Border Patrol

How soft your fields of green
Can whisper tales of gore
Of how we calmed the tides of war
We are young overlords
--Led Zeppelin

A follow-on issue to yesterday's missive concerns the need for immigration laws in general. Why not just drop the border fences and let people move where they want?

Open border policy is consistent with free market ideology. Countries are like sellers. They offer opportunities, infrastructure, climate, security, and other amenities. Would-be residents are like buyers. The price residents pay to access country amenities include things like taxes, having to live by certain rules/codes of conduct, and, importantly, sacrifice of some degree of freedom.

When property rights are well respected, then free movement policy provides the ultimate environment for increasing the standard of living for all. People find their best country 'fit' and become more productive in environments that help them seek their individual destinies.

Open border policies lose their effectiveness when property rights are not well respected. If a country forcibly takes portions of some residents' property and redistributes this wealth to others, then the stage is set for acquiring wealth by political means rather than by economic means. Because people have a natural preference for leisure over labor, countries that appropriate large amounts of property become magnets for would-be residents seeking wealth by political favor.

When rule of a country that practices wealth redistribution is determined by democratic vote, then residents and would-be residents naturally group into blocs, commonly termed special interest groups (SIGs), to strengthen their influence with policymakers.

Over time, the influx of those willing to sell votes for political favor poisons the productive wealth creating capacity of the country. Those with productive capacity protect their remaining wealth by getting it out of the country. Or they leave the country themselves.

Meanwhile, it is likely that some SIGs will use their political influence to create rules that limit further influx of would-be residents--in order to protect the wealth that they have acquired from further appropriation. The extent to which those laws are actually enforced likely depends on which SIGs have control of the political process at the time.

Standard of living is certain to fall for this country.

Which describes fairly well in my humble view of our immigration system today.

Razing Arizona

Won't you let me in, immigration man?
I won't toe your line today
I can't see it anyway
--Crosby, Stills, Nash & Young

A last minute ruling by a US District Court judge struck down key provisions of a pending Arizona statute designed to tighten monitoring of immigration status of people in the state.

Arizona argued that the legislation was necessary because of the federal government's failure to adequately enforce US laws to keep illegal immigrants out of the state. The state contended, with reasonable evidence to support its claim, that outsized and increasing proportions of in-state crimes are being committed by illegal immigrants. To increase the safety of its legal residents, Arizona sought more control over the detection process.

The federal government went to court to block enforcement of this law using two primary arguments. One was that the the Arizona statute would violate the liberty of legal residents who, under the new law, might be held by police authorities while their legal status is being determined. The other contest was that immigration law and enforcement is the domain of the federal government, not the states.

The judge's ruling highlights two primary issues. One involves the tradeoff between freedom and safety. The judge stated that "Requiring Arizona law enforcement officials and agencies to determine the immigration status of every person who is arrested burdens lawfully present aliens because their liberty will be restricted while their status is checked."

Why the judge, a Clinton appointee, stopped at 'lawfully present aliens' and failed to include 'legal US citizens' is surprising to me, because any increase law enforcement aimed at promoting safety is likely to compromise freedom for the citizenry at large. That said, this ruling seems wholly consistent with Constitutional intent and the Bill of Rights--particularly the Fourth Amendment.

The philosophical tenet here is this: when faced with a matter that involves choosing between greater freedom and greater safety, the alternative that favors greater freedom will be chosen. Patrick Henry's infamous 'Give me liberty or give me death' remark captures this tenet well.

While wonderfully applied by the judge in this particular instance, one has to wonder why it isn't applied more consistently across the legal spectrum. Individual liberty is compromised by a broad range of government activities ranging from the Patriot Act to social security initiatives.

It is easy to conclude that the judicial process mirrors the political process at large: be consistent with a position only when it is politically convenient.

The other issue in the Arizona ruling concerns states' rights. The judge ruled "Even though Arizona's interests may be consistent with those of the federal government, it is not in the public interest for Arizona to enforce preemptive laws."

Heading to the Constitution, the extent to which immigration issues, particularly those related to enforcement, are the province of the federal government is unclear to me. Article 1 Section 8 grants Congress the power to "establish an Uniform Rule of Naturalization."

If indeed this power includes authority for writing and enforcing immigation procedures, then it seems to me that the key words above are 'uniform rule'. The implication is that any immigration rules need to be a) effective, b) equally applied across the entire country. Right now, I believe Arizona has a good argument that the current rules enacted by the US government are not working in their state, either because the law itself is ineffective or because it is being ineffectively enforced by federal officials.

This bids the question of when are states properly justified to take a preemptive (using ruling judge's words above) legal action when a federal law is being ineffectively executed by the central power? One thing I am certain of is that the Founders did not intend on making the states overly dependent on the federal government to the extent that the states would lose the bulk of their sovereignty.

Unfortunately, legislative and judicial rulings continue to transfer more authority from states to the central government at the expense of the Tenth Amendment.

Closed Doors

"Fact is, all lies, all evil deeds, they stink. You can cover them up for a while, but they don't go away."
--Dalton Russell (Inside Man)

Quick update on FDIC bank closings:

2006      0
2007      3
2008    25
2009   140
2010   103 (thru 7/27)

This yr's numbers project to nearly 180 by yr end.

position in SPX

Fixer Upper

Okay
Just a little pinprick
They'll be no more aaah
But you may feel a little sick
--Pink Floyd

Frank Shostak explains why more economic stimulus would be unwise. Regardless, I do believe that the primary driver behind the bullish price action since July 1ish is indeed rising expectations of another shot in the arm from government.

I have no doubt that another fix is heading our way. It's easy to argue that it's already underway (more unemployment bennies, etc). I do have doubts, however, as to its effectiveness. Like any addiction, our dependency on spending and debt are progressive, meaning that we require larger and larger dosages of stimulant in order to get high.

Not sure we have the capacity to handle the requisite dose this time around.

I slapped on a token amount of short exposure last week. While it may be a while for this bullish phase to play out, will be on the lookout for an opening to stage a more meaningful rendezvous w/ Boo.

position in SPX

Blown Speakers

It's so easy to blow up your problems
It's so easy to play up your breakdown
It's so easy to fly through a window
It's so easy to fool with the sound
--The Cars

Public Law 111-203, or the Dodd Frank Act, has been signed into law. No need to replow old ground on the potential value in this one.

Did want to add an interesting tidbit today courtesy of Fleck. The original Glass Steagall Act of 1933 was 37 pages. The Sarbanes Oxley Act of 2002 (another piece of highly touted but consequently proved worthless legislation) was 66 pages.

The 2010 Dodd Frank Act weighs in at 2319 pages.

Perhaps policymakers believe that more pages = more effective regulatory law...

Moreover, if we utilize pages of legislation as a proxy for extent to which government has intervened in markets, these data add to the pile of evidence suggesting ongoing movement away from capitalism and toward the socialism side of the scale.

Postscript: after posting this missive, happened to stumble this piece posted today in the Mises site. As the author suggests, it's easy to note similarities between the regimented state of WWII Germany and the US today from a regulatory standpoint.

Rollerworld

"The game was invented to demonstrate the futility of individual effort."
--Mr Bartholomew (Rollerball)

Interesting article on the 'Ville this am regarding movements toward nationalizing consumer credit in the UK. Essentially, banks in the UK will be able to submit any form of consumer credit to the BOE as collateral for liquidity loans (liquidity loans being a code word for free money to the banks).

This is one approach for doing an 'end around' a broken credit system. In this set-up, banks have much lower (perhaps even no) risk of loss from bad loan-making, thus they're more likely to pyramid credit created out of thin air by central banks to liquify the monetary system. Banks become middle men for central banks handing money directly to the people. One expression of Helicopter Ben's famed 'chopper drop' approach.

Of course, the assumption is that there will be ample quantities of consumers willing to borrow funds from lenders...an assumption that may be tenuous (see Japan).

I also like the larger message of this piece. The author shares that he tries to conjure up the wildest policymaker schemes imaginable in order to be a step or two ahead of reality when those seemingly fictitious dreams become reality.

If you want to keep up with socioeconomic economic reality, then you better have a wild imagination.

Ticket to Ride

She's got a ticket to ride
But she don't care
--The Beatles

Trying to work down my reading backlog, I cracked open Fortune's semi-annual investing issue and happened across a piece by columnists Allan Sloan titled, "Worried about the stock market? Here's the I advice I give my family." (can't find the link in Fortune archives)

It's basically a rehash of the tired message of 'don't get caught up in the day to day gyrations...relax and be in it for the long haul.' He claims that 'amateurs' have no business reacting to market movement--that's a 'participant sport' that should be reserved for 'market pros.'

My response is that if you're an 'amateur,' then why are you involved in markets at all? You are competing against people who have done their homework to make informed decisions. Concluding that somehow your amateur status will benefit you if you stay distant and 'ride out declines' seems seems like a lottery mind set to me.

And a ticket on a ride to the poor house.

position in SPX

Reference

Sloan, A. 2010. Worried about the stock market? Here's the advice I give my own family. Fortune, June 14: 55.

Nullification

The change, it had to come
We knew it all along
We were liberated from the fold
That's all
--The Who

When I first saw the term 'nullification' a coupla weeks back I didn't know what it meant. Nullification is essentially one or more states refusing to obey a Federal law or mandate that the state(s) view as unconstitutional.

Jefferson and other Framers viewed nullification as an essential right of each state and its citizenry that served to check central government power. First exercised by Kentucky and Virginia in response to the Sedition Act of 1798, nullification was utilized a few times during the country's first 100 yrs. It essentially fell out of favor with the start of the Progressive movement and the rise of nationalism.

The argument for nullification can be traced back to (at least) the Constitutional debates when many folks, particularly those with Anti-Federalist pursuasions, voiced concern about the power that could potentially be assimilated by the Federal government over time. Perhaps better than today, people understood the despotic nature of centralized government. They knew that this authoritarian nature was likely to grow with the distance between government and those being governed.

Tilting the balance of power in favor of local, as opposed to national, government power was seen by many as perhaps the most effective check on central government's power hungry tendencies. Not only could local governments tailor action toward unique needs of their citizenry, but they would also easier to monitor and replace if things got out of hand.

Some states were wary of ratifying the Constitution out of fear a progressively expanding central government scope. One stipulation made to Virginia and other dissenters was that they would have the right to refuse to obey any law passed by the Federal government deemed unconstitutional. The Tenth Amendment essentially grants this right to each state. Nullification was born.

Chodorov (1959) is among many who have concluded that the best way to reverse the massive rise in State power is to decentralize government--to put more authority in local hands. It's been so long since states had any real influence in things that putting them in the driver's seat is hard to imagine.

In the name of liberty, however, the notion of nullification certainly merits more debate. Indeed, I hope this debate gets really loud.

References

Chodorov, F. 1959. The rise and fall of society. New York: The Devin-Adair Company.

Agency of Theft

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

What is the core competence of government? Coercion. Government either forces people to do things they don't want to do, or keeps people from doing things they do want to do.

While this might sound contrary to the notion of freedom, it is not. In a free society, some degree of coercive power in the form of government helps individuals protect their property (broadly construed to include a person's life, wherewithal to produce, and physical property) from forcible appropriation (theft) by others. Were government not around to provide coercive assistance in this regard, individuals would spend much more time protecting themselves from thieves and less time pursuing their destinies.

As such, when the coercive power of government is applied toward the protection of property rights, then people are more free.

Expanding government's power beyond this limited scope necessarily means putting government in the wealth appropriation business. Government uses its core competence of coercion to take from some and give to others. Government becomes a thief. And because it possesses virtually unmatched coercive power, government becomes an attractive thief for hire.

Those seeking to employ this agent of coercion are called special interest groups (SIGs). SIGs are interested in acquiring wealth by political rather than economic means. SIGs understand that government is the perfect thief. Not only does government possess superior coercive power, but by hiring an outside agent to do their dirty work SIGs may be able to deflect blame (and perhaps even guilt) toward another party. Indeed, SIGs might even convince others that undertaking theft in this manner is socially acceptable.

Once government gets into the wealth appropriation business, we become a society of thieves. This is our current condition. We're a nation of thieves with government as our agent for hire.

And we're much less free because of it.

When No Rule of Law Rules

Welcome to your life
There's no turning back
Even while we sleep
We will find you
--Tears for Fears

Ron Paul employs the Obama administration's oil drilling moratorium to illustrate two consequences when the rule of law is not followed.

The first is regime uncertainty. Regime uncertainty occurs when the people in charge make up their own rules rather than following existing law. The rules are arbitrary, grounded in the personal views of the rulers and subject to change when whims and moods change. This creates an uncertain environment for those in the marketplace. Both buyers and sellers are hesitant to take risk since government might intervene at any time to penalize action. So producers curtail investments, and customers curtail purchases.

Proposition 1a: The less government adheres to the rule of law, the higher the regime uncertainty.

Proposition 1b: The higher the regime uncertainty, the lower the level of economic activity.

The second consequence of not following the rule of law is regulatory capture. Regulatory capture occurs when organizations decide that it is better to join government in the arbitrary rule-making process. They hope that by taking the 'if we can't beat them, join them' approach that they can tilt the rules in their favor. As RP observes, a slick thing about regulatory capture is that people are lulled into a false sense of security. They think they are being protected from Big Business when the rules actually place incumbent firms in a more monopolistic position that squelches innovaton and entry. SIG city, baby.

Proposition 2a: The less government adheres to the rule of law, the higher the regulatory capture.

Proposition 2b: The higher the regulatory capture, the greater the monopoly power of incumbent firms.

These conditions are in play today. They don't improve standard of living.

Capital Consumption

"Don't worry. As long as you hit that wire with the connecting hook at precisely 88 miles per hour the instant the lightning strikes the tower, everything will be fine."
--Dr Emmett Brown (Back to the Future)

Better standard of living comes from improved productivity (productivity = output obtained per unit of input). Improved productivity comes from investment in tools and techniques that increase output produced per unit of input. Investment comes from capital. Capital comes from savings.

When government confiscates savings via taxes, debt, or money printing, capital is lost for investment purposes. Extending unemployment benefits without a commensurate decrease in spending elsewhere is not an investment in the future. It is an attempt to maintain or improve current standard of living at the expense of the future. This is because capital that could be invested intelligently in productive problems at some point in the future is being consumed today.

The analogy is taking money out of your IRA or savings acct and spending it on a vaction, or on new car, or on groceries that you will consume in the next few wks. You live larger in the present at the expense of the future.

Capital consumption mortgages the future.

Waking Up

I think it's time we stop, hey, what's that sound
Everybody look what's going down
--Buffalo Springfield

A silver lining in our growing mass of problems is that the worse things get, the more likely it is that people begin to wake up and question the ill conceived actions of present day government. The gestation of the Tea Party movement is likely grounded in this phenomenon.

People can (and do) argue endlessly about the goodness or badness of government policies using personally held values as a basis. Because they are based on moral, religious, or other value judgments that vary among individuals, such debates can never be resolved.

What can be resolved is the effect of our current policies on economic outcomes, because economics is grounded in a set of natural laws that can be applied predictively. Applying these natural laws to our current set of policy choices suggests that we are likely headed toward dramatically lower living standards if not outright economic collapse.

Recent Bloomberg/BW data suggest that people continue to wake up to that fact. Nearly 2/3 of the country think that we are headed in the wrong direction and that level of pessimism is increasing. More than half believe that government spending is out of control and threatens our future.

It will likely take more pain before a substantial degree of social power can be truly harnessed. (Un)fortunately, more pain is likely in the cards.

The Individual's Economic Problem

I can't stand this indecision
Married with a lack of vision
Everybody wants to rule the world
--Tears for Fears

Imagine that you have a job cutting wood. Your annual take home pay is $30,000. That $30K is your income. Although you might visualize it as a stack of dollar bills, your income is really a stream of economic resources.

Indeed, before there were dollars and other currencies, your take home pay may very well have been denominated in cords of wood--some fraction of your daily production. Money in currency form merely eases exchange. Rather than trading logs to the baker for loaves of bread, money simplifies the economic calculation of exchange, thereby reducing the awkwardness inherent in trading material resources outright.

As such, it is good to remind yourself every so often that your monetary income really represents a stream of resources.

What to do with these resources? You have two basic options. You can consume them, or you can save them. Consuming them raises your standard of living today. Saving them raises or preserves your standard of living in the future.

The higher the value that you place on living in the present (a.k.a. high time preference), then the more you'll want to consume resources today. If you REALLY want to elevate your present standard of living, then in addition to consuming all of your income, you might seek out lenders willing to let you borrow some of their resources for consumption purposes as well.

The catch with borrowing is that someday you'll have to pay those resources back to the lender plus a little bit extra (a.k.a. interest). If you plan to be more productive chopping wood in the future and your income stream increases commensurately, then borrowing today may not put a dent in your lifestyle down the road. However, should your future income fall short of supporting your elevated lifestyle while paying back the debts you have accumulated, then you will have to dial back on your future standard of living as greater portions of your incoming resource stream are diverted toward paying back your creditors.

The lower the value you place on living in the present (a.k.a. low time preference), then the more you'll sock away resources today for future consumption. This means a lower standard of living now. But those savings could come in handy down the road if/when you a) retire from cutting wood and your income stream vanishes, or b) merely want to supplement your income with saved resources so that you can elevate your standard of living at some future date.

If you save a sizable fraction of your income, then you may be willing to extend it to others in the form of investments that permit other people to elevate their living standards today. You could invest resources in the form of loan projects, in which case you expect to get those resources back in the future plus interest. Or you could invest resources in equity projects, meaning that your resources will be applied toward some productive endeavor that hopefully provides you with a future stream of cash (resources) from the venture's operations. While investing can potentially increase your resource level at some future date, it is also risky. There's a chance that you'll lose part or all of your investment if projects do not pan out. If the perceived reward is high enough, however, it may be worth the risk.

Those resources from savings that are applied toward investment are categorically referred to as capital.

Mathematically, the economic situation facing individuals can be written like this:

income = consumption + savings + investment (capital)  (1)

Another word for consumption is standard of living. If we substitute it into (1) and solve for it, we get:

standard of living = income - savings - investment  (2)

Equation (2) expresses the centrality of income (obtained thru productive work) in determining standard of living. To raise standard of living, you can generate more income. Or you can save and invest less.

You can even raise your living standard thru borrowing (negative savings), altho borrowing to raise living standards today comes out of the hide to future income (to pay back your loans), which jeopardizes your living standard down the road. The more you borrow to live phat today, the greater the chance that your future living standard will be lower.

It's hard to over stress the importance of this basic relationship in understanding our current situation, and the folly of most remedial action either in motion or being discussed.

position in bonds

Surprise Spec

The news slows, people forget
The shares crash, hopes are dashed
People forget, forget they're hiding
--The Who

Earlier this year I went long the US dollar, an unlikely trade for me given my view of the world.

Am in another one now as I've initiated a position in longer dated Treasuries via TLT. Nice cup-and-handlish pattern. More importantly, recent action in govies is consistent with the notion that deflationary pressures are again building.

The time horizon on the above chart only captures the last six months. A multi-year chart indicates that the TLT touched 115 during the early 2009 decline, suggesting perhaps a 15% move if we get going in that direction again.

I certainly 'see' the downside as well, given the Fed's nearly unlimited Power of the Press. In the near term, however, I'm thinking that the phantom of deflation may gain the upper hand.

Small potatoes position and doubt it will grow into much more than that. But wanted some exposure.

position in TLT

Budgetary Pretense

"You guys have lots of bonds."
--Lana (Risky Business)

The Obama administration has forecast a 10 yr spending budget (blue dotted line below). Others have issued a more 'realistic' forecast using their assumptions (red dotted line below).

If the economy hits another deflationary air pocket in the next few months, then my sense is that they're both too low.
Assume for sake of discussion that the red line is accurate. Current US public debt outstanding is about $13.2 trillion. The red line above forecasts about $1.5 trillion/yr on average, or $15 trillion in spending in the upcoming decade.

Seems unlikely that the bond market will finance all of that. Which leaves taxing, or inflating.

Illiquid Tide

'Cause the hurt doesn't show
The pain still grows
It's stranger to you and me
--Phil Collins

Interesting chart below. For decades US households carried enough cash to cover liabilities.

That all changed 10 or so yrs ago. Now US households operate in an illiquid state.

Which begs the question: how can we get big time inflation, where folks are getting rid of their cash because they fear dollars will be less, if they don't hold any cash?

Yield Sign

Slip kid, slip kid, second generation
Your sliding down the hill like me
--The Who

Stocks slippin' a coupla percent midday. Lots of potential 'reasons.' One is bank earnings reports that suggest little in terms of loan growth--particularly w.r.t. loan demand.

As stated by Peter Atwater this morning on the Buzz: "...when those who can't borrow can't and those who can borrow won't, it is hard to create a debt driven recovery."

Feels deflationary to me.

In that regard, my eyes keep gravitating to those 10 yr yields. They never really got going to the upside with stocks. And yesterday while stocks rallied, yields continued to sink.

A decisive break lower thru 29 (2.9%) might suggest another leg lower for risky assets.

Almost has me wanting to get long some govies...

no positions

Interpretation Station

I must've dreamed a thousand dreams
Been haunted by a million screams
But I can hear the marching feet
They're moving into the street
--Genesis

As referenced yesterday, an Iowa Tea Party group was in the news for posting a billboard portraying an image of Barack Obama under the caption of 'Democrat Socialism' sandwiched between an image of Adolf Hitler under the caption of 'National Socialism' and an image of Vladimir Lenin under the caption of 'Marxist Socialism.' The word 'change' is stamped on each image. Under the images runs the statement: Radical Leaders Prey on the Fearful and Naive.

As expected, the billboard drew howls from Obama supporters over a perceived direct comparison between Obama and Hitler (altho much less angst seemed to be voiced w.r.t. comparison vs Lenin).

Rather than pondering direct likeness, however, let's consider a plausible alternative interpretation.

Hayek (1944) posited that increasingly interventionist policies of the US and UK were moving the countries further along the socialist scale. Unless these policies reversed, Hayek posited, then outcomes resembling extreme authoritarian states such as those operated by the German Nazis and the Russian Communists were likely.

Hayek also observed that it was during crisis situations that governments were particularly prone promote the need for change in order to acquire more control.

Hayek's thesis is still in play today. Interpreting the billboard in this context seems within the scope of reason.

References

Hayek, F.A. 1944. The road to serfdom. Chicago: The University of Chicago.

Just Like That...

'How'd you do that? How'd you do that?'
--Daniel Larusso (The Karate Kid)

After posting the previous missive, I happened to check in on Facebook where I saw that my sister had just posted this.

Altered State

'If you don't mind me asking, son, what happened?'
--Admiral Leslie Reigart (Behind Enemy Lines)

It's hard not to read this 1960s essay by Alan Greenspan and ask 'what happened?' Elmer essentially nails the rationale for gold in the context of the welfare state. Quite ironically, however, as Fed chairman he proceeded to speak and act in ways totally inconsistent with what he knew.

Perhaps there's a lesson here that's generalizable to bureaucrats as a whole. Borrowing from Red, when individuals enter bureaucratic life, they become 'institutionalized.' Whatever values and thought processes they had going in get revised in light of the unique context they navigate. Bureaucratic environments differ in many ways compared to organizations that function in market environments (different goals, incentives, etc). Behavior seems bound to be subject to influence.

Currently, there is some debate over the socialist nature of the Obama administration. On the one hand, it seems doubtful that anyone in this administration is a card carrying socialist. On the other hand, there can be little doubt that a significant portion of the programs/initiatives/behavior of this administration resembles activities that we would expect to see under a centrally planned or socialist state.

The point: perhaps the bureaucratic context is capable of altering an individual's actions in ways that perhaps even the individual never dreamed ex ante.

position in gold

Tea Up the Great Debate

They gave you life
And in return you gave them Hell
As cold as ice, I hope we live to tell the tale
I hope we live to tell the tale
--Tears for Fears

The founding tenets of the Tea Party movement are limited government, fiscal responsibility, and free markets. These were also founding tenets of the United States. They drove the Revolution and the country's governing framework.

People who oppose the Tea Party rarely attack these founding tenets head on. Instead, using juvenile tactics, opponents commonly resort to name calling (racists, simpletons, et al) or some other diversionary argument (e.g., TP is a covert Republican operation, TP is in pocket of Big Business). Easily, nine of every ten criticisms of the TP movement utilize such 'playground' methods.

My sense is that these diversionary tactics are intentional. Were they to attack the founding tenets directly, Tea Party opponents risk alienating (or awakening) a broad group of Americans who still link these ideals with what this country is supposed to represent. Tea Party opponents fear this--they don't want to encourage more folks joining the Tea Party just to affirm belief in the founding tenets (althought this may already be happening).

At some point, however, direct debate over the appropriateness of the founding tenets seems unavoidable--and absolutely necessary. At its core, the question is this: Do we as American wish to live as a free people? And unfortunately, given the behavior of a large group of citizens over the past century, I do not think the answer is all that obvious.

During the period surrounding the Constitution's development, we conducted the most lucid debate in our country's history on the value of freedom and the proper role of government. Pick up the Federalist Papers, or the writings of those who opposed the Constitution as written (a.k.a. the Anti-Federalists) and observe a level of sophistication far superior to today's political exchange.

I'm hopeful that the Tea Party holds together so that we can once again lay the founding tenets out there for full scale debate.

From where I sit, this would be the most civilized way to understand the extent to which a market for freedom still exists in this country. Would think the less civilized ways are to be avoided if at all possible.

Make It Take It

Knee deep in the hoopla
Sinking in your fight
Too many runaways
Eating up the night
--Jefferson Starship

After the markets traced out the bearish head and shoulders pattern and broke down, we've had a stiff rally that has retraced about 3/4 of the recent decline.

These are some whippy moves, to be sure. Since bottoming in sessions before the Independence Day holiday, major indexes have been up six sessions in a row. As in the past, however, this uptrend has lacked volume relative to the downtrends. Morever, the action feels a bit 'forced' to me. Unnatural.

Personally, I peeled out my small Exxon (XOM) position today, leaving a snivlet Microsoft still on the sheets. That may be for sale tomorrow, depending on how the market digests Intel's warm vibe post bell.

Could we scream higher from here? Sure, these are markets. But I've been long a touch of stock for a trade only and this trade is nearing completion.

Will likely look for an opportunity to lean short in sessions ahead.

position in MSFT

For Richer or Poorer

Just wait till tomorrow
I guess that's what they all say
Just before they fall apart
--New Order

The 'wealth effect' posits that when people feel wealthier, they will consume/spend more. And if people consume more, then they will commensurately save less.

A nice expression of the wealth effect taken from this missive appears below.

As stock prices go up, people save less. And vice versa.

People often state that through their 401k accounts, they are 'saving' for retirement. Not if this money is going into risky assets like stocks or bonds. Saving is putting resources aside today for the purposes of consumption in the future.

Investing is not a form of saving. Rather, it is a form of speculation. Are entrepreneurs who sink their own money into a business venture 'saving' for the future? Of course not. They are risking capital today in hopes of realizing an acceptable, but uncertain, future return. Why should someone who buys a fractional share of a business via a stock purchase be viewed differently?

The above chart also suggests a forecast (perhaps an overly simplistic one) in the spirit of the natural balancing principle of markets. A prolonged bull market in stocks helped drive savings to ultralow levels. A prolonged bear market may be necessary in order to rebalance savings to more natural levels.

position in select stocks

Centrally Parked

Now, the mist across the window hides the lines
But nothing hides the color of the lights that shine
Electricity so fine
Look and dry your eyes
--Joe Jackson

My sister pointed me toward this Diane Rehm show featuring a dialogue about the Tea Party. Thought this was well done. Seemed fair and balanced, plus remained focused on central issues (seemingly difficult to do w.r.t. Tea Party).

Judging by call in/email questions plus comments left on the DR website, though, this show may have been rough for many in her listening base.

All the more reason for snaps to DR for a nicely facilitated effort.

Supply Side Economics

That's the situation
I've known it from the start
Every time that I look at you
I can't see the future
--Genesis

Interesting missive from the Hussman site that extends previous thoughts of optimistic earnings expectations.

One chart that I found particularly interesting was this one:

The strength of the relationship between the manufacturing Purchasing Managers Index (PMI) and earnings surprised me. The earnings numbers are shifted forward by six months to account for the lag between business conditions upstream in the supply chain (that's what the PMI is supposed to reflect) and downstream financial performance.

A number of smart cookies track PMI as a leading indicator. Can you see why?

no positions

Do We Have Capitalism?

I try so hard not to get upset
Because I know all the trouble I'll get
--Til Tuesday

In a previous missive, we defined the two categorical approaches to economic organizing: market economy (or capitalism) and planned economy (or socialism). We also elaborated the 'in between' condition known as mixed economy (or interventionism).

'Common wisdom' often fingers capitalism as a primary contributor to economic and social malaise. This claim has been around for some time (e.g., Marx & Engels, 1848), and tends to get louder during downturns such as the current one.

Although many people appear to accept this claim as fact, as it stands it is merely a viewpoint. Elevating the claim toward factual status requires that it be reasonably validated. Early steps in the validation process include a) defining capitalism in sensible terms, and b) demonstrating that what we currently have is indeed capitalism. If one or the other can not be done, then what we have is an 'empty claim.' Empty claims get us nowhere if we are to be intellectually honest. Plus, they dramatically increase risk of error should we take remedial action based on them.

Hopefully we have accomplished a) via our previous post. This leaves us with b), demonstrating that what we currently have is capitalism. Because capitalism is defined as private ownership and control of the means of production and exchange, then we can rightly conclude that capitalism indeed exists if there is no interference in production and distribution by government--save for that which preserves individual property rights.

Mises (1998) categorized interference as follows:

Restrictions. The authority forbids production of certain goods (e.g., alcohol during prohibition), application of certain production methods (ban on deep water drilling), or makes manufacture of certain goods more difficult and more expensive (seat belt/air bag mandate in autos).

Price controls. The authority fixes prices (rent controls), wages (minimum wage laws), or interest rates (FOMC monetary policy).

Inflation and credit expansion. The authority expands the supply of money of money and credit (all central banks). Includes manipulation of exchange rates and currency controls.

Confiscation and subsidies. The authority confiscates property (taxes) and subsidizes behavior of interest (housing incentives, ag kickback for growing corn for ethanol).

The evidence is overwhelming that all forms of market interference are present en force today. As such, there can be little doubt that our current economic system is not capitalism.

Instead, because government interferes in some, but not to a total, degree in market activity, the reasonable conclusion is that we operate under mixed economy conditions.

With their present argument filed under the 'empty claim' category, persistent anti-capitalists might try a different argument. "Perhaps we don't have a pure capitalist system, but the system leans more toward capitalism than socialism, and recently we've been moving more in the capatalist direction. We need to move more in the opposite direction in order to fix our growing set of problems."

Getting this claim off the ground requires that we establish the position and general direction of our mixed economy on the capitalism <-------->socialism scale. While establishing the absolute position on the scale can be difficult, it seems easier to establish the general direction of our economy (heading toward capitalism or socialism) by plotting the historic course using longitudinal data.

We'll give this a try in future missives.

References

Marx, K.H. & Engels, F. 1848. The manifest of the Communist Party. London: Burghard.

Mises, L. 1998. Interventionism. Irvington-on-Hudson, NY: The Foundation for Economic Education, Inc.

Head Fake

Take my money, my cigarettes
I haven't seen the worst of it yet
--Talking Heads

Recently we highlighted a well thought missive by John Hussman. He includes a particularly salient paragraph that bears repeating here (boldfaced emphasis mine):

"From an inflation standpoint, it is important to recognize the distinction between what occurs during a credit crisis and what occurs afterward. Credit strains typically create a nearly frantic demand for government liabilities that are considered default-free (even if they are subject to inflation risk). This raises the marginal utility of government liabilities relative to the marginal utility of goods and services. That's an economist's way of saying that interest rates drop and deflation pressures take hold. Commodity price declines are also common, which is a word of caution to investors accumulating gold here, who may experience a roller coaster shortly. Over the short term, very large quantities of money and government debt can be created with seemingly no ill effects. It's typically several years after the crisis that those liabilities lose value, ultimately at a very rapid pace."

Dr John thus explains why we can realize deflation despite gargantuan increases in money by the Fed. This explanation also tells us why yields on Treasuries go down in the face of huge increases in US govt debt.

The nasty thing is that bureaucrats use goods/service prices and bond yields as signals that they might be overdoing the stimulus. As long as those signals don't exhibit significant upticks (which they likely won't for a while), policymakers feel they have room to step harder on the accelerator.

This sets us up for a big reversal down the road. But as the good doctor suggests, we may be years from the transition from deflation to inflation.

position in gold

Short Term Thinking III

Here comes the rain again
Falling on my head like a memory
Falling on my head like a new emotion
--Eurythmics

Last time we considered the relationship between leverage and time horizon for decisions. The formal proposition was:

Proposition 1: The greater the leverage, the shorter the decision-making time horizon.

While there appears to be conceptual and empirical support for the influence of leverage, other factors are likely to shrink time horizon as well.

The 'obvious' one is environmental uncertainty. As present and future conditions become more unpredictable, then decision makers are likely to focus on the here and now. From a fundamental investment standpoint, if future cash flows cannot be confidently forecast, then it makes little sense to make long term capital commitments. A proxy for uncertainty is volatility or variation. Higher volatility is likely to motivate increased response to cope with changing conditions, which kicks more behavior into present time periods. Stated formally,

Proposition 2: The greater the uncertainty, the shorter the decision-making time horizon. 

One contributor to uncertainty is the political arena. For example, the spectre of government interference in economic activity is likely to give managers pause about committing to long horizon projects (see this missive for a nice elaboration here). In such situations, managers are more likely to choke up on the risk bat and swing for average that is more likely to accrue from shorter term decisions that can assessed with clarity.

To use one industry example, the energy sector is often regarded as one that has lacked 'foresight' in its decisions. Domestically we lack exploration and production capacity as well as refining capacity for fossil fuels. Alternative energy sources, such as batteries, nuclear, solar, wind, etc seem underdeveloped as well. Why so short term of an orientation? One thing that would be paralyzing me is the regulatory environment. I have little idea what energy industry regulation is going to look like down the road, other than a sense that it will be more restrictive.

The other thing that would give me pause is government's habit of picking winners and losers in the energy sector, and tossing out incentives and disincentives accordingly. If I'm an ALT E entrepreneur, not sure I'd want to be making big capital commitments if government might take that risk for me, or at least spot me a few $million. If I'm and oil and gas operator, I might to be less likely to invest in a $10 billion refinery project if government is going to throw its weight behind, say, nuclear or batteries.

Although potential for government interference is really one form of uncertainty specified in Proposition 2 above, its capacity attracting decision-maker attention seems to merit singular theoretical focus here. Therefore,

Proposition 3: The greater the prospect of government intervention, the shorter the decision-making time horizon.

Evidence suggests that all of these factors are in force today--and growing in intensity. That time horizons for decisions has been shrinking accordingly should be no surprise.

no positions

Leverage and the Short Term

Just a little more time is all we're asking for
'Cause just a little more time could open closing doors
--Corey Hart

In a previous post, we considered decision-making time horizons with a focus on what makes decisions more short term oriented. We observed that while people may have an inclination for 'now versus later,' interest rates in unhampered markets serve to balance long-term and short-term thinking on a risk/reward basis.

In hampered markets, however, this balance is disturbed. Intervention in credit markets sends false signals that motivate risky behavior during periods of high time preference--a volatile combination that often produces 'crack up booms.' Leverage, defined here as borrowing to increase potential returns (and in the context of high time preference, to increase current standard of living), rises above levels likely in free market situations. We ended by proposing that this leverage is a contributing factors to shorter term focus. Stated more formally:

Proposition: The greater the leverage, the shorter the decision-making time horizon.

Scenarios using a stock market context serve to illustrate. First, consider an individual who has $100,000 in stock but has no debt. This person is unlevered. Let's say stock markets run into a rough patch and lose 50% of their value. The individual's account is now worth $50,000. If the person can tolerate this large drawdown and believes in the future of his/her investments, then the individual may do nothing. Lack of action would suggest that the individual's time horizon extends beyond the present volatility. Indeed, this individual may be 'in it for the long term.'

Now consider a second individual who has $100,000 in stock. In this case, however, $60,000 in stock was purchased with the investor's own money while the other $40,000 was purchased using a loan from the individual's broker. This is known as being 'on margin.' In this example let's specify a 'margin requirement' of 50%, meaning that the stock:loan ratio cannot fall below 2:1 (which would occur in this case if stock value fell below $80,000). Should such a decline occur, then the investor would get a 'margin call' from the broker; the investor would then be required to act--either by adding more capital to the account or selling stock to pay down the margin loan until the stock:loan ratio once again achieved 2:1.

Why would an individual want to be margined? Why, to increase potential returns! If stock prices double from here, then the return on the investor's $60K of capital is ($200,000 - $100,000)/$60,000 = 167%. Had the investor borrowed no money and merely invested his/her $60K in unmargined fashion, then the return on a stock price double would have been ($120,000 - $60,000)/$60,000 = 100%. Not awful by any means, but lower both in ROI and in absolute dollar terms ($40K less to be exact). This is the magic of leverage.

Unfortunately, leverage works both ways. What if stock prices decrease instead? A 10% decline in a $100,000 portfolio represents a $10,000 loss. Just as ROI is magnified when prices rise, it is also magnified when prices fall. A 10% decline on $100K generates a -17% ROI for the leveraged portfolio compared to, well, a -10% ROI for the unleveraged situation. The steeper the decline the more likely a reactive decision becomes. Should the losses push the leveraged portfolio below $80,000, then the investor will be forced to act by the broker.

Now lets's increase the leverage. A margin requirement of 10% would permit the individual to buy $100,000 worth of stock with only $10,000 of equity capital. This may seem like an extreme amount of leverage, but most banks operate with a maximum of 10% equity and usually much lower. Wall Street firms often achieve leverage ratios of 30 to 1 or more. Hopefully you can see that any doesn't take much of a price decline before the leveraged individual is in reactive decision-making mode.

Although we've been focusing on the individual's reponse to losses, it is also likely that the individual will be more likely to react to short term gains as well. Because of general tendencies toward loss aversion (Kahneman & Tversky, 1979), individuals are more likely to 'take their trade' and sell winners relatively soon--a condition more likely when gains are magnified by leverage.

The main point of this exercise is to demonstrate that leverage increases the likelihood of action in response to near term stimuli. When folks borrow resources to increase present day standard of living (mortgage, credit card, bank loan, etc), they are under obligation to pay the loan back some day. If for some reason the environment changes and individuals fear they can't pay back the loan, or that the leverage is decreasing rather than increasing their standard of living, then they are likely to react to that stimulus.

As such, leverage is more likely to motivate short term decisions.

Given levels and trends in debt at all levels (individual, firm, sovereign), society is operating in an increasingly leveraged state. It should be no surprise, then, we are noticing general tendency for short term decision making.

What's the source of all this leverage? Excellent question, young grasshopper, and one people should ponder in a truth-seeking manner.

Aim High

Frank Horrigan: I'll bet you that brown pigeon down there flies off before the white one.
Lilly Raines: How do you know?
Frank Horrigan: I know things about pigeons, Lilly.
--In the Line of Fire

Taken from this BW article, the below chart (GREAT chart format, btw) indicates that analysts nearly always over-estimate future earnings out of the gate. Their optimism usually must be ratcheted down in subsequent periods as reality unfolds.

Also note that the biggest misses correspond to recessions (91-92, 01-02, 08+), implying that analysts have trouble forecasting slowdowns and/or their effect on earnings.

Why do analysts consistently over-estimate financial performance. Perhaps analysts are just an optimistic lot by nature. Or perhaps analysts over-estimate earnings in order in order to make stocks look cheaper than they really are, which helps their firms sell more stock.

So, next time you read/hear some pundit chatting up valuations based on 'forward' earnings estimates, put your thinking caps on.

Blue Plate Special

Jordan Tate: "You're not a cook."
Casey Ryback: "Yeah, well I also cook."
--Under Siege

After yesterday's early rally fell apart, many bears surely leaned on stocks thinking that we were heading lower post haste. However, today's higher open didn't crack, and the day was spent squeezing the eyeballs out of the shorts to a tune of nearly 3% higher on the indexes.

It does feel like we need to relieve some pressure on the tape, and today began that process. How long this relief rally lasts is of course anyone's guess. However, given the technical field position (not to mention fundies, macro), it seems that bullish moves higher from here are appetizers while bearish moves lower are entrees (thx to Kevin Depew of Minyanville for that one).

Am currently positioned for an upside snack via snivlets in Microsoft (MSFT) and Exxon (XOM). A bit more jig from here, however, and my small little plate with that tiny fork will be clean.

Will then consider waving down a waiter and ordering a main course for me and Boo.

positions in MSFT, XOM

Safe Refuge

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

During the 1920s folks took large amounts of speculative risk. They bought stocks, real estate, lots of consumer goods. And they did this with borrowed money. And the Twenties roared...

Then came the inevitable bust that follows leveraged spending. Leverage works both ways, and when prices fall insolvency can arrive pretty quick. Catastrophic losses transformed many speculators into frugal penny pinchers for the rest of their lives. Austerity became the norm for this generation.

We're seeing some behavior reminiscent of the Depression generation. Folks who haven't saved in years (perhaps in their lifetimes) are trying to sock money away in significant size. They're also swearing off risky assets like stocks in favor of savings accounts and CDs.

Like all natural systems, markets seek balance. When behavior extends too far in one direction, opposing forces nudge (shove?) behavior in the other direction to correct the imbalance.

Whether the current saving phenomenon becomes a secular trend similar to the 1930s remains to be seen. Should it stick, then policymakers hoping to jack the economy by reviving old borrowing and spending habits will be pushing string.

Time Passages

Well the picture is changing
You're part of a crowd
They're laughing at something
And the music's loud
--Al Stewart

A claim that has a long history, and one that seems to be getting louder, is that capitalism has a short term focus. Proponents of this viewpoint often point to the volatility observed in many modern markets as proof of a narrow time horizon.

Of course, an important assumption underlying this line of thought is that present conditions equate to capitalism--a supposition that intellectually honest individuals may have trouble establishing as true.

A basic axiom of human behavior is that individuals prefer to satisfy needs in the present rather than in the future. Therefore, we should not be surprised that people have a proclivity for 'now rather than later.' People generally value present goods higher while 'discounting' the value of future goods. Moreover, the value of future goods is likely to decrease as the length of time necessary for their completion increases.

This does not imply, however, that people always elect the short term option when making decisions. Individuals differ in their 'time preferences.' Time preference pertains to the premium individuals place on enjoyment in the present versus enjoyment in the future. Those with higher time preferences place higher value on near term enjoyment, while those with lower time preferences place more value on their future well-being.

It is also possible that individual time preferences move up and down in collective fashion. Work from the emerging field of socionomics suggests that time preference may follow social mood, cycling through phases of high time preference (perhaps during periods of collective optimism) followed by phases of low time preference (perhaps during periods of collective pessimism).

In unhampered markets, interest rates can be viewed as an expression of general time preference. High interest rates coincide with high time preference in such contexts. Those holding capital increase the price (interest rate) at which they'll lend or invest it--because they have heightened desire to consume that capital in pursuit of present day pleasures. The higher the time preference, the higher the discount (interest) rate placed on returns receivable in the future.

Conversely, low interest rates generally coincide with low time preference. Those holding capital reduce the price (interest rate) at which they'll lend or invest it--because they have little desire to consume that capital in pursuit of present day pleasures.

In free markets, interest rates provide an important signal about aggregate time preference and investment opportunity. High interest rates reflect high time preference, suggesting relatively low amounts of capital available for risky projects. Borrowing costs are high, which lowers projected return on investment, which in turn discourages speculative borrowing. On the other hand, low interest rates reflect low time preference, suggesting relatively high amounts of capital available for risky projects. Borrowing costs are low, which raises prospective returns, which in turn encourages speculative borrowing.

It appears, therefore, that free markets contain neither a long term or short term bias by nature. Instead, time horizon is likely to shift with changing time preference and the risk/reward profile offered by the cost of capital (interest rate) for risky projects. Greed (for gains) and fear (of loss) provide a natural balance for economic calculation in these changing conditions.

In hampered markets, however, the interest rate signal gets distorted, perhaps badly, by government attempts to manipulate borrowing costs. Government price fixing of interest rates (which usually amounts to keeping interest rates artificially low) can create situations that are unlikely in free, unhampered markets. For example, government can suppress interest rates during periods when aggregate time preference is high. This situation is unlikely in free markets because it cheapens borrowing costs when people are willing to take on speculative risk in order to elevate present living standards. Such conditions are unlikely to persist in free markets. Moreover, the combination of artificially cheap funds and high risk appetite is liable to spark a speculative boom grounded in high degrees of leverage.

I propose that it is this unnatural condition--the one of high leverage fueled by artificially cheap borrowing costs--that encourages the equally unnatural situation of excessively short time horizons in decision-making. We'll elaborate in a future post.

Coming to Terms

It happened one summer
It happened one time
It happened forever
For a short time
--The Motels

While our planet is well endowed, most resources are not in readily consumable form. Natural conditions of abundance are an illusion. Axiomatically, from the standpoint of human existance, the state of nature is one of scarcity.

Reducing conditions of scarcity requires production. Production is the transformation of resources into consumable goods and services. Some combination of labor and capital (i.e., equipment) is necessary to execute the production process. Axiomatically, production is required in order to advance standard of living.

Although it is reduced by production, scarcity is not eliminated. Many factors constrain the abundance obtainable from production. Certain raw materials may be hard to find, thus limiting manufacture of certain outputs. Capital is limited by technological state-of-the-art and by available savings that can be used for investment. Labor is limited by the hours in a day, by methodological state-of-the-art, and by human tendencies to favor leisure over work. Moreover, humans have ever increasing needs and desires which exert constant pressure on production for more. Axiomatically, resources must be rationed, or 'economized,' in order to satisfy needs under scarcity constraints.

So how should such economizing proceed? How to decide what resources to use, who makes what and how, and who gets what and how?

There are two general approaches for economizing. One is a market economy (a.k.a. capitalism, unhampered economy, laissez faire, free market). In a market economy, economic decisions are made by market participants--buyers and sellers engaged in cooperative exchange. Ownership of the means of production, and control of commercial decisions and methods, is in private hands. Government's role in a market economy is limited to the protection of property rights of all individuals.

The other approach is a planned economy (a.k.a. socialism, command economy, central planning). In a planned economy, economic decisions are made by the state--planning bureaus engaged in allocating resources. Ownership of the means of production, and control of all commercial decisions and methods, is in the hands of planning boards. Government's role in a planned economy is all encompassing, although emphasis on protecting individual property rights is muted since a large amount of property is in public rather than private hands.

The two categorical approaches to economizing define extremes of sorts, meaning that it is likely that many if not most economic systems operate somewhere 'in between' the poles. The in-between condition is called a mixed economy (a.k.a. managed capitalism, hampered economy, interventionism). A mixed economy is characterized by some degree of state intervention in production and distribution processes. Government may own some, but not all, of the productive capital. Government may make or regulate some, but not all, of the commercial decisions. The greater the government involvement, the closer the system is to the planned economy extreme.

Where does the U.S. economy stand vis a vis this framework? We'll consider in future posts.

Independence Day

"So, here's to the men who did what was considered wrong, in order to do what they knew was right...what they knew was right."
--Benjamin Franklin Gates (National Treasure)

Sadly, ten years ago I took freedom for granted. I knew little about this country's founding. I had never read the Constitution.

It's different now. I think about liberty every day. I marvel at what those colonials did when they realized that freedom was not just some philosophical concept, but a way of life that was within their grasp.

They were the true revolutionaries. They were the true liberals. They knew liberty was right. They could feel it in their bones.

The labels of revolutionary and liberal today connote considerably different meanings. Those who wear these terms believe they are 'progressive'--pursuing a new society in sync with modern times.

But what they pursue isn't radical or liberal at all. They seek an authoritarian design that restrains individuals from unincumbered pursuit of their destinies. There is nothing progressive in this design. It is regressive--it returns us to a governance structure has shackled people throughout the history of mankind.

Liberty remains the truly radical idea. Independence Day reminds us of what an enlightened group of revolutionaries did in the name of freedom to form these United States. An opportunity to reflect not just on their action, but on what we are willing to do in order to remain a free people.

Happy Fourth!

Scoring the Front Nine

"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

As we head toward the Back Nine of 2010, a brief progress report on this yr's personal financial goals.

Pay off mortgage. Just submitted my July payment which will bring balance below $10K! Still hoping for end of summer completion.

Add to bullion. Was more aggressive than initially planned in early spring. Gold bullion by weight has increased over 50% YOY.

Deflation trading. I've basically been trading uptrends and downtrends in the tape with decent results so far this yr. I do sense deflationary pressure dead ahead. Except for snivlet-sized longs in a coupla stocks (MSFT, XOM), I'm all cash. Will enter H2 looking for opportunity to re-enter some short exposure.

Overall have been quite fortunate thus far this yr given general conditions.

positions in bullion, MSFT, XOM

Spoon It Out

"It seems to me that if there were any logic to our language, trust would be a four letter word."
--Joel Goodson (Risky Business)

On the back of the last piece, this editorial by Paul Krugman. The basic thought that we may be entering (I think perhaps already into) a depressionary phase is one that has merit, but his explanation as to why and what to do about it is laughable. I'm continually amazed that a guy who is supposed to be so smart can spew such gibberish.

I'll leave it to the reader to test his claims against reason and evidence to assess their validity. You don't have to be a PhD to shoot holes thru this one.

Of course, he only spews this drivel because there's demand for it (supply follows demand).

Another data point that outsourcing your brain to 'specialists' like this guy is truly risky business.

Inconvience Stores

"Klipspringer has been here since a party I threw in April. I didn't even realize he was here until two weeks ago."
--Jay Gatsby (The Great Gatsby)

David Stockman employs some data to counter ongoing claims from the Krugmans and the Stiglitzes that the Depression was 'caused' by a lack of government spending. He notes that government spending back then was tiny, clocking in at about 3% of GDP vs over 25% today. Totally eliminating the fiscal budget back then was insignificant compared to 40%+ haircut that GDP took from 1929 to 1932.

As Mr Stockman observes, the big categorical declines during this period occured in private fixed investment (-92% wow), consumption (-61%), and exports (-65%). All of these were the result of binging during the 1920s. And, as this author and others observe, this binging can be directly tied to the easy monetary policy of the Fed (e.g., Anderson, 1949; Phillips, McManus, & Nelson, 1937; Rothbard, 1963).

The classic 'crack up boom' followed by the inevitable bust.

The evidence is clear for those who want to see it. Obviously, many do not.

References

Anderson, B.M. 1949. Economics and the public welfare. New York: D Van Nostrand & Co.

Phillips, C.A., McManus, C.F., & Nelson, R.W. 1937. Banking and the business cycle. New York: The Macmillan Company.

Rothbard, M.N. 1963. America's Great Depression. Princeton: D Van Nostrand & Co.

Shorts On, Shorts Off

"Walk on road, hm? Walk left side, safe. Walk right side, safe. Walk middle, sooner or later get squished just like grape."
--Mr Miyagi (Karate Kid)

Just a quick note that I took off my short side trade into this morning's slide.

Could we go lower from here? Oh yeah. And I think we do over time. We've previously noted that SPX 950 seems the next 'logical' support level for the tape.

But these daily declines have been getting a bit too patterned for my tastes. While I respect the potential for an elevator shaft move lower, I equally respect the spectre of a relief rally here as well. In that vein, I did pick up a snivlet of Microsoft (MSFT) in case Snapper makes a cameo.

In a nutshell: shortin's hard, mon. Lot's of things work against short side bets, not the least of which is the government's printing press.

So it's said, should we indeed get a stiff lift from here, I'll be sniffing around for

position in MSFT