Saturday, December 31, 2011

Origin of Society and Government

If I'm losing control, will you turn me away?
Or touch me deep inside?
And before this gets old, will it still feel the same?
There's no way this will die
--Pat Benatar

Excerpt from Frank Chodorov's (1959) The Rise and Fall of Society, which remains one of the best books on liberty and society that I have read. The basic question on the table in this excerpt is why humans socialize and form government.

There is a preposterous train of thought that society and goverment precede the individual. Lincoln, in fact, used such a rationale in his defense of authoritarian federal rule during the Civil War. Indeed, this twisted thought process forms the basis for socialism in all of its flavors--communism, facism, et al.

In reality, societies precede governments. And individuals precede societies. The question then becomes what motivates individuals to socialize and to form governments?

Chodorov reasons that there is one constant in human behavior that can be observed wherever we encounter people: they are always and everywhere concerned with making a living. 'Making a living' is broadly construed to mean the process of satisfying needs, be those needs physical or psychological.

Various truths accompany the process of making a living. Human needs are never fully satisfied. People always reach for more. Moreover, the basic condition of our planet is one of scarcity. In order to satisfy needs, resources in non-consumable form must be converted into consumable form through productive effort. However, people have a general preference for less effort rather than more, and to satisfy their needs sooner rather than later.

Thus people constantly search for ways to economize effort. Economy may be obtained thru various approaches. People can set aside some resources today to develop tools that increase productivity tomorrow. Higher output per hour relieves conditions of scarcity and improves standard of living. This approach is central to capitalism--the development of labor saving devices thru capital investments that increase abundance.

Economy may also be gained by division of labor. Specialization in a particular line of work improves productivity through repetition. Learning by doing increases efficiency. Because there is less changing between tasks, switching costs are also reduced.

To realize the fruits of specialization, however, people must engage in trade. Trade permits people to broadly satisfy their needs with more economy. More can be obtained per unit of effort when people specialize in their production and then trade.

Here we have the basic answer to why individuals socialize. Societies are a natural expression of the human desire to satisfy needs. These needs can be better satisfied through voluntary exchange with others than by people working in isolation. The key word here is voluntary, for if an individual does not like the terms offered in societal exchange then that individual can choose a more self-sufficient condition, albiet at a lower living standard perhaps.

Because man has an aversion to labor, and prefers satisfying needs using the least amount of effort possible, there will be those in society who covet the output produced by others. As such, individuals engaged in societal cooperation institute government to help protect property from expropriation by others. As long as the scope of government is limited to the protection of individual property rights, then individuals and society prosper.

Unfortunately man's aversion to effort in the pursuit of ever more satisfaction finds him seeking a broader scope for government. "Because government is an instrument of force," he reasons, "perhaps it can be employed to deliver into my possession economic resources that I won't have to work for." Government thus becomes a strong armed agent for a thieving principal.

When the scope of government moves beyond the protection of property to the expropriation of property, then prosperity is lost in societal arrangements.

It should be evident, therefore, that society and government are constructs--institutions that individuals create in their lifelong pursuits of making a living. The institutions assist in man's endeavor to get more for less.

The problem, of course, arises when these institutions reduce the voluntary cooperation necessary for increasing prosperity, and instead fester forceful invasion of one individual on another.

Time Tunnel

There's a crazy mirror showing us both in 5-D
I'm laughing at you, you're laughing at me
There's a room of shadows that gets so dark brother
It's easy for two people to lose each other in this tunnel of love
--Bruce Springsteen

Decent demo of the slippage or tracking error that occurs when holding leveraged ETFs over time. While these vehicles may be useful for trading, the tracking error erodes long term returns, making them undesirable for investors with long time horizons.

no positions

Friday, December 30, 2011

Ownership and Socialism

You don't know how desperate I've become
And it looks like I'm losing this fight
In your world, I have no meaning
Though I'm trying hard to understand
--John Waite

Am starting once again Mises' (1951) Socialism. An important point made early relates to ownership. There is economic ownership and legal ownership. They are not necessarily equivalent.

In economic terms, ownership is the power of disposal. In the case of first order, or consumer, goods, the individual who can direct consumption of the good owns it. Thus, a thief who steals bread from a supermarket owns the bread from an economic standpoint because the thief is in control of its disposal. This state of ownership is true despite the fact that the thief does not have legal title to the bread.

Under the auspices of Natural Law, rightful ownership equates to individual property rights. Broadly construed, property includes an individual's life, his/her wherewithal to produce, and the fruits obtained from production. Natural Law declares that property is the dominion of the individual who can dispose of it as desired as long as the individuals does not forcefully interfere with the pursuits of others while doing so.

Socialism endeavors to expropriate property from the individual to the collective. It seeks to do this by empowering an institution, government, as a 'legal' agent for expropriation. Direct and forceful transfer of property from individual to states, as well as forceful limitations placed on the rights of individual property owners, are means of socialization.

From Mises:

"If the State takes the power of disposal from the owner piecemeal, by extending its influence over production; if its power to determine what direction production should take and what kind of production there should be, is increased, then the owner is left at last with nothing except the empty name of ownership, and property has passed into the hands of the State." (p. 56)


Mises, L. 1951. Socialism: An economic and sociological analysis. New Haven: Yale University Press.

Thursday, December 29, 2011

The Roosevelt Myth

"Unfortunately, no one can be told what the Matrix is. You have to see it for yourself."
--Morpheus (The Matrix)

Finally completed Flynn's (1954) The Roosevelt Myth. Flynn believed that mainstream history was giving FDR a free pass and he wanted to set the record straight. As such, Flynn's work parallels that of Garrett, Lane, Hazlitt, et al who sought to record and analyze what others were ignoring during the 1920s-1940s.

Flynn was a well known journalist who wrote for Harper's, Collier's, and others. By the 1930s he became one of the best known political commentators in the United States.

His perspective is particularly interesting because he was a Democrat with populist inclinations who voted for FDR in 1932. However, it did not take Flynn long to realize that FDR was veering far away from his original campaign promises (which amazingly enough centered on reducing government, balancing the budget, and keeping the US out of war!).

The book, which is well cited, is divided into sections that chronologically follow FDR's three and a fraction terms (FDR died in April 1945 shortly after his inauguration for a fourth term).

An overarching question that Flynn considers is what motivated FDR to do the things he did during his presidency? The evidence suggests that Roosevelt was not motivated by strong ideology. By his second term beginning in 1936, opponents were accusing him of being a Marxist or at least someone of Communist persuasion.

While it is true that FDR had begun populating his administration with people of those colors from the outset, it appears that FDR was no more loyal to collectivist ideals than to any other idea that could earn him votes. Indeed, it was during the FDR administration that the market for political favor exploded in size. Prior to FDR, special interest groups were largely limited to big business. FDR made markets for political favor across the spectrum, picking up the poor, labor, old people, and any other category that sensed that they could get something from government in exchange for their vote.

The Roosevelt family itself was not immune to graft. For example, Roosevelt's wife and two sons made fortunes by exploiting White House ties during this period.

FDR displayed little discipline toward self-study and self-expertise. Instead, he surrounded himself with 'The Braintrust,' i.e., so called experts on economics, sociology et al who had opinions that FDR could use. And use them he did, flittering about like a moth in a light bulb factory from one government program to the next. During his first two terms, more than 100 government agencies reporting to the executive branch were created.

Flynn astutely observes that it was the practice of Congress writing blank checks to FDR for his spending whims, and the practice of FDR then using those funds to enact policy thru his vast agency reach, that elevated presidential power far beyond the intent of the Framers. The result is the Statist model that continues to escalate today.

Although FDR's behavior can be seen as politically rather than ideologically motivated, there is little doubt that many in his administration were sympathetic to socialist causes. And those administrators knew how to manipulate FDR in manners that advanced their agendas. It is unlikely that FDR would have been re-elected in 1940 or 1944 without the support of union and other special interest groups with Communist ties. One of Flynn's contributions is to elaborate those linkages and their impact on FDR's behavior.

When he began his second term in 1936, FDR was engaged in some end zone dancing about the economy, patting himself on the back that his New Deal programs had slain the Depression monster. Within a year, however, deflation returned and unemployment quickly recaptured Depression era highs above 20%.

Desperate to kick-start the economy, FDR eyed military spending and, gradually, military involvement as a means for breaking the back of the Depression. Flynn makes it clear that Russian interests played in role in US military policy decisions before, during, and after WWII. Stalin was clearly the dominant figure in policy decisions during the war, walking right over FDR in nearly every way possible.

It is quite likely that FDR's policy decisions, which can be seen as increasingly inept by late 1939, were partly due to his deteriorating health. Flynn makes a strong case that there was broad concerted effort to deceive the American people as to FDR's true state of health, and that this deception was successful enough to push Roosevelt over the top in the 1944 election. All the while, politically motivated interests were using FDR as a puppet to express their desires.

Flynn's portrayal of FDR as a purely political animal with modest intellectual capacity who oversaw a morally bankrupt regime is the antithesis of popular accounts. It demonstrates the power of the Matrix to slant, and the capacity for truth if the Matrix is cast aside.


Flynn, J.T. 1948. The Roosevelt myth. New York: The Devin-Adair Company.

Wednesday, December 28, 2011

Melted Butter

Dream of better lives the kind that never hate
Wrapped in a state of imaginary grace
I made a pilgrimage to save this human's race
Never comprehending the race had long gone by
--Modern English

Action in precious metals continues ugly. New lows for the move today. Peering thru a longer time horizon lens, however, finds the yellow metal just now touching its multi-year uptrend line--a defined risk set-up for bullish traders.

One apparent takeaway from a macro perspective is that gold is not buying the thesis that the financial system is reliquifying--particularly w.r.t. the EU. Instead it is behaving like a wave of deleveraging, deflation in in the cards.

position in GLD

Under the Euro Surface

We mention the time we were together
So long ago, well I don't remember
All I know is that it makes me feel good now
--The Motels

Am continuing to pick up chatter like this that the situation in Europe is worse than appears. The EU version of TARP, the Long Term Refinancing Operations (LTRO), has seen a commensurate jump in bank funds with the ECB Deposit Facility to a record high half trillion euros.

The implication is that interbank lending in Euro is largely frozen. Banks are instead choosing to keep funds w/ the central bank.

Deja vu pangs here, as this is very reminiscent of the risk averse behavior we saw stateside in 2008.

Which probably shouldn't be surprising. After all, the situations are largely the same. Risk seeking behavior and easy credit ran up massive debt and leverage. Now risk appetites are waning. And price declines threaten leverage systems with insolvency.

position in SPX

Tuesday, December 27, 2011

Rogers Outlook

"My prediction? Pain."
--Clubber Lang (Rocky III)

Jim Rogers checks in w/ his thoughts on 2012. He is not optimistic, but does note that markets could be propped up as gov'ts print and spend ahead of big elections in order to buy votes.

Also thought this extended interview w/ Glenn Beck was interesting. It is easy to see why Beck left the mainstream media system. He can now ask questions that he could not have when under the control of someone else.

JR does not mince words. But what is interesting here is that Beck's format made JR perhaps let is guard down even more and let it fly. He obviously foresees a rough road ahead.

He pulled a couple of 1 oz gold coins out of his pocket that he picked up on his way to the interview. He shows a Canadian Maple and a Chinese Panda.

His favorite commodity sector continues to be ags, and he says that he buys the Rogers ag index.

position in RJA, gold

Monday, December 26, 2011

Media Bias and Distortion Effects

Message just keeps getting clearer
Radio's on and I'm moving 'round the place
I check my look in the mirror
I wanna change my clothes, my hair, my face
--Bruce Springsteen

One implication of of Crawford and Sobel's (1982) model of strategic information transmission is that politically motivated information sources are likely to exaggerate their messages in order to influence less biased consumers of information.

Cai and Wang (2006) subsequently conducted experiments to estimate the amount of information and the degree of bias.

In an average state of the world that was 5.0, senders sent a message of 5.894. On average, then, senders sent a message that was biased by 0.894 units from the truth.

The receivers, even though they know that the average state of the world would be 5.0, chose an average policy of 5.282. Thus, receivers were 'fooled' into choosing a policy that was 0.282 units higher than the truth.

The results demonstrate that the typical person underestimates the degree to which other prople are strategic. In the context of media bias, consumers of information are more 'trusting' of news sources than they should be.

Such findings do not support a rational choice theory basis for media consumption. Instead, the results argue for a 'media effects' explanation.

Even when consumers are on guard for bias in the information that they receive, bias emanating from media sources is still prone to distort the beliefs of information consumers.


Cai, H. and Wang, J.T. 2006. Overcommunication in strategic information transmission games. Games and Economic Behavior, 56: 7-36.

Saturday, December 24, 2011

Loan Ranger

Step right up, and don't be shy
'Cause you will not believe your eyes
--The Tubes

After more than a year in court, the Fed has finally released data on its bank lending programs during the credit market meltdown in 2008/2009. Some mind numbing numbers. $1.2 trillion in loans plus a pledge to backstop about $7 trillion on bank liabilities. Bloomberg estimates that nearly 200 banks participating in the Fed's programs could have made nearly $13 trillion by investing the Fed's loans that they took.

Many people continue to pat themselves on the back that these measures averted a system meltdown. The numbers above should tell you that we printed our way out of this episode. Those hurt go beyond taxpayers, as anyone holding dollars now has less wealth in hand. Not to mention the elevated moral hazard...

It continues to amaze me how people keep pointing to the banks and the rich as the 'cause' of widening income differentials in this country...

Friday, December 23, 2011

Political Karn Evil

Welcome back my friends
To the show that never ends
We're so glad you could attend
Come inside! Come inside!
--Emerson, Lake & Palmer

President Obama's speech yesterday on the importance of extending the payroll tax cuts two more months, while a critical number of House Republicans were holding out to extend the cuts thru 2012, was the height of political carnival. The president trotted out stories of the hardships that people would have to burden without the two month extension. One person he cited, for example, claimed that he would have to forego nights out for pizza with his daughters if the extension were not passed.


Of course, the president did not take the time to explain why two more months of pizaa with the kids was superior to the 12 more months of pizza with the kids that House Republicans were proposing.

The portion of the bill (which passed this am) which received nearly no media attention the extension, once again, of benefits for the unemployed.

Those who slurp this stuff up deserve the despotism being heaped upon us.

Thursday, December 22, 2011

Gold, Silver, and the Spectre of Systemic Collapse

Fate, it seems, is not without a sense of irony
--Morpheus (The Matrix)

Interesting take (part 1, part 2) on whether precious metals would really 'work' if we get a systemic collapse. The author is careful to state upfront that he is considering the worst case scenarios in the spectrum of chance.

He concludes those seeking power in a vacuum of collapse will likely demonize holders of gold, blaming them for 'causing' the collapse. Because most people will not have acquired precious metals for protection, the masses will likely jump on board this bandwagon in hopes that they will be able to get something for nothing.

He posits that metals markets will come under strict control with limited ability to convert metal into anything other than new script. Conversion rates may penalize metal holders, forcing them to give back much of the gains realized during the runup.

Silver, in his view, may have more utility than gold as a medium of exchange. It may be subject to less oversight, plus it is practically divisible into smaller units conducive to barter and routine trade. For this purpose, the author highlights the merits of US 90% silver coins minted 1964 or earlier.

The potential superiority of silver in this scenario is consistent with conclusions I've reached with my 'inner circle.' Gold is better viewed as a store of value to be passed along to future generations. Silver has more value as a medium for barter or exchange.

The other thing I found valuable in the author's work is his assertion that a powerful few, likely those with great influence in the current system, will try to reclaim control in the 'new' system. If that is the case, then the prudent question to ask is how will these people seek to preserve their weath across the transition? If there is a reasonable answer to this question, then perhaps individuals should allocate some resources in that direction as well.

I find it unpleasant to dream inside such a scenario. But prudent risk management requires exploring those scenarios far out in the tails of probability--where chances of occurence are small but the consequences of occurence are large.

Patterns of Optimism

So glad we've almost made it
So sad they had to fade it
--Tears for Fears

Back in early November technicians were eyeing the pennant patterns forming in the major indexes, and largely opining that the resolution of that pattern was likely to be higher. As we now know, the bulls were fooled as prices moved lower.

Now, technicians are eyeing a forming inverse head and shoulders pattern with similar optimism.

Will Hoofy's heros bring home the bacon this time? That seems to be the growing consensus.

Personally, I'm not playing it that way. There is far too much macro overhang for my tastes, not to mention overvaluation at the micro level, to merit holding a bunch of long equity risk.

Am currently about 10% net long, but that long exposure is in commodities. It is offset not quite one for one with an index equity short. This hedged position has not proven to be as effective this time around because of recent weak commodity performance relative to stocks.

Currently, however, my MO remains the same. Use price to my advantage to a) add exposure at lower prices and b) unload exposure at higher prices. All the while, I want to maintain sizeable dry power (read: cash and short term fixed income).

position in commodities, SPX

Wednesday, December 21, 2011

Re-Hypothecation and Precious Metal ETFs

"Unexpected this is. And unfortunate."
--Yoda (Return of the Jedi)

Zerohedge has been suggesting that the re-hypothecation issues faced by MF Global could spill over into precious metal ETFs such as GLD and SLV.

Further, ZH has posited a conspiracy theory that the metal ETFs were created to lure unknowing investors into instruments of paper gold and out of mining shares. Banks and other parties interested in getting control of the tangible gold supply chain could thereby acquire mining shares on the cheap. At some point, investors holding GLD et al will discover that they're holding worthless claims while the banks wind up holding the tangible gold assets.

Quite the Jedi Mind Trick...

While the conspiracy theory doesn't do much for me, the ETF re-hypothecation issue does. ZH builds its case around a lawsuit brought by a unit of HSBC on behalf of a client against the legal trustee of MF Global in charge of settling bankruptcy claims. The client (apparently using MF as his broker) was holding $850,000 in physical bullion at HSBC as collateral for underlying commodity contracts w/ MF. Following the MF bankruptcy, the client instructed HSBC to transfer the bullion to his Brink's account. Before the metal could be shipped, the MF trustee wrote HSBC claiming that the bullion was 'customer property' and not the client's.

In the lawsuit, HSBC is asking the court to rule on who is the rightful owner of the bullion.

If MF Global re-hypothecated physical bullion held in client accounts, then it is possible that the plaintiff no longer has legal custody of the bars.

The ramifications for ETFs like GLD are straightforward. These ETFs have gone to great lengths to demonstrate that the funds are actual in possession of physical metal, including publishing lists of bar serial numbers, positioning video cameras in the vaults that show the gold, and taking commentators on guided tours of the vault gold.

However, as the MF case demonstrates, measures that indicate metal on hand do not equate to ownership. The vault metal could be re-hypothecated or leased to someone else. When a counterparty somewhere in a daisy chain of trades fails to uphold its side of a contract, multiple parties might claim ownership.

Not exactly the situation that an investor wants with a 'safe haven' investment...

It is easy to file this situation under the general category of 'counterparty risk' that an investor takes on when buying any 'paper' form of a physical asset. I must admit, however, to being influenced by the re-hypothecation argument.

If you believe, as I do, that today's market prices are built on mountains of paper claims and leverage, then one has to question the validity of a security claiming to represent a physical asset that has no proof of clean title. As Zerohedge suggests, the metal ETFs can be seen as synthetic collateralized debt obligations (CDOs) that provide the illusion of investing in physical gold.

As such, I'm currently looking at lightening up my positions in GLD and SLV, and perhaps exiting them entirely--particularly if we see a relief rally after the recent carnage.

Am also getting the sense that Central Fund of Canada (CEF), while not perfect, is a more valid expression of physical bullion than either GLD or SLV.

position in GLD, SLV, CEF

Tuesday, December 20, 2011

Natural Law and The Constitution

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

What made the Constitution remarkable was that it was the first government design grounded in natural law. Yes, prior governments such as Rome incorporated features of natural law into its design. But the Constitution of the United States was the first (and only) attempt to express natural law as articulated by Locke et al across the scope of government.

However, the expression of natural law in the Constitution is not perfect. Several parts of the Constitution are obviously inconsistent with natural law, suggesting that the Framers either did not fully grasp what natural law was about or that they compromised their ideals. The latter seems more likely given what we know about the process that defined the Constitutional Convention of 1787.

The most glaring deviation from natural law is what today is known as the Three Fifths clause, evident right away in Article 1, Section 2. I want to reflect more on this in a later post, but right now it is worth noting that if there was ever an argument against compromise in political processes, then the Three Fifths clause provides it. The Three Fifths clause treats certain individuals as property and denies them their natural rights. It took the country nearly 100 years to reverse it in writing, and a century more to broadly enforce it.

The Constitution strays from natural law in some other ways. In Article 1, Section 8, the Constitution grants the federal government monopoly power over money. The history of the world suggests that governments will always find a way to devalue money, thereby expropriating property from the citizenry.

The Constitution also empowered Congress to grant monopoly power to people deemed by the government to possess innovative inventions and ideas. While this was done with the stated goal 'to promote the Progress of Science and useful Arts,' distibuting legal monopolies shields individuals from market competition, and opens a market for political favor between those seeking special privilege and government officials who can grant it.

One item in the Constitution originally consistent with natural law but has since been bastardized was the muted taxation power of the federal government (Article 1, Section 9). The original design severely limited the federal government's capacity for direct taxation of individuals. This is wholly consistent with the notion of property rights which forms the basis for natural law. The Sixteenth Amendment changed this, granting the federal government with essentially unlimited power to appropriate personal property via income taxes.

Because government officials largely ignore the Constitution today, the extent to which the Constitution aligns with natural law seems unimportant. But that is precisely the point. Our tenuous condition today can be explained by our divergence from natural law which was well, but not perfectly, articulated by the Constitution.

Until/unless we reverse this course, we are destined to meet the same fate as all nations who came and went before us.

Monday, December 19, 2011


All the old paintings on the tomb
They do the sand dance, don't cha know?
If they move too fast
They're falling down like a domino
--The Bangles

On top of hypothecation and re-hypothecation, there is also hyper-hypothecation. Hyper-hypothecation is basically the re-hypothecation process done multiple times between various trading partners.

HH creates systemic counter-party risk in a leveraged system. If one trading partner in a chain fails to make good on a contract, then the entire system freezes up because there is not enough capital to meet all the margin calls.

Conceivably, prices may be in error if participants fail to understand the counterparty risks that cascade thru a market system. Once those risks are understood, prices are likely to drop...significantly.

This pretty much describes our ponzi-esque condition...

Hypothecation and Re-Hypothecation

"The mother of all evil is speculation. Leveraged debt."
--Gordon Gekko (Wall Street: Money Never Sleeps)

The MF Global meltdown has brought the words 'hypothecation' and 're-hypothecation' to the forefront. Hypothecation is the relatively common situation where a buyer pledges collateral to secure a debt. The borrower retains ownership of the collateral, but in the 'hypothetical' case that the borrower defaults, then the creditor can take possession of the collateral.

In the US, the right of a creditor to take ownership of collateral if the debtor defaults is called a lien.

The lion's share of home mortgages reflect hypothecation. The home 'buyer' pledges the property to be purchased as collateral to secure a mortgage from a lender. Until the house is paid off, the creditor retains the right to take possession of the property if the borrower fails to keep up with mortgage payments.

Re-hypothecation occurs when financial entities pledge collateral that has already been posted by clients to support their own borrowing and trading. If a broker dealer such as MF Global puts up assets held by clients in 'margin accounts' as collateral to, say, speculate in Euro sovereign bonds, then this broker dealer would be engaging in re-hypothecation.

The immediate consequence of re-hypothecation is that it increases systemic leverage. More assets can be borrowed and controlled with less amounts of underlying equity.

As we noted many times on these pages, leverage becomes problematic when price moves against you. The higher the leverage, the smaller the change in price necessary to wipe you out.

Thus, when Euro bonds tanked over the past few months, MF Global was wiped out.

In the case where leverage is built on re-hypothecation, then the question becomes one of property rights. Whose property is lost when MF Global was wiped out? If re-hypothecation is in fact a legal aspect of a contract (e.g., a client of MF Global agrees that a condition of maintaining a 'margin account' at the firm is that holdings can be re-hypothecated for MF's own trading endeavors), then it is the client, not the firm, that is on the hook.

Thus, clients of MF Global may be out billions of dollars...

Sunday, December 18, 2011

Rational Choice Theory and Media Effects

Hey, everybody plays the fool sometimes
--Aaron Neville

There is a theoretical argument against media bias having any effect on individual perception. Rational choice theory argues that people adjust for the bias of information streaming from particular outlets. Thus, a moderate who is listening to Rush Limbaugh would process information thru a filter that would strip out bias.

Ironically, rational choice theory suggests that listening to Rush Limbaugh drives moderates to become more liberal when processing information rather than more conservative.

In the opposite direction, assume that the average voter understands that the media, on average, are biased left. In previous missives, we have noted that politically motivated journalists will slant their message to a greater extreme in order to sway the voter. Thus, media messages are biased more extremely to the left.

Rational choice theory posits that, because the average voter recognizes the biased message, then the voter process the information with a conservative filter in order to 'sterilize' the message.

However, advances in research cast doubt on the validity of rational choice theory in the realm of media. It appears that significant 'media effects' are present when consuming information presented by politically motivated media. Stated differently, voters can be systematically fooled into thinking and voting against their natural tastes and values.

More in upcoming missives...

Freedom Watch

"Your victories, and your losses, are shared by more than you know. Stay with us. Stay the course!"
--Col Harry Burwell (The Patriot)

Over the past few yrs, I have undertaken significant personal study to better understand the Constitution, its development, and subsequent events that have diminished its influence in American life. Until recently, mainstream media was a worthless resource in this regard.

Fortunately, Judge Andrew Napolitano has shouldered responsibility for delivering nightly analysis and commentary that can help anyone better understand current events in the context of the Constitution and liberty. Here, the judge recaps some of highlights of 2011 and sets the stage for 2012.

I pray for this guy--that he has the stamina to continue in an environment that is hostile to Constitutional context. It does appear that he possesses indominable spirit that will help him press ahead.

Hopefully that indominable spirit rubs off on others in the upcoming period.

Saturday, December 17, 2011

Bass Voice

My world's on fire, how about yours?
That's the way I like it and I'll never get bored

A couple of interviews w/ Kyle Bass that I have yet to chew fully thru. Similar themes to recent commentary. The end of ponzi in Japan, EU on fire, dysfunctional US govt. One new dimension was his bullish take on Canada--which is tempered by his bearishness elsewhere which will spill over in a negative way to the Knucks.

Interesting stat: value of bank assets worldwide: $87 trillion. Value of bank assets in Europe: $40 trillion. Euro bank balance sheets are 3x levered as the US.

When asked why ECB won't just print the debt whole, Bass said "Your question should be do they print before or after they default. In my opinion, they have to just print afterward because the number that they're going to have to print is so large that they all know this going in."

Not sure I understand what he's saying here. Perhaps the transcript that I'm reading is out of context, and I'll know more once I watch the actual interview.

Thursday, December 15, 2011

Fooled Again

And the men who spurred us on
Sit in judgment of our own
They decide, and the shotgun sings the song
--The Who

Remember SB 1867--that stealth Senate bill that removes due process from US soil in favor of the discretion of authorities? No way it could pass the House, they said. And if it did, the president would veto it, they said.

It passed the House late yesterday and President Obama has withdrawn his veto threat. Indefinite detention without due process is now in play in this country.

This outcome was hardly in doubt. The State continues to amass power in the name of 'security.' When done in this manner, and in measured increments, it appears that the people will get fooled again.

Totalitarianism by gradualism.

Wednesday, December 14, 2011

Eject Button

"Ice, I got your MIG dead ahead."
--Pete 'Maverick' Mitchell (Top Gun)

Sold my small UUP call position this am into this morning's spike higher in the dollar.

Resistance is approaching dead ahead. Plus possible double top.

Just tradin' 'em...

no positions

Fractional Reserve Folly

There's a room where the lights won't find you
Holding hands while the wall come tumbling down
When they do
I'll be right behind you.
--Tears for Fears

Nice overview of the Corzine/MF Global dynamic. As the author points out, the borrowing and levering of client assets is at the heart of this problem. And it is nothing new. Banks do it every day.

The leverage in a fractional reserve system means that the system is fragile. Fragile to small downward moves in price. Fragile to declines in confidence.

He's right. MF Global seems a chirping canary.

position in SPX

Buy Light Zone

There's a storm on the loose, sirens in my head
I'm wrapped up in silence, circuits all dead
I cannot decode
My life spins into frenzy
--Golden Earring

Buying some gold and silver this am into the continued smeltage. Support is coming up fast. Stochastics getting there as well. Stated differently, risk/reward is getting more attractive.

Nothing crazy, just some incremental adds. Truth be told, would welcome lower prices for more substantial buying.

position in GLD, SLV, CEF

Tuesday, December 13, 2011

Believing vs Knowing

Dr Richard Kimble: They killed my wife.
Deputy Marshall Samuel Gerard: I know it, Richard. I know it.
--The Fugitive

Mises discusses the causes of blind adherence to socialism.

"People do not ask for socialism because they know that socialism will improve their conditions, and they do not reject capitalism because they know that it is a system prejudicial to their interests. They are socialists because they believe that socialism will improve their conditions, and they hate capitalism because they believe that it harms them. They are socialists because they are blinded by envy and ignorance."

Editorial/opinion pages seem to be aggregators of the envious and the ignorant. People head to these places to either gain comfort that others hold similar beliefs, or to battle those with differing opinions. At the end of the day, these people are rarely closer to the truth. They maintain their envy and ignorance.

Truth comes from shedding envy and ignorance. It is an intentional, persistent journey in pursuit of what is--wherever it leads.

When truth is grasped, a person no longer looks to others for validation of what he/she thinks or believes. Instead, that person knows.

Monday, December 12, 2011

Hussman's Hard Negative

I keep looking for something I can't get
Broken hearts lie all around me
And I don't see an easy way to get out of this
--Cutting Crew

Another weekly letter by John Hussman that contains several nuggets of insight. Right off the bat, he makes it clear that conditions have turned decisively negative, in his view.

The current situation is "characterized by an extremely unfavorable ensemble of conditions across valuations, sentiment, economic factors, and other conditions. Current conditions cluster with periods such as May 1962, October 1973, July 2001, and December 2007, all of which produced 10-20% market losses in extremely short order."

Dr J notes the increasing disparity between the leading indicators that his firm and ECRI tracks, which now signal an extremely high probability of US recession, and the prognostications of mainstream forecasters and pundits.

He notes some exchange between a Bloomber interviewer and ECRI's, Lakshman Achuthan:

Bloomber interviewer: [ECRI recently made] a recession call. What happened?
Achuthan: It's happening.

Suggests some serious cognitive dissonance out there regarding recession chances.

He also notes that the EU summit last week did (and can do) little to avert the central condition of credit crisis: solvency. Solvency is a shortfall between money owed and the resources needed to credibly repay it. Emphasis on 'credibly.' Printing money to pay back debts in devalued currency is not a credible strategy--at least in the eyes of creditors...

John suggests that perhaps one credible means for relieving stress in the EU is for countries to issue convertible sovereign bonds as they roll debt. The bonds would be convertible into the currency of the issuer at the option of the issuing government. Those countries with shaky fiscal houses would be required to pay a significant premium in order to compensate bond buyers for the commensurate risk.

Over time, John suggests, convertible debt might relieve the acute pressure that has built in the EU system. EU members would need to achieve sufficient financial credibility to remain in the EU system, lest they be subject to huge premiums on debt issued. The need for questionable bureaucratic enforcement mechanisms would be reduced. John suggests, "If the system can be saved, it will be saved" under such an arrangement.

One problem, of course, is that the significant discount that many EU countries currently enjoy by issuing debt under the implicit backing of the EU umbrella would vanish. Those countries would be forced to pay up and/or get their fiscal houses in order.

Market forces hate moral hazard...

position in SPX

Dark Gold

Dark side's calling now
Nothing is real
She'll never know just how I feel
From out of the shadows
She walks like a dream
Makes me feel crazy
Makes me feel so mean
--John Cafferty & the Beaver Brown Band

Never got off a comment last week on the head-and-shoulders (bearish) pattern setting up in gold. This morning gold is down nearly $50, which essentially validates the 'dandruff.'

Why the thrust downward in the yellow metal? Not sure, cookie, as there is no 'obvious' gold-related news on the tape. Over the weekend, however, there were some rumblings that last week's EU summit outcomes 'did not go far enough' in resolving the debt crisis. Swap spreads are generally widening today, with Greek spreads crossing the 10,000 bps mark--implying a 100% chance of default.

Am starting to sense that gold may be a leading indicator of another round of 'risk off' in the markets. Added to my short equity position this am, and may do more in the upcoming sessions depending on how things unfold.

position in GLD, SPX

Sunday, December 11, 2011

Beck and Call

We both know we're headed for disaster
Our minds say no
But our hearts are talking faster
--Donnie Iris

Interesting chat with Glenn Beck. I like GB because he's not afraid to speak his mind. His thought processes continue to strengthen.

Like many of us, he began studying our situation with novice-like capability. But he has stuck with it, seeking out new sources and more information in search of the truth.

This interview is the first time I've seen video of Beck since he left Fox. What I noticed right away is an air of calm about him. He replies to the judge's questions with little hint of any need for acceptance or validation. Like many of us, he appears to understand that his thought processes have grown during the journey. He knows that he is closer to truth to previously.

When approaching truth, there is no need to seek affirmation of others. Reason provides the validation.

Quest for truth leads to similar conclusions offered by GB here. That the socialist model of the last 100 years is coming apart. That, because Europe was ahead in implementing the socialist model, the EU is likely to disintegrate ahead of us. That Tea Partiers increasingly fear the system as unfixable. That there exists only one political party in the US, the Big Government Party.

For those who  been'working the system,' does it remain worthwhile to try to proactively reverse our course? Or is time better spent preparing for what increasingly seems to be apocalytpic meltdown?

Saturday, December 10, 2011

Media Bias Research and the Endogeniety Problem

Color me your color, baby
Color me your car
Color me your color, darling
I know who you are

The endogeniety problem is often present in studies seeking to establish relationships between media outlet exposure and erroneous views on issues.

The hypothesis goes like this. I suspect that outlet X misinforms its viewers. So if I survey viewers of various media outlets about their knowledge of a particular 'fact,' and viewers of X are more 'incorrect' on the fact than the viewers of other outlets, then I can conclude that X is misinforming its viewers in a politically slanted way.

Before we get to the endogeniety problem here, studies like this one have other obvious issues. Take, for example, the 'facts' that are employed in the study. One must come up with 'facts' that are not contestable, which is harder than you might think. Just because something is claimed as true by a group of people, e.g., George Bush lied about WMD in Iraq, does not make it a fact. Moreover, one would think that samples of media stories surrounding such facts require similar exposure across media outlets, lest the issue could plausibly relate to programming choices by outlet managers rather than distortion of facts actually presented.

Even if the researcher was able to compensate for the 'fact factors,' the endogeniety problem remains. People who view X may do so because they prefer the X's content and how it is delivered. Viwers may be attracted to X because they have particular beliefs and views of the world, and X's output may confirm those beliefs (this is the confirmation bias mechanism at work). These beliefs and views may cause large numbers of viewers of X to interpret information differently than those with other beliefs and views.

Because viewers self-select X, it will be difficult to discern whether subjects our hypothetical study significantly differ in their grasp of 'facts' because of the X treatment, or because of some other factor endogenous to the subjects that influences their intrepretive mechanisms.

If/when such studies are published, they should raise more questions than answers.

Friday, December 9, 2011

The Endogeniety Problem

Inside, outside, leave me alone
Inside, outside, nowhere is home
--The Who

Lots of empirical research is tainted with an endogeniety problem. Suppose that you are a medical researcher, and you suspect a relationship between consumption of soy and the onset of cancer.

So you commission a survey study, asking people whether they have ever had cancer and also asking if they consume products with soy in them. The test seems straightforward. If soy consumers have a higher occurence of cancer than non-soy consumers, then the results seemingly show a relationship between soy and cancer.

However, there are other factors that might influence the onset of cancer besides consumption of soy products. Age, genetics, exercise, other dietary factors, etc. If people who are prone to contract cancer by these other factors are also likely to consume soy, then your study is plagued by a selection effect. Soy consumers are not a cross section of the population and may be more susceptable to cancer.

Consequently, your survey will take on two effects. It will reflect the possibility of a positive relationship between soy consumption and cancer as hypothesized. But it will also reflect the possiblity of contracting cancer due to other peculiarities of the sample. Thus, your survey is likely to overstate the true relationship between soy and cancer.

Because the subjects were allowed to choose the treatment, the treatment choice is 'inside' or part of the study. This is the endogeniety problem.

One way to avoid the endogeniety problem in survey research is to divide subjects into control and trial groups. This may be done by flipping a coin. Another way is to divide subjects according to whether they were born on odd or even days of the month.

The priniciple is to not permit subjects to self-select into the treament and control groups. Instead, it is best to have nature choose for them. In survey research, the key to avoiding the endogeniety problem is to conduct a 'natural' experiment.

Thursday, December 8, 2011

Fairness Folly

"Unfortunately, no one can be told what the Matrix is. You have to see it for yourself."
--Morpheus (The Matrix)

The Judge observes that in his 'Teddy Roosevelt' speech a couple days ago in Kansas, President Obama sought to justify the heavy handed role of government, forcefully taking from some and giving to others, in the name of 'fairness.'

Fairness is a favorite positive substitute symbol for propogandists, as it evokes warm feelings from people while the underlying meaning of the word is gradually changed. Thus, spending is  said to be 'investing.' And mob rule is said to be 'democracy.'

Now, the president seeks to frame the taking of resources from people at the point of a gun (commonly defined as robbery) as 'fairness.'

As the Judge notes, it is the responsibility of government to treat all people fairly--a.k.a. equal treatment under the law, or the rule of law. This is Jefferson's 'all men are created equal' statement. All are naturally born to be treated equally under the law. None are born to be treated favorably.

What the president is espousing is unequal treatment under the law--a.k.a. discretionary rule or the rule of man. The rule of man is arbitrary, and subject to personal discretion. My definition of fairness may be different from yours. But if I am in power then I can force my definition of fairness on you.

Will the American people slurp the latest version of fairness blather down? History would suggest yes, as precedents go back to Teddy R himself. The numbers are also favorable, as the majority of people like to employ the concept of fairness to rationalize why they should be permitted to forcefully take liberty and property from minorities in the name of 'democracy.'

Like the Judge, I am hopeful that enough people are waking up to these thinly veiled attempts seeking to alienate us from our natural right to freedom.

Wednesday, December 7, 2011

The Black Swan of Cairo

All the old paintings in the tombs
They do the sand dance don't you know
If they move too quick, oh-way-oh
They're falling down like a domino
--The Bangles

During his recently profiled presentation, Kyle Bass recommended that people in the audience read "The Black Swan of Cairo" (Taleb & Blyth, 2011). The paper is co-authored by Nassim Taleb of previous 'black swan' fame.

Bass is right. This is an insightful piece.

Although written in light of the political unrest taking place in Egypt earlier this year, the article is essentially an argument against the suppression of volatility and an argument for letting natural systems breathe with the inevitable ups and downs that are inherent to them.

The mortgage meltdown in 2007-8 and the current political upheaval in the Middle East share a common trait--they both follow prolonged periods of artificial suppression of volatility by policy makers in the name of 'stability.' Taleb and Blyth (2011) argue that such suppression pushes unobserved risks further into the tails of probability distributions. As the tails 'fatten,' the chances of extreme events grow--although things appear calm on the surface. At some point, however, the highly constrained system explodes in a massive blowup as pent up potential energy turns kinetic.

Paradoxically, actions taken seek to suppress naturally occuring volatility, while possibly well intended, tend to exacerbate volatility in the long run. Some examples:

Living in a super sterile environment...increases potential for disease.
Interest rate manipulation by central banks in the name of price stability...increases potential for big price swings.
Supporting a dictatorship...increases potential for political blowups.
Increasing regulation to reduce risk...motivates people to take more risk (moral hazard).

I find this model very intuitive as it is wholly consistent with principles of natural law. The authors quote Rousseau: "A little bit of agitation gives motivation to the soul, and what really makes the species prosper is not peace but freedom."

A nice insight toward the end of the piece: variation is information. Where there is no variation, there is no information. Thus, an intelligence apparatus seeking to distill info from political behavior in other countries will have a rough go of it when those countries have been manipulated by policies aimed at reducing variation.

The authors wrap it up nicely:

"With freedom comes some unpredictable fluctuation. This is one of life's packages: there is no freedom without noise - and no stability without volatility."

Another way of articulating the fundamental tradeoff between safety and freedom.


Taleb, N.N. & Blyth, M. 2011. The black swan of Cairo. Foreign Affairs, 90(3): 33-39.

Tuesday, December 6, 2011

Come Undone: Kyle Bass Redux

Oh, it'll take a little time
Might take a little time
To come undone now
--Duran Duran

After a very interesting exchange last year, Kyle Bass returned for another insightful panel discussion this year (the actual discussion starts about 3 mins in).

I follow my fair share of macro discourse. I find the thoughts presented here as among the most interesting that I've heard. Bass' grasp of the sovereign debt and leverage situation is on a different level than most.

He is convinced that a EU crack up is imminent. From a silver lining standpoint, he suggests that, after observing the pending Euro collapse from front row seats, US policymakers might actually be stunned enough to proactively reverse course. Interesting thought.

On the other hand, he notes that capital flight into US Treasuries might lull policy makers into thinking that there is actually no crisis in our future.

In any event, this 1+ hr dialogue is worth your time. Personally, I plan to take it in a couple more times in the next few days.

position in USD, SPX

Monday, December 5, 2011

Lollipop Guild

"You have no power here. Begone, before somebody drops a house on you too!"
--Glinda, Good Witch of the North (The Wizard of Oz)

Another sage letter by Dr J. In the front half he makes a compelling argument for a recession given the position of his forward looking indicators.

In the back half he discusses the EU situation given last week's 'coordinated' move by central banks. He reminds once again that the issue is one of solvency rather than of liquidity. Last week's coordinated dollar swap program is a short term measure aimed at boosting liquidity.

To remedy the solvency problem, it is likely that either banks fail or non-bank holders of EU debt must take haircuts. Thus far, no one wants to do that.

John ends with a section called "We represent the Lollipop Guild." His thoughts here are so wonderfully collected that I want to capture them here in their entirety:

"Frankly, I am concerned that Wall Street is becoming little more than a glorified crack house. Day after day, the sole focus of Wall Street is on more sugar, stronger sugar, Big Bazookas of sugar, unlimited sugar, and anything that will get somebody to deliver the sugar faster. This is like offering a lollipop to quiet down a 2-year old throwing a tantrum, and expecting that the result will be fewer tantrums.

"What we have increasingly observed over the past decade is nothing but the gradual destruction of the ability of the financial markets to allocate capital for the benefit of future growth. By preventing the natural discipline of the markets to impose losses on the poor stewards of capital, and to impose interest rates high enough to force debtors to allocate the capital usefully, the world's policy makers are increasingly wrecking the prospects for long-term economic growth. The world's standard of living (what we can consumer for the work we do) is intimately tied to its productivity (what we can produce for the work we do). That productivity requires scarce savings to be allocated to productive physical capital, and to productive human capital (primarily education).

"Nietzsche famously said, 'What does not kill me makes me stronger.' The corollary is 'What constantly rescues me makes me weaker.' The world will only stop looking for bailouts when policy makers stop handing them out."

Re-read until you understand.

Sunday, December 4, 2011

A Simple Model of Compromise

"A strange game. The only winning move is not to play."
--Joshua (WarGames)

Let's say you that value liberty. You believe that all individuals should be free to pursue their interests without forceful interference from others.

Others in the society in which you live, however, believe in forceful interference. They recruit government as an agent of force in order to coerce others to do what they want.

However, because those who believe in forceful interference like to view themselves as 'civilized,' they usually don't unleash their government agents until first 'negotiating' with you. Of course, the best outcome for you would be a negotiation where you give up no freedom. The worst outcome would be where you give up all of your freedom and assume the role of a serf.

The spectrum of outcomes can be pictured as follows:

0% free<------------------------->100% free

Those who believe in interference have already told you that they are seeking a compromise. In negotiations, compromise is seen as meeting a counterparty somewhere 'in between.' On the scale above, a compromise would result in a negotiated level of freedom somewhere between 0 and 100 percent. For the sake of our example, let's define a negotiated compromise as meeting the counterparty exactly halfway between on the freedom scale above.
At the bargaining table, then, you face one of two choices: 1) walk away from the table and retain 100% of your freedom, or 2) compromise and give up 50% of your freedom.

If you compromise, your freedom is now 100*.5=50% of the original level.

Down the road, if there is a second negotiation and you compromise again, then your freedom is 100*.5*.5=25% of your original level.

If there is a third negotion and you compromise, then you have 100*.5*.5*.5=12.5% of your original freedom.

The general form of this model where you compromise in each round becomes: % freedom maintained = 100*(0.5)^n where n = number of times that freedom is negotiated.

After seven rounds of negotions, your freedom is less than 1% of its original level.

When negotiations involve the level of freedom that you maintain, compromise results in loss of freedom. In negotiations with multiple rounds, compromising in each round results in a loss of freedom the declines geometrically with the number of rounds.

What If Rx

"I know what you're thinking, 'cause right now I'm thinking the same thing. Actually, I've been thinking it ever since I got here: Why, oh why didn't I take the BLUE pill?"
--Cypher (The Matrix)

The judge plays what if. Of course, he describes no make believe scenario. We are losing freedom by the day. And have been doing so for decades.

My greatest hope is that more people being to see through the Matrix. Right now, far too many have chosen the blue pill...

Saturday, December 3, 2011

Oath Keepers

"When your friends betray you, sometimes the only people you can trust are strangers."
--Danny Roman (The Negotiator)

Related to the previous post, meet the Oath Keepers, a group of cops who have sworn an oath to uphold the Constitution even if ordered to do differently by superiors.

Imagine the situation when Oath Keepers are ordered by higher ups to disarm or detain US citizens.

Disappearing Act

"These people can make us disappear."
--Nina Chance (Murder at 1600)

While US citizens were enjoying Thanksgiving leftovers last weekend, representatives of the US Senate led by John McCain (R, AZ) and and Carl Levin (D, MI) were secretly crafting additions to the National Defense Authorization Act (S 1867) that would declare the United States a battlefied and permit the military to intervene in domestic situations deemed a threat to national security. This intervention would include the detaining of US citizens indefinitely without due process.

The bill quickly swept thru Senate this week by a vote of 93-7.

The judge discusses the situation prior to the Senate voted with one of the few subsequent nay voters, Rand Paul (R, KY).

Once again, we have a clear example of Congress people who took an oath to uphold the Constitution crushing it into the ground beneath their feet.

The last time US troops regularly walked US streets was under the Lincoln regime. Should this bill pass the House and get signed into law by the president, the United States may become a perpetual state of martial law.

Friday, December 2, 2011

Spill and Spoil

Watching I keep waiting still anticipating love
Never hesitating to become the fated ones

US markets gapped higher this am on more optimism over a resolution of the EU situation coupled w/ a brighter than expected payroll number. About mid-day, however, stocks started leaking and sovereign bonds spreads begans blowing out.

The culprit: chatter that Congressional Republicans were at work to block IMF bailouts of EU countries.

Wow. Should that be true and come to fruition, it would be the first responsible action this group would have taken in some time. Using US taxpayer dollars to bail out the excesses of other countries is clearly unconstitutional.

But I'm not holding my breath...

position in SPX

Thursday, December 1, 2011

The Fox Dynamic

There is freedom within
There is freedom without
Try to catch the deluge in a paper cup
--Crowded House

With the overwhelming majority of media distorting messages to the left, it should be no wonder that Fox appears so different than the rest. In the late 1990s, Fox positioned itself to the right of other large media outlets and has been hugely successful since.

Why it took so long for a major outlet with a conservative slant to come about is perplexing. After all, there is a large conservative market out there--as verified by Fox's big viewership. It is also mystifying why there have been few 'me too' followers seeking some of the pie that Fox has been gorging in.

My best answer is that the supply of conservative journalists has been chronically low, meaning that there has been a deaarth of the most critical supply necessary for generating right leaning content. We know the general tendency for left-minded people to 'self-select' into journalism careers. Moreover, newsrooms full of liberal reported create a hostile environment for those who are not like-minded.

Now that Fox is in the mix, the dynamic appears to be shifting. Fox commands such a large market share that left leaning outlets now fight over a smaller piece of economic pie. Lacking the economic resources they once enjoyed, many of these outlets have been driven to the brink of failure. Opportunities for left-minded journalists are therefore shrinking.

As such, it is easy to understand why left-leaning media and their supporters despise Fox. Control of the media mechanism has been taken away from the Left, and it is doubtful that it will returned.

The big opportunity instead appears to be on the conservative side--particularly for enterprising outlets seeking to cut in on Fox's success. Quoting Fox's Brit Hume in Groseclose (2011):

"[If you are willing to pursue stories that traditional, liberal reporters aren't interested in,] it gets to be like picking up money off the street."

That money will remain easy pickings until competition intensifies.
no positions

Wednesday, November 30, 2011

Bazooka Time

Lieutenant Briggs: Suppose they panic and start shooting?
Harry Callahan: Nothing wrong with shooting if the right people get shot.
--Magnum Force

As noted in this morning's post, central banks got out the bazookas today in an attempt to blow away systemic deflationary forces that are driving Euro and US banks toward insolvency.

On the surface, the concerted central bank actions are clearly inflationary.

This post on zerohedge w/ Peter Schiff comments captures it well. The snippet at the end of the post REALLY captures it well:

"...this is merely the beginning as more and more inflationary actions have to be undertaken by central banks to save banks from being crushed by untenable debt loads. Whether they succeed in overturning the deflationary tsunami is unknown. What is certain is that they will bring fiat currencies to the [brink] of viability (and beyond) in trying."

As the snippet notes, the big question is whether this collective action will work. In late 2008, the Fed got out the fire hose of liquidity to stem the Lehman blowup. After a sharp relief rally on the news, however, markets resumed their downward path as the deflationary forces were not to be denied.

Hard not to wonder whether the same set up might not be in play here. Yes, the collective bazooka exceeds the power of the Fed's firehose. But the deflationary forces are more global in nature this time around.

Peter Schiff suggests that this is the time to load up on gold. That may turn out to be the case. Heck, gold popped 40 handles today.

But the other side of the trade is that the market forces pressing against the intervention are deflationary in nature.

And it's generally not nice to fool Mother Nature.

position in SPX, gold

Coordinated Action

"Extreme situations call for extreme measures."
--Terry Silver (Karate Kid 3)

This morning central banks around the world announced coordinated measures to enhance global financial system liquidity. Coordinated measures like this imply that central bankers see something severely wrong with the global financial system.

Their perceptions of systemic probs are correct, although as usual they are behind the curve.

Unfortunately, the planned approach--i.e., 'more liquidity'--does little to remedy the underlying problem, which is one of insolvency.

Nonetheless, the news jacked markets around the world. Domestic stock markets have opened about 2% higher. Gold jumped $30 on the money printing spectre.

My inclination is to 'fade' (read: sell) this news and will be looking for an opportunity to add to short side exposure.

position in SPX, gold

Tuesday, November 29, 2011

Examples of Distortion Theory

There's more to the picture than meets the eye
Hey, hey, my, my
--Neil Young

It is easy to find examples of the distortion theory of media bias in the everyday press. About a month ago outlets like the New York Times and LA Times ran pieces on drug shortages. The NYT and LAT articles both focus on what government is doing to stem shortages and suggests the cause of shortages relate to greedy health care providers. There is also innuendo that those providers require even more oversight.

Neither piece remotely considers the government's role in causing the shortage. When health care becomes socialized, consumption of health care goods becomes subsidized. A basic axiom in economics is that, when you subsidize behavior, you get more of it. Consumption of onco drugs et al therefore goes up. At the same time, government reimbursement policies place a ceiling on how much providers can charge for those drugs. Place a ceiling on price of a good and you'll get less of that good.

So, government policies have stimulated demand and curtailed supply. Shortages in such situations are not only predictable but inevitable. Yet, journalists in both the NYT and LAT pieces fail to touch this side of the story.

Then there is this recent CBS report on positive thinking and disease. The piece suggests that there is no valid scientific evidence between positive attitudes and outcomes for people with cancer. One immediate problem is that the report does not clearly define what is meant by 'positive thinking,' 'survival,' et al although there are surely many ways that these terms could be defined and measured. Thus you wind up with people discussing/debating different concepts as if they are equivalent.

The report cites a UPenn researcher who has found no relationship between positive thinking and survival (again, however defined). The researcher dismisses other studies contradicting his as 'bad science.' Yet, the CBS report does not investigate or clarify why other studies should be considered 'bad science' while the UPenn study should be considered valid.

Further, a variety of 'positive thinking/positive outcome' cases are cited in the report. Are these cases to be considered random events/flukes? Or might they suggest variables or special subgroupings that the UPenn study is missing. The Yale research cited near the end of the report suggests perhaps the latter, but the reporter does not make a connection.

Consistent with Groseclose's (2011) distortion theory, neither of these examples appear to report incorrect 'facts.' But both examples omit important facts and perspectives.

By omitting these facts and perspectives, both examples are slanted toward certain conclusions. In the first example, a reader is tempted to conclude that health care providers are the problem and government is necessary to make things better. In the second example, the reader is tempted to conclude that individual attitudes and initiative do little to alter acute illness.

Such conclusions are consistent with favorite protagonist/antagonist pairs of the Left: pro government/anti business; pro victim/anti individual initiative.
Because they may not know better, dull minds are liable to slurp the messages up. Thus, as Groseclose (2011) proposes, liberal media bias is likely to distort the American mind.

Monday, November 28, 2011

Skeptical Spectacle

If I'm losing control, will you turn me away
Or touch me deep inside?
And before this gets old, will it still feel the same?
There's no way this can die
--Pat Benatar

If we were to assign news-related causes to today' 2-3% stock market rally, it would probably be a blend of better than expected Black Friday sales plus the spectre of (another) Euro bailout. Of course, we learned today that a) the IMF had no Italian bailout program in motion, and b) last week's retail sales numbers may be greatly exaggerated.

So perhaps today's move is just one more rally to blow off some near term selling pressure.

Technically, an upside move 'works' to SPX 1220.

Other technical evidence, however, is not in synch with a sustained upside move. After an early move lower, Treasuries recovered most of the day's losses. Bank stocks gave up a big chunk of their early gains. The dollar also closed near even after early selling. Oil closed near its lows.

Hard not to view these 'divergences' with some skepticism about the prospects for big upside from here. Time will tell, of course.

Personally, I did a whole lot of nuttin' today. Will likely put back on some of the incremental short exposure ditched last week should prices continue higher toward 1220. Other than that, I continue to be active in the physical metals market, buying both gold and silver.

position in SPX, gold, silver

Cash Rich, Balance Sheet Poor

Reached out a hand to touch your face
You're slowly disappearing from my view
Appearing from my view
--A Flock of Seagulls

Interesting weekly comment by John Hussman, particularly the back half devoted to corporate balance sheets. Many bulls claim that corporations are 'flush with cash' and that corporate balance sheets 'have never been stronger.' As Dr J demonstrates, these claims have little merit.

When compared to the amount of debt on corporate balance sheets, cash has been coming off historical lows. Cash as a fraction of net worth and total assets is also small (in the 5-10% range).

As such, much of the 'cash' on corporate balance sheets comes from debt. Corporations have been building cash in this manner due to cheap financing terms.

Make no mistake, the dominant feature of today's corporation continues to be debt and leverage, not cash.

John also comments on another eye-opening trend: the decline in tangible assets in non-finance corporations. The fraction of tangible assets to total assets is now below half. The remaining assets are financial assets such as debt securities and stocks.

As John notes, "This is striking, in that we presently have a menu of prospective returns on financial assets that is among the most dismal in history."

This is another argument for tangible assets (e.g., commodities) over financial assets, and for companies that are weighted toward more tangible assets.

position in commodities

Sunday, November 27, 2011

Loan Ranger

"I got the Holy Spirit. You should get on it. It's a good train."
--Lyle (The Italian Job)

The IMF is said to be preparing a $800 billion loan for Italy in case its debt crisis worsens. The amusing quote here is "[Italy Prime Minister Monti] could draw on the money if his planned austerity measures fail to stop speculation on Italian debt..."

It's only speculation, of course, when price is going in the 'wrong' direction.

We should note that the US is the largest contributor to the IMF. So, once again, we appear to be stepping over the Constitution to fund the problems of other countries on the backs US taxpayers.

Friday, November 25, 2011

Distortion Theory of Media Bias

Haven't you heard, it's a battle of words
The poster bearer cried
Listen son, said the man with the gun
There's room for you inside
--Pink Floyd

Groseclose (2011) builds on previous theoretical concepts to propose a 'distortion theory' of media bias. The gist is that the stories that journalists select and how those stories are presented are shaped by the biases that journalists possess. Because an overwhelming majority of journalists are biased Left, it follows that we should observe general Left-leaning bias in media content.

It is straightforward to view Groseclose's distortion theory as an application of confirmation bias or selective reasoning to journalistic processes. Simply, what journalists decide as worth reporting will colored by their views of the world.

On any given day, there may be dozens of issues that journalists might choose to cover. On a particular issue, there may be hundreds of facts that might be relevant. It is impossible for journalist to capture them all. Instead, journalists can only report a sample.

Because of their own ideological views, however, journalists do not report a representative sample of stories or facts. They give us a biased sample. A sample that is biased Left.

Groseclose states:

"While the job of a journalist is to shine a light on the facts, in the current state of the U.S. media, journalists do not shine their light straight. Instead it is as if they use a prism, bending the light and causing it to make a left turn. The end result is that we, the readers and viewers of the news, are more likely to see facts from the left side of the spectrum." (2011: 68)

Left unchecked, consumption of biased media is likely to cause general political views to take a Left turn as well.


Groseclose, T. 2011. Left turn: How liberal media bias distorts the American mind. New York: St Martin's Press.

Thursday, November 24, 2011

The Forgotten Man

I'm gonna teach you
How to sing it out
Come-a, come-a, come-a
Let me show you what it's all about
--Jackson Five

William Graham Sumner was a professor of sociology at Yale in the late 1800s. Unlike many of his contemporaries, Sumner refused to be sucked into socialistic fads coloring academic work emanating from European universities.

Instead, Sumner focused on social theory surrounding the nature of liberty and contemporary society. At first glance one might think that space to be crowded. Sadly, however, the vacuum created by the rush of many academics toward emerging theories of socialism left Sumner in a somewhat solitary theoretical position.

A gain for us, though, as it served to highlight Sumner's thought processes for all to consider.

In 1883, Sumner wrote a series of essays for Harper's Weekly on the subject of worker relations. He expanded two of his favorite essays from the series in an address given to audiences in New York and Connecticut that same year. The address as well as the essays are often famously referred to as "The Forgotten Man."

This is a remarkable essay for the time, and it rings true today.
One of the more thought provoking features is how Sumner introduces the Forgotten Man using some 'social justice algebra:'

"As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C should do for X or, in the better case, what A, B, and C should do for X. As for A and B, who get a law to make themselves do for X what they are willing to do for him, we have nothing to say except that they might better have done it without any law, but what I want to do is to look up C...I call him the Forgotten Man...He is the victim of the reformer, social speculator and philanthropist..."

The Forgotten Man wears scars from the truncheon swung by the Welfare State.

Wednesday, November 23, 2011

Democracy, Compromise, and Progress

I got a Gibson
Without a case
But I can't get that even tanned look on my face
Ill fitting clothes
I blend in a crowd
Fingers so clumsy
Voice so loud
--The Who

This article makes a number of thoughtful points.

Variation is a basic axiom of nature. Innovation results from variation. In most if not all cases, progress must come out of an extreme minority of opinion, not out of majority opinion.

Democracy squelches innovation by imposing the will of the majority on the minority.

Compromise is also prone to stop progress. "Truth is not a thing that can be compromised. A thing is right or it is wrong. Principle cannot be compromised; it can only be abandoned. The route to the discovery of truth is to allow a person to be wholly right or wholly wrong. Compromise is bound to be wrong."

An essential feature of effective government is to protect the rights of minorities from plunder by the majority. The ultimate minority is one person. Thus, the goal of effective government is to protect each person against the plunder of one or more persons.

The protection must be general--i.e., it must protect all persons equally.

Doing so maximizes the chance of progress.

Sacrificial Lamb

Jumpin' up, fallin' down
Don't misunderstand me
You don't think that I know your plan
What you tryin' to hand me?
--James Gang

Tossed about 20% of my SPX short to the trading gods in respect of the move lower that we've seen. Technically, we're approaching what might be thought of as a 'minor' support level at 1160ish.

More substantial support rests at about 1120ish.

Will look to piece out more short exposure on extended weakness. Will also look to add to my metals exposure should they continue weak as well.

position in SPX

Bids Wanted Bunds

We are matching spark and flame
Caught in endless repetition
Life for life we'll be the same
I must leave before you burn me
--The Fixx

In the perpetual train wreck that is Europe, Germany experienced a 'bids wanted' situation in their bond auction last nite. The country could not get off more than 1/3 of its 10 yr notes.

Now that the best house in a bad neighborhood is having trouble getting credit, how distant can a Euro implosion be?

Tuesday, November 22, 2011

Marbury v. Madison

All for freedom and of pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

The presidential election of 1800 was a 'rematch' of the intense debates that took place during the constitutional ratification process a dozen years prior. In one corner were the Federalists with their incumbent candidate John Adams. The Federalists, politically close to modern Big Government Democrats and Republicans, favored a broad reading of the Constitution in which a strong central government prevailed over weaker states.

Many people were not pleased with the power that the federal government had been assimilating under the Federalist regimes of Washington and Adams. High profile dissenters included Jefferson and Madison, who saw the country veering away from the original intent of the Constitution. Thus, the Democratic-Republican Party was born, with a Jefferson presidential ticket in play for the 1800 election.

Parenthetically, the Democratic-Republicans were popularly referred to as the Anti-Federalists as people resurrected the familiar label from the old Constitutional debates.

A hard fought election found the Anti-Federalists winning the day--not only of the presidency but also of control of Congress.

Wishing to maintain power through the judicial system, the lame duck Federalist Congress passed a law that created 42 additional federal judges in February 1801. Two days before he left office, Adams appointed Federalist judges to assume these newly created benches to 'pack the court' in his party's favor. These appointees became known as the 'Midnight Judges.'

William Marbury was one of those appointees. He was nominated to be Justice of the Peace in Washington DC, which was the lowest rank of all Adams appointees.

To extend the Federalist judicial power grab, John Marshall, who was Adams' secretary of state, took over as Chief Justice of the Supreme Court on March 3, 1801. The next day Marshall swore in Jefferson as the 3rd president of the United States.

When Jefferson was sworn in, several Midnight Judges, including Marbury, had yet to receive their official commissions. Jefferson swiftly moved to declare these commissions null and void--basically because the official paperwork never came through under the Adams administration. Jefferson's newly appointed secretary of state Madison was instructed not to hand over any more commissions to the Midnight Judges.

Marbury sued, and took his lawsuit directly to the Supreme Court, pursuant to the Judiciary Act of 1789. Marbury sought a writ of mandumus--a court order requiring a government official to carry out a nondiscretionary appointment. Stated differently, Marbury wanted a court order that forced Madison to hand over his commission.

The Supreme Court headed by Marshall pondered the case for two years. While it appeared that Marbury had earned a valid commission, the High Court was distrubed by the Judical Act of 1789 itself. The Act, i.e., Congress, gave the Supreme Court original jurisdiction for cases like Marbury's.

However, the Constitution did not. Constitutionally, original jurisdiction for the Supreme court is limited to "all cases affecting Ambassadors, other public Ministers and Consuls, and those in which a State shall be Party. In all other Cases before mentioned, the supreme Court shall have appellate Jurisdication." (Article 3, Section 2)

The Court reasoned that, although the Judicial Act of 1789 gave the Supreme Court authority to afford a remedy to Marbury, the act of Congress authorizing the Court to hear the case was not grounded in the Constitution. The Court's authority was therefore null and void.

Coming from a unanimous opinion written by Chief Justice John Marshall, this was a remarkable ruling. Despite his Federalist urges to centralize power (and he would indeed satisfy those urges in later rulings), Marshall could not reasonably deny the limits to government power defined by the Constitution--at least in the case. As Marshall saw it, Congress is a creature created by the Constitution; Congress does not have the power to trump its creator.

Marbury v. Madison is the most important legal case in US history because it established the principle of judicial review. Judicial review is the power of the Supreme Court and all federal courts to examine statutes (and presidential behavior) and to declare them void if found to be inconsistent with the Constitution.

Marshall wrote: "it is the very essence of judicial duty to decide if two laws conflict, which shall supercede, and whether any laws conflict with the Constitution, which is superior and must prevail."

This is a position wholly consistent with Natural Law, upon which the Constitution is based.

It did, however, create a politically sticky issue. With Marbury, the High Court granted itself the authority to declare the will of the people (as represented by Congress) null and void if that will contradicts the Constitution. Positivists argue that the will of the people should prevail regardless of what the Constitution says. Moreover, they say, there is no such constitutionally enumerated power for the Court to rule on a statute's constitutionality.

As such, Marbury can be seen as a two edged sword. It permitted judges to invalidate laws that violated the natural rights of individuals. However, it also gave the Supreme Court incredible trumping power.

It wouldn't take power hungry politicians long to figure out how to employ that judicial trumping power in their favor.