Circus Circus

"Quite impressive for a farmer with a pitchfork, wouldn't you say?"
--Colonel William Tavington (The Patriot)

In the early 1770s, as momentum grew behind the idea of independence from England, so did Colonial satire against the Crown.

Satire and politics go hand in hand, of course. Here's an amusing example of the current batch that rails against our increasingly intrusive Federal government. Satire is one method of pushback.

In years prior to the American Revolution, various modes of pushback escalated in their intensity. But in its early phases, pushback is downplayed and ridiculed by incumbents.

I was reminded of such today, when I heard a commentator on NPR label the recent town hall protests against the administration's health care plan a 'circus.'

However, even administration partisans are noting the damage that this circus has done to the health care plan on the table.

Should this type of pushback continue to escalate, then chances for big change increase.

Practice Shots

"I've seen you guys can shoot but there's more to the game than shooting. There's fundamentals and defense."
--Coach Norman Dale (Hoosiers)

When history looks back on our present period, a number of individuals formerly seen as legitimate will be viewed as foolish. Navigating for a leading position on this list is Nobel laureate Paul Krugman. He continues to spew drivel such as this NYT op-ed that only central planners could love.

Of course, op-ed is a breeding ground for such one-sided, half baked nonsense.

Pieces like this are best used for honing critical thinking skills. Simply take each of Dr Krugman's claims and test it against reason.

Heat of the Moment

Do you remember when we used to dance
And incidence arose from circumstance
One thing lead to another we were young
And we would scream together songs unsung
--Asia

Per a contributor on the Buzz at Minyanville, here's a very cool heat map of the S&P 500.

position in SPX

Think

Tell you straight - no intervention
To your face - no deception
--Eurythmics

As myriad points of view w.r.t. the health care debate make themselves known, it is tempting to seek a 'trusted authority' to shape your view for you.

Don't outsource your brain. Your most trusted authority should be your power of reason.

Think through the following questions which form the issues around which the health care debate, and nearly all government programs, are shaped.

1) What is likely to happen to supply if we put a ceiling on price of health care services (e.g., a maximum reimbursement for a medical procedure)?

2) What is likely to happen to demand if we make health care ultra low cost or free to a segment or group of the population?

3) What is likely to happen to time to access services under 1) and 2) above?

4) If government control increases in the health care system, will motivation to improve/innovate likely increase or decrease?

5) Are health care costs likely to increase or decrease under a health care system subject to increased government control?

6) With future liabilities of present government health care programs such as Medicare and Medicaid already estimated at $30 trillion or more, and national debt in the tens of trillions, how do we pay for such a system?

Your power of reason will likely point you in the following directions:

1) Whenever maximum prices are set, supply shortages develop. Less health care services will become available as lower prices discourage providers from operating. Need an excellent oncolologist or orthodontist? There will be less of them available as many bright ones will pursue other careers that promise greater reward.

2) A general rule of thumb: If the price of a valuable good or service is free, then demand for that good or service is unlimited. Segments of the population that get a price break will consume more health care than they would otherwise. This, of course, further restricts availability for others.

3) Less supply, more demand...Time to access the health care system will certainly increase.

4) In market systems, buyers--not sellers--drive innovation thru their search of value. Producers who become more efficient or who innovate for their customers are rewarded with business. When people pay less out of pocket because they are backstopped by the government, they are less driven to shop around and make value-driven decisions. Providers have less incentive to innovate. Add the price caps in 1) and you've further restricted innovation. Top it off with less entry into the industry, as entrepreneurs are turned off by the low prospects of reward by the rigid industry structure, and you have the static condition which has defined government programs through the ages.

5) Less supply, more demand, less efficiency, reduced innovation. Costs have only one way to go.
6) Some combination of what we do already when we fund deficit spending: tax, borrow, print. Because we have no savings, the cost of providing more health care resources today comes at the expense of future living standards. Our kids will pay.

position in USD

Fools Rush In

Thank you driver for getting me here
You'll be an inspector, have no fear
I don't want to cause no fuss
But can I buy your magic bus?
--The Who

We permit the creation of a fractional banking system, which allows banks to lend out $10 or more for every dollar of capital they possess. we permit the creation of a central bank, which bails out the banks when they take too much risk with their fractional leverage.

We disconnect the central bank from the voting process, which effective creates an elite group of untouchables to oversee this flawed system into perpetuity.

Then, when, things come crashing down, we rail against the big banks for their 'greed' and we demand action by elected officials.

We are truly fools.

position in USD

Funding Problem

See the people walking down the street
Fall in line just watching all their feet
They don't know where they wanna go
But they're walking in time
--The Go Go's

Some commentators are waxing bullish about charts like these suggesting upturns in equity mutual fund inflows and high levels of cash in investment accounts. Perhaps they're correct but consider the other side of the trade.

Exhibit 1 indicates that the trend of money flows out equity mutual funds is perhaps reversing. However, mutual fund flows have been on a steady decline since 2004--well before the recent stock market meltdown. Perhaps substitute products, such as ETFs, have provided durable alternatives to buying a mutual fund. Moreover, observe the lopsided inflow pattern over the past 20 yrs. Is it likely that we'll revert to the mean of the past two decades? Or might secular change yield a decade or more of lower mutual fund inflows or even (gasp!) persistent outflows?

Exhibit 2 indicates high amounts of retail money market funds relative to stock market value. Hoofy argues that this is bullish, since investors will have to put this cash to work, thus goosing stock prices higher. Boo might counter that, currently, cash stashed in money market accounts is not 'free and clear'--it is borrowed money (home equity loans, credit card loans, etc). In a deflationary environment, collective risk appetite may not drive much of this cash into stocks. Instead it will be used to retire debt.

Truth or Consequences

Honesty is such a lonely word
Everyone is so untrue
Honesty is hardly ever heard
And mostly what I need from you
--Billy Joel

The Atlanta Fed head notes that the real US unemployment rate is higher than the reported number by more than 50%. The current 'official' value of about 9 1/2% omits discouraged and underemployed workers.

I've seen studies suggesting that if we measured unemployment like we did in the 1930s, then we'd have unemployment numbers at the 20% level that defined the Great Depression.

Of course, the article does not tackle what many inquiring minds would like to know: Why the heck don't we count all the unemployed in our unemployment stats?

Sequential Depression

Step by step, one by one
Higher and higher
Step by step, rung by rung
Climbing Jacob's Ladder
--Huey Lewis & The News

Mr P helps clarify why we'll experience a signficant period of debt destruction (a.k.a. deflation) prior to 'big' inflation. Essentially, there's too much debt out there, and the Fed and other government bureaucrats can't pyramid enough new credit thru our monetary system (a.k.a. inflation) to compensate for the deflation.

He also helped answer a question that I had. Why can't the Fed just do an 'end around' the dysfunctional credit system and just drop money from helicopters right into spenders' hands? Mr P thinks that foreign debt holders such as China have told the Fed in no uncertain terms that they will dump US bond holdings if dollar devaluation gets out of control.

At some point, the Fed will almost certainly trash the dollar regardless, but that's 'out there' sometime in the future. That's why Mr P has currently returned to the US--he sees a nice trade during this deflationary phase. Then he'll be gone. Perhaps for good.

position in USD

Near Beer

"I'm going to need a beer to put these flames out. Yo!"
--Maverick (Top Gun)

Stat of the day. Per Kevin Depew on Minyanville's Buzz, domestic beer prices (YOY %change) have registered a TD 13 sequential sell signal.

Road to Ruin

Standing like a stone on the old plantation
The rich old man would have never let him in
Good enough to hire not good enough to marry
When it all happens nobody wins
--Bruce Hornsby & The Range

In a missive concerning the current health care debate, an MD writes the following:

"Medical care is not a right. Medical care is a service provided by doctors and others to individuals who want to purchase it. A patient presents to the doctor with a request for care. The fact that the patient has a serious condition — even a life threatening one — does not entitle him, as his right, to the services of the doctor. To claim that he does means that doctors and others who provide these services have no rights, or that society can deliberately ignore these rights for the 'greater good.'"

She's correct. Any system that forces care on a provider and/or fixes the price of care is a system of coercion.

Health care is not a right. In the context of a free society, individuals cannot claim access to goods or services that, thru the fulfullment of those claims, violates the rights of others. Medical professionals become the slaves of those seeking 'rightful' services.

She also notes that today's health care system is far from a free market, given the dominant government interventions already in place.

As she suggests, heading down a path toward increased government control of this system promises a lower standard of living.

Vote of Incompetence

In violent times
You shouldn't have to sell your soul
In black and white
They really really ought to know
--Tears For Fears

President Obama nominated Ben Bernanke for another 4 yr term as Fed chairman today. The president commended Bernanke's "bold action and out-of-the-box thinking that has helped put the brakes on our economic free fall."

Just one more laughable moment.

The record offers no indication that Mr Bernanke saw this mile wide problem on the horizon. Once the storm hit, he did what any central banker predictably does to avert self-inflicted economic crisis: print more money, expand credit, create more debt, buy in assets that are declining in value.

The Fed chairman has been riding point on the initiative to mortgage our future in hopes of stemming the present tide.

Yep, those are real foresighted, heroic actions worthy of another term.

Fail Safe

Rachel Marron: "You don't look like a bodyguard."
Frank Farmer: "What'd you expect?"
Rachel Marron: "Well, I don't know, maybe a tough guy?"
Frank Farmer: "This is my disguise."
--The Bodyguard

Nice compilation of government welfare programs, which have been escalating since the Civil War.

The missive's last paragraph is worth pondering:

"We can have a free society or a welfare state. We cannot have both."

It gets back to that core tradeoff: freedom versus security.

Dragon Tales

"A good fight should be like a small play but, played seriously. When the opponent expands, I contract. When he contracts, I expand. And when the opportunity presents itself, I do not hit. It hits all by itself."
--Lee (Enter the Dragon)

Many folks, including smart cookies that I respect, are hailing the 21st century as the China's century. But as my friend Vitaliy argues, this proclamation is no layup.

First and foremost, China is a socialist country, meaning that central planning determines how resources are allocated. There is no doubt in my mind that significant capital misallocation is currently taking place. In recent months, for example, credit and loans have zoomed higher as planners step on the gas trying to revive China's economy and financial markets.

This massive credit expansion fueled by bureaucrats will certainly end badly. Given the gigantic bets that the rest of of the world is placing on China's sustained growth, what does a Chinese bust imply for the globe?

Inside Out

"Knights, the gift of freedom is yours by right. But the home we seek resides not in some distant land, it's in us, and in our actions on this day! If this be our destiny, then so be it. But let history remember, that as free men, we chose to make it so."
--Arthur (King Arthur)

We waste time and energy searching 'out there' for solutions to our problems. New people, methods, books, etc that will magically flip a switch and position our bodies and minds in a manner that we 'get it.'

But as Arthur alludes above, the answer is not out there somewhere, it's in each of us. Each of us carries the life force necessary to make big change.

There is no magic to unlocking this force. We express it through our behavior--something that is under our control.

A close friend likes to state it this way: "If it is to be, then it is up to me."

Want to be a better sibling, parent, athlete, student, teacher, etc? Wake up each day and act to make it so.

Such an 'answer' seems too simple. We long for a sophisticated solution that seemingly requires tremendous intellectual journey and novel frames of mind.

But engaging in long arduous search is midguided. The force for change and improvement is near by.

It's putting the force into motion, yes, putting our heads down and grinding out the action day in and day out. That's the hard part.

Sentinels Past

"But choose wisely, for while the true Grail will bring you life, the false Grail will take it from you."
--Grail Knight (Indiana Jones and the Last Crusade)

One of my favorite reads is classical liberal writing from the 1920s thru the 1940s written not by 'professional' economists but by people in other fields. Their non-economic background facilitated a common sense, 'on the ground' perspective.

Henry Hazlitt may have been the most famous (notorious) of the bunch. But the list also includes Albert Nock, Isabel Paterson, and Garet Garrett. Garrett was for many years a writer and editor for the Saturday Evening Post. Like others in this group, his elegant literary style took aim at describing what he saw as the problems of the day. His critique of the New Deal and of our entries into WWII and Korea made him quite literally an unpopular fellow.

Here's one example of his thought processs. Note his reference to the Constitution's 'common welfare' clause we discussed a couple of missives back.

Garrett clearly understood the irreversible nature of government intervention. Once loss of liberty is rationalized for whatever reason, the proverbial slippery slope awaits.

I believe the contributions that Garrett and the rest of this group made to the historical record are underappreciated. For those people seeking a better sense of how todays problems connect with past actions, writings from this group can help connect the dots.

Fading Light

Hear the echoes and feel yourself starting to turn
Don't know why you should feel
That there's something to learn
It's just a game that you play
--Al Stewart

Who was the last President to consistently uphold the spirit of the Constitution? I'd have to go back a few years to Grover Cleveland. A Democrat from an era when this afilliation still meant The Party of Jefferson, Cleveland was the only president to serve two non-consecutive terms--although he did win the popular vote three times (1884, 1888, 1892).

What sticks out about Cleveland was his unwillingness to grow government. He vetoed upwards of 600 bills (an average of more than one per week over his 8 yrs in office).

His explanation of his veto of the Texas Seed Bill in 1887 well reflects his principles. He states:

"I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the general government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service of benefit. A prevalent tendency to disregard to disregard the limited mission of this power and duty should, I think, be steadfastly resisted, to the end that the lesson should be constantly enforced that, though the people support the government, the government should not support the people."

Down the page, he continues:

"Federal aid in such cases encourages the expectation of paternal care on the part of the government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthens the bonds of a common brotherhood."

Cleveland understood the effects of government intervention on State dependence (positive relationship) and charity/social obligation (negative relationship).

Very wise.

Can you imagine a president uttering such a response today?

Money Model

Weve got nothing to eat
We got nowhere to work
Nothing to drink
We just lost our shirts
--Rolling Stones

Just ran across this Feb discusssion on deflation by Mike Shedlock. One of the more cogent missives I've read on why deflation will trump inflation, even in the midst of massive 'money printing.'

The bottom line is that credit is contracting faster than base money is being created. The sheer volume of debt out there, which counting its derivative forms is in the hundreds of $trillions, almost guarantees that this trend won't reverse anytime soon.

The toothpaste is out of the tube.

Leaping Loopholes

"You want to know something funny? You actually made me think about the law. I managed to go through three years of law school without doing that."
--Mitch McDeere (The Firm)

Proponents of universal health care argue that inexpensive health care should be the 'right' of all Americans. When pressed to justify the Constitutionality of this claim, many seek shelter of the 'general welfare clause' (Article 1, Section 8, paragraph 1).

This clause, along with the subsequent 'commerce clause,' has been fuel for more government intervention (directly thru amendments and laws, and indirectly thru court rulings) than any other portion of the Constitution. Their open endedness amounts to loopholes, and those intent on expanding the influence of government have been busy exploiting them before the Constitutional ink finished drying.

Many opponents to the Constitution (at least 1/3 of the citizenry per historical docs) feared the downstream consequences of these loopholes. In fact, it motivated a number of Convention delegates to walk out in disgust.

Their fear was that these loopholes would result in loss of liberty as government exploited them to grow in size and influence.

Precisely what we face today.

Show Me State

"Private, I know they brainwashed you in boot camp, but sometimes you gotta question authority."
--Casey Ryback (Under Siege)

Politicians continue to argue that the Federal Reserve needs to be an independent agency in order to be free of the political games people play. "You wouldn't want Congress to set monetary policy," they say.

This is laughable for a number of reasons.

1) If you believe that the current set up insulates the Fed from political influence then you are dreaming, hoping, or naive. Start with the low hanging fruit that the president names the Fed chairman.

2) Don't you have to ask why bureaucrats warn of intangling monetary system matters in Capitol Hill politics, but not other matters such as budgeting, health care, social safety nets, etc? Political influence is bad for one but not for the others???

3) The primary lever available to citizens when it comes to political matters is the vote. If people are dissatisfied with bureaucrats' performance, then they can 'vote the rascals out.' By creating an agency outside of the voting umbrella, we create an elite class of untouchables that becomes a self-perpetuating oligarchy, accountable to no one.

Of course, questioning why we have a central bank at all renders the above moot.

Drying Off

Nothing's so cold
As closing the heart when all we need
Is to free the soul
But we wouldn't be that brave I know
--Toad the Wet Sprocket

Am digging the action in Merck (MRK). Has been trading dry during the recent market give back.

Technically, the stock has broken a multiyear downtrend and has formed nearly a 12 month base.

Most pharma has been trading better, likely due to prognostications that the administrations health care proposal may have less teeth w.r.t. the drug makers.

A decisive move thru 32 seemingly 'works' to 36ish, which is the 200 day moving average.

position in MRK

Who Are You

I staggered back to the underground
And the breeze blew back my hair
I remember throwing punches around
And preaching from my chair
--The Who

Watching the shares traded pile up each day, I like to consider who's pressing the buy/sell buttons. Categorical possibilities include:

retail folks (investors and traders)
mutual funds
institutional money (e.g., pension funds, insurance cos)
hedge funds
trading desks of financial firms
venture capital/private equity
government entities (domestic and foreign)

I'd love to have a daily profile of the percentage of all shares bought and sold by these categorial entities, as I believe this would provide excellent insight into the method behind the madness.

The 'average' profile seems likely to change over time. Right now, it 'feels' like institutions, hedgies, trading desks, and perhaps gov't are dominating the action.

Retail and mutual funds are likely to be sitting on the sidelines (low percentage of overall activity right now), as collective mood of the masses moves toward more risk aversion. Should this risk aversion capture the well-heeled set, then other categories such as hedgies should reduce their activity as well.

Before it's over, perhaps government will dominate the action.

The Blue Pill

"You know, I know this steak doesn't exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realize? Ignorance is bliss."
--Cypher (The Matrix)

The group known as the Anti-Federalists largely opposed ratification of the Constitution as written because they knew that bureaucrats associated with strong centralized governments have an uncanny way of outlasting citizen capacity for guarding liberty. It is possible that individuals may be worn down by constant attacks on their liberty, and it is at such time that the State is quick to snatch freedom away.

I wonder whether we aren't experiencing one of those periods currently. Folks seem to be wearing down--becoming immune to the methodical chipping away of freedom by government intervention.

Will our country ultimately trade freedom for the illusion of economic and social security promised by the State?

Prop, Drop, and Roll

Well I see a face coming through the haze
I remember him from those crazy days
--The Who

Another missive by Mr P that should be marked 'read multiple times.' Reflecting on another pass thru it this morning, I'm struck by a few thoughts.

One is how closely the United States is tracking a textbook central planning model. The extent of our goverment's involvement in markets is truly breathtaking. Is it any wonder we're seeing 'tea parties' and other form of citizen pushback against government intervention. It's hard for me to see how this pushback from liberty-loving individuals does not continue to escalate.

Another is the extent to which the current pause in economic decline is purely a construct of government efforts to prop things up. Among other things, the government is keeping insolvent institutions from failing, buying mortgages, monetizing debt, buying old cars, extending unemployment coverage, buying in interest rate spreads, and backstopping the entire banking system. Pundits who create analogs with previous periods just don't understand (or care about) how truly novel this situation has become.

It will be interesting to see whether Mr P's thesis, that US government officials may cut stimulus to appease Chinese creditors, comes to fruition. Given the magnitude of the intervention, and its influence on keeping the system from crashing (not to mention this administration's core ideology), it's hard for me to see this set of bureaucrats easing off the gas--even with a brick wall right in front of them.

Finally, I think Mr P is spot on the inflation/deflation debate. In the long run, I think 'big inflation' is inevitable as bureaucrats desperately attempt to print our way out of the abyss. But the printing press requires credit creation, and credit creation requires appetite for risk. I doubt that higher collective risk appetites are in the cards for quite a while. Given the hundreds of trillions in credit and related derivatives, it is more likely that debt will continue to be destroyed in the near term. This deflationary contraction only ends at lower prices (probably much lower) that prompts folks to take more risk again.

Near term deflation; long term big inflation. That's the most likely scenario in my mind's eye.

Risk indeed seems very high, Mr P.

Yes Men

The muses dance and sing
They make the children really ring
I spend the day your way
Call it morning driving thru the sound and
In and out the valley
--Yes

A recent WSJ article (editorial?) framed President Obama as a micromanager, due to his desire for details about economic activity. So what. Decision-makers have different styles, some require more information than others.

More interesting in this piece is the president's purported desire for other points of view. He apparently challenges his staff to seek out arguments counter to staff beliefs. Fair enough. But how realistic is achieving true balanced perspective when you and your staff are strong idealogues proven to adhere to a particular viewpoint? A staff composed of Geithner, Summers, Emanuel, Axelrod, Romer, et al all lean far to one side of the spectrum.

Moreover, attempts to seek out counter points of view does not seem to have influenced this administration's decision-making outcomes, which have all been consistent with core ideological stance.

It's hard not to conclude that visible attempts to seek balanced perspective in decision-making is little more than a media gimmick.

The other conclusion that bubbles up from this article is the size of the problem faced by central planners who believe that they can somehow pull the correct levers to steer economies and markets. Given the systems' complexity and dynamics, that anyone can believe that he/she can manage this thing is the height of folly.

Or of hubris.

We Shall Scrimp and Save

When I get older losing my hair
Many years from now
Will you still be sending me a valentine
Birthday greetings bottle of wine
--Beatles

Fido notes that 401(k) contributions were up in Q2. Two things to note. One, stock prices went higher in Q2. Higher prices attract people like flames attract moths.

Second, the last paragraph in the article associates retirement contributions with saving. For most people, this in incorrect. Saving is putting aside resources for use in the future. No risk.

Most people stick retirement monies into risky assets. They are not saving for retirement. They are speculating for retirement.

Fund of Funds

"Hey Ray, wouldn't it be funny if I went to Harvard, you went to Jail and we both ended up surrounded by crooks."
--Mitch McDeere (The Firm)

It has amassed the world's largest asset portfolio.

It is hiring hundreds of traders and money managers.

Some big bad hedge fund in Stamford? Nope, it's The Fed.

Junk Yard Logic

Here in my car
I feel safest of all
I can lock all my doors
It's the only way to live
In cars
--Gary Numan

Caroline Baum is one of the sharper journalists on The Street. Her Bloomberg piece today illustrates the folly behind the Cash for Clunkers program.

She draws from the writings of Frederic Bastiat, a French economist from the mid 1800s. Bastiat famously dismissed any government program that destroyed existing goods to create new demand. Standard of living does not rise in such an instance. In the short run, a 'special interest' group may benefit, but at the expense of others over the long run.

Ms Baum rightly draws parallels to Depressionary programs where the State sponsored crop burnings to reduce supply and prop up ag prices.

The logical extension to these programs is for everyone to destroy all their property. Imagine the economic stimulus!

position in ags

Green Light

"I think its safe to say that this party is about to become a historical fact."
--Duncan (Some Kind of Wonderful)

Here's a first. Yesterday I bought the dollar via the DB US Dollar Index Up (UUP). Given my uber grizzly long term view of the USD, what gives?

It's because, between here and dollar dust time, I'm assigning significant probability to another round of deflation. The massive amount of dollar-denominated debt essentially constitutes a synthetic short against the dollar. By definition, deflation constitutes debt destruction. Folks will need to buy dollars in order to cover their dollar-denominated debt projects. All else equal, increased dollar demand translates into higher USD price.


Note that the lift in the USD last yr during last year's deflationary phase, which amounted to approximately a 25% move. In my view, we could be setting up for some vuja de.

What could be the catalyst for another deflationary phase? Wish I knew. There's so much debt in the system that it could just sink under its own weight. What's different now compared to two yrs ago is that social mood has shifted. Collective appetite for risk is down. People don't want to hold debt if they're risk averse. I think darker social moods puts a leash on credit expansion for some time to come.

An individual doesn't have to buy a special asset like the UUP to position for deflation. High levels of cash, low debt, and minimal risky assets are prudent choices for withstanding deflationary times. That so few people are positioned in this manner suggests a pretty uncrowded trade.

Make no mistake, I view the dollar as flawed and believe that over time it'll turn into so much confetti. In the near term, however, an imploding mountain of debt could squeeze the dollar higher.

position in UUP

The Market for Freedom

"Give me liberty or give me death."
--Patrick Henry, 1775

Each time I reflect on this sentence I'm humbled by its implication. Those who value liberty to the utmost are willing to make the ultimate sacrifice in a (perhaps inevitable) struggle to attain it.

Patrick Henry's words were quite literally expressed through the mortal actions of many during the American Revolution.

Great libertarian thinkers throughout history have recognized that the struggle for freedom never ends. Once attained, liberty is constantly under attack by others seeking economic or political gain.

There can be little question that the assault on liberty in this country has been escalating for a long time--at least a century. Sadly, US citizenry has generally been willing to cede freedom away to the State.

I wonder whether this trend might not be slowing, as isolated pockets begin to speak out against escalating State intervention. My hope is that this form of resistance gains traction, such that a market for liberty is once again sought in size.

This is what occured in the early 1770s. Early calls for liberty were first ridiculed and then debated. The vision of freedom gained momentum until enough people, driven by sheer will, decided to take action to convert the construct into reality.

At that time, unfortunately, violence was necessary in the late 1770s in order to bring the idea to life. This is because the State pushed back.

Should enough US citizenry seek to reclaim liberty lost, what are the chances that the State will once again push back? My reading of history suggests that pushback by the State is inevitable.

If probablity of pushback is near certain, then what happens next?

Grossing It Up

But don't be fooled by the radio
The TV or the magazines
They show you photographs of how your life should be
But they're just someone else's fantasy
--Styx

Many fixate on the value of Gross Domestic Product (GDP) as the primary measure of economic health. Austrian economists long ago dismissed this focus as not only a waste of time but downright dangerous. Frank Shostak summarizes the primary arguments.

One problem with GDP is accurately measuring output. As with most econometric series managed by the government, when you look under the hood you'd be surprised at the sloppy mechanisms used to collect and analyze the data. Assumptions, estimates, fudge factors. It is easy to conclude that these processes are readily subject to political influence and manipulation.

A bigger problem relates to what GDP actually tells us. As currently structured, GDP is a measure of consumption. To boost it, consumption must increase. If citizens don't want to spend, then government has to pick up the slack and do the spending.

This is precisely the course of action being taken by our current administration.

But does a measure that focuses on consumption provide an accurate picture of economic health and well being? Suppose for example that individuals decide not to work anymore. They dip into their savings in order to continue current consumption patterns and maintain their standard of living. All the while they are contributing to a healthy GDP number as measured.

It should be easy to see, however, that such actions will likely compromise standard of living down the road. Savings are lost, which in turn reduces investment in capital goods necessary to improve future productivity. And it is improved productivity (getting more output per unit of scarce economic resource) which increases future standard of living.

Efforts to boost GDP, like those we're currently employing, commonly result in capital consumption. And by consuming vital investment capital in order to 'make the number', we'll be worse off in the long run.

Reciprocity

Better get yourself together
And hold on to what you've got
Once the music hits your system
There's no way your gonna stop
--Miami Sound Machine

The S&P 500 Index (SPX) marks new highs for the year, while the US Dollar Index clocks in new lows.

This inverse relationship is no coincidence. In a debt-laden, overvalued world, the only way to push asset prices higher is to print more money. And, of course, we've been doing a lot of that.

Equity prices have been floating higher on an ocean of liquidity.

Should another round of deleveraging follow, then the above relationships are likely to reverse, as individuals sell stocks and buy dollars to cover their debt projects. Given the current approach to money creation, the Fed won't be able to operate the printing presses (read: pyramid credit thru the monetary system) fast enough to offset the downdraft.

Personally, I've been unwinding speculative long positions and building cash because I like the odds of Deleveragaing Round II as we move into Fall.

position in SPX

Fade Trade

So glad weve almost made it
So sad they had to fade it
Everybody wants to rule the world
--Tears for Fears

Markets gapped higher this morning in part on Alan Greenspan's suggestion that the economy has bottomed. One thing I've learned from studying markets is that any forecast offered by Elmer tends to be a fadeable event.

As markets trade currently, the SPX and COMP are right up against those round number levels (1000 and 2000 respectively). My buddy Toddo has four legs in the bear costume for the first time in quite a while.

Personally, I've been using this liftage to pare long side exposure. Most incremental positions have been sold. Planning to sell ag-based commodity position into further jig.

I also initiated an S&P short. Leaning against these levels seems seems a worthy fade trade.

positions in DBA, SPX

Street Signs

And we'll drink and dance with one hand free
And have the world so easily
And oh we'll be a sight to see
Back in the high life again
--Steve Winwood

Over the past couple of months, I've noticed much less traffic on the roads. The reduction seems much more pronounced on local streets. I would 'think' local street traffic volume is a better proxy for consumer spending tendencies than highway traffic.

Far fewer people seem out and about to me.

Data from the National Restaurant Association lend support to my anecdotal observations, with its Restaurant Performance Index clocking in below 100 for the 20th consecutive month. Any reading below 100 indicates contraction.

Local street traffic reflects activity at the retail end of supply chains. A dearth here seems a harbinger for further slowdowns upstream.

Sleep Talking

Sweet dreams are made of this
Who am I to disagree?
I travel the world
And the seven seas
Everybody's looking for something
--Eurythmics

President Obama says he won't sleep until every American who wants a job has a job. He better have plenty of No Doze on hand.

Our historic patterns of borrowing and spending has created excessive supply and a state of overcapacity. If left alone, market forces correct such imbalances by reducing consumer demand (i.e., less borrowing and spending) which, in turn, lowers supply. Excess capacity must be retired.

This means jobs will be lost in the transition to efficiency. Over time, however, the general decline in prices (including wages) drive the system toward full employment as employers purchase labor at lower prices.

The government wants to do the opposite. Bureacrats seek to extend our spending binge and prop up excess supply. By borrowing and spending more, they merely prolong and deepen the pain. High unemployment rates are certain to persist.

A key lesson from the Great Depression is that unemployment rates didn't decline despite all government interventionary attempts to lower the jobless rate. We exited the 1930s decade at the same 20% unemployment rate that marked the beginning of the New Deal in 1932.

As it stands, it will be this administration's policies that will bring sleepless nights to millions of Americans as they worry about their persistent state of unemployment.