Saturday, October 30, 2010

Dad's Ballot

"You will have saved the lives of millions of registered voters."
--Dr Peter Venkman (Ghostbusters)

As a kid, I knew little about my parents' politics. Not that I cared, as politics was as distant as Jupiter in my mind growing up.

Despite my disinterest, I did happen to pick up two politically-oriented tidbits about my Dad, purely by accident I suppose. One was that he didn't like Nixon. Nixon resigned in August, 1974 while we were on vacation. It happened to be Daddio's birthday, and I think we may have put an extra candle on the cake to celebrate his extra special day.

The other thing I was privy to was Dad's voting strategy. He prefered not to vote for incumbants. "I vote 'em all out," he would say.

Whether he actually did so or not, or did so in non-partisan fashion, I have no idea. But a let's-clean-house voting heuristic reflects belief that politicians produce results that are more alike than different, and that those results are generally unsatisfactory.

Given our current structure, it's a wonder that people should expect otherwise. It goes something like this:

a) Political favor is for sale, and SIGs purchase it thru various means.
b) Thru borrowing, taxing, and inflation, politicians marshall resources to satisfy the SIGs that support them.
c) Government spending goes ever higher, and does so in bi-partisan fashion.
d) Politicians lever up (read: borrow) in order to satisfy more demand for political favor.
e) Debt levels rise ever higher, and the country's financial situation gets more precarious.
f) Voters ditch incumbents in favor of a new slate that promises to 'change things.'
g) return to a)

We are destined to be stuck in this Do Loop until one of two things happen. We restructure the system to prohibit sale of political favor. Or the system collapses under the weight of massive debt.

Meanwhile, Dad's basic voting strategy will likely remain a favorite.

Friday, October 29, 2010


Welcome back my friends
To the show that never ends
--Emerson, Lake & Palmer

Unusual pattern in the daily indexes. Despite some intraday range, price at the close similar to price at the open. Has been going for for more than a week.

Could be interpreted as market participants unsure what to do ahead of next wk's election, QE2 events.

Meanwhile, the chart pattern evokes the unsettled feelings that I get when the Racer reaches the apex of that first hill...

position in SH

Spooky Theory

Dean Yeager: "Your theories are the worst kind of popular tripe, your methods are sloppy, and your conclusions are highly questionable. You are a poor scientist, Dr Venkman."
Dr Peter Venkman: "I see."

Interesting interview w/ Bob Prechter. Over the past decade, Prechter has been assembling a theory of 'socionomics.'

Socionomics is the study of actions that result from changes in social mood. Essentially, socionomics is about herd behavior and how the herd's direction shifts course from time to time.

We've scribed about this area before, as there may be something socionomics can add to our understanding of economic and social behavior. Theory building in the area is nascent, but papers written in the socionomics domain are gaining broader acceptance and getting published in respected outlets.

One issue I do have with socionomics--at least when it is publicly explained by the likes of Prechter--concerns claims of causality. Prechter et al claim that, per socionomic theory, many cause-effect relationships considered 'truth' by conventional wisdom are actually reversed. For example, rather than asserting that the Great Depression darkened social mood, socionomists suggest that the more appropriate statement is that darkened social mood caused the Great Depression.

There is no empirical evidence that validates such a claim. In part this is because the social mood construct has not been effectively operationalized. Even so, proving causal relationships empirically is an uphill battle.

Conceptual arguments on the causality issue have yet to be convincing either.

I wonder whether systems dynamics might not be at play here. For instance, perhaps darkening social mood prompts more risk averse social action, and risk averse social action prompts darkening social mood. A reinforcing effect, portrayed by Senge's (1990) snowball rolling downhill causal loop diagram, may be present. Increasing the level of one variable increases the level of the other, and the system gradually builds up steam.

Perhaps some exogenous event puts the thing in motion.

My sense is that weaving systems theory into socionomic thought might help better explain how herds get in gear, and why they reverse.


Senge, P. 1990. The fifth discipline. New York: Currency Doubleday.

Thursday, October 28, 2010

Key Master

"What he means is Old Testament stuff, Mr Mayor. Real wrath of God type stuff."
--Dr Ray Stantz (Ghostbusters)

More well reasoned discourse from Kyle Bass on our central problem: excessive debt.

To Bass, revenues at the national level (GDP) are at or near the level where servicing debt is impossible without making significant sacrifice.

Interesting question asked during the convo: Since nearly all countries owe mountains of money, why not agree to knock a few zeros off everyone's tab. Viola--no more debt, problem solved.

However, as Bass notes, if current debt is 100 and people agree that it should now be 30, then someone is out 70.

This is because that 70 represented resources that someone in the past had lent out and had expected to get back. If someone makes the debt 'disappear' (default), then the creditor will not regain those resources and his/her standard of living falls.

Bass observes that making debt disappear thru default is likely--perhaps soon. But it will not come without pain. Standard of living will fall on average. Moreover, social unrest and perhaps political upheaval will arise(see Greece).

At the end, he notes that it's a matter of making difficult decisions today vs. apocalyptic decisions later.'

position in Treasuries 

Wednesday, October 27, 2010

Sale Pending

I close my eyes
Only for a moment and the moment's gone

A week from today promises to be interest for financial markets. Mid-term election results will be in. Plus, the Fed is expected to announce specifics about QE2 as part of its FOMC confab.

An article in today's WSJ estimates the size of QE2 at 'a few hundred billion dollars over several months.' Many believe this is a trial balloon figure leaked by Fed sources.

Seems to me that the over/under here is currently ~$500 billion based on commentary I've read. In other words, half a trillion dollars are likely already baked into the market cake.

While a number higher than that may rally 'em for a while, I continue to sense that the election/QE2 confluence will be sold.

position in SH, Treasuries

Tuesday, October 26, 2010

PC Monitor

We tried to speak between lines of oration
You could only repeat what we told you
Your axe belongs to a dying nation
They don't know that we own you
--The Who

Interesting interview with Juan Williams on the Diane Rehm show today which, of course, is an NPR program.

During the first half of the program, Williams largely fielded questions about the situation surrounding his firing. During the second half of the program, the discussion veered inward toward NPR issues in the wake of things. This segment a bit less objective to me and, at one point, it seemed like Diane Rehm was trying to facilitate a peace treaty between Williams and NPR management. Juan didn't seem receptive.

When the story first broke last week I noted that Williams' candor had previously made a mark w/ me. Since then, his demeanor continues to impress. Not sure I could maintain clarity of mind and consistency like he has over the past week. I certainly do not agree with him on lots of issues, but the way he conducts himself is admirable from my perspective.

Since I have probably heard him recount the situation at least a half dozen times over the past week, many of the remarks he made on today's radio program were 'repeats.' However, a few nuggets of newness were unearthed during the interview.

At ~10 mins, Ms Rehm challenged Williams over a comment he made back in 1986 regarding a situation where black shoppers were excluded from entering a jewelry store on the grounds that they deemd likely to commit robbery. Williams said at the time that "common sense becomes racism when skin color becomes a formula when figuring out who is the danger to me."  Rehm asked whether the same line of thought can be applied to 'Muslim garb.'  Williams said yes, but that it is important to separate the feeling from the action.

When, for example, an individual encounters people perceived as linked to a demographic with a history of crime (his examples included being followed by a group of young black men dressed thuggishly, or a group of skin heads), then it is human nature to feel threatened. (As noted previously, the process of pattern recognition that helps discern conditions of threat is oten referred to as 'profiling.') Such feelings, as Williams noted, surface as "matter of being aware of your environment."

However, such feelings should not be the basis for pre-emptive action against the profiled group (e.g., prohibiting Muslims from boarding plances, extra security checks, etc.). Profiling and subsequent feelings are human nature, perhaps even instinctive. But action is a choice, totally within our control.

During the listener Q&A, there was a question from a journalism student (~ 35 mins) asking whether journalists could operate in an truly unbiased manner. Williams said no, that we all have biases that influence us, and that credibility would actually be enhanced if an audience understood exactly how a journalist thinks if it is pertinent to the discussion at hand.

His comment reminded me that Minyanville has a policy that requires contributors to disclose any positions that they have in securities discuss in a missive. This policy helps readers separate valuable insight from someone who is 'talking his/her book.' Similarly, it seems that Williams is suggesting that a journalist who operates in a manner that makes it easy for the audience to understand his/her biases is more trustworthy, and less likely to deceive someone when talking his/her book.

Finally, just before the end (~50 min), Diane Rehm asked whether we've reached a point of political correctness in this country that's no longer tolerable. This was, of course, exactly the issue that O'Reilly raised last Mon nite.

Williams responded that if it becomes difficult to see reality and not raise issues out of fear of offending someone, then it is difficult to have honest discussions about important issues. "I don't think that's healthy," he said. "I don't think that's American. I don't think that's in keeping with the idea of, again, allowing all sides an ability to speak."

One of my largest personal biases is an unshakeable belief in liberty and the value of a free society. That bias certainly attracted me toward O'Reilly's topic last Mon and has kept me following ensuing events with interest. In the paragraph above, Juan Williams articulates the linkage between political correctness and freedom much better than me.

In general form, the proposition might read: Taken to extremes, politically correct behavior reduces honesty and willingness to face hard issues, which over time leads to a less free society.

Monday, October 25, 2010

Tolerance Limits

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

Those on the Left often claim that they stand for 'tolerance.' In multiple interviews this past weekend I heard Juan Williams note that he used to believe this until his experiences proved otherwise.

He suggested that tolerance with the Left ends when behavior is perceived as crossing the party line. Say or do something that this group does not like, and you will face sanctions.

Viewed thru this lens, the conduit for these sanctions was NPR, an organization that is sympathetic to leftist views.

One could certainly argue that Juan Williams has an axe to grind based on the events of the past week. However, it is also straightforward to offer conceptual support for his argument.

Philosophy of the Left is grounded in collectivism. Collectivism is belief in the interdependence of people in an overarching group setting. It prioritizes goals of the group over goals of the individual.

This characteristic can lead to some political advantages. For example, if you can get people to buy into your philosophy and join your group, there's strength in numbers--good for activism and for building SIGs in 'majority rules' democratic process where political favor is for sale.

Problems arise when someone goes against the group. If an individual violates the rules of the collective, then they are subject to sanction: social ("You're a bigot."), economic ("Fire that guy."), perhaps even physical (as we have witnessed in many collectivist regimes).

Indeed, there is a case to be made that the Left, due to its collectivist underpinnings, is likely to be intolerant by nature.

How to Buy Political Favor

"They want what every first term administration wants--a second term."
--Robert Ritter (Clear and Present Danger)

In its current form, the US government can be seen as a fluid market for political favor. Sellers are politicians who have power to forcibly take resources from some and give them to others. Buyers are special interest groups (SIGs) who would like to receive some of those resources.

How do SIGs buy political favor? There are three primary ways.

1) Campaign contributions. Primarily, these funds go toward marketing initiatives aimed at influencing voter thought process. These programs are largely composed of propaganda and smear. The quid pro quo is that if a SIG contributes to money to a candidate's campaign, then the candidate owes the SIG favors if he/she wins.

Currently, campaign contributions get lots of attention because of rules purportedly governing their limits. Plus, contributions are also 'measureable.' Unless, of course, savvy contributors have found ways to game the system, which renders the accounting system largely meaningless.

However, fidelity of the campaign contribution system is neither here nor there, because there are other ways to buy political favor.

2) Out of office 'grants.' Murray Rothbard used to say that to really understand why politicians do what they do in office, you need to study their lives outside of office. For example, examine their careers pre- and post-Washington, as well as changes in their personal fortunes while in office. SIGs could hold sway over candidates by employing them in lucrative roles before entering public office (e.g., Dick Cheney at Halliburton (HAL)), by employing them in lucrative roles after leaving public office (e.g., Bob Rubin at Citigroup (C)), or perhaps even by helping them improve their financial position while being in public office (e.g., any current Congress person w/ stock or real estate holdings).

3) Voter blocs. Perhaps the 'best' way for a SIG to buy influence is to offer the seller of political favor a large homogenous group that can be influenced to vote a certain way by the group's leadership. If your group measures in the hundreds of thousands, or perhaps millions, then that's alotta purchasing power.

When government is for sale, there is no larger market on the planet than the market for political favor. If you're a buyer, then there's lots of ways to submit your bid.

Sunday, October 24, 2010

Speaking of Freedom

Abigail Chase: "You're treasure hunters, aren't you?"
Benjamin Franklin Gates: "We're more like treasure protectors."
--National Treasure

One of the biggest ironies of the Juan Williams situation last wk is that it stemmed from a thesis floated by Bill O'Reilly that the culture of 'politically correct' has gone over the edge. O'Reilly posited that people routinely want to level sanctions on others when something is said that they don't agree with. Fear of being sanctioned is limiting freedom of speech.

Williams, who was a participant in that discussion, winds up getting canned because he said something that his employer (and likely some of the employer's resource providers) did not agree with.

Since the incident, I've heard a number of folks opine that 'politically correct is now on the run.'

Perhaps we are rediscovering the First Amendment. Which would be a positive step toward rediscovering the Constitution.

Saturday, October 23, 2010

Hey Big Spender

Meet the new boss
Same as the old boss
--The Who

Once a week, John Stossel hosts a weekly talk show on FoxBusiness that, near as I can tell, is the only program discussing today's issues from a libertarian perspective.

This week his topic was government spending. During the show, he questioned Republican claims to shrink government based on a historical record that does not match party rhetoric.

He grilled Karl Rovel about the gigantic spending record of the Bush administration. Rove's answers were pathetic and I wish Stossel would have pressed him more.

Using the same Office of Management and Budget source as Stossel, let's examine the data a bit more closely. The chart below shows federal government outlays since 1949. This year was the beginning of Truman's second term and represented the first full presidential term post WWII. This seemed the a reasonable starting point for 'modern' times.

Outlays under Democrat adminstrations are indicated in blue while outlays under Republican administrations are indicated in red. Visual inspection alone suggests little difference in spending habits between regimes. Spending goes up regardless of who's in office (although there were actually three declines in outlays during the above period--two under Ike and one under LBJ).

Moreover, rate of change in outlays does not appear visually different either (the curve increases smoothly over time). One might argue that rate of change increased a bit less under Clinton. But Bush picked the pace back up and Obama has steepened the geometric progression.

From a statistical standpoint, the total period above represents 62 years (counting this year) with an average year over year change in federal government outlays of +8.4%. (GDP increased +6.8% annually during this period)

Republican administrations dominate the time period 36 yrs to 26. Average annual percentage change in outlays during Democrat administrations is higher than that during Republican regimes: 10.2% annually for Dems vs 7.0% for GOP. However, a simple two sample t-test suggests that the difference in means is not significant (p = .16).

Both the eyeball and the stats tell us the same thing. In general, Democrats and Republicans display similar spending habits.

Friday, October 22, 2010

The Market for Bias

"That's the press, baby. The press. And there's nothing you can do about it. Nothing."
--Ed Hucheson (Deadline USA)

During some self study on media bias a month or so back, I ran across an interesting paper by Sutter (2001). An important assumption underpinning the study is that people prefer news sources that most align with their personal biases.

At first, I was troubled by that assumption, because it basically tosses the concept of demand for balanced, critical thought out the window. But the more I thought about, the more it seemed like a valid assumption.

In fact, the supporting argument is pretty straightforward. We know that humans possess general tendency for selective reasoning and confirmation bias (Klayman & Ha, 1987). This means that we seek out evidence that supports our view of the world and discount evidence that disconfirms it.

We also know that humans prefer pleasure over pain. When we consume information that is consistent with our point of view, it feels good and provides positive psychic income. Information that is inconsistent with our point of view is often painful to consume--perhaps to the point where it raises physical defensive mechanisms (increased heart rate, elevated adrenaline levels, yelling at the TV, etc.). Psychic income is likely to be negative in such a case.

As such, it stands to reason that people will seek the pleasure of consuming information that best fits their preference for bias.

One of the more robust findings in psychology is that people are generally overconfident (Thaler, 1999). Individuals rate their personal capacities for judgment highly (Stone, 1994). Our tendency to overestimate our analytical abilities leads to one of life's delicious ironies: although we all possess tendency for unbalanced, biased thought, we're liable to view ourselves as balanced, critical thinkers.

Because we're likely to consider ourselves balanced, critical thinkers, it stands to reason that we're prone to believe that the media sources that we frequent produce balanced content as well. And media outlets that we don't prefer are likely to be seen as biased through our eyes.

Media providers appear to see the marketing opportunity in this, as we can observe operators across the spectrum promoting that they are the ones producing balanced, unbiased content.

If there is demand for biased information, then suppliers will seek to satisfy demand in a manner that creates value. Currently, it appears that there is a large market for bias.


Klayman, J. & Ha, Y. 1987. Confirmation, disconfirmation, and information in hypothesis testing. Psychological Review, 94: 211-228.

Koehler, D.J. 1991. Explanation, imagination, and confidence in judgment. Psychological Bulletin, 110: 499-519.

Stone, D.N. 1994. Overconfidence in initial self-efficacy judgments: Effects on decision processes and performance. Organization Behavior and Human Decision Processes, 59: 452-474.

Sutter, D. 2001. Can the media be so liberal? The economics of media bias. Cato Journal, 20: 431-451.

Thaler, R.H. 1999. The end of behavioral finance. Financial Analysts Journal, 55(6): 12-17.

Oktoberfest Test

Rise up, gather 'round
Rock this place down to the ground
Burn it up, let's go for broke
Watch the night go up in smoke
--Def Leppard

Interesting piece suggesting Germany has been more market driven than US in solving economic problems. Author suggests that German Chancellor Angela Merkel has been much more proactive than US bureaucrats in getting government out of the way of economic recovery. Germany has been cutting taxes and government spending. Now, growth forecasts are going up and deficits are being scrutinized.

Germany certainly has its share of problems. But currently it offers a nice demo of what can happen when government relieves some socialistic pressure from markets.

no positions

Thursday, October 21, 2010

Let It Fly

Oh to fly
A free bird, yeah
--Lynyrd Skynyrd

Juan Williams let his side of the story fly this pm on Fox's website. As noted previously, I luv Williams' candor--he doesn't skirt issues.

Williams suggests his firing was politically motivated, and submits evidence to that effect. To be sure, claiming that Williams' remarks on O'Reilly's show were bigoted and grounds for dismissal by themself borders on the laughable.

So instead NPR seems to be claiming that he violated long standing policies. And, indeed, it appears he has violated a number of policies, such as appearing on 'non-news' shows and voicing commentary and opinion (which apparently his position as an 'analyst' does not permit). The problem is that he's been violating these policies for years. That NPR chose to take action on them now is, um, questionable.

Far be it from me to advocate a wrongful dismissal lawsuit, but were Juan Williams to take legal action against NPR, he might have an interesting case. Not my bag, tho, and hopefully not Williams' either.

Williams doesn't have to worry about going on the unemployment dole, tho. Fox quickly snapped him up with a $2 million three yr contract.

My sense (hope) is lots of the uproar from this situation stems from the fact that many perceive Juan Williams as a person of integrity and character in a field where those qualities are rare.

And now he's working for Fox. I wouldn't be surprised if his 8 pm appearance on O'Reilly tonite out draws the NL playoff game.

Seems to me that NPR has quickly created a plate full of problems. Both for itself and for Leftist media in general.

Bigot Defined

"Isn't it ironic, don't you think?"
--Alanis Morissette

From my trusty Webster's:

bigot 1. a person who holds blindly and intolerantly to a particular creed, opinion, etc. 2. a narrow-minded person.

Given human proclivity for selective reasoning and confirmation bias, this definition just about covers us all.

Seems to me that people who sling this word around in accusatory fashion likely have no mirrors handy...

The Politically Correct Folly

Shout, shout, let it all out
These are the things I can do without
Come on, I'm talking to you, come on
--Tears for Fears

I've long regarded Juan Williams among the sharpest political and social analysts in media. From the get go, he earned my respect not only with keen insight, but with a balanced perspective and a candid, respectful demanor--a rare blend these days.

Yesterday NPR fired Williams for remarks he made on O'Reilly's show Monday nite.

This is a laughably sad move by NPR, an outlet that has squandered any modicum of equity that it was building w/ me.

I saw the O'Reilly segment live Monday nite. The segment was built on a thesis floated by O'Reilly that we, with emphasis on those on the Left, have evolved a culture of 'political correctness' that has gone too far. Routinely, people are being sanctioned for saying/writing things that are factually correct yet claimed as being offensive to some group or individual.

A motivator for O'Reilly's thesis was a recent appearance he made on a Leftist TV talk show where, during a 'conversation' (which resembled more like a 4 on 1 assault) with the hosts, O'Reilly stated that 'Muslims killed us on 9/11,' whereupon one of the hosts cursed at O'Reilly and joined another in walking off the set.

O'Reilly's statement, of course, was factually accurate. But it was deemed as 'offensive' to some.

Williams agreed with O'Reilly's thesis (which may have been the key issue with Leftist overseers). During his comments, Williams noted that after what transpired on 9/11, when he's on an airplane and he sees people in Muslim garb, 'I get worried. I get nervous.'

As this is a self-reported statement of how he behaves or feels, the issue can not be that this statement is not factual or sincere. Rather, it appears that Williams' reaction to the situation--i.e., being worried or nervous when being on a plane with Muslims post 9/11--is what offends some people. His statement were factual and sincere, but not politically correct.

While some claim Williams' remarks are those of an irrational bigot, his reaction can reasonably be framed as a rational response to threat. A properly functioning human mind encodes data from dangerous situations past, and brings those memories to bear when moving thru the present. Occaisionally, the mind recognizes patterns in present situations that resemble those from past dangers. A threat is signalled.

Patterns that motivate a threat signal might include an unlit street at night, dark alleys, high crime neighborhoods, cars with tinted windows and rumbling sub woofers, and, yes, people dressed in Muslim garb on airplanes post 9/11.

I feel exactly the same as Juan.

Another word that describes this pattern recognition process is 'profiling' which, naturally, has become associated with behavior deemed...not politically correct. In fact, objections to profiling have gotten so loud that we discourage police from saying that they profile when investigating criminal activity. Riiiiight.

I certainly hope Mr Williams does not get discouraged from this turn of events and that he does not change his ways. Pls stay the course, Juan.

Meanwhile, market strength of Left leaning media outlets continues to dwindle, while Fox's market power continues to grow. Leftists remain largely clueless in explaining this phenomenon.

In markets, supply follows demand. Perhaps demand for 'politically correct' is not as strong as the Left believes...

Wednesday, October 20, 2010

Greedy Details

"Stop telling lies about me and I'll stop telling the truth about you."
--Gordon Gekko (Money Never Sleeps)

One thing that impressed me about Wall Street II was how technically correct the background story appeared. I've only seen it once and there were a lot of moving parts that I may have missed, but I did not detect one error in the historical account of the 2008 credit collapse.

This article reveals why. Oliver Stone had a stable of respected advisers who helped him get a complex story pretty right.

Interviews w/ Stone suggest that he wanted to convey that free markets are 'bad' and in need of regulation and control. Ironically, by taking great pains to get the technical story correct, he makes it difficult to conclude that the 2008 backdrop reflected a free market situation at all.

It seems more likely that viewers question the wisdom of government interference that Stone correctly positioned as central to the implosion.

Tuesday, October 19, 2010

Opting In

It's been such a long time
I think I should be going
And time doesn't wait for me
It keeps on rolling

Bought some options for the first time in ages--puts on the Financial Sector SPDR (XLF).

From where I sit, the mounting problems underneath the financials have the potential to let go in a hurry. If they do, then the XLF could see 12 in short order.

Moreover, option premiums are reasonable, and with the markets in their existing state I'd rather be a buyer rather than a seller of volatility here.

The heck of it is the timing, of course. And time matters more with options...

position in XLF

Virginia Territory

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

Within minutes of President Obama's signing of the health care bill back in March, lawsuits challenging its Constitutionality were filed in both Florida and Virginia. The Florida case is a joint filing of 20+ state AGs arguing that the federal government overstepped the bounds of the Commerce Clause.

The Virginia case is different in that it concerns Virginia alone. As explained by state AG Ken Cuccinelli, Virginia passed a statute prior to the federal bill's signing that made it illegal to force Virginia citizens to buy health insurance. Interestingly, the state legislature passed this statute out of session, and it passed with very broad support (the Virginia state lawmaker mix is ~40% Democrats).

In addition to the Commerce Clause issue, then, the Virginia case also pulls in concerns related to the Supremacy Clause and the 10th Amendment.

Yesterday, a Richmond District Court judge heard arguments for summary judgment and indicated that he will rule by December. Rest assured that whatever his decision, however, this one is headed to the high court...

That Virginia has assumed a leadership role in this issue should be no surprise. Since our founding days, Virginia has been the vanguard of suspicion w.r.t. central authority. In fact, Virginia refused to sign the Constitution because of big government concerns. It was not until a Bill of Rights was promised that better elaborated individual and state's rights that Virginia delegates climbed aboard.

Given the trampling of those rights over the last two hundred years, can't help but wonder whether the likes of Jefferson, Henry, Mason, et al might not regret their state's concession. In any event, am certain they'd be plenty proud of Old Dominion's role in challenging the oppressive power of today's federal government.

Cast of Characters

Thank you very much, Mr Roboto
For doing the jobs nobody wants to
And thank you very much, Mr Roboto
For helping me escape

Nice summary of cast of characters in Fraudclosure. Lots of links in the foreclosure supply chain. One party under-represented in the cast is government, particularly Congress.

As more people wrap their heads around this mess, hopefully Washington bureaucrats will get the billing that they deserve.

Monday, October 18, 2010

2007 Redux

"I'm sure that in 1985 plutonium is available in every corner drugstore. But in 1955 it's a little hard to come by."
--Dr Emmett Brown (Back to the Future)

Hard for me not cross fraudclosure, QE2, et al with the optimistic tape and generate a the feeling like I'm back in 2007.

During 2007 we had the initial rumblings of the mortgage crisis via subprime (remember New Century?) while Fed officials stepped up with more liquidity and assurances that problems were 'contained.' Markets chose to fixate on the 'good' news and rallied for much of 2007. The Dow touched an all time high in late 2007.

Then the House of Cards collapsed.

Setup feeling similar now. Big probs w/ the banks and real estate, the Fed's liquidity howitzer, and big time fund managers warning that people should not fight the Fed. have chosen to party.

Interestingly, John Mauldin and John Hussman both waxed nostalgically about 2007 in their most recent commentary. Humbling to be vibing in parallel w/ these two...

Dr J's commentary continues to creep up my reading list. Truly great stuff from where I sit. I read w/ interest that he's getting pretty defensive here--even 'feeding the ducks' w.r.t. metals positions...

While the 2007 experience tells us that this party can certainly last awhile, I'm increasingly prone to look for short side opportunities.

position in SH, gold, silver

Sunday, October 17, 2010

The Next Shoe to Drop?

Happiness, is so hard to find
Hey baby, tell me what is on your mind
--Nu Shooz

The more I read into the 'fraudclosure' situation, the more it seems to me that mainstream media is under-reporting it, and that market participants are not discounting it properly. See here and here for a couple of 'non mainstream' takes on what is going on and what the consequences might be (be sure to read the comments at the end of both to get a more well rounded view).

This assessment is likely to change as I learn more, but right now it seems to me that there are two primary problems. One issue is that the chain of title has been broken in many properties due to systemic fraud in the transfer process. The other issue is that, because of the vagaries of the securitization process (e.g., the Mortgage Electronic Registration System or MERS), it may be unclear as to exactly who does or has held the title to a property.

Thought processes like this one imply that homeowners in default are actually entitled to their homes free and clear if their chain of title has been broken.

In his preface to a version of the above piece posted on his blog, Barry Ritholtz suggests that such a perverse outcome is unlikely. Courts have long had the authority to apply principles of equity in order to prevent outcomes that unjustly enrich wrongdoers. In foreclosure fraud cases, both sides have committed wrong: homeowners who are in foreclosure and banks/securitizers that failed to manage the title process correctly.

As such, a mountain of court cases are likely. Among other things, these cases must determine: who back in the chain legally holds title, any monies owed those title holders, how to resolve cases where mortgage payers are in default and cannot/have not paid the rightful title holders.

It also seems highly likely that criminal fraud cases will be brought against many operators in the title supply chain.

Fast forwarding to end game outcomes suggests a couple of scenarios that must be considered as possessing decent probability: a) the likelihood that lots of financial service firms ranging from big banks to mortgage insurers are insolvent and candidates for failure, and b) the likelihood that the Fed will be printing gargantuan amounts of money to keep the system from imploding.

Consistent w/ the bipolar world we live in, a) is extremely deflationary while b) is extremely inflationary. BOTH situations, however, suggest the chance of extreme disorder.

Which has me thinking about upping my ante in gold and silver once again...

Meanwhile, the shorter term consequence seems to be that any progress in working off problems in residential real estate has been stalled--perhaps for a very long period of time. Foreclosures are dead in the water for now. New mortgage originations are also likely to slow dramtically. If I'm a potential home buyer, it would be hard for me to be confident in the closing process right now.

Heck, it even has me wondering right now whether I truly own my home free and clear. And whether I would have been better off never making a single mortgage payment at all (see moral hazard).

In any case, this story is rapidly gaining mindshare with me as the Next Shoe To Drop on our fragile system.

positions in gold, silver

Saturday, October 16, 2010

Printing Wealth

We can't afford to be innocent
Stand up and face the enemy
It's a do or die situation
We will be invincible
--Pat Benatar

Over the past wk or so, various Fed heads have been making the media rounds chatting up the virtues of QE2. Here's a small snippet from NY Fed official Brian Sack:

"[QE2] adds to household wealth by keeping asset prices higher than they otherwise would be."

Hard to believe Fed officials actually believe that wealth is improved by money printing...

Regardless, it does appear that the Fed pull out all stops to keep stock prices jacked. It remains to be seen whether such efforts will be successful.

position in SH

Friday, October 15, 2010


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

One issue that is still flying below many if not most mainstream market radars is the 'frozen' mortgage foreclosure process. Foreclosures have largely ceased because banks skipped key steps during the mortgage origination and/or foreclosure processes--which now calls into question who has legal title to perhaps millions of properties.

Some of the best discussion I've seen of this issue can be found on Barry Ritholtz's fine site (scroll down thru the last week or so of posts for some excellent data and analysis).

The issue now for the banks is that they may have to 'put back' many mortgages to the borrowers--in addition to slow future mortgage foreclosures and origination processes to a crawl. Banks may also face fraud charges and civil suits.

This issue found CDS spreads on many banks blowing out this week. Many bank share prices also took a hit in the face of rising general markets. Bank of America (BAC) shares, for example, are off about 10% in two days on gigantic volume. B of A naturally claims that concerns are overblown.

Hard not to liken the present situation to the deterioration in mortgage markets in summer/fall of 2007 in the face of rising stock prices. That situation wound up setting up the trade of a lifetime for those with the gumption to get short.

position in SH

Thursday, October 14, 2010

The Greenspan, er, Bernanke Put

"The list is long, but distinguished."
--Goose (Top Gun)

Following up on yesterday's post, market participants coined the term 'Greenspan put' during the former Fed chief's tenure. The term represented the fact that, whenever markets went into tailspins, the Federal Reserve under Greenspan's watch was constantly there to bail investors out. The '87 crash, the peso crisis, Asian Contagion, Long Term Capital, the dot com bust...

It didn't take long for market participants to realize that the Fed was granting them free put options. Whenever markets got into trouble, participants could 'put' their problems on the Fed, just as any insurance claimant would.

The moral hazard implications of this arrangement should be obvious. "Hey, we can take more risk," market participants reason, "because the Fed has our backs in case our hoped for gains turn into big losses."

A pile of empirical research supports the notion that government intervention in financial markets encourages additional risk taking (e.g., Miller, Weller, & Zhang, 2002; Lee & Shin, 2008). A related stream of research, incidently, finds similar tendencies among consumer behavior when bank deposits are backstopped by government insurance programs such as FDIC (e.g., Grossman, 1992; Hooks & Robinson, 2002; Neir & Baumann, 2006)

Greenspan's retirement in 2006 proved that the put was not peculiar to his tenure. In fact, his successor, Ben Bernanke, has been even more aggressive in the bail out seat. During the past two years, Bernanke has thrown $trillions at the credit market meltdown and recently announced intentions to do more.

The Fed's recent signal that a big batch of money printing via QE2 has markets exuberant once again. Global rallies in nearly all risk markets reflect correlated confidence in the Fed and other central banks to revive economic activity with more money printing.

And if QE2 doesn't 'work'? "No worries," snort market participants, "if prices reverse and go lower central banks will bail us out like they always have."

After observing so many market participants jumping aboard the QE2 train lately, I wonder how close we are to pricing in the entire impact of this Fed money printing scheme in its best case scenario. I am confident that we haven't priced in the impact of downside scenarios.

There's another minor item that those banking on exercising another Greenspan Bernanke put may want to take into account. Insurers that are not adequately capitalized in times of  crisis go bust, rendering related insurance policies worthless.

position in SH


Miller, M., Weller, P., & Zhang, L. 2002. Moral hazard and the US stock market: Analysing the ‘Greenspan Put.’ Economic Journal, 112: C171-C186.

Neir, E. & Baumann, U. 2006. Market discipline, disclosure, and moral hazard in banking. Journal of Financial Intermediation, 15: 332-361.

Grossman, R.S. 1992. Deposit insurance, regulation, and moral hazard in the thrift industry: Evidence from the 1930s. American Economic Review, 82: 800-821.

Hooks, L.M. & Robinson, K.J. 2002. Deposit insurance and moral hazard: Evidence from Texas banking in the 1920s. Journal of Economic History, 62: 833-853.

Lee, J. & Shin, K. 2008. IMF bailouts and moral hazard. Journal of International Money & Finance, 27: 816-830.

Trading Desk

Randolph Duke: "Now, some of our clients are speculating that the price of gold will rise in the future. And we have other clients who are speculating that the price of gold will fall. They place their orders with us, and we buy or sell their gold for them."
Mortimer Duke: "Tell him the good part."
Randolph Duke: "The good part, William, is that no matter whether our clients make money or lose money, Duke & Duke get the commissions."
Mortimer Duke: "Well, what do you think, Valentine?"
Billy Ray Valentine: "Sounds to me like you guys are a couple of bookies."
--Trading Places

Wound up peeling off the paper gold and silver trade this am. Was getting 'that feeling' as we opened with another gap higher.

Big move in short time, with silver up over 30% since initiating exposure in early Aug.

The journey with PHYS didn't last long, as it went out the door with the others. I just didn't like how that security was trading. Thru my eyes, it was not tracking spot gold like GLD did. Over the long run, that may not matter. But since I'm often trading these 'paper' gold proxies, I found the PHYS action irksome.

Might gold and silver continue higher from here? Fer sure, dude. I'm just sensing too many piling onto the 'QE will make gold zoom' bandwagon in the short term. That and the gappy daily moves have me moving to the sidelines for a spell.

Should trends continue, exposure to physical bullion will still permit participation in the move.

position in gold, silver

Wednesday, October 13, 2010

Put Options, Insurance, and Moral Hazard

If I swallow anything evil
Put your finger down my throat
If I shiver, please give me a blanket
Keep me warm, let me wear your coat
--The Who

A put is an option contract that gives its owner the right, but not the obligation (that's why it's called an 'option'), to sell (or 'put') an asset to someone else at a given price (called the 'strike price').

It's not as complicated as it sounds, and odds are very good that you own one or more put options yourself. For example, insurance policies are put options. You buy a new put option every six months when you pay your auto insurance premium. When you drive accident free over the six month period, the put expires worthless. But in the unfortunate case that you have an accident, and the damage exceeds your deductible (which essentially serves as the strike price), then you will most likely exercise your right to 'put' the problem on you insurance company who is then obligated to cover excess damages.

Puts, therefore, can be viewed as a tool for managing downside risk. They are quite handy when problems arise, but the frustrating thing is that you often must shell out significant upfront money for an option that frequently expires worthless. Wouldn't it be great if you could get that put option for free?

In the public domain, people receive low or no cost put options all the time. Welfare programs such as food stamps, unemployment benefits, and healthcare benefits are often provided to people who have paid little or nothing in terms of upfront premium for such insurance coverage.

Such a situation creates a significant moral hazard problem. Moral hazard, a term that appears to have been coined by the British insurance industry in the 1800s, reflects the human tendency to take more risk when it is perceived that any costs related to the risky behavior will be shouldered by another entity (i.e., the insurer). Thus, people who are out of work may be less inclined to look for a job when they are receiving unemployment benefits. People might engage in poor dietary and exercise habits if they have access to low or no cost health care.

Moral hazard is grounded in basic axioms such as the Law of Parsimmony which, when stretched to its limit, suggests that people are inclined to exploit situations where they can get 'something for nothing.'

The moral hazard condition is in play whenever behavior has been insured. However, the upfront costs that one must pay for put options helps check excessive risk taking. When insurance premiums are lowered below the market price, however, moral hazard is likely to be amplified.

Currently, we may be witnessing moral hazard writ large in financial markets worldwide. We'll examine this in a subsequent post.

position in SH

Tuesday, October 12, 2010

Physical Graffiti

Down by the seaside
See the boats go sailin'
Can the people hear
What the little fish are sayin'
--Led Zeppelin

When buying 'paper gold,' my vehicle of choice has been the SPDR Gold Trust ETF (GLD). Initiated in 2004 (has it been that long ago?), GLD has become a popular and convenient way to gain exposure to the gold bullion itself. The fund now holds more gold than all but a few central banks.

A nice feature of GLD is that it is backed by actual metal. ETFs for other commodities (e.g., crude, grains, softs, etc) invest in futures contracts rather than in the physical commodity itself. GLD buys bars; those interested can actually track the bars the fund owns. For those who doubt the ability of futures exchanges to deliver physical in a pinch, or those who do not possess minimum capital necessary to buy gold futures, then GLD is attractive.

GLD does possess some drawbacks, however. Although GLD is technically backed by physical metal, individual shareholders can not take delivery of bullion unless they are 'qualified' to do so (codeword meaning that you have to own multimillion dollar positions in GLD before delivery is permitted). Also, the fund's arcane ownership and leasing rules suggest that the value of the GLD fund may not actually be backed by physical gold in the straightforward manner often presumed.

One other drawback is that GLD charges a management fee which clips about half a percent from the fund's value annually. Might not seem like much, but someone who plans to 'buy and hold' GLD for 10 to 20 yrs will realize some significant slippage vis a vis the underlying gold price.

As such, it's been hard for me to hold onto GLD for uber long periods of time, preferring instead to 'trade around' GLD while focusing on actual physical gold for my long term holdings.

Recently, however, the Sprott Physical Gold Trust (PHYS) has popped up on my radar.

Initiated by well known (and I think very trustworthy) gold guy Eric Sprott, PHYS is a closed-end mutual fund trust that trades on the NYSE and in Canada. PHYS differs from GLD in that it invests in gold that is fully allocated, meaning that the fund will not engage in short term lend lease activities that might jeopardize the fund's net asset value. Another attractive feature is that the fund holds its gold at the Royal Canadian Mint--which has utility for people wishing to gain exposure to physical gold that is held outside the US. Finally, PHYS is redeemable in actual physical gold, although the ownership minimum for redemption priviledges currently is 400 oz (about a half million USD).

The biggest drawback to PHYS is that, because it is structured as a closed-end mutual fund, the share price often trades at a significant difference from the underlying net asset value. When the fund first started trading earlier this year, the prices traded at steep premiums to the underlying NAV. Recently, however, that premium has been declining and now stands at 2-3%.

Today I started a small position in PHYS. What finally pushed me over the edge was a comment by Fleck that he had bought some--for basically the reasons outlined above.

Nothing crazy as I want to get a better feel for how this thing behaves. And don't worry, I have a ways to go before that 400 oz redemption priviledge kicks in...

positions in GLD, PHYS

Missing in Auction

"You didn't really think I'd leave...without making sure you were dead."
--Col James Braddock (Missing in Action 2)

Wanted to jot this observation for future reference. In the past, surges on gold prices brought out lots of sellers of certified and slabbed Gold Eagles on ebay.

This time around, ebay supply has been notably absent. Few dates for sale...very few pure auctions.

Not sure what it means, but a divergence from past patterns.

position in gold

Suspended Animation

Is there any just cause for feeling like this
On the surface I'm a name on a list
I try to be discreet but then blow it again
--Cutting Crew

John Hussman's thought process continues to resonate w/ me. His recent missive is particularly insightful w.r.t. the role of fundamental analysis and valuation in market assessment.

Really liked this particular quote: "We'd love to be bulls...But that would be helped if stocks were priced appropriately and if there was not a large anvil suspended on a fraying string overhead."

Picture perfect...

position in SH

Monday, October 11, 2010

Spin and Turn

Talking 'bout your troubles and you never, never learn
Ride a painted pony let the spinnin' wheel turn
--Blood, Sweat & Tears

At the end of the last post, we posed a question about the risks of QE. Minyanville's Peter Atwater has been discussing who in particular stands to get (or is already getting) hurt from QE. The hurtful include:

Small banks. Spreads are shrinking between cost of funds (not changing) and investment yields (coming in).

Low income households. Commodities of all sorts are screaming higher, meaning upward price pressure on necessities. Rising commodity costs tend to fall disproportionately on lower income households.

Savers and the elderly. Savers are clearly penalized when planners hold interest rates well below market. The elderly, who in particular depend on fixed income froms savings vehicles, are being taken to the woodshed.

Defined benefit plans. Pension plans and their ilk are coming nowhere near their estimated 7-9% returns. Unfunded liabilities are likely to grow.

Endowments. Having to cut back on their 4-5% annual draws.

It should be apparent that an important downside consequence of QE is the likelihood of lower standard of living for at least some groups. It should also be apparent that a subset of people in these groups may try to compensate for their situation by taking on more, perhaps enormous, risk.

As such, downside possibilities from QE include: less competition in banking (as small firms go bust or get taken out), more poor people on food stamps, less saving and more risk taking--particulary among elderly trying to compensate for loss of income, increased likelihood of pension plans going broke, less resources from charity coming from endowments.

Any balanced discussion of QE should include a discussion of the above risks that are already being realized to a significant degree.

position in commodities, Treasuries, USD

Sunday, October 10, 2010

Funny Money

After three days of the desert fun
I was looking at a river bed
And the story it told of a river that flowed
Made me sad to think it was dead

Many view money as wealth (a.k.a. economic resources). But money is nothing more than a medium of exchange. Prior to money, people traded economic resources directly. If I chopped wood, then I could use some of my 'income' of wood to trade for other goods.

The clumsiness of such a barter system is readily understandable. As such, money was created to make exchange easier.

The oldest forms of money were hard assets. Because of the unique properties of gold (scarcity, divisibility, portability, durability), it rose to the top of the list as a preferred currency.

Over time, societies have moved toward paper currencies as the predominant medium of exchange. Initially, paper money was 'backed' by gold or silver, meaning that one could cash in paper for a commensurate amount of metal.

Gradually, however, precious metal backing has been removed, such that now the only thing backing modern currencies is well, nothing, really. Absent the discipline that gold backing instills, governments over time print more of money by 'fiat' in order to achieve political agendas.

Governments rarely come right out and say that they're printing it, however. If they did, even those at the lower wrungs of the societal pyramid would catch on to the consequences. Instead, governments invent various codewords for money printing: monetary policy, reserve ratios, repos, open market operations, etc. Such technical terms seem to keep inquiry at bay.

The hip money printing term right is 'quantitative easing (QE).' Over the past two years, the Fed has printed over $2 trillion as part of the QE program. Recently, Fed officials have been signaling that they're ready to do more--perhaps another $1 trillion or so.

The question on many people's minds seem to be whether QE will 'work' w.r.t. stimulating the economy. The question few are asking is, if money is merely a medium of exchange, then how can printing more of it create a more prosperous situation?

Moreover, few seem to be asking what are the risks associated with gobs of greenbacks out of thin air?

That's one for you to ponder...

position in gold, silver, USD

Saturday, October 9, 2010

Midterm Exams

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

Prediction markets currently assign a better than 75% chance of Republicans winning control of the House in next month's election, and slightly better than coin flip odds of GOP winning control of the Senate.

Because financial markets are forward looking mechanisms as well, they've surely been factoring in similar probabilities.

As such, one way to interpret current market enthusiasm is that Republican control of Congress will create gridlock on the Hill, thereby squelching Democrat agendas and perhaps even driving reversal of some previous progams and policies. A more favorable economic environment may result.

Historically, however, Republicans have demonstrated little difference in fiscal restraint vis a vis their colleagues across the aisle. And while Tea Party philosophy is likely to motivate more fiscally responsible behavior among some bureaucrats, it remains to be seen whether a) the degree of behavioral change is enough to make a difference, and b) whether this behavior 'sticks' - or whether it's back to business as usual after a short while.

Given our structural problems related to spending and debt, it's hard to see how the midterm elections make much inroads into those issues very quickly.

I'm inclinded to think that, should markets continue to rally into early November, we may be looking at a 'sell the news' event. Regardless of the outcome (i.e., Republicans or Democrats 'win'), a decent short side opportunity may present itself.

position in SH, Treasuries

Friday, October 8, 2010

Everyday Economics

I know you're in there
You're just of sight
Oh, time passages
Buy me a ticket on the last train home tonight
--Al Stewart

Mises notes that many folks mistakenly view economics as concerned only with monetary outcomes and material well being--applicable toward capatalistic systems but not other forms of organized society. This narrow view assumes that, because capitalists are obsessed with wealth, cost, and profit, economics only 'matters' in this context.

As Mises observes, however, cost is an element of any kind of human action. Cost is the value of things individuals give up in order to attain what is desired. It is the value attached to the most urgently desired satisfaction among other satisfactions that must be foregone. Choosing to spend time with family rather than to work on the yard, for example, is an economic decision because it requires a sacrifice--one or the other. Whenever conditions of scarcity exist, then choices must be 'economized.'

Income gained from economic decisions can be psychic as well as material in nature.

Indeed, time may be the ultimate economic good. As humans, each of us has a limited amount of it. And how we spend this exact minute is important because we can never get that minute back. Time, like any scarce good, requires economizing.

Economics, then, can be viewed more generally as the study of decisions that require sacrifice. The domain of such decisions blankets the human condition.

Thursday, October 7, 2010

Convex Situation

But somehow I can't believe
That anything should happen
I know where I belong
And nothing's gonna happen
--Tal Bachman

Noted a couple months back that I was impressed w/ Kyle Bass w.r.t. demeanor and thought process. This recent vid series reinforces those thoughts.

Understated but firm and well reasoned.

An overarching theme of these talks was the notion that we're transitioning from a deflationary to an inflationary environment. Not sure Kyle Bass tipped his hand as to whether he thinks we're doing that now. It does appear that he's assigning a signficant chance that we are in his probability spectrum.

I particularly liked his comment that, in adverse or defensive environments, you're looking for investments with 'convexity.' In this context, convexity means that the change in your investment exceeds the change in the underlying condition that you're protecting yourself against (see the aqua blue line here for representative shape of a convex function). In an inflationary environment, for instance, you want investments that preserve or improve your purchasing power.

Bass suggests that stocks are unlikely to display convexity in highly inflationary environments. He observes that, while the Zimbabwe stock market has been a top performer in nominal terms over the last ten years, if you factor in the loss in purchasing power of the Zimbabwe currency, then investors in Zimbabwe stocks have actually lost money. Rather than convexity, Zimbabwe stocks have exhibited 'concavity', or higher loss in value relative to the underlying inflation (e.g., black line here).

Gold and other precious metals, as Bass observes, have been performing with convexity. In an environment of currency debasement, gains in gold have outpaced loss in purchasing power via inflation.

Similar to Jim Rogers, Mr Bass appears to think precious metals are likely to hold up well in the environment ahead.

position in SH, gold, silver, USD

Investment Biker

And still they lead me back
To the long winding road
You left me standing here
A long, long time ago
--The Beatles

The always interesting Jim Rogers weighs in. Nothing super different vs the past. His thesis remains that governments around the world are printing gigantic amounts of money, which means people need to protect themselves with hard assets. Hard assets mean commodities--oil, ags, base metals, precious metals.

JR pretty much caught the low in commodities when he began buyin' 'em in 1999. Since then, commodities have had a 10 yr bull run that has gone largely unnoticed. Jim thinks they'll go higher.

One tidbit that did catch my ear was that, while JR is pessimistic on the dollar over the long haul, he senses overly bearish near term. Chart gazing, one can detect decent multi-year support on or around this level.

I've initiated a small position for a trade. At minimum, should be a decent hedge vs precious metals.

position in USD, gold, silver

Wednesday, October 6, 2010

Follow the Yellow Brick Road

"Better get under cover, Sylvester. There's a storm blowin' up a whopper, to use the vernacular of the peasantry"
--Professor Marvel (The Wizard of Oz)

For many years holders of precious metals have been posing the question of "What would drive gold and silver wildly higher?" The answer inevitably relates to situations where governments embark on fanatical campaigns to debase their currencies--likely in desperate attempts to keep the wheels on sputtering economic wagons.

It's hard not to wonder whether we're approaching that point. Recent salvos by the Fed, ECB, BOJ, IMF et al suggest that central banks are boldly prepared to do whatever it takes to 'manufacture inflation.'

Previous discussion focused on the vulnerability of the dollar to Big Debasement, due to the fiscal probs here in the US. Increasingly, however, folks seem to be recognizing that all currencies are in the same boat--unbacked and subject to political manipulation. Beggar thy neighbor policies have all currencies in a race for the bottom.

In competitive debasement scenarios, cross rates may not change much. A devaluation in the dollar, for instance, is meant with commensurate devaluation of the euro.

What does change is the purchasing power of currency in hand. Dollars, euros, etc will buy less because there are more of them. The historical reference for gauging this loss of purchasing power is gold.

The strong moves in gold and silver may reflect more people waking up to this fact. The recent move does not look like past moves, and the price action is getting 'wide and loose.'

To me, this means we're either close to a near term top based on investor overreaction to recent central bank rhetoric, or we're approaching a launch toward an entirely new frame of reference. In previous situations like this, I've been prone to favor the trading top argument.

Given the macro picture, however, the 'launch' argument seems dismissible only at one's own peril.

positions in gold, silver, Treasuries

Tuesday, October 5, 2010

Smoot Point

Will you stand above me?
Call my name or walk on by
Rain keeps falling, rain keeps falling
Down, down, down, down
--Simple Minds

After the stock market crash punctuated the end of the Roaring Twenties, the Tariff Act of 1930, better known as the Smoot-Hawley Act, was one of the early pieces of legislature enacted to jump start a rapidly stagnating economy, primarily by shielding domestic industry from foreign competition. The act imposed tariffs (read: raised prices) on over 20,000 imported goods.

Predictably, instead of reversing the economic decline, Smoot Hawley helped plunge the country into depression. When economies slow, natural market forces exert downward pressure on prices. Lower prices help those on lower incomes get by. Tariffs impose mandatory price increases which make it harder for people to make ends meet.

Moreover, tariffs invite retaliation. In response to Smoot Hawley, nearly every industrialized country in the world raised their own barriers on US goods being shipped abroad. The all-too-predictable result was that foreign demand for US goods decreased, thereby exacerbating the tailspin in domestic capacity utilization.

Today, as economies slow across the board and debt burdens escalate, we once again hear bureaucratic rumblings about the need to protect domestic industries. While outright tariffs are still employed, the preferred tool for tilting trade is the currency. The idea is to devalue your currency so that foreign buyers will be enticed by purchase more of your goods. Reminiscent of the mercantilist approach of old.

The problem, of course, is that all nations want their currency weaker vis a vis others. So everyone engages in currency devaluation. A world wide confetti fest results.

While it seems that most people are oblivious to the consequences of this approach, gold and silver certainly 'see' them.

positions in gold, silver

Test Bank

"A toast! A toast! To Mama Dollar and Papa Dollar, and if you want to keep this old building and loan in business, you better have a family real quick."
--George Bailey (It's a Wonderful Life)

I like Peter Atwater's vision that by the time this credit crisis bottoms, the typical bank will be much smaller and scale and locally situated. Between here and there, however, calls for a toppling of the giants.

This will ocurs when we can no longer afford to prop 'em up under the guise of 'too big to fail.' Reducing barriers to entry will knock inept giants down via the energy of free enterprise.

position in SH

Monday, October 4, 2010

The Socialists' Problem

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

Although many continue to blame current economic and social problems on capitalism, it should be readiliy apparent to anyone who is intellectually honest that capitalism in its true sense does not exist today. In the United States, any semblance of free market operations began to disappear a century or so back, largely in line with the onset of the Progressive movement.

As a matter of fact, the United States was the last industrialized country to send free markets packing, as other countries had opted for alternative structure at earlier dates. Parenthetically, this is probably why the American free market myth persists--the structure of US markets may indeed appear relatively unhampered when compared to others.

Today, the design that dominates economic structure around the world is socialistic in nature. Increasingly, control of production and distribution of economic resources rests with government rather than with private enterprise. The primary rationale for this movement relates to the idea of equality or 'social justice.' Social justice requires that resources be distributed in an 'equitable' manner so that all have their 'fair share'--both now and when times get tough (i.e., sickness, unemployement, etc). Because the core competence of governments is coercion, they are well positioned to serve as strong armed agents for the forced distribution of ecoomic resources.

Socialists face a fundamental problem, however. The central planning function that makes production and distribution decisions in socialistic systems is inferior to market mechanisms for resource allocation. Consequently, productivity suffers. And with it, standard of living.

Lower standard of living makes the citizenry unhappy--particularly if citizens can observe people in other countries living more comfortably. Socialist planners, desperate to keep their jobs but recognizing that citizen desire for standard of living exceeds the resource-producing capacity of their economic systems, resort to borrowing resources from others in order to appease the unrest.

Borrowing permits those living in socialistic systems to elevate their living standards above their income-producting ability.

This artificially elevated living standard is a temporary condition, however. With the entire world moving more socialistic in nature, it is only a matter of time before pockets of economic resources that have been saved are subsequently borrowed. Moreover, if the resources that have been borrowed are to be paid back, then socialist economies already living beyond their means must dial back drastically on future standards of living in order to pay back their debt. The other alternative, of course, is to default, in which case lenders must dial back on their future living standards since they have less resources.

Either way, when the entire world is moving toward socialism, the system resembles a gigantic pyramid scheme heading toward dislocation.

There is a good case to be made that this is precisely what we're witnessing today. A world increasingly moving toward the socialism end of the economic spectrum has been sacrificing productive capacity in the name of social justice et al. Conditions of economic scarcity are higher than they would be otherwise. This has weakened standard of living, motivating bureaucrats to increasingly borrow more resources to make up the difference. The pool of real savings, however, is nearing (or has reached) depletion.

For a while, bureaucrats are apt to pretend that they are creating resources by printing money. But it is only a matter of time before citizens discover that pieces of paper are not economic resources.

The faster we look toward more government to 'solve' this problem, the more likely we will face a signficant dislocation in living standards worldwide.

It's also not hard to envision that, during the entire time that the economic system is collapsing under the dead weight of socialism, that mindless people will continue to point to capitalism as the cause.

position in SH, US Treasuries

Homeless Shelter

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

Hard to see firming in home prices with trends like this.

Note that vacancies were on the rise way before the recent mortgage meltdown. Points to an increase in supply in the face of weakening demand.

Markets rarely act this way unless they have some 'help'...

position in SH

Sunday, October 3, 2010

AA Update

"Like I always say, kid. Money's only something you need in case you don't die tomorrow."
--Carl Fox (Wall Street)

Brief review of asset allocation as we enter Q4. Here's how things stand ex real estate:

cash  67%
bullion  21%
commodity ETFs  7%
fixed income  3%
short equities  2%

Commodity ETF holdings are currently limited to GLD and SLV. This is essentially 'paper' bullion added to physical stock. Increasingly, my view of the world finds me wanting to swap out of cash and into bullion Currently, the combined 21 + 7 = 28% does not 'feel' like enough. Entering Q4, then, I'll be looking to bump precious metal exposure higher.

Other than that, I hope to continue 'tactical' trading some of the general market ups and downs, particularly around 'trend reversals.' Have had some success employing this approach trading both uptrends (long) and downtrends (short). Nothing crazy in terms of capital at risk, but good fortune here has added a few shekels.

My sense continues to be that there is a big trade to the downside 'out there.' Perhaps some clarity will emerge in order to 'see it' if/when. Or perhaps not...

positions in GLD, SLV, bullion, TLT, SH

Saturday, October 2, 2010

Rockin' Robbins

Every little swallow, every chickadee
Every little bird in the tall oak tree
The wise old owl, the big black crow
Flappin' their wings singing go bird go
--Jackson Five

Lionel Robbins discusses the 'poverty in plenty' notion and its relationship to government intervention and economic hardship. Robbins was a top British economist in the early 20th century, and his thought processes mirrored those of the Austrian school. Curiously, later in his career he 'jumped ship' from his long held views and joined the Keynesian movement for reasons that appear less than intellectually honest.

The piece appearing here was written prior to his 'defection.'

First, he dismisses claims that modern methods of production have eliminated the scarcity condition. He observes that if you took the productive capacity of the industrialized world, increased it by 20%, and then distributed it evenly throughout the entire planet, then it is likely that nearly everyone in industrialized countries would be worse off. This is because poverty in industrialized countries is a relative condition. Compared to standards of living of third world countries, even those at the lowest wrungs of the social pyramid in industrialized societies enjoy higher living standards.

His point is that even at maximum utilization of the world's productive equipment, we would be, on average, very badly off.

Then, he proceeds to ask why we cannot achieve even this low standard. Why is it that when needs of consumption are so great, there are periods that productive capacity sits idle (during such as times of economic recessions or depressions)?

Robbins notes that there are many who feel this phenonenon is due to an absence of centralized control of production. Absent central planning, the problem of production and distribution rests with private enterprise who generates economic resources guided by anticipations of consumers. Opponents argue that the market system is bound to lead to dislocation. The problem of economic downturns, they say, is due to the breakdown of private enterprise. If resources were generated and distributed by central planners, they claim, then there would be no dislocation.

Robbins argues that this thesis breaks down when viewed through the lens of reason. Production in free markets is oriented toward satisfying consumer demand. When (not if) mistakes are made, those who make the mistakes suffer and are motivated to correct them. The market mechanism, if left to itself, compels the necessary adjustment. Market arrangements are not conducive to dislocation, because market participants are motivated to correct their mistakes as soon as possible.

If free markets aren't to blame, then how are we to explain the periodic episodes of downturn and depression? During downturns, persistent maladjustments between supply and deman are visible, suggesting that producers miscalculated yet did not move to correct their errors. Morever, these maladjustments are apparent in more than one market, suggesting structural factors at work across much of the economy.

Robbins divides the explanation for these broad, persistent maladjustments into two pieces. When business outlook appears favorable, if more money than usual is available for investment, then it should be easy to see that investors will be led to make mistakes, launching new undertakings that will persistently bear fruit only if the easy money conditions last. A speculative mania may follow that requires ever increasing amounts of easy money for good times to persist. When conditions inevitably turn, then demand falls off and the mistakes are revealed as the boom sinks under its own weight. The observable outcomes are economic stagnation, unemployement, and unused capacity.

The first piece of the explanation, therefore, is that the slump is brought about by mistakes made in the boom that preceded it. At the root of the problem are conditions of easy money, which motivate speculation and error that ultimately lead to economic dislocation. Robbins points to the central banks as the sources of easy money supply.

The second piece of the explanation, Robbins argues, relates to actions that governments take once the dislocation occurs. Instead of realizing that it is at such time that governments should secure the maximum freedom of markets (so that mistakes can be quickly corrected), governments 'block up' channels of trade with restrictions and limitations. Additional credit supply, trade sanctions, subsidies and other interventions prevent markets from clearing. Investors are likely not to take risk under such situations. The slump therefore persists. 

Robbins then applies his explanations to the various booms and busts the occured in the early part of the 20th century.

When such interventionary actions of government are multiplied indefinitely, then Robbins submits that there should be little question why the phenomenon of poverty in the midst of plenty exists--or why it is likely to continue to persist.

It is not free markets, but rather the suspension of free markets, that is responsible for this phenomenon. It is not capitalism but interventionism and monetary uncertainty that are responsible for the persistence of the slump.

Friday, October 1, 2010

Debunking Deleveraging

Sometimes I never leave
But sometimes I would
Sometimes I stay too long
Sometimes I would
--The Motels

Lots of ink has been spilled about the 'consumer deleveraging.' Consumers everywhere are supposedly paying down debt--cutting up credit cards, paying off mortgages, etc.

The data don't show it. Over the past year or so, consumer debt has leveled off which to many, I suppose, seems like deleveraging after a multi-decade run up.

Deleveraging and deflation are bedfellows. The data suggest that chance of deflationary winds remains substantial.

position in US Treasuries