Wednesday, May 28, 2008

Eyes Wide Shut

The Matrix is everywhere. It is all around us. Even now, in this very room. You can see it when you look out your window or when you turn on your television. You can feel it when you go to work... when you go to church... when you pay your taxes. It is the world that has been pulled over your eyes to blind you from the truth.
--Morpheus (The Matrix)

There is little question that our dependence on government is increasing. Energy, security, environment, food.

As the state provides for us, we gradually forego the liberty we once fought so hard to attain centuries ago.

A general cycle from liberty to control has repeated many times throughout human existence. Based on historical evidence, how will this present cycle likely end?

Thursday, May 22, 2008

Gas Lines

If you seek it, you cannot find it
--Zen riddle

Spikey crude has all kinds of market participants taking a short side swipe at the energy sector. Has the price action been bubbly? Sure seems that way as the charts have that parabolic look.

But my sense is that all this attention from the bears will prolong the move higher. About 3 yrs ago, the homebuilders were going ballistic and shorts were tripping over themselves in anticipation of a huge reversal. But the homies kept going higher, and the subsequent short squeeze squirted prices into the stratosphere. It wasn't until most of the bears shifted attention from the sector that the homies began a death spiral that knocked 70% off the index.

A similar phenomenon occurred with the financials. The bears knew the story cold. It was a tale of massive leverage and risk that was bound to end badly. So the shorts piled on in anticipation of a massive reversal from the multi-year uptrend in the financials. Once again, bears were carried out on stretchers daily as prices squeezed higher. Then, in mid 2007, after most exhausted bears had thrown in the towel (I was one of them, covering just about a week before the turmoil began last July), the price decline commenced. The bank index is down some 40% since with some financial firms much lower (e.g., ABK, BSC, NCC).

The point? Bubbly tops rarely emerge when bears are so intent catching the ride lower. My sense is that the probability of a significant decline in crude is low until the stretcher count of blown out shorts rises.

Once the attention of the bears shifts elsewhere, then oil prices are more apt to, er, slide down a slippery slope.

no positions

Wednesday, May 21, 2008

Perpetual Motion

I have to believe that when things are bad I can change them.
--Jim Braddock (Cinderella Man)

As crude moves north of $130, bureaucrats are crawling from the woodwork screaming that rising commodity prices are the result of 'speculators.' Prices would be much lower, they contend, were it not for financial actors jamming markets higher.

Of course, if any group was truly to 'blame' for a 'speculative' component to current market activity, then it would be the bureaucrats themselves. After all, it has been their lose money and credit policies from which speculative juices have flowed for years.

Naturally, the bureaucratic solution to this situation is more government led intervention. Kevin Depew notes that all of this is nothing new. For example, bureaucrats led by FDR himself fiddled with commodity prices throughout the 1930s as they searched for commodity prices that were not too high and not too low but juuust right.

Round and round we go...

no positions

Tuesday, May 20, 2008

The Bird Herd

If I leave here tomorrow
Would you still remember me?
For I must be traveling on now
Cause there's too many places I've got to see
--Lynyrd Skynyrd

A while back a friend and I were standing on a train platform north of Chicago waiting to catch the El downtown. Across the way there were a couple dozen pigeons perched on a rooftop. Suddenly, one of the birds took off and the whole flock followed. They circled over our heads to the left, then around behind us, then to our right, before finally coming to rest...on the same rooftop that they had vacated less than a minute earlier.

A metaphor of classic market behavior, courtesy of Mother Nature.

Sunday, May 18, 2008

Shifting Gears

Who's gonna tell you when
It's too late
Who's gonna tell you things
Aren't so great
--Ric Ocasek

Reports streaming from discount retailers like Wal-Mart (WMT) and Target (TGT) continue to suggest that consumers are allocating much more of their purchases on staples while shunning discretionaries.

If this trend increases, then the effect of this 'hunker down' behavior on the U.S. (and world) economy will likely be significant. Add this ingredient to a mixture that includes burgeoning debt, rising prices of staples, and tight credit and you get a nasty deflationary, not inflationary, cocktail.

no positions

Wednesday, May 14, 2008

Netting Cash

We're talking bout the dollar bill
And that old man who's over the hill
Now what are we all to do
When money's got a hold on you
--Simply Red

Many pundits cite high degrees of cash on the sidelines as a reason to be bullish. Imagine the increase in prices, they dream, if (when) this 'liquidity' gets put to work in Microsoft (MSFT) or General Electric (GE)!

Given our indebted position, isn't this cash merely a product of leverage? Gross cash rather than net cash. This money is not free and clear, rather it's linked to a liability.

If the debtors decide that they need to pay back their loans, then this 'cash' up and disappears, doesn't it?

Such a situation characterizes a deflationary environment.

no positions

Friday, May 2, 2008

Fear of Freedom

"Everyone's trying to get out of Washington, and we're the only schmucks trying to get in."
--Julius Levinson (Independence Day)

A chronic argument in favor of the Fed is that we need an agency that is 'independent of politics' in order to effectively set monetary policy. Here are a few thoughts in that regard drawn from Murray Rothbard's fine little book called The Case Against the Fed.

a) If you take a sphere of government and make it 'independent of politics', then that sphere of gov't becomes a self-perpetuating oligarchy, accountable to no one and not subject to the public's ability to 'throw the rascals out.' If people can not replace a ruling elite, then the ruling elite becomes more suitable for a dictatorship than for a 'democratic' country (p. 5). As such, arguing for complete Fed independence seems some variation of the Jedi Mind Trick...

b) Wouldn't it be suspicious if other regulated industries (insurance, airlines, drugs, etc) demanded unchecked power from state regulators? Yet, we're ok w/ the cozy relationship between bankers and the Fed (p. 7).

c) It is argued that the public has a chronic lust for inflation, and if monetary policy was placed in the hands of gov't officials, politicians would bow to short term election cycle pressures. As such, a 'sure way' to minimize inflation is to have private bankers appoint Fed officials because, according to Fed officials, private bankers 'are among the world's fiercest inflation hawks.' (as cited in New York Times 10/12/93 on pp. 8-9 of Rothbard. Essentially, we need to Fed to save us from ourselves.

I'll leave it up to you to reflect on the validity of that thought process...


Rothbard, M.N. 1994. The case against the Fed. Auburn, AL: Ludwig von Mises Institute.

Thursday, May 1, 2008

Social Mood Index

I'm just a wandering on the face of this earth
Meeting so many people
Who are trying to be free
--Moody Blues

The nascent field of socionomics (see is concerned with the causal nature of collective mood on social behavior. I see big value in Kevin Depew's fieldwork on the relationship between social mood and markets.

Makes me wonder about the utility of a 'social mood index.' If validated, such a metric could help test the growing number of propositions about the influence of social mood.

What components might a social mood index include? I've yet to dig into the literature, but would think social mood has numerous dimensions. The one most cited in Kevin's work relates to collective appetite for risk, and ranges from risk averse to risk seeking. Some metrics that might be reflective of risk appetite include savings rates (saving vs spending), 3 month t-bill rates (time preference proxy), and credit creation (willingness to lever).

Whatever the measures, would think the 'best' ones would be leading indicators of phenomena such as price declines in stock market indices such as the S&P 500 (SPX). This would be necessary to demonstrate causality.

no positions