Tuesday, May 31, 2011

The Capitol Building Loves Anacott Steel

"No, Mr Gekko, that wouldn't have been legal. That's insider information, isn't it?"
--Bud Fox (Wall Street)

I have never been a big proponent of insider trading laws. Discerning what constitutes publicly available information is difficult and practically unenforceable. Witness the pathetically low number of cases actually pursued vs the plethora of big price/volume moves ahead of news.

It is often said that insider trading laws level the playing field for the Little Guy. This is pretty laughable when you look at the Little Guy's performance vs the Big Guy since the enactment of insider trading laws. Moreover, if the Little Guy is coaxed to enter stock markets and trade 'em under the perception that insider trading rules make things fair, then who exactly benefits from these laws? Don't all Little Guys have to open brokerage accounts, pay commissions, pay asset management fees?

There's a nice case to be made that insider trading rules have created a huge windfall for the Big Guys.

If there is one group where insider trading rules should apply, then it is government officials. Because government officials can reallocate resources by force, it would be very easy for them to front run markets. A Washington official who has advanced notice that the federal government will award a big contract to, say, General Electric (GE) or Lockheed Martin (LMT), could scoop tens of thousands of shares ahead of the announcement and make a killing.

Not surprisingly, however, insider trading laws applicable to everyone else do not apply to Washington. And guess what? Studies show that the stock portfolios of members of Congress beat the market by 6 to 10 percent annually.

These are what academics like to call 'abnormal returns.' The best hedge fund managers in the world would simply call them 'enviable.'

Hey, now there's a thought for getting our debt situation under control. Capitol Capital, a hedge fund managed by the Hill's best traders that applies its abnormal returns toward our $14 trillion in public debt.

no positions

Sunday, May 29, 2011

Better Late than Never

Nothing is planned by the sea and the sand
--The Who

Over the past year or so, KC Fed head Thomas Hoenig has been increasingly vocal that the Fed has morphed into a serial bubble blower. Rather than forcing rates toward zero and pushing people out on the risk curve, Hoenig thinks the Fed should raise rates to encourage saving and capital accumulation.

Hoenig is not an FOMC voting member this year. As an FOMC member in 2010, however, Hoenig voted against stimulus policy decisions on 8 different occasions.

My preference, of course, if for no central bank at all. Until that occurs, Hoenig is pointing the Fed in the right direction.

Hoenig retires in the fall. Can't help but wonder whether his conscience has him wanting to come clean.

Saturday, May 28, 2011

Cash is Not Trash

They can beg and they can plead
But they can't see the light, that's right
'Cause the boy with cold hard cash
Is always Mr Right

Jim Grant sees some value in large cap stocks like Cisco (CSCO) and Johnson & Johnson (JNJ). Generally, however, he sees most asset classes as richly priced.

He suggests that one investment strategy in the current environment is to simply hold cash, because the opportunity cost associated with not being in T-bills and other short term instruments is 'not much.' Although you make next to nothing on the cash, it is available when other asset classes become more attractively valued. Overvaluation, he observes, often 'passes in a thunderclap' and those who are liquid can 'get fully invested in a comfortable way.'

This strategy has made sense to me for some time. I find it interesting coming out of Jim Grant's mouth because of his inclination toward inflationary macro scenarios. What he is describing his more consistent with what happens in a deflationary situation. After all, why hold cash if you think its value will be inflated away.

Currently my cash level is just over 50%. I wouldn't mind bumping this to the 60-70% range, and will be looking to sell strength to do so.

positions in CSCO, JNJ

Friday, May 27, 2011

Chicken Littles

"Wait a minute, fellows. I was just thinking. I really don't want to see the Wizard this much. I'd better wait for you outside."
--Cowardly Lion (The Wizard of Oz)

President Obama maintains that the war in Libya is not a war. The judge and his guest note how laughable this farce is.

The discussion turned to how Congress could abdicate their Constitutional responsibilities to declare war. Their conclusion: Congress is full of cowards. Rather than defend the Constitution as they pledge to do when they enter office, those on Capitol Hill slink away on the path of least resistance.

When it comes to Congress, 'public service' is one of the all time greatest misnomers.

Thursday, May 26, 2011

Why Progress Against Disease is Impaired

Drawn into the stream
Of undefined illusion
Those diamond dreams
They can't disguise the truth
--Level 42

Interesting albiet older article on former Intel (INTC) exec Andy Grove's crusade against Parkinson's disease. Grove was diagnosed about 10 yrs ago and has since committed $60+ million of his personal fortune plus much of his attention toward progress in treating the disease.

A theme of this article is Grove's frustration with the slow paced, inefficient nature of the process--even with projects that he has funded.

Grove's frustration is understandable given his background. Andy Grove founded and grew one of the most successful enterprises on the planet. He gained his industrial experience in a market environment that approaches the unhampered ideal. Info tech hardware and software is relatively unregulated, highly competitive, and global. Lack of government intervention has driven textbook 'creative destruction' behavior, where operators spin on the hampster wheel, constantly innovating and driving down costs to stay alive.

Speed, innovation, and market focus. This is the environment that Andy Grove is familiar with--one that he seemingly is using as a benchmark in his Parkinson's pursuits. Unfortunately, the health care sector in general and drug production in particular are not very market driven.

To understand the issue, let's examine a simplified version of the pharmaceutical supply chain. Upstream are activities involved in basic or 'deep' research. Projects here address general research questions that may not have immediate or specific application. What genomic markers are associated with the onset of Parkinson's? Are certain demographic factors more predictive of breast cancer?

Deep research findings generate basic raw materials for more focused efforts downstream in the supply chain.

An important characterist about deep medicinal research as currently practiced is that these operations are usually not done by private enterprise. Generally, and increasingly, basic pharma research is conducted by government sponsored enterprises (GSEs). GSEs are either government agencies or they receive federal assistance (direct dollars, subsidies, tax incentives).

Government's presence in basic research crowds out similar activities by private enterprise. Government directly or indirectly controls much of the industry' capacity, and constitutes a barrier to entry to private enterprises who want to engage in basic research. Moreover, encumbant operators such as large pharma may be content to 'outsource' basic research to GSEs to reduce cost and free up resources for other endeavors.

The problem with this approach is that basic research lacks market connecction and incentives. Projects are likely to proceed more slowly and toward the wrong goals. How, for example, are correct research priorities to be established in the absence of information about supply and demand, and risk and reward (as established by prices)? What incentive do university lab researchers have to speed laboratory progress?

Thus Andy Grove laments about poor research project priorities, snail's pace progressm, no double loop learning, etc...

Deep research is rarely an end in itself. Information and knowledge gained upstream must be transformed downstream into commercial products and services that treat disease.

For drugs/medicines, the downstream link is dominated by private enterprise. Private enterprises procure the knowledge created by upstream deep research (via alliances, buyouts, public info, etc) and use the information to develop medicines.

This environment is highly regulated. Patents grant companies with legal monopolies over certain treatments, which keep prices high and squelches innovation by new entrants. The Food & Drug Administration (FDA) oversees the new medicine approval process, which raises costs and slows development speed. Moreover, promising treatments that fail to meet FDA regulatory hurdles are barred from the market.

Once again, incentive to be fast, innovative, and efficient is attenuated by distorted (or non existant) market signals. And, once again, we find Andy Grove shaking his head at the lack of progress toward his goals.

But it is no mystery. Hampered market conditions dominate upstream and downstream in the medicinal supply chain.

As long as this is the case, the medicinal supply chain is likely to chew thru enormous quantities of economic resources on the way to producing a dearth of valuable treatments. Medicines that do surface will, on average, take painfully long times to produce.

We reap what we sow...

positions in select pharma

Wednesday, May 25, 2011

Silverado Tornado

"You're too fast for me, that's all I know."
--Brooks (The Rookie)

Exited my three week old SLV trade on today's strength. A couple of adds as SLV leveled off in the 32-35 range helped this trade along.

Perhaps it will continue higher on a quest to fill the gap at 38ish. This level also coincides w/ the 50 day moving avg.

But my time horizon going into this trade was shorter term, and I was fortunate to be able to sell into strength today.

While the volatility has declined somewhat, this was still one one of the jumpier positions that I've held in a while. Hard to imagine folks trading this thing w/ leverage. 
no positions

Tuesday, May 24, 2011

Deflation Dimension

So I went to the bank
To see what they could do
They said son, looks like bad luck
Gotta hold on you
--Simply Red

During his CFA speech, Grant offered a definition of deflation that I had not quite considered before. He argued, as we have on these pages, that deflation is not simply falling prices. After all, prices are likely to fall in unhampered markets as productivity increases. Higher productivity means greater abundance. More supply of economic resources per monetary unit means lower prices.

Stated differently, lower prices are natural outcomes of free markets.

Instead, Grant suggests that deflation is 'too little income chasing too much debt. It is a disorder of lending and borrowing.'

He notes that in a credit crisis, inventories (whether they be hard goods or securities) cannot be financed and therefore are thrown on the market. Prices broadly fall as a consequence.

Deflation, therefore, is not the Wal-Marts (WMT) and tech hardware industries of the world getting more efficient. Rather, deflation is excess credit leaving the system.

What's particularly new and vivid to me about Grant's explanation is the notion of inventories of all sorts being thrown on the market because they cannot be financed.

When you hear market watchers gasp that 'they're selling anything that isn't nailed down,' deflation is likely at hand.

no positions

Red to Gold

Drifting through eternal systems
Language spoken no one listens
--Elizabeth Daily

Another remark on Grant. In his 5/20 letter, Grant reprints a speech he gave at the CFA annual meeting in early May in Scotland. In it, he builds the case for the Chinese 'red capitalism' being an exaggerated version of the hampered market model practiced in the US.

He suggests the situation in China as a 'description, writ large, of the salient error of all the world's monetary arrangements--namely the elevation of the technique of command and control over the free interplay of supply and demand.'

Grant then makes the case for the gold standard as a means for putting markets back in control.

position in gold

Monday, May 23, 2011

Chinese Checker

"I know the vibration was not normal."
--Jack Godell (The China Syndrome)

Jim Grant is one of my favorite reads. His newsletter, Grant's Interest Rate Observer, is a bit out of my price range but I'm fortunate to score an issue every now and then.

His May 20th newsletter discusses troubles under the hood w/ China's banking system. While China's markets and massive growth have been all the rage, people seem to forget that a socialist regime oversees the country. Central planners control capital allocation on a macro scale. When bureaucrats sitting in a room are deciding how to allocate capital, they are likely to make more mistakes of longer duration than individuals making decisions in unhampered markets.

Grant suggests that Chinese banks are holding gobs of non-performing loans--loans that banks were required to take on per govt officials. These loans are currently not marked anywhere close to market.

This situation, of course, is reminscent of the credit crunch faced by banks in the US. Grant suspects that, because the Chinese system is so opaque, the potential exists for big problems if things start to go bad.

His 'new working hypothesis is that the banks of the People's Republic...will execute the greatest belly flop in the history of paper money.'

Should this come to pass, there is no way that the problem would be contained to China.

Bargain Hunting

I'd pay any price just to get you
Work all my life and I will
To win you, I'd stand
Naked, stoned, and stabbed
--The Who

The laughable shop closing laws in Germany are coming down. Even in authoritarian regimes where the State seeks to shape a better human being via force, it is impossible to keep market forces at bay. Pockets of resistance to State force pop up (e.g., black markets). And as more people taste the freedom and its capacity to improve standard of living, pressure builds until the system tips.

This month Utah became the first state in many years to legalize gold and silver coins as currency. More than a dozen other states have similar laws brewing. Market forces are responding to another stimulus of State oppression.

The Tea Party movement is another example.

Despite a pervasive constructivist mindset, natural law in the form of market forces cannot be suppressed.

positions in gold, silver

Saturday, May 21, 2011

Gradual Slavery

Morpheus: The Matrix is everywhere. It is all around us. Even now, in this very room. You can see it when you look our your window, or when you turn on your television. You can feel it when you go to work...when you go to church...when you pay your taxes. It is the world that has been pulled over your eyes to blind you from the truth.
Neo: What truth?
Morpheus: That you are a slave, Neo. Like everyone else you were born into bondage. Into a prison that you cannot taste or see or touch. A prison for your mind.
--The Matrix

Fine monologue by the judge on the progression of the United States from a land of the free to police state. The judge suggests that a significant factor in this progression has been its gradualism.

Radical disruptive change is readily noticeable to the citizenry and likely to be put down if undesirable. But gradual change, as metaphored by the oft used 'boiled frog' story, often goes unnoticed by the public. Chains of bondage wrap gradually like vines of ivy growing around a trellis.

It should be noted that many socialist movements (e.g, Fabians) believe that socialist principles are best advanced thru gradualist rather than revolutionary means. The judge provides some history that supports a gradualist approach at work here in America.

One explanation as to why the Tea Party and other movements have gained traction recently is that gradualism has given way to more disruptive approaches over the past few years, thus waking more people out of their slumber. They now see more clearly how far we have strayed from freedom.

You can probably count me among this group.

Insightful quote offered by the judge near the end of his monologue:

"There are none who are so enslaved as those who falsely believe themselves to be free."

Thursday, May 19, 2011

Selling Strength

They're seeing through the promises
And all the lies they dare to tell
Is it heaven or hell?
They know very well

Am moving into 'sell strength' mode. While I believe that there is some value in select large cap stocks, there are just too many negative factors that, in my view, serve as headwinds against higher prices here.

Beyond the myriad macro factors (debt, EU, Mid East, etc), overall metrics suggest conditions of extreme stock market valuation. Couple that with the pending end of QE2 and one has to wonder what will keep stock prices levitating at nosebleed levels.

I have therefore been trying to use price to my advantage to unwind some risk. Sold positions in Intel (INTC) and Merck (MRK) yesterday. On further strength, will likely do same for Johnson & Johnson (JNJ). All of these stocks have had nice 15-20% moves off their spring lows and are trading near the upper end of technical band tags.

Should the price action in Cisco (CSCO) and Microsoft (MSFT) strengthen, I may make some partial sales here as well although I still perceive some value in these names. Currently, however, neither of these stocks can get out of their own way--which may be telling in and of itself.

If commodity prices strengthen, then I will likely lighten up on a number of related ETFs although I plan to retain a core position in the SPDR Gold Trust (GLD).

Hard not to eye the action in the general indexes without wondering whether we're putting in a significant top. First near term confirmation of such in the SPX would be a decisve break of the multi-month uptrend line (1330ish).

positions in CSCO, MSFT, GLD, SPX

Wednesday, May 18, 2011

The Real Economic Experts

"What God desires is here (head), and here (heart), and what you decide to do everyday, you will be a good man...or not."
--Hospitaller (Kingdom of Heaven)

People state that they know little or nothing about economics. But they likely know more than they think or admit to.

Economics involves the production, distribution, and consumption of goods and services. These goods and services are scarce resources and therefore need 'economizing.'

Economizing is a behavior that we all engage in. Over time, we all gain economic skills because we must allocate scarce resources according to our taste preferences.

What people probably mean is that they know little or nothing about economics as taught in school. This is probably a good thing rather than a detriment. Economics as a science has made little progress in the last few decades. In fact, there is an argument to be made that the drivel filling most college economics textbooks constitutes a digression in the formal field.

Mises (1949) quite aptly titled his magnum opus in economics "Human Action." Contrary to popular belief, complex mathematics is not central to economics. Instead, economics centers on human behavior. Even core concepts like 'supply and demand' are constructs that reflect the actions of individuals done in the context of resource scarcity.

Next time you encounter an economic problem being discussed by so-called experts, frame the problem in your terms. Ask yourself how the situation applies to what you do when you are economizing.

Chances are, you'll be further ahead than those who stay glued to 'expert' economic analysis.


Mises, L. 1949. Human action. New Haven: Yale University Press.

Police State

Over the counter with a shotgun
Pretty soon everybody got one

Last week the Indiana Supreme Court ruled that residents have no right to resist unlawful police entry into their homes. The majority of justices in the 3-2 ruling contended that permitting resistance 'unnecessarily escalates the level of violence' to all parties involved.

But it is the right of all individuals to protect themselves. This right is clearly specified in the Fourth Amendment.

This ruling is clearly unconstitutional. If it cannot be overturned, then it is one more indication that our system is truly broken.

btw, earlier in the week, the same court upheld police use of no knock warrants, which also blatantly violate the Fourth Amendment.

This is what a police state looks like.

Tuesday, May 17, 2011

Locavore Store

"There's no place like home."
--Dorothy Gale (The Wizard of Oz)

The author of this article offers a harsh take on the 'buy local' crowd. He argues that, when it is done to stimulate local economies or to save the planet, buying local is a bad idea. Buying local only makes sense when there's 'good value.'

But individual taste preferences vary. What seems terrible value to one individual may be great value to another. Some may not be willing to pay $2 more per pound for locally grown veggies but others may. Paying more may be a fine trade for people who enjoy psychic income from supporting local growers or eliminating a carbon footprint or two.

Locavores that vote with their wallets signal to producers that their output is valuable and that they should produce more. Over time, competition will drive even better quality (quality as defined by the buyers) local produce at lower prices.

Demand has been growing for local as well as green products. Much of this demand has been of the pure, grassroots type. Classically, supply follows demand in such instances. A nice demonstration of free market dynamics.

What pollutes this system is government intervention. If, for example, government decides that it is a good idea to subsidize local growers or to 'invest' in green technologies to create local jobs, then signals coming from the market get distorted, capital gets misallocated, and standard of living goes down rather than up.

Some of this is already going on courtesy of the Obama administration.

Hopefully this meddling will cease, lest local markets will not develop to their full potential.

Monday, May 16, 2011

Defining Politics

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

In the civic context, politics is commonly defined as (1) the science and practice of government, or as the activities associated with government.

The operative characteristic of government is force. Government either forces people to a) do things that they do not want to do, or b) restrain from doing things that they do want to do.

What separates the use of force by government from the use of force by other entities is that the use of force by government is sanctioned by some fraction of society. Government force can be sanctioned by a ruling fraction of people. That ruling fraction may be small in the case of a monarchy or oligarchy. Or the ruling fraction may be large in the case of a democracy.

Government force can also be sanctioned through the rule of law. In this case, procedures recognized by the community as binding specify the legitimate domain of government force. The sanctioning fraction of society needs to be very large, otherwise the law would not be viewed as binding or legitimate.

As such, we can redefine politics as (2) the science and practice of using force sanctioned by some fraction of society, either through discretionary rule or through the rule of law.

Politics has a relational meaning as well. We speak of 'office politics' or of people acting 'politically.' In such cases we are typically referring to a desire to obtain resources by power or influence rather than by toiling to produce those resources through personal labor.

Because a basic axiom of human behavior is preference for leisure over labor, politics becomes a means for obtaining resources and satisfying desires on the back of the effort of others. Politics provide an opportunity to 'get something for nothing.'

When the scope of govenment includes capacity for taking wealth from some and redistributing it to others, then people are likely to seek political means for obtaining wealth and satisfying their desires. In this context, politics can be seen as (3) the science and practice of using force sanctioned by some fraction of society so that some may obtain wealth produced by others.

Sunday, May 15, 2011

The True Addiction

You can't sleep, you can't eat
There's no doubt, you're in deep
--Robert Palmer

The addiction analogy used by the judge as it relates to the US debt problem is wholly appropriate. We have used a similar analogy many times in these pages (e.g., here, here).

The judge focuses on prohibiting the debt ceiling from increasing as a means for us to kick the habit. But the true addiction is not borrowing, it is spending. Theoretically, we could restrain Washington from borrowing more, but they could still spend more via taxation and money printing.

Truly combating our addiction would mean cutting off the federal government's direct access to economic resources.

Government access to economic resources was greatly expanded by two policies initiated during the Progressive Era. The Federal Reserve Act established a central bank in this country with authority to create money and credit out of thin air. The Sixteenth Amendment gave the government authority to confiscate economic resources from individuals created through productive work.

Our true addiction is spending. Treating the addiction requires reversing the two policies that give government the resources to spend.

Saturday, May 14, 2011

Leveraging Time

I've been around for you
I've been up and down for you
But I just can't get any relief
--Reo Speedwagon

Building on the previous post, there should be a relationship between leverage and time preference. Time preference reflects desire to satisfy needs in the present.

Individuals with high time preference consume resources rather than save them. Investments are shorter term in nature. Positions are put on a 'short leash' using a trading mentality.

Individuals with low time preference are prone to save resources for future consumption. Investments are longer term in nature. Positions are put on a 'long leash' using an investing mentality.

Increased leverage should reduce time preference. Because leverage magnifies losses, people engaged in carry trades must react relatively quickly to prices that move against them, lest they lose money much quicker and approach insolvency.

So, the next time you wonder why individuals, organizations, governments increasingly seem to fixate on the short term, the answer is simple.

It's the leverage, cookie.

position in SPX

Transition Condition

Nothing is planned
By the sea and the sand
--The Who

One phenomenon that is perplexing many who believe in the Big Inflation thesis is the behavior of bond markets--particularly government bond markets. Theory says that yields should go up with inflationary expectations. People should be selling bonds today out of worries that the real value of their bonds will go down as their coupons get paid back in dollars that are lower in value.

That theory has not been working out well in practice. Despite the $trillions created by the Federal Reserve over the past couple of years, and commodity prices screaming higher, long bond yields have not gone to the moon as many inflationistas have forecast.

Perhaps the theory doesn not account well for the dynamics of transitionary periods.

For more than two decades, central  banks have been suppressing interest rates and offering credit on the cheap. This credit has gone into all kinds of risky assets--stocks, commodities, real estate, plants and equipment. Bonds are also a risky asset class although they are often perceived as less risky than other categories. This is particularly true of bonds issued by the US government.

The easy credit spawned a secular boom in leveraged risk taking. Individuals, organizations, and governments have all borrowed at low interest rates and invested in assets deemed to return something more than the cost of carrying the loan. This behavior is also known as the carry trade.

Leverage magnifies returns when prices are going in your direction. A few years back people could buy a $500,000 house with little money down and low interest rate, and flip that house a year or two later for $750,000, generating an enormous return over the cost of carry.

As many have discovered over the past couple of years, leverage magnifies losses as well. When firms like Bears Stearns and Fannie Mae (FNMA) were levered 30:1 or higher in mortgage related derivatives, it did not take much decline in home prices before their assets were less than liabilities, creating conditions of insolvency.

In leveraged systems, falling prices motivate many to close out their carry trades. Risky assets are sold, dollars are bought back, and loans are paid off. We saw, and continue to see, a lot of this since 2007-2008.

But not all carry trades are taken off. Some leveraged investors, rather than totally getting out of risk, merely substitute less risky assets. Thus, rather than using credit to buy stocks, carry traders buy bonds instead. Leverage is still in the system, but it is located in assets classes deemes 'less risky.'

One explanation as to why bond yields have not yet backed up is that much leverage remains in the system. Carry traders are content to earn the spread between nearly 0% borrowing cost from the Fed and ten year T-notes paying 3.1%.

But this is a transitory situation. Huge amounts of leverage cannot last forever. Central banks can seek to force spreads open but over time they must collapse as resources borrowed from the future are paid back (or defaulted upon). Short rates will rise and/or returns on risky assets will fall and the carry trade spread will be crushed--regardless of government intervention to the contrary.

At some point, then, we may witness another counterintuitive situation as markets rebalance. It does not seem out of the realm of possibility that bonds could sell off big-time as more and more leverage leaves the system.

position in SH

Friday, May 13, 2011

Central Bank Revolution

"Why should I trade one tyrant three thousand miles away for three thousand tyrants one mile away? An elected legislature can trample a man's rights as easily as a king can."
--Benjamin Martin (The Patriot)

Interesting note by Judge N during his nightly screed, this one concerning government and money, that the American Revolution may have been motivated more by Bank of England tyranny than by King of England tyranny. Stated differently, the Revolution was driven more by tyrannical monetary policy than by tyrannical fiscal policy.

We face similar tyranny today. The Federal Reserve is an unelected, unconstitutional central bank that prints money at its discretion. Every dollar that it prints reduces the value of those in circulation. Meanwhile, those who get to use dollars fresh off the press enjoy 'first user advantage.' By being the first users of newly minted cash, entities like big banks, the government, and social welfare recipients obtain a claim on economic resources without directly producing those resources. As such, first user advantage results in wealth transfer from the productive to the unproductive.

Like the judge, I marvel at how little Americans seem to understand the Fed and its workings. Obviously, examination of the downside of central banking is not a priority item in most school syllabi.

Perhaps Ron Paul's presidential campaign will elevate awareness and inspire more people to ask questions. Until more people question the validity of the Federal Reserve, our path is mapped toward squalor.

Wednesday, May 11, 2011

The Age of Ron Paul

Jo Jo was a man who thought he was a loner
But he knew it couldn't last
--The Beatles

Juan Williams argues that the conversation inside the Republican party is being shaped to a large degree by Ron Paul. Williams admits to some amazement in stating so, but he thinks that the GOP has to seriously cope with what he calls 'the Age of Ron Paul.'

It's easy to be surprised. After all, Ron Paul has been mocked, dismissed, etc by partisans on both sides of the aisle for decades.

On the other hand, look at the essence of Ron Paul's message. Our country was conceived in liberty, but we've been ceding that liberty away. Unless we institute policies that better align with the freedom ideals (free markets, limited markets, fiscal responsibility), then the future of this country is in doubt. That message, it seems, is resonating with ever greater numbers of Americans. Last fall, that message was reflected in behavior at the ballot box.

As Ron Paul's message gains traction among the citizenry, the GOP is being forced to cope. We noted early last year that many Republicans were likely riding the coat tails of the Tea Party movement despite not having much ideologically in common w/ Tea Party philosophy. If the Tea Party movement gained traction, we suggested, then the Republican party would face a cross roads.

That cross roads may have arrived. Neocons are beginning to place anti Ron Paul commentary in some interesting venues.

However, as much as Republican hardliners might dislike the Tea Party and its 'Father,' they surely understand the risk involved with dismissing Ron Paul outright. The risk is that the party breaks in two, with Tea Party partisans moving to form their own party.

Should the libertarian message continue to resonate among the people, the Republican Party will either need to reinvent itself, or face self-destruction.

Tuesday, May 10, 2011

Unemployment is the Law

If you ever get annoyed
Look at me, I'm self employed
I love to work at nothing all day
--Bachman Turner Overdrive

Refreshing to see college students blogging about the downside of the minimum wage. Unfortunately, this learning must be done outside the classroom since it is rarely addressed in basic econ classes.

Minimum wage laws = compulsory unemployment.

Capital Punishment

Some days won't end ever and some days pass on by
I'll be working here forever--at least until I die
--Huey Lewis and the News

Nice article by Jeff Tucker on the impoverished condition in Haiti. Why is there little wealth in Haiti? Trade is fluid. The people are hard working. How can it be that these people are barely getting by?

Haiti lacks capital. Capital is income that is not consumed. Instead, it is saved and invested in assets that improve productivity. Productive assets lengthen the supply chain as work becomes more specialized. Specialization improves efficiency and drives value toward the market.

Hayek (1941) observed that, although capital in a nonpermanent resource, it must be maintained over a long period of time to provide a continuing stream of income. As such, owners of capital must hire workers, replace parts, and generally maintain operations through extended periods of production.

It is the stability and sophistication of capital that differentiates developed from under-developed countries.

Haiti's government is a primary reason why the country does not possess much capital. The regime has a long record of appropriating wealth wherever it emerges. Obviously, such a situation is not conducive to internal saving or foreign direct investment. This is not an attractive place for capital.

As such, Haiti's government is 'keeping prosperity at bay,' notes Tucker.

Nice observation to end it:

"Now, to be sure, there are plenty of Americans who are firmly convinced that we would all be better off if we grew our own food, bought only locally, kept firms small, eschewed modern conveniences like home appliances, went back to using only natural products, expropriated wealthy savers, harassed the capitalistic class until it felt itself unwelcome and vanished. This paradise has a name, and it is Haiti."


Hayek, F.A. 1941. The pure theory of capital. Norwich: Jarrold and Sons.

Monday, May 9, 2011


"Gonna come a time when we all gonna have to ante up. Ante up and kick in like men. LIKE MEN!"
--Sgt Major John Rawlins (Glory)

Rumors throughout the weekend that Greece might exit the EU. Nothing 'real' yet, but Greek debt spreads continue to widen...

The situation does present a reminder as to what has transpired over the past couple of years. Debt and leverage on private balance sheets has been shifted to the public sector. The debt has not gone away. It has been socialized.

Many people are waxing poetic about the improved balance sheets and strong cash positions of many corporations. But that improvement has come at the expense of the citizenry. As government takes on debt previously held by private companies and individuals, the spectre of higher taxes and a depreciating currency become realized.

The US is now lugging federal-level debt nearly equal to GDP. Reinhart & Rogoff (2009) found that debt:GDP of 90% is generally the point of no return. We passed that warning sign a while back.

Bulls argue that the off loading of risk to government is bullish for stocks. Perhaps that turns out to be the case.

Bears counter that risk has merely changed hands temporarily. Corporations will ultimately pay. Companies will be targets of future govt tax campaigns. Plus, citizens will have less disposable income to buy goods and services because they are on the hook for future govt debt liabilities as well.

While special interests sometimes benefit from political favor, the magnitude of our debt problem suggests that all will need to ante up.


Reinhart, C.M. & Rogoff, K.S. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.

Sunday, May 8, 2011

Yielding the Way

You're not happy with how I act
You better turn around boy, don't look back

Perhaps a key tell that the commodity-driven inflation trade was on borrowed time was Treasury yields. After threatening to break higher a couple months back, ten year yields flipped over and have been heading lower.

Yields have now fallen to the 3.1ish level--an area that has frequently found support since 2009. If yields can't get traction around here, then there is not much support till down around 2.5%.

Since lower bond yields often correspond to increased risk aversion among market participants, one has to be conscious about what bond yield trends might be forecasting about the direction of stock and other risky assets prices.

position in SPX

Saturday, May 7, 2011

End It

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

The judge observes that President Obama has an opportunity to reverse policies of imperilism that he has escalated thus far during his presidency. The Guantanamo detention center remains open; troop levels have increased in Afghanistan; 50,000 troops remain in Iraq; Libya, Pakistan, and Yemen have been invaded; and the Patriot Act remains in force.

On top of that, we have added $trillions in crippling debt to fund this effort.

Bin Laden and other terrorists have succeeded in manipulating us into sacrificing a central tenet of the United States that they truly despise: freedom. As we have frequently noted on these pages, there is a fundamental tradeoff between freedom and safety. The more we turn ourselves into a police state in an attempt to be safe, the less free we become.

The terrorists have obtained what they hoped for: America is less free than we were 10 years ago.

The death of bin Laden offers a chance to redeem these mistakes. True victory in the War on Terror means ending the war. A free society is the best response to perpetrators who wish to suppress liberty.

You can end it right here, Mr President.

Friday, May 6, 2011

Oil Spill

The time has come
To say fair's fair
To pay the rent
To pay our share
--Midnight Oil

The wild action in silver yesterday spilled over into commodities at large. It was pretty much chaos across the entire space. The CRB index itself was down about 5%.

Silver wound up getting smoked for 10% yesterday. That's a lot, but it's not super unusual for the commodity known as White Lightning.

More surprising was the move in crude, which was also down 10%. That's a big move for oil. On the week Texas Tea was down about 14%.

Technically speaking, there may be minor support for oil around these levels, but major support defined by the move off the 2009 lows rests at 90ish. I've been buying lightly around here and will probably look to get more aggressive if that 90 level actually shows up.

Although commodities were certaintly due for a correction, moves of this magnitude usually happen for a reason. Unfortunately, that reason is often not apparent until it is too late to act. What market participants need to be wondering is what situation(s), macro or otherwise, might this bearish price action in commodities be forecasting?

position in silver, oil

Thursday, May 5, 2011

Clear and Present Danger

"How dare you come into this office and bark at me like some little junk yard dog. I am the President of the United States!
--President Bennett (Clear and Present Danger)

Judge N once again discusses the bin Laden killing. Over the past couple of days, the incident as recounted by the Obama administration has been under constant revision. First the administration claimed that bin Laden was armed and had fired on the Seals who had invaded his dwelling. Supposedly, Bin Laden had also used his wife as a human shield.

Clearly the administration, keeping an eye on the law, was trying to make the case that bin Laden had initiated the violence which subsequently resulted in his death.

The administration then changed its story--apparently because it didn't align with the Seal team's actual experience. Bin Laden was not armed, did not use his wife as a human shield, and did not put up resistance.

Under the law, entry of US troops into the sovereign territory of another nation, without a declaration of war against that nation or permission to enter by that nation, is illegal. Under the law, sending troops to arrest and capture a person wanted for mass murder and directing those troops to return the person to the US has been sanctioned by US courts in the past (but seemingly to me would require a court order first?). But under the law, sending troops to kill someone is illegal.

The law permits the president to capture and charge someone, but it does not allow him to kill someone that he should arrest.

We know that President Obama did not set out to do the former. Otherwise, in his explanation of the incident to the American people, he would have carefully outlined how the operation was designed to follow the law. Instead, he illegally authorized the use of lethal force.

The framers understood this situation all too well, as they frequently witnessed European kings killing whomever they wished in the name of 'safety.' Thus the framers wrote limits to executive power into the Constitution, and subsequent lawmakers wrote statutes to prohibit the arbitrary use of lethal force by executive order.

Now, the administration is suppressing evidence surrounding the event. Bin Laden's body was conveniently dropped into the ocean. Photographs and other evidence is being withheld from the public.

Hard not to view this as another case of poor judgment. At the very least, were I trying to fly a case of poor presidential judgment under the radar, suppressing evidence seems only likely to awaken more people from their state of legal slumber.

As the judge notes, a similar pattern can be seen in Libya. The president has involved us in another war that was not declared by Congress. Subsequently, the administration has given conficting explanations for why we are involved (a.k.a. 'mission creep'). Last weekend, an attack to kill Libyan leader Qadaffi failed, but left three children dead as collateral damage.

Indeed, judge, these are dangerous times. When people can act above the law, liberty is threatened.

White Lightning

"I feel the need, the need for speed."
--Maverick (Top Gun)

Parabolic prices attract traders like flames attract moths. The effect is often the same as well.

The past few weeks saw silver prices go vertical. Last week they touched levels not seen since the Hunt Bros episdoe in 1980. Recently, volume on the ishares Silver Trust ETF (SLV) has been eclipsing volume in the SPDR S&P 500 ETF (SPY).

Over the past 4 days, prices have reversed hard. Silver is down about 25% in four days. Part of this can be attributed to margin requirement increases for trading silver contracts on futures exchanges. A more likely rationale, however, is that silver prices experienced classic trend exhaustion.

An old trading saying goes 'Don't catch a falling knife.' Despite the warning, I'm taking a stab (pun) at SLV from the long side as there appears to be some technical support around the $36 level. More significant support lies below in the $30-32 area which may be the place for a serious position if/when.

This is a classic 'fast market' right now, and trading it is not for the faint of heart. Silver didn't earn its White Lightning monicker by accident...

position in SLV, SPX

Wednesday, May 4, 2011

Extra-Judicial Killing

"And when the last law was cut down, and the devil turned round on you, where would you hide, the laws being flat?"
--Sir Thomas More (A Man for All Seasons)

Cogent and instructive monologue by the judge in follow-up to his previous night's comments. In legal terms, the killing of bin Laden was an extra-judicial killing. This means that the government killed someone who was not on a battlefield, who did not pose an immediate threat to the freedom or security of any people that the government protects, and that the killing was not a punishment ordered as a consequence of a trial.

All western countries have laws that make this criminal. The reason why extra-judicial killing has been made illegal is because, under our system, the government cannot decide who to kill without following its own law. Following the law requires due process. Due process means that, before the government can take life, liberty, or property from anyone, it must prove to neutral persons that its target is unworthy of that life, liberty, or property because of something that the person did that caused harm.

The Constitution was intended to limit government and guarantee due process. Killing bad people without lawful authority is outside the confines of the Constitution and outside of the rule of law.

What is the rule of law? It is the fundamental principal that the laws apply to everyone and in all instances. This means that emergencies, vengeance, political advantage, or persons in power are irrelevant to the law. Everyone must obey the law, whether janitor, soldier, or president.

President Nixon once famously argued that if the president does it, it is not illegal. That is dead wrong according to the founding principals of this country. Under the rule of law, the president is not a king who wields discretionary power. By definition, discretionary power unequally distributes rights. This country's founders understood that the people's rights could only be protected under the rule of law, not the arbitrary rule of men.

The judge brilliantly quotes from Robert Bolt's A Man for All Seasons. Listen carefully to the passages, for they have great relevance to what is happening today.

When Real is Unreal

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

Interesting chart showing the disposable income. Over the past decade, real income has basically gone nowhere for the median household.

'Real' income means that it has been corrected for changes in the CPI. For example, if your salary increases by 5% but the prices of goods and services also increase 5%, then your 'real' income in terms of purchasing power has not changed.

There is a fair amount of evidence that the goverment is under reporting the CPI and has been for many years. Some estimates suggest that if we compared apples to apples with older methodology, the CPI is increasing at triple the currently reported rates.

If that it true, then what is the real trend in real disposable income over the past decade?

Tuesday, May 3, 2011

Above the Law

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

The killing of Osama Bin Laden has sparked celebration among many Americans. Even those who oppose most of this administration's policies have congratulated President Obama for sanctioning the hit.

The media has mostly done the same. Although there have been scattered questions about whether celebrating someone else's death is ok to do--even if that someone is a mass murdering terrorist--there seems little doubt among most Americans that this operation was a 'good kill.'

Last night, the only person that I could find questioning the legitimacy of OBL's murder was Judge N. Like myself, he confessed that his emotional and patriotic side was glad that all of those who experienced loss from 9/11 could experience some closure. However, his moral and legal side perceives the action sanctioned by the president as dangerous and unlawful.

The lawful power of the president to have someone killed is governed by the Constitution, by international treaties, and by federal statutes. Killing by government is a crime except in self-defense situations where attack is eminent, on battlefields after formal declarations of war, and as the result of trial-by-jury verdicts.

None of those conditions existed in the case of Bin Laden. Yes, he was wanted for horrific crimes and deserved to be brought to justice. But that is justice accord to the law and not according to the president.

There can be no doubt by the reactions of Americans that this particular killing was quite popular. But this does not excuse the fact that this killing violated the law. When the rule of law is ignored, there is no protection against the emotional urges of the mob or against the discretionary whims of the powerful.

As the judge observes, the president took an oath to uphold the rule of law. He has violated that oath, and continues to operate in a manner that is above the law.

A president who operates in this manner is a bigger threat to liberty than Bin Laden ever was.

Widening Divide

Now we're back on the train, yeah
Oh, back on the chain gang
--The Pretenders

Peter Atwater shows a nice graph in this article that pictures the widening chasm between the haves and have nots.

The Bloomber Consumer Comfort Index is used as a proxy for social mood. I knew little about this index prior to Peter's piece but upon examining the methodology it appears to garner reasonable face validity as a social mood proxy.

His point is that if you take approx 2003 as a frame of reference, then the CCI has since been consistently lower than movements in the S&P 500. Moreover the gap between the CCI and the SPX has been widening. In particular, uptrends in the SPX are not being mirrored by uptrends in the CCI.

If we accept the assumption that the SPX is a reasonable proxy for the welfare of the well-to-do, then this graph portrays the growing disparity between the rich and the rest. Government policies, particularly those of the Federal Reserve, have clearly targeted higher stock market prices as a path to broad economic recovery. These policies have indeed jacked stocks higher, but these higher stock prices are not trickling down to improve the condition of the masses.

The next time President Obama or someone in his administration blames someone else about the widening chasm between rich and poor, don't be duped by the rhethoric. This administration is playing a direct role in exacerbating income disparity in this country.

position in SPX 

Monday, May 2, 2011


It's early fall
There's a cloud in the New York skyline
Innocence...dragged across a yellow line

Last night, the news wires lit up w/ the news of Osama Bin Laden's death.

Am hesitant to call this 'justice' because it seems to me that true justice is something that we as humans cannot competently meter out. One reason for this is that it does not seem that we have a true sense of what justice means.

If justice escapes our understanding, then it is likely that true justice is the jurisdiction of our Creator. Precisely when God might resolve wordly issues in the name of justice also seems beyond our comprehension. It has been proposed that God's version of justice will be served on Judgment Day. If this turns out to be true, then justice seems an end-of-our-journey condition shaped by God--a condition that possesses devine finality. But how this squares with our meager understanding of temporality is certainly beyond my capacity.

I can more confidently conclude that OBL's death brings some sense of closure to those who experienced loss on the Worst Day. It can not replace what we lost almost ten years ago, but it may help us focus more on what's ahead, rather than on what we've left behind.

Sunday, May 1, 2011

Pinch and Flinch

Lindsey Brigman: I got over four years invested in this project.
Virgil Brigman: Yeah? You only had three years invested in me.
Lindsey Brigman: Well, you have to have priorities.
--The Abyss

After last week's dovish guidance from the Fed in the face of rising commodity prices, it is now very hard to imagine what would drive policy makers to stop the monetary printing presses, or even to slow them down. Of course, it is precisely these types of situations that require investors to make sure they see the other side of the trade.

Markets are seemingly looking thru every crisis (e.g., EU) and discounting the government bailouts that would likely follow.

Still, I can conjure a couple of situations, in my view not well discounted by markets, that might give policymakers cause for pause. Both of them are scenarios in which commodity prices experience a dramatic increase in prices--perhaps extreme enough that policymakers are forced to rethink their approach.

One scenario is a significant upward revaluation of the yuan. US bureaucrats have been hounding Chinese officials to quit 'manipulating' their currency (obviously US officials are not against the pot calling the kettle black). There was some chatter on trading desks last Friday that China may in fact be preparing for a yuan revaluation.

Washington should be careful for what it wishes. Revaluation would mean that the yuan would strengthen against the dollar, which would of course would hammer USD purchasing power. The Dollar Index is already approaching all time lows. Lower dollar means higher commodity prices.

The other scenario relates specifically to oil. This weekend, prices at the pump here in Ohio are said to average $4.11/gallon--an all time high that surpasses the summer oil 2008 spike.

It's hard not to look at the above chart of oil and think 'bullish.'

Should oil prices continue their upward march, and particularly if prices head into a parabolic frolic like gold/silver, there is likely some level where the economy cries uncle.

Higher oil prices is the situation I currently find most likely to force the Fed's hand.

position oil, gold, silver