one single day
But if you leave don't look back
I'll be running the other way
--OMD

The Cobb Salad Question of the Week last Saturday was, "If all inteference was miraculously removed on interest rates, and free market forces were permitted to do their thing, where do you think US long bond yields would be?"

We know that rates are being held artificially low not only in the US but worldwide by central banks to encourage credit growth. Why the forced suppression? Because we're nearing completion of a multi-decade debt super cycle, and after years of gorging on cheap credit, the market's natural tendency here is to raise the price of borrowing and wipe out the imbalances that have grown with excess.

But bureaucrats and their constituents don't want to cope with the downside of this excess. Borrowers are lugging more debt than they can service, and lenders are looking at big time defaults. So the bureaucratic solution is another fix (multi meanings here) of cheap credit.

Right now troubled sovereign debt (Greece, Portugal, etc) is trading in 7-9% range but such 'junk sovereign' yields would trade lots higher if intervention was removed from the mix.

We thought that perhaps 7-8% would be about right for the US in a free market world, although I wouldn't be at all surprised to see higher.

Personally, I'm not sure where long bond rates would have to be to find me buyin' 'em. The first number that came to mind was 15%. But as Don suggested, if rates are 15%+ then that may mean the dollar's value is getting smoked, thus crushing real returns on fixed income. Recall that late 70s, early 80s period w/ 18% CDs?

Gold remains a reasonable hedge in an unpredicatable world that teeters between inflationary and deflationary extremes created by government force.

position in CDs, gold

Palm Sunday Justice

It's Palm Sunday in the Catholic church. The reading of the Passion has always been frustrating for me. I tend to imagine being there and stepping in to help Jesus when he was in trouble. Of course, Peter thought the same. The story tells us it's easier said than done.

One thing that struck me this time around is the decision making process that led up to Pilate's verdict. Pilate is usually painted as the bad guy as he was the one who passed judgement. But he wasn't alone. Although Pilate was the ultimate 'judge' who rendered the sentence, essentially he was merely following thru on the jury's verdict. The jury was the people.

Based on his review of the evidence, Pilate proclaimed that Jesus had not broken the law, that no 'capital crime' had been committed. But the people didn't care about the law. They didn't like Jesus and wanted him dead.

So Pilate caved. He 'washed his hands' to symbolize that he was merely executing the Will of the People.

It struck me today how the closely this situation resembles modern government process. The Founders understood the dangers of democracy, of majority rule. Perhaps they even studied the Passion for how extremely wrong things can go when large groups exact their brand of justice thru the instrument of State power. The Founders knew government is full of Pilates more than willing to cater to these interest groups.

This is why the Founders designed our country as a republic rather than a democracy. The word democracy, btw, appears in none of America's founding documents. Instead, the point of reference for right and wrong, for justice, was The Law. The Constitution provided the general framework and idea for the law and what it should represent. Their idea was that law would rule, not people's desires or wishes as expressed by majority vote.

It's interesting that Rome was the first republic. As the Founders knew, Rome collapsed when they quit following the law, when they quit being a republic. The Passion demonstrates the consequences.

Today, we seem much like that angry mob in Jerusalem, demanding bread, circuses, and our own brand of arbitrary 'justice' from the government. We have our modern-day Pilates and Roman soldiers, acting as compliant agents on behalf of their principals with coercive force.

A moral of the Passion story that I hadn't considered before: the dangers of government driven by majority rule rather than The Law. Mix majority rule with State power and you get a situation that produced the single worst event in the history of the world.

Reform Movement

We always wish for money
We always wish for fame
We think we have the answers
Some things ain't ever gonna change
--John Waite

Whenever times get tough, politicians jump out of the woodwork with proposals for 'reform.' To them, reform represents a ticket to political power punched by special interest groups.

That said, this to-do list offered under auspices of banking reform contains some good thoughts. The items are more in the spirit of true re-form the sector towards naturual market state. Most reform movements actually de-form market structure.

My favorite is eliminating FDIC insurance. Cloaking banks w/ an FDIC put disengages consumers from critical search for financial service value. As Peter notes, this fosters the moral hazard/too big to fail outcomes that will ultimately, er, break the bank.

Great quote at the bottom: "Over the past 80 years...we've traded bank runs for country runs."

Upward Bound

Man we were killing time
We were young and restless
We needed to unwind
I guess nothing can last forever, forever-no
--Bryan Adams

Interesting multiyear inverse head and shoulders pattern being perfected on 10 year yields (TNX). Chance favors upside resolution to this pattern, which means higher yields.

Hoofy argues that it's all good, bro. Interest rates typically rise in anticipation of stronger economic activity.

Boo counters that the US (and world) is as leveraged as ever, and high yields are no friend when you're drowning in debt.

There is also thought that bonds are responding to increased supply emanating from Sovereign bailouts (looks like Portugal is up next), and tough talk between Obama administration and China re letting the yuan rise.

On the latter point, a cautionary 'be careful for what you wish' seems appropriate.

In any event, a decisive move above 4% (TNX 40) suggest that, technically, we may be off to the races.

Something to watch, as the Fed can't buy the entire curve...

no positions

Tea Time

"Why should I trade one tyrant 3000 miles away for 3000 tyrants one mile away? An elected legislature can trample a man's rights as easily as a king can."
--Benjamin Martin (The Patriot)

The Tea Party movement is a groundswell activist response to big government, fiscal irresponsibility, and diminishing freedom. It is a constellation of local organizations with little structure (example here). There are no dues, signup sheets, or key party positions. Interested individuals pretty much just show up when they care to.

In the eyes of some, lack of structure reduces the Tea Party's legitimacy. It attracts 'fringe' folks with weird agendas that dilute the party's message--so goes one line of criticism. Others argue that without a formal hierarchy, the party can gain no political traction.

There is also belief, it seems, that the Tea Party movement is somehow underwritten by Republicans or conservatives. What exactly there is to underwrite is, of course, a good question. More to the point, however, is that any on-the-ground time spent with folks in local Tea Parties reveals a non-partisan distaste for big government of all makes and models--Welfare and Warfare States alike.

This worries only a few on the Right currently; it would concern many more if big-government conservatives were not so busy exploiting a Democrat-bashing ride on Tea Partier's coat tails. In strategy land, this activity is known as engaging in 'the enemy of my enemy is my friend' tactics. From the Left's perspective, the opposition appears as one. But in reality, the opposition is two groups who don't really care for each other.

What critics fail to realize, or refuse to acknowledge, is that the Tea Party movement emphasizes social power over political power. Social power is mankind's conquest of nature--i.e., harnessing power to produce in relative abundance from nature's condition of relative scarcity. The abundance, or wealth, is obtained via economic means. The other way to acquire wealth is via political means. Political power is wielding the coercive power of the State to acquire wealth. It is dominance of one group over another thru the use of violence.

Many critics like to paint Tea Partiers as a violent lot. Ironically, these same critics systematically enlist government as their agent for conducting violent intervention on a breathtaking scale.

There is little doubt that Tea Partiers are 'angry.' Anger is a strong feeling of displeasure or hostility. Tea Partier anger is in response to the increasingly oppressive force exerted by the State. Oppression is the arbitrary and cruel exercise of power. Axiomatically, oppressive power grows with government size and scope.

Central to the small government, freedom-based mindset that grounds the Tea Party movement is belief in the power of peaceful, cooperative exchange (a.k.a. markets) to advance mankind. Government's role in this situation is limited to assisting individuals in protecting their lives, wherewithall to produce, and property.

Under this arrangement, people seek civil means to settle their differences. However, if civility brings no recourse to signficant and repeated violations of liberty, then peace-loving individuals either submit or push back (see Jefferson).

The entire setup seems remarkably similar to that period over 200 yrs ago. My reading of US history suggests that the last time we had grassroots activism of the Tea Party type was indeed colonial America. In the early/mid 1700s, in churches, taverns, town halls, and elsewhere, the idea of liberty and the casting off of despotism started as small conversation. Over time, more and more people began to 'see' it, which sparked action that the world had not seen before.

My sense is that it may be coming to life again in similar grassroots fashion.