Drivel Me This

We know you've got to blame someone
For your own confusion
But we're on guard this time
Against your final solution
--Red Ryder

Mainstream economists, the so-called 'experts,' continue to spew drivel like this. To the extent that we rely on the Mankiws and Krugmans of the world to steer us out of economic problems, then we fully deserve the hardships that are certain to flow from following such misguidance.

Debt Respite

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

We closed on my sold house friday. Closing on the new property is scheduled for a week from Tuesday, meaning there's an interim 10 day period where I'm debt free.

It's an exhilirating, albiet temporary, feeling. And one I hope to return to sooner rather than later.

International Harvester

"Three weeks from now, I will be harvesting my crops. Imagine where you will be, and it will be so. "
--Maximus (Gladiator)

Who do I respect the most among investors? Jim Rogers. Straight shooter, sees the big picture, apolitical.

And contrarian. His forthcoming book, written as if he's talking to his young daughters, advises them to think for themselves.

To me, his hallmark is consistency. His views don't shift with the wind. For instance, this recent interview is similar to ones he gave last year. He's constantly assimilating new data, but usually applies lessons learned towards conservatively revising his thesis.

Too often in the past, my actions have resembled those of a moth in a light bulb factory. JR is a model of consistency.

Slow Mover

Well I'm gonna find a home
And we'll see how it feels
Goin' mobile
Keep me movin'
--The Who

I'm in the process of moving. We're scheduled to close on the sold property this Friday; closing on the purchased property is scheduled for about 10 days later.

This is my first real estate transaction where I've sold a property in addition to buying (I rented prior to buying my current residence). The process has been much more time consuming than anticipated. Cycle time from when I first considered moving till I'm finally in my new residence will be about 4 months.

For entrepreneurs out there, I believe there is significant opportunity to help movers manage the transition between homes. Moving, storage, address changes, financing, etc.

There are probably boutique services along these lines but an offering centered on the meat of the market may realize significant traction. I for one would certainly take a look.

Spare Change

"That's suit thinking. Something happens when a man puts on a necktie. Cuts off all the oxygen to his brain."
--Fred Melrose (Secret of My Success)

A fair amount of media ink is being spilled today about President Obama's initiative to cut the federal government budget by $100 million. Pretty amusing, given that his previously announced programs to increase government spending will triple the budget deficit to about ~$1.7 trillion this year.

Few media outlets have done the math, but here's one. The cut amounts to .oo6% of this year's budget deficit. If you're skeptical of media reported figures (I wouldn't blame you if you were), then do the math yourself. Just divide $100,000,000 by $1,700,000,000,000.

Real change or spare change?

Liberty for Sale

Louis Winthorpe III: "Looking good, Billy Ray."
Billy Ray Valentine: "Feeling good, Louis."
--Trading Places

A core tenet in understanding financial markets is seeing both sides of the trade. For every buyer, there's a seller, and prudent decision makers seek to understand the trade off.

Perhaps the biggest trade off we face involves the market for security. Offer up enough of your resources (your money, your wherewithal to produce, etc.), and you'll find a seller of security. The seller will provide you food, shelter, and defense in a manner that will increase your economic and social security. That security comes at a price, however. Freedom declines when you've given up resources to others and become dependent on them.

The Founders understood this trade off. They concluded that life as a colony of England, whose security services included what was considered to be the greatest military force in the world, was not worth the reduction in freedom that came with being loyal subjects to the King.

This mindset was famously captured by Patrick Henry's words, "Give me liberty or give me death."

The question seems once more upon us. Do we increase our dependence on government and entrust them to keep us safe--in both the economic and social sense? Or do we value liberty--the freedom to pursue life on our own terms?

"Those who give up essential liberty to purchase a little temporary safety, deserve neither liberty or safety."
--Benjamin Franklin

To Catch a Thief

"A man may move a man. A father may claim a son. But remember that, even when those who move you be kings or men of power, your soul is in your keeping alone. When you stand before God you cannot say 'but I was told by others to do thus' or that 'virtue was not convenient at the time.' That will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

rob: to take something away by force: steal from: to take personal property from by violence or threat.

An individual is confronted by a gang. The gang leader demands that the individual surrender his/her wallet, or else face coercive action. The individual complies.

An individual is confronted by the government. The government demands that the individual surrender a portion of his/her wealth, or else face coercive action. The individual complies.

Both acts are consistent with the definition of robbery.

When government action reflects the will of a small band of rulers, the thieves are the oligarchs themselves.

When government action reflects the will of the majority, the thieves include both those who carry out the robbery as well as those who voted for the theft via democratic process. In this case, government serves as agent for principals who seek the property of others.

Both are accomplices in an act of wrongdoing.

Tea It Up

"Would you tell me please, Mr Howard, why should I trade one tyrant three thousand 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)

We have a debt and spending problem that continues to escalate. History suggests that, once debt and spending reach levels such as ours, collapse is inevitable.

To have any chance of avoiding this unpleasant endgame, we need to reverse this process. Pay down debt and save. While many individuals have begun doing just that, government appears to be stepping up their activity to compensate. As such, a hard reversal requires that we cut government intervention dramatically.

Using history as a guide, I'm not very optimistic that a reversal can be done at this point. However, I must admit to a glimmer of hope nested in the activism of these 'tea parties.' Perhaps this movement never amounts to anything. But it does spark imagination about what an active, engaged citizenry might do to disassemble oppressive government.

Should a grass roots approach like this get traction, then perhaps we stand a chance at peacefully reclaiming liberty lost. Otherwise, history suggests revolution of a much more ominous variety.

Shelter of Squalor

Oh, a storm is threatening
My very life today
If I don't get some shelter
Oh yeah, I'm gonna fade away
--Rolling Stones

General Motors (GM) seems destined for bankruptcy--perhaps with the US government buying an equity stake. Keep in mind that bankruptcy of the restructuring kind, which this would be, is not the free market at work. It is an intervention.

Restructuring bankruptcies shelter weak firms from creditors seeking to liquidate resources. In a free market, those resources, once liquidated, would then move into hands that are more capable of satisfying market needs.

Because scarce economic resources are likely to remain under the control of less competent allocators, society at large is worse off. Restructuring bankruptcies tend to hinder, not help, collective standard of living.

no positions

Case in Point

"I'm not gonna spend the rest of my life working my ass off and getting nowhere just because I followed rules that I had nothing to do with setting up, okay?"
--Tess McGill (Working Girl)

As a bit of a self-test on the previous post, I flipped on the 10 am segment of the Diane Rehm show while heading to work. The general theme was the current state (little s) of unemployment and what the State (big S) should do about it.

Those seeking a good example of media punditry upon which to practice their critical reasoning skills need look no further than this discussion.

Hearing Aid

With a little perseverance you can get things done
Without a blind adherence that has conquered some
--Corey Hart

What is passing for economic intelligence among media pundits is becoming truly astonishing. Many people come to depend on the drivel spewed by the pundits because their personal levels of financial and economic literacy is low.

This is no excuse. Start reading (a good start would be Mr P's salient anthology over the past couple of yrs--take the time).

Beyond that, engage your brain and reason things through. For example, does it make sense that we're trying to resolve a debt and spending problem by borrowing more and increasing consumption?

The key question to be asking is what are the underlying factors that led to our massive borrowing and over-consumption binge over the past 2-3 decades. Valid solutions need to attack root causes.

Think for yourself. Submit all information you accumulate to a personal test of reason before admitting it as knowledge. You'll likely find that much of what's floating around in popular channels does not pass the test.

Freedom for Sale

I wanna glide down over Mulholland
I wanna write her name in the sky
Gonna free fall out into nothin'
Gonna leave this world for a while
--Tom Petty

Nice passage from a recent Richard Russell nightly missive. He was reflecting on a recent Q&A session among investors that he attended.

"One visitor asked what I'd do if I was running the country now. I answered, 'I wouldn't do a thing. I'd allow the bear market to run its course.' To my surprise, the crowd applauded wildly. Obviously, a lot of people disagree with the policy of bailing out everything that looks sick. I think this is a policy that is going to fail, and it's a policy that's going to strap the US with almost uncontrollable debt and interest on the debt for years to come.

"The policy is: Spend whatever it takes now, and as for the trillions of dollars in new debt, let the politicians of tomorrow deal with the 'impossible debts' and let our kids and grandkids pay with rising taxes.

"There are two things I will say about the situation with certainty. The standard of living in the US is sure to decline. And the international power of the US will decline. To put it bluntly, the US will not be the undisputed leader of the world, as it has been since World War II.

"The US cannot lead the world and at the same time be the world's biggest debtor. The marvelous US lifestyle of recent decades depends on our creditors sending us their goods and their savings (over $2 billion a day). This is unsustainable. That which is unsustainable will end."

It boils down to this truism: Debt reduces freedom.

Pony Express

"Seems like you're a man trying to give away money and don't have too many takers."
Jed Cooper (Hang 'Em High)

Wells Fargo's (WFC) accounting shenanigans was good for a 20% pop on the Bank Index (BKX) today. In times past such a one day move would be unheard of. But when markets are sick, outsized move occur routinely.

Chart gazing reveals a near text book breakout above resistance today. Tranched resistance awaits above at BKX 40 and 50.


Also noteworthy was Berkshire Hathaway's (BRK.B) credit downgrade. Interestingly, Berk's fall from hollowed AAA didn't dent the stock. In fact it was up 3-4% on the day.

When battered stocks no longer head lower on bad news and rip higher on good news, that's typically bullish. More market upside seems in the cards.

I've been expecting a stimulus/optimism fed sustained upside move for some time now. Perhaps we're into it. I'm not doing anything special about it at the present. Am thinking about pruning miscellaneous long positions (e.g., RJI, VLO) into further liftage. It's in the back of my mind that perhaps the short side will beckon down the road.

But that point (if/when) feels like it's a long way off. Right now I'm a spectator, and a pretty disengaged one at that.

positions in RJI, VLO

Pad Lock

One day you see me the next day I'm gone
Don't fight me baby I don't want to hold on
--Madonna

After watching 10 yr yields continue to tick higher, I went ahead and locked in my mortgage rate yesterday. The 15 yr fixed rate is 4 5/8%.

Initially, I wanted to finance about 50% of the price but am going to do 60% because: a) borrowing costs are lower than I forecast when entering this project, b) a lower down payment frees up cash for home improvements (this house will need some soon), c) I can always chunk the mortgage down on my own.

The thing about leverage is that it is intoxicating--especially when credit is cheap--and it tempts you to over extend. I want to intelligently employ leverage early in my 'relationship' with this house while working to reign it in as quickly as possible.

As such, I plan to do double mortgage payments right out of the gate. Hopefully, I can toss in a lump sum paydown at least once per year as well. God willing, I hope to pay this puppy off by September 2013 (about 4 1/2 yrs).

Fragile Fantasy

Don't get me wrong
If I come and go like fashion
I might be great tomorrow
But hopeless yesterday
--The Pretenders

This past week saw FASB finally bow to pressures from Wall Street and Washington to ease accounting standards. Mark-to-imagination seems eminent.

Three conditions are contributing towards the move towards fantasy:

Illiquid assets. Assets that don't trade every day are harder to price. Perhaps more importantly, the spread between the bid and ask on illiquid assets is usually quite wide. Quick sale of an illiquid asset, such as a house, usually means that the seller must settle for a significantly lower price.

Declining prices. Again, quick sale of an illiquid asset falling in value usually means bigger losses.

Leverage. This is the biggie. Let's say you're debt free and have $100K in cash. You take the cash and buy $100K in illiquid mortgage-backed securities (MBS). Prices subsequently fall an estimated 5%. That stings but no immediate action is required. If you can stomach the 'paper loss', you might rough it out in hopes of a rebound in prices.

Now let's say you run an investment fund and you have $100K to invest. Your 'prime broker,' basically a high powered lender, will loan you money so that you can borrow $9 for every $1 in capital that you have, as long as you maintain a 9:1 debt:capital ratio. You do so and prices of the MBS subsequently decline 5%. Your original $1 million in MBS assets is now worth $950K, your equity is now $50K, and your debt:capital ratio is now 18:1. Your prime broker calls and demands that you either a) come up with an additional $50K to make up for the loss in capital, or b) sell $450K in assets to get your debt:capital ratio back to 9:1. This is known as a 'margin call.'

Note how leverage magnifies the loss. In this case the nomial 5% loss turns into a -50% return on capital. Note also that at a greater than 10% price decline in the leveraged scenario above, the investor would have negative equity (a.k.a. being 'upside down') and effectively wiped out in a margin call.

Worldwide financial markets currently fall into some variation of the leveraged scenario portrayed above. In some markets, however, financial asset prices have fallen at least 20-30%. And the leverage employed was 20 to one or more.

As such, much of the global faces a huge margin call. Rather than coping with it like adults, we're skipping off to the land of make believe like children.

Bad to the Bone

"I'm fuzzy on the whole good/bad thing. What do you mean, 'bad?'"
--Dr Peter Venkman (Ghostbusters)

Big rally today on firming belief that collective global stimulus and oversight, M2M rule changes, et al has helped markets put in a significant bottom.

Rather than stocks, however, my eyes keep migrating towards the dollar. At some point, all of this money printing seems certain to crush the USD. Consensus seems to be that this won't happen overnight and that, well, we'll worry about that later.

Technically, the dollar's multi-month short covering rally appears to be running out of gas. The last few days have seen a weak bounce off the uptrend line with the USD seemingly destined to test support once more.

Some believe that a weaker dollar is a necessary precursor to a sustainable stock market lift here (dollar debasement/inflation). In the near term, perhaps, but history suggests that destroying a currency is extremely 'bad' over time.

position in USD

G Men

"You know something, Verna? If I turn my back long enough for Big Ed to put a hole in it, there'd be a hole in it."
--Cody Jarrett (White Heat)

A summit of a group of 20 developed and emerging countries (the so called G20) meet today to discuss global economic concerns and associated policy. There are calls for unity among the G20 in order to collectively solve economic problems that grip the world.

An axiom of international trade and in foreign policy is that countries act in their own best interest. Collective policies that aim to do otherwise are destined to fail over time. This is why cartels are subject to cheating, and why economic blocs such as the European Union are strained.
Complex economic problems cannot be solved by a group of bureaucrats in a room. Instead, individuals making buying and selling decisions in their own best interest will best allocate resources over time.

Countries that value freedom to pursue a higher standard of living are likely to avoid central planning on a global scale.