Sunday, July 31, 2011

Antecedents of the Civil War Part I

"There's an old Indian saying: Follow the cigar smoke, find the fat man there."
--Brig General John Buford (Gettysburg)

The Constitution was barely dry when some people such as Alexander Hamilton were already trying to exceed its bounds. Hamilton believed that the US would be better off with a strong central government more in line w/ the British design that the US had recently thrown off.

The Federalist Party that harbored Hamilton's platform was already sliding when Hamilton was killed in his famous duel with Aaron Burr in 1804. By 1815ish the Federalist Party was largely history. However, the idea of a dominant central government was not. The baton was passed to the National Republican Party which became the Whig Party which became the Republican Party.

Henry Clay and other future Whig leaders developed what became known as the American System to express the strong central government ideal. The American System stressed protectionist tariffs, central banking, and government funded 'internal improvements' as its primary planks.

The American System is what economists today call a mercantilist policy. Today, particular planks would also fit the label 'corporate welfare.'

Key backers of the American System were Northern businessmen who stood to get rich if this system was implemented. Southern states opposed the American System from the get go, arguing that most of the benefits would not flow in their direction, and that the successes of Northern producers would come out of the hides of Sourthern producers.

In the first half of the 1800s, Washington backers of the American System were able to implement the various planks with mixed success. Internal improvements primarily took the form of government funded transportation projects such as the Erie Canal. America's second attempt at central banking, the Second Bank of the United States, was enacted in 1816 only to be shut down by Andrew Jackson in 1833.

The element of the American System that was operationalized to the fullest degree during the first half of the 19th century was the tariff plank. Beginning in 1816, a series of tariffs were imposed on imported goods. Initially, tariff rates were 20-25% although future tariff acts taxed imports at rates north of 40%.

As with all tariffs, groups protected by the tariffs benefitted. In this case, those groups were the stakeholders of manufacturers primarily located in the Northern states. Losers included all buyers of protected goods, since similar good were available in unhampered markets for a cheaper goods.

The biggest losers were the Southern states. Because the Southern economy was primarily an agrarian one, Southern states needed to trade for manufactured goods. The South's primary trading partners were the North and Europe. The imposition of tariffs raised to cost of trade in the South, and tilted trade away from Europe and toward the North.

It did not take long before Southern states decried federal government policies, particularly with respect to tariffs, as unjust and unconstitutional.

Saturday, July 30, 2011

The Clinton Surplus Myth

But don't be fooled by the radio
The TV or the magazines

I continue to hear Liberals wax poetic about the purported budget surplus during the late Clinton years. That surplus was an illusion--a product of government intervention and of accounting chicanery.

By 1998, the US economy was riding the wave of an economic boom. Part of that boom was a function of an exciting new technology--the internet. Another part was good old monetary intervention--i.e., loose credit. Together, these factors fueled massive speculation in the stock markets. Although I have no ready access to tax receipt data by category, the late Clinton years saw a massive windfall of capital gains tax receipts.

When a president can blow a bubble on his watch, then the inflow side of the ledger will certainly bulge. The key is for that president to jump ship before that bubble bursts...

Central to the Clinton surplus hoax was the accounting chicanery at work. Government accounting rules permit payroll taxes for Social Security to be treated as inflows. In reality, Social Security taxes are trust payments, not revenue for operations. As we know, however, government has been spending these trust payments, leaving IOUs called Treasury bonds in their place. (Payees into the Social Security system have essentially been transformed into creditors.)

Government borrowing to compensate for spending Social Security trust funds does not show up in the official federal government receipt/outlay data--except as interest expense.

It should be noted that if corporate managers attempted to account for the finances in this manner, then they would be spending some time in jail. Government officials, of course, get to play by their own rules.

The important point is this: During the late Clinton years, the national debt continued to increase.

Countries borrow to cover budget shortfalls.

Treasury Hunters

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

Largely lost in the drama this week was the rally in long bonds. On Friday, 10 yr Treasury yields hit a new low for the move.

Technically, it appears that a two month head and shoulders pattern has resolved lower.

Bonds could be strong for a number of reasons. One is that bond market investors are not very concerned about a default or about a US credit rating downgrade (otherwise bonds would be selling off). Another is that investors are seeking safety in the midst of domestic and EU fiscal turmoil.

Of course, an alternative view is that domestic bond markets have been so manipulated that no interpretation is possible...

no positions

Friday, July 29, 2011

Holding the Line

It's not in the way you look
Or the things that you'll say that you'll do

Some of the earliests posts about the Tea Party on these pages suggested that Tea Party philosophy was not a good fit w/ old school Republicans. This is because at its heart, today's Republican Party is Big Government, thereby placing it near the Democrat Party on the political landscape.

Old school Republicans made friends with Tea Party types at the time because, in true the-enemy-of-my-enemy-is-my-friend fashion, they saw an opportunity to ride the coat tails of a growing social movement to oust some Democrats last November.

Predictably, Tea Party electee pledges not to be co-opted by the Old Guard have increasingly drawn fire from the Old Guard, probably because veteran Republicans figured that they could get the incomers to cross over by now.

By and large, however, Tea Party people in Congress have stood pretty fast. Currently, they are spoiling House Speaker John Boehner's sprint toward a Big Government solution to the debt ceiling issue. And old school Republicans are voicing frustrations of the Tea Partier's failure to fall in line.

Should the Tea Partiers somehow resist the intensifying political pressure and successfully thwart a debt ceiling increase, then they will have facilitated two heroic outcomes: 1) a course reversal away from squalor and toward prosperity, and 2) waning influence of old school Republicans.

Thursday, July 28, 2011

Slavery and the Constitution

Col Robert G. Shaw: It stinks, I suppose.
Pvt Trip: Yeah, it stinks bad. And we all covered up in it too. Ain't nobody clean. Be nice to get clean, though.

In Dred Scott v. Sanford (1857), better known today as the Dred Scott Decision, the Supreme Court essentially ruled that slavery was constitutional. The implication was that the Constitution needed to be amended in order to legally end slavery.

Although I've read the Constitution hundreds of times, I confess to having been ignorant on precisely how slavery could be construed as legal in the original document.

The conclusion can be reached in a roundabout sort of way--which perhaps reflected the conflict many of the framers surely felt when merging principles of natural rights with a law that permitted one person to be the legal property of another.

That said, the legality of slavery in the Constitution can in fact be construed from a few passages:

Article 1, Section 2. The third paragraph contains the notorious Three Fifths Clause, which apportioned House representatives in each state according to the number of 'free Persons' plus 'three fifths of all other Persons.' Those 'other persons' were slaves. We know this because at the Constitutional Convention, those from states without strong slaveholder interests argued that each slave should count as zero, while those from states with strong slaveholder interests argued that each slave should count as a whole vote. The compromise was 3/5.

Article 1, Section 9. The first paragraph states "The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the year one thousand eight hundred and eight..." Some argue that this passage applied to the slave trade. Of course, by the 1850s, this passage no longer held as written as the 1808 deadline had long since passed.

Article 4, Section 2. The third paragraph states "No Person held to Service or Labour in one State, under the Laws thereof, escaping into another, shall, in Consequence of any Law or Regulation therein, be discharged from such Service or Labour, but shall be delivered up on Claim of the Party to whom such Service or Labour may be due." This became the basis for the Fugitive Slave Act of 1793 and later of 1850.

The necessary amendments implied by the Dred Scott Decision eventually materialized during the Reconstruction period. The 14th Amendment, ratified in 1865, superceded Article 1, Section 2. The 13th Amendment, enacted in 1868, superceded Article 4, Section 2.

Fault and Default

I feel the earth shake, raise my voice
I have my sould, I have a choice
I feel it burning, I want more
So what am I waiting for?
--Miley and Billy Ray Cyrus

Ron Paul stands firm on no debt ceiling increase whatsoever. Unfortunately, he believes he'll be in the very small minority.

As such, he believes that default is inevitable. But his definition of default is the broader one--one that includes defaulting thru debasing the currency. His thesis is based on the reality that we've borrowed beyond our capacity to repay. As a consequence, we either stop payments to creditors or pay them back in devalued dollars.

His idea is to start positioning for the inevitable default.

Meanwhile, we may be foregoing a final opportunity to change course under our own volition.

position in USD

Wednesday, July 27, 2011

The Real Lincoln

"You see more than do most men."
--Abraham Lincoln (The Blue and the Gray)

Finally finished Tom DiLorenzo's The Real Lincoln. Eye opening book on which I will reflect more fully in posts ahead. For now, a few summary thoughts:

Main purpose of the Civil War. Any serious student of history soon realizes that 'freeing the slaves' was not the primary, or likely even tertiary, motivator of the Civil War. Lincoln's oft stated objective behind the war was to 'preserve the Union'--meaning that he wanted to prevent Southern states from seceeding. But why was this Lincoln's motivator? When one begins to understand Lincoln's hunger for political power and his allegiance to Clay's American System, then the dot connecting gets easier...

Main consequence of the Civil War. Clearly, the key outcome of the Civil War is that it squelched the notion of federalism--i.e., the founding idea that states are sovereign and that the federal government served the states. Perversely, since the end of the Civil War, revisionists have tried to argue that it was the federal government that created the states.

The reason that the end of federalism was so important was that the loss of states' rights removed the 'last best bulwark' (Wilson, 1998) of constitutional liberty as envisioned by the founders. The last bulwark consisted of a state's right to leave the union should it feel that the federal government was overstepping its constitutional limits. Without that right, the people hand their sovereignty over to judges who tell us what orders we must obey. This is, of course, the precise course of US government since 1865.

Tainted history. I've mentioned before that the more I dig into US history, the greater my surprise over what I don't know about our path from there to here. Now, I'll be the first to admit that history was never my favorite subject in school, but it seems clear that my ignorance is not merely the result of not paying attention in class. US history has clearly been slanted.

There is perhaps no greater example of this than Lincoln and the Civil War. Lincoln the humanitarian and emancipator when the data suggest Lincoln as tyrant and centralizer. The Civil War as a just war to free the slaves when the data suggest the Civil War as unjust to terroize people seeking to govern themselves.

History as taught here in the US has an agenda. Which implies self-study as the path to the Truth.


DiLorenzo, T.J. 2002. The real Lincoln. New York: Three Rivers Press.

Wilson, C. 1999. Secession: The last, best bulwark of our constitutional liberties. In D. Gordon (ed.), Secession, state and liberty: 89-98. New Brunswick, NJ: Transaction.

Tax Cuts as Expenses

This wouldn't be the first time
That things have gone astray
Now you've thrown it all away
--Bryan Adams

Over the past few days, I have heard the president and other Liberals refer to tax cuts as expenses. This mindset sees people's incomes as belonging to government, unless government is kind enough to let people keep what they produce.

Authoritarian rule changes little over time.

Tuesday, July 26, 2011

Micro Manager

"Brantley, you like to sweat, don't you?"
--Howard Prescott (The Secret of My Success)

Have been getting long Microsoft (MSFT) for a trade. The stock trades 'dry,' meaning that the stock price remains firm even when the overall tape is weak.

If (when) a debt deal gets cut, then this stock seems a good candidate to lead things in any sort of 'relief rally' that might ensue.

First stop is about fifty cents higher at $28.50. If that is breached, then $30.25ish seems big resistance.

Because it's hard for me to trust 'em these days, odds are good that I'll be gone long before $30.25 comes into view...

position in MSFT

One Hundred Years of Default

"It is my duty to myself and to any man who is working for me that he honor all his contracts."
--James Duncan MacHardie (From the Terrace)

The judge observes that we have defaulted at least 3x in the past 100 years. Default in this context is the failure to pay a debt obligation.

In 1933 the FDR administration took away the dollar's domestic link to gold, thereby defaulting on the federal government's obligation to permit US citizens to convert their paper currency to precious metal at the citizens' discretion.

In 1968, the Johnson administration took away the dollar 'silver certificate's link to silver, thereby defaulting on the federal government's obligation to to permit holders of silver certificates to convert their paper currency into silver.

In 1971, the Nixon administration took away the dollar's link to gold in payments to foreigners (want to watch a president really squirm?), thereby defaulting on the federal government's obligation to permit foreign holders to demand payments from the US government in gold.

If we broaden the definition of default to include paying back debt obligations in a devalued currency that provides creditors less value than when the contract was actually written, then we have been defaulting almost continuously on our debt obligations for nearly 100 years.

Our choices ahead of us are these: a) shrink government dramatically, or b) default again.

position in gold, silver, USD

Monday, July 25, 2011

Educated Force

We don't need to education
We don't need no though control
--Pink Floyd

While finishing up Paterson (1943), ran across a nice passage about the folly of public education (again, paragraph breaks inserted by me):

"There can be no greater stretch of arbitrary power than is required to seize children from their parents, teach them whatever the authorities decree they shall be taught, and expropriate from the parents the funds to pay for the procedure.

"If this principle really is not understood, let any parent holding a positive religious faith consider how it would seem to him if his children were taken by force and taught an opposite creed. Would he not recognize tyranny naked?...

"The intrinsic nature of the power authorized was so little realized that this was called "free education," the most absolute contradiction of facts by terminology of which the language is capable."

This books was a great read. And like others of its time period, could have been written yesterday.

Sunday, July 24, 2011

The American System

Col Robert Gould Shaw: What are you doing?
Col Montgomery: Liberating this town in the name of the republic.

Henry Clay (Whig, KY) entered national politics in 1811 as a member of Congress. Clay was a political heir to Alexander Hamilton's vision of strong centralized government, a vision that planked the Whig Party platform.

Clay was a central formulator of what came to be known as the 'American System.' The American System consisted of three key elements. High tariffs shielded certain domestic industries from foreign competition. A national banking system gave government control of the money supply. Finally, the road to commerce was paved on government funded programs known as 'internal improvements.'

Modern economists would label the American System as a program of mercantilism. Mercantilism is a conduit for building imperial State power through practices of protectionism and subsidies for favored industries.

Moreover, tax funded subsidies to businesses for government sponsored 'internal improvement' projects are today seen as 'corporate welfare.'

In the first half of the 1800s, Whig politicians were able to put in motion various elements of the American System. For instance, a series of high tariffs protected Northern manufacturers from foreign competition. By the 1840s, the majority of US exports came from the South. Because the South's economy was predominantly grounded in agriculture, those high tariffs meant that Southerners paid more for manufactured goods--whether they came from Europe or the United States.

By the 1820s Southern states condemned the tariffs and other elements of the American System as unconstitutional tools of plunder. The costs of government policies were largely being levied on the South, while those in the North enjoyed an outsized chunk of the spoils.

Parenthetically, South Carolina was close to secession in the 1830s and had voted to nullify (read: refused to collect) a federally improsed tariff before the federal government relectantly backed down.

The American System was a strong centralized government design--one that did not align well with the limited government Constitutional design.

The influence of the American System in driving the South toward secession after Lincoln's election in 1860 cannot be underestimated.

btw, can you name the young Whig politician from Illinois who was a devout proponent of Henry Clay and the American system from the get go?

Saturday, July 23, 2011

Precious Pyramid

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

Consistent w/ the plan outlined last weekend, I initiated positions in both GLD and SLV and began 'pyramiding' into higher prices.

Both metals trade great right now. Short term pullbacks are being bought as prices stair step higher. This kind of action makes me thing that a strong trend may be forthcoming.

Perhaps it is becoming increasingly obvious to market participants that governments around the world will keep kicking the can down the road till the system breaks. As much as I would hope that the federal government will get off the spending/debt addiction, chance does not favor it. Plus this week the comments of EU officials suggests that they're all in in terms of keeping the union together (even Germany).

This means one thing: escalation of money printing.

Have also stepped up physical gold buying as my cash balances are looking less valuable by the day...

positions in GLD, SLV, UUP

Friday, July 22, 2011

This Cap is Too Big

Look at me
I can be
--John Fogerty

Interesting chart below sourced from Mary Meeker's presentation on the US fiscal situation. Meeker made a name for herself as a .com analyst at Morgan Stanley (MS) during the tech bubble days; she's now and is now at VC firm Kleiner Perkins.

The thought process behind the presentation seemed mediocre, but I did like the graph.

Yesterday we argued that the 'cap' part of the Cut, Cap, and Balance bill was not aggressive enough. Essentially, it would institutionalize federal government spending at 20% of GDP.

The graph shows that, from the country's founding until the 1930s, federal government spending remained relatively constant at about 3% of GDP. The excursions from the 3% trend were war primarily war-related.

The New Deal changed that, and federal government spending has never looked back.

Historical evidence suggests government spending in a free society can certainly be limited under 5% of total output. Legalizing a cap of 20% institutionalizes squalor.

no positions

Thursday, July 21, 2011

The Party Not of Jefferson

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

Over the past few months the activities of Congressional Republicans have been subject to scrutiny on these pages--often with criticism. Because the GOP tends to be slightly closer to the ideal of liberty than the Democrats, and because last November's election breathed some Constitutional life into that side of the aisle, this group may represent our final hope to turn the country's fiscal situation around in a proactive manner.

As such, we must work this group hard as hard as we can.
This group must pick up the slack for the truly pathetic performance of Congressional Democrats.

Consider the current budget deficit fiasco. Here is a group that had a majority in both houses and yet decided that it was not in their political best interest to craft a budget ahead of last Fall's election. Two or three extensions later, we now face an 'Armeggedon' August deadline and Hill Democrats have not put forth one fiscal bill for vote. All the while Democrats are trying to hold Republicans accountable should no agreement be reached by 8/2.

The core competence of the Democrat Party is political calculation. Hopefully, more people are opening their eyes to what is going on here.

Surely, Jefferson would not recognize the party that once bore his name.

Cut, Cap, and Balance

"No more."
--Rick Latimer (The Principal)

Earlier this week the House passed H.R. 2560, better known as the 'Cut, Cap, and Balance Act.' The bill has three primary components. One is to cut about $100 billion from the FY 2012 budget as proposed by the Obama Administration. The $100 billion comes about 75% from the hide of what is commonly termed 'discretionary' spending and 25% from 'mandatory' spending (oh that Washington terminology).

Secondly, the bill caps annual spending as a percentage of GDP. In FY 2012 the cap is 22.5% and over the next 10 years it whittles down to 19.9% (apparently politicians have learned the magic of .99 pricing).

Finally, the bill requires passage of a balanced budget amendment (presumably thru Congress but ratified by the states) prior to permitting an increase in the debt ceiling.

From where I sit this bill is inadequate. Cut: A FY 2012 spending cut of $100 billion is rounding error on a $3.5 trillion budget. Cap: Why cap spending at 20% of GDP instead of working to reduce it over time? Balance: While attractive on the surface, a balanced budget amendment may not pass, nor will it necessarily bind future Congresses from tax increases.

I note that Ron Paul voted thumbs down, consistent with his policy of no deals, no compromise.

The bottom line is that this bill still empowers the spending and debt addiction. The right thing to do is to vote 'no' on raising the debt ceiling.

Wednesday, July 20, 2011

Intellectual Dishonesty

"I play the stock market of the spirit and I sell short."
--Ellsworth Toohey (The Fountainhead)

Interesting profile in the New Yorker of Ray Dalio, founder and CEO of Bridgewater Associates. Bridgewater is the world's largest hedge fund operator with about $90 billion under management. His story and his firm's approach are worth pondering. Here, however, I'd like to focus on the journalistic approach in the piece--an approach that is typical of the New Yorker and similar outlets.

The article's tone could be deemed 'classic intellectual,' as the author is prone to peering down his nose with normative disdain at Dalio and Bridewater's approach. For instance, the author seems to question Bridgewater's 'cult-like' environment and Dalio's lists of rules and principles that tend to 'weed out' people who are not good fits with the culture.

What the author fails to realize/acknowledge is that there is a large body of research (e.g., Collins & Porras, 1994) linking high performing organizations to ideosyncratic, cult-like workplaces that are not necessarily inclusive or fun places to work. The Bridgewater environment certainly seems quirky and not for everyone. But it is likely that this cultural uniqueness contributes to the firm's strategic success.

Near the end of the article, after quoting Dalio as saying that earning more than the average market return is 'zero sum,' the author predictably questions the 'social utility' of hedge funds. His argument is that if there is not a net positive sum, then maybe the hedge fund industry does not have a valid 'social purpose.' After all, the author states, hedge funds attract many of the best and brightest away from other, presumably more productive, endeavors.

The author once again demonstrates his ignorance on a number of counts. While battles between hedge funds for 'alpha,' or excess market returns may be zero sum (i.e., gains for one firm come out of the hides of other firms), the markets that these firms operate in are not zero sum. For example, hedge funds add volume that would not be there otherwise, thereby narrowing spreads and improving liquidity. More importantly, buyers and sellers would not engage in trade unless each side perceived itself as better off. Markets facilitate positive sum transactions. Bridgewater, for instance, has been a big buyer of Treasuries over the years. Where would the US, the largest issuer of debt on the planet, be without such big buyers? As Dalio correctly observes, the hedge fund industry contributes to the efficiency of the capital allocation process.

Moreover, the author seems oblivious to the reality that hedge funds would not exist without demand for what hedge funds do. I mean, clients have given Bridgewater $90 billion to manage. This is the typical intellectual perspective that views producers with scorn while totally ignoring the market principle that supply follows demand. In markets, buyers rule, not the sellers. Yet the intellectual set continues to fantasize that producers are somehow putting guns to buyers' heads and forcing them to buy, and society is worse off as a result.

Forced consumption can only occur in socialist economies. Socialism removes buyer choice from the equation, relying instead on the 'wisdom' of central planners to determine how economic resources are allocated. Ironically, socialism is precisely the direction that intellectuals generally believe to be righteous.

Schumpeter (1942) famously observed that capitalism drives a 'process of creative destruction.' where producers are obsoleted by other firms who develop better ways to satisfy customers. From the producer's standpoint, any industry may seem 'zero sum' if producers are ultimately destined to hand over the reigns to other producers. One competitor's gain can be seen as another competitor's loss. The sure fire winner in this process, however, is the consumer. The competitive process generates goods and services that raise standards of living across the social spectrum.

The author does correctly point out that hedge funds generally operate with significant leverage to 'magnify their bets. However, he then implicates that hedge fund leverage in the collapse of Bear Stearns and Lehman when funds pulled capital en masse from banks during the meltdown. The author fails to mention that pulling capital requires that the hedge fund first unlevers, and that Bear, Lehman were (and many still are) operating at leverage ratios of 30:1 or more. He also ignores the fact that institutions like Bear, Lehman, et al are the source of hedge fund leverage. A fund can only get levered if can find a creditor that is willing to lend at an interest rate that is attractive.

If the author really wanted to approach the root cause of the market bubbles he seems to think are blown by hedge funds, then he should be asking about where all the cheap credit comes from that provides the fodder for leverage throughout the financial system.

position in SPX


Collins, J.C. & Porras, J.I. 1994. Built to last. New York: Free Press.

Schumpeter, J.A. 1942. Capitalism, socialism, and democracy. New York: Harper & Brothers.

Tuesday, July 19, 2011

Old Age and Default

Send me a postcard
Drop me a line stating point of view
Indicate precisely what you mean to say
Yours sincerely wasting away
--The Beatles

Interesting discussion of the negative relationship between the age of a country's population and propensity for sovereign debt default. What many people don't understand about sovereign debt is that it is usually unsecured, meaning that there is no collateral for lenders to claim if the borrower defaults. This is unlike other debt instruments such as mortgages or corporate bonds which are typically backed by real assets.

As such, lending to countries is pretty much dependent on the creditor's assessment of the borrower's ability, or perhaps more importantly the borrower's willingness, to pay.

It is likely that old age reduces willingness to pay. Paying back debt might cut into entitlements that older segments of the population enjoy, such as State provided health care and retirement benefits. People may be less willing to forego those benefits in lieu of using those economic resources to pay back loans.

If the country is too leveraged, however, then the point may be moot. Socialistic systems require ever more economic resources to keep the wheels on the wagon. Credit will be cut off, either thru default or by bond market shut down.

This is the central message of Reinhart and Rogoff (2009).


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

Hedged Vision

I know you've deceived me now here's a surprise
I know that you have 'cause there's magic in my eyes
--The Who

Bloomberg reports that many large hedge funds have low net risk levels and high cash positions. For example, George Soros' Quantum Fund is carrying about 75% cash.

Many large hedgies are 'macro' funds, meaning that they allocate assets and trade on broad macroeconomic theses. Fund managers state that they have lowered risk levels because the macro picture is murky. On the one hand, growing debt problems around the world make for a bearish macro scenario. On the other hand, governments seem poised with vast interventionary resources, which may be bullish.

Keep in mind that the 'clarity' that hedgies currently seek may arrive at pretty much the same time for all. Expect some big moves if/when.

position in SPX

Monday, July 18, 2011

Being Played

"I've been played like a grand piano by Gekko the Great."
--Bud Fox (Wall Street)

A few weeks back we noted the contradictory nature of Moody's putting US debt under 'review' for a possible downgrade. The ratings agency said that the creditworthiness of the US would be in jeopardy unless the debt ceiling is raised.

Think about this...THINK! This is the equivalent to saying that your ability to pay back a loan increases as you borrow more.

We wondered at the time whether this statement was politically motivated.

Over the past couple of weeks, as drama surrounding the debt ceiling talks has increased, both Moody's and S&P have issued louder warnings that America's Aaa credit rating may be downgraded if the debt ceiling is not raised.

The obvious question upon examining our fiscal situation is how the US could possibly hold the highest credit rating in the land in the first place. Be that as it may, seeking to justify a reduction in creditworthiness because the borrower does not borrow more is simply laughable.

Indeed, the behavior of the ratings agencies seems politically motivated. The rating agencies, and the concept of credit ratings themselves, conveniently fit into a political design grounded in debt and money printing.

If you slurp the rating agency story down, then you're being played.

Sunday, July 17, 2011

Debt Ceiling Drivel

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

Over the past 24 hrs, I have heard more than one stalwart media outlet claim that a budget agreement by the Aug 2 deadline is necessary to avert a default. That this drivel continues to be spooned out reflects the sad state of reporting in this country.

Statements that equate no budget agreement with default are simply not true. These 'untruths' reflect either a lack of precision with language, poor financial literacy, or deliberate attempts to deceive.

One more time, lets looks at the data. Expected receipts are $2.2 trillion in 2011 and $2.6 trillion in 2012. Expected net interest outlays are $207 billion in 2011 and $242 billion in 2012. As such, outlays for interest payments are expected to be less than 10% of inflows.

Clearly, the federal government has the capacity to pay its debts. One does not need a 'professional' to figure this out.

The current debt ceiling discussion is more accurate framed like this: It is a discussion as to whether the federal government has the fortitude to cut spending now.

Saturday, July 16, 2011

New Zone for Gold

Yeah there's a storm on the loose, sirens in my head
Wrapped up in silence, all circuits are dead
Cannot decode, my whole life spins into frenzy
--Golden Earring

Pretty much lost in all of the theater this week is that gold marked another all time high this week. Very impressive, as it seemed that the late April high would not be surmounted, and weakness near the end of June suggested that a major break was imminent.

Because gold is essentially a bet on disorder (monetary, fiscal, social, etc.), there could be many interpretations as to 'why' the breakout right here. Most scenarios end with the argument that more money printing is likely.

Late last summer I initiated a position in SLV to exploit a breakout in silver wherein I added more shares as prices went higher. Such pyramid trades are usually not how I roll, but it can be an effective way to play a strong trending move while using higher prices to help manage risk.

In the next week I will be looking for entry points in both GLD and SLV using a pyramid design.

position in GLD

Friday, July 15, 2011

The AAA Bubble

"Just remember, license never replace eye, ear, and brain."
--Miyagi (The Karate Kid)

Wow, this observation really struck me. From 1990 to 2009, assets with the highest credit rating increased from 20% of all fixed income to 55%. Sovereign debt comprises more than half of all AAA.

This bids an obvious question. In a world where debt and leverage have been dramatically increasing, how is it that more than half of all fixed income can be stamped as essentially risk free?

Seems that we have outsourced our brains to the ratings agencies.

Interest Expense

Substitution, mass confusion
Clouds inside your head
--The Cars

Federal government officials keep citing that annual interest expense amounts to about $400 billion. I would like to understand where this number is coming from.

The administration's own budget data (Table 3.1 here) estimates FY11 outlays for interest as $207 billion. That is broken down into 'on budget' at $315 billion and 'off budget' at -$116 billion. I presume the 'off budget' primarily relates to Social Security and the negative outlay (i.e., inflow) is from interest income on Treasuries tied to the 'theoretical' surplus in Social Security.

Focusing on the net number seems wholly appropriate as inflows are matched against outflows. If this is a bad assumption, then accounting for negative interest expense in outlays seems erroneous. It should more appropriately appear as an inflow.

Seemingly, net interest expense is half of what is being quoted and gross interest expense (i.e., on budget) is 2/3 of what is being quoted.

Thursday, July 14, 2011

S&P Chart Gazing

I've been looking so long at my pictures of you
That I almost believe that they're real
--The Cure

Starting to wonder whether the SPX might not have a date with 1000-1025. Near term support remains 1250ish, which coincides with the uptrend line off the March 2009 lines as well as the 50 day moving average on a weekly basis.

If support at 1250 is broken, then significant support does not come into play until the 1000-1025 area.

Such a level would also correspond to a near perfect 50% fibonacci retracement of the current uptrend.

A downside resolution of the current action may not occur at all. Macro winds could blow bullish and the tape could sail higher.

Should things get going to the downside, however, the 1000-1025 zone seems a plausible landing zone for the tape.

position in SPX

Stop It

Right here, right now
Watching the world wake up from history
--Jesus Jones

As the judge observes, we have a chance to stop the debt and spending madness right here. If House Republicans vote to raising the debt ceiling, then we can proactively work to reverse course.

A few weeks back, I would have opined that the chances of this happening were slim to none. But the public is increasingly engaged in this debate, and all polls suggest that at least 60% of the public is against more debt.

(btw, the president dismissed these figures the other day in an interview, suggesting that folks are busy and really don't understand the problems, and that they should let the 'professional politicians' deal w/ the issue. That's right, Mr President. The people are a bunch of rubes and you know better than us. The British expressed a similar condescending view toward the newly independent United States 235 yrs ago.)

Republicans know that new elects were sent to Washington to reverse our debt problem. Many old schoolers were probably hoping that people would disengage from the process post-election.

However, the opposite appears to be occurring. And this is putting fear--the fear of job loss--into Republicans that would otherwise cave on the debt ceiling vote.

Raising the debt ceiling increases the probability that we will back peddle into austerity with less control over our destiny. Stated differently, debt reduces freedom.

Stop it. Right here, right now.

Old Dogs, Old Tricks

Open up the window
Let some air into this room
I think I'm almost chokin'
On the smell of stale perfume
--Three Dog Night

Republican Senator Mitch McConnell (KY) demonstrated his Big Government roots with his laughable proposal for raising the debt ceiling yesterday. Surely Mr McConnell is aware that what he is proposing is clearly unconstitutional.

Perhaps that is why Democrats are warm to the idea.

McConnell's proposal is a perfect example of Congressional willingness to abdicate Constitutional responsibilities for calculated political gain.

It's worked in the past, which is prolly why this old dog has resorted to old tricks.

Unfortunately for Mr McConnell and other old dogs, the public is increasingly more engaged in the issues. Last November the people sent new elects were sent to DC to reverse our course on spending and debt.

Wednesday, July 13, 2011

Bennie and the Fix

Hey kids, plug into the faithless
Maybe they're blinded
But Bennie makes them ageless
--Elton John

While speaking to Congress today, Fed chair Ben Bernanke stated that the Fed is prepared to inject additional stimulus should economic conditions warrant. QE3 anyone?

Those words were barely out of his mouth before domestic markets ramped higher by 1% or so.

Exuberance dwindled as the day wore on, however. By the close, major indexes sported a bearish whisker on the candlestick charts. The SPX is once again sitting on its 50 day moving average.

Perhaps it dawned on market participants that further economic weakness will likely be necessary before the Fed can engage in more money printing.

The market continues to act like an addict, perking up at signs of another fix, and fading when prosects of another fix dwindle.

position in SPX

The EU Junkyard

He sings the songs that remind him of the good times
He sings the songs that remind him of the better times

Per Moody's, Ireland sovereign debt is now rated at junk status. Welcome to the junkyard that is the EU.

Tuesday, July 12, 2011

Obama and The Fourteenth Amendment

Col Robert Gould Shaw: What are you doing?
Col Montgomery: Liberating this town in the name of the republic

Rumor has it that the Obama administration is pondering raising the debt ceiling without Congress's approval by evoking the Fourteenth Amendment.

The Fourteenth Amendment was ratified by the states in 1868. The amendment contains five sections, with the fifth merely stating that Congress has the power to enforce the other four sections via legislation. The sections seem unrelated unless one considers that the amendment was passed not long after the end of the Civil War.

Although it is the shortest, the first section is the section that has attracted perhaps the most attention over the years. It specifies that those who are born or naturalized in the United States are US citizens, that states cannot take away priviledge of citizenship, that states cannot deprive people of life, liberty, or property without due process of law (famously known as the 'due process clause'), and that states cannot deny people equal protection under the law (the 'equal protection clause').

The second section lifted the 'three fifths' limitation in the Constitution (Article 1, Section 2) for apportioning House seats for Congress. Prior to the Fourteenth Amendment, those 'bound to service for a term of years (i.e., slaves) carried only a 3/5 weighting when determining House seats compared to people who were not slaves who received a weighting of one.

The third section prohibited those who participated in rebellion against the US (e.g., fought for South during Civil War) to hold federal or state government office--unless Congress voted to remove the disability (which it did in 1898).

It is the fourth section that the Obama administration has been scrutinizing. The fourth section reads:

"The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties of services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation occurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of a slave; but all such debts, obligations and claims shall be held illegal and void."

The fourth section is clearly focused on debts incurred during the Civil War, with the basic interpretation being that debt incurred by the North is valid while that incurred by the South is invalid. The administration is apparently focusing on the idea in section four that "the public debt of the United States...shall not be questioned" as a possible justification for bypassing Congress and raising the debt ceiling by edict.

This would be a gross 'out of context' interpretation of the Constitution and its amendments (something, of course, that the Left is prone to do).

More importantly, it would also be an expression of imperial power, something that the founders clearly feared.

We should fear it too.

Monday, July 11, 2011

Sticky Risk

"Looks like the University of Illinois!"
--Joel Goodson (Risky Business)

From where I sit, it seems like markets are increasingly incapable of discounting potential future scenarios, particularly bearish ones, until events are practically on top of us. The macro conditions underlying the US credit market meltdown in 2008 were a mile wide and visible for years. Yet, it wasn't until big financial institutions began taking on water that markets really seemed to grasp what was going on.

Perhaps this 'sticky risk' thesis is erroneous. After all, it has long been observed that markets ramp higher on slopes with lots of horizontal run compared to the verticality of elevator shaft-like declines. Optimism is sticky until the last ounce of hope is poured into the boat.

But if there is something to the sticky risk thesis, then what factors might be contributing to the phenomenon?

The rise of high frequency trading (HFT) is one possibility. Estimates suggest that computerized trading now comprises anywhere from 30%-50% of daily trading volume. Trading in any form is often short-term oriented, but the algorithms of automated trading may exacerbate the situation, since computer programs may not account for longer term fundamental or macro headwinds that may be approaching.

On the other hand, HFT has only recently become dominant in daily buy/sell volume. It was no where near as prevalent in 2007-2008 when markets dislocated.

A second possibility is the presence of buyers that are not price sensitive. The conspiracy theorist crowd (of which I'm one) believe that, in addition to the publicly telegraphed market interventions that governments do daily in currency and debt markets, governments have been buying stocks to prop up stock markets in the face of adverse news and events. In other countries, this is legal. For instance, the BOJ was buying the Nikkei during the spring earthquake in Japan. In the US, however, it is illegal for the government to buy stocks.

Governments can also intervene overtly by restricting two sided markets. For example, the US government prohibited short sales on certain stocks during domestic market turmoil 2-3 yrs ago. Now, we're seeing similar bans on short selling being imposed in Europe...

A third factor at work is moral hazard. Moral hazard is taking more risk than you otherwise would because you think that someone will have your back if something goes wrong. Stated differently, people take more risk when they think that their behavior is insured. All government interventions to keep markets from falling can be viewed as fueling moral hazard, and research suggests that market participants indeed take more risk knowning that central banks and other government entities will act to bail them out if risk runs awry.

In the context of our present discussion, moral hazard drives market participants toward higher time preference (short time horizons) and reduces propensity for risk management. Even in the face of evidence that risk is high and should be reduced, individuals are likely to keep risk on longer than they otherwise would because they know that government will come to the rescue if things get bad.

Finally, a fourth factor is leverage. Leverage is using borrowed funds (i.e., debt) to magnify potential returns. Leverage, however, is a two edged sword in that, when prices move against you, losses are magnified. By definition, people take on leveraged positions when appetite for risk is high.

It is plausible that leverage makes people skittish and cause them to jump ship at the first sign of trouble. Perhaps, but empirical evidence using volatility and other measures suggest that leverage tempers volatility during upmarkets and exacerbates volatility in down markets. Perhaps prospect theory is at work--i.e., emotions keeping people in risky positions longer than they would sans emotions (or the leverage).

With leverage at world record levels (and increasing daily), this factor may be the most salient in explaining the sticky risk phenomenon.

position in SPX

Scarlett Does Italy

"I can't think of that right now. If I do, I'll go crazy. I'll think about that tomorrow."
--Scarlett O'Hara (Gone With The Wind)

Today it's Italy's turn to take the stage in the EU mess. Chatter has it that Italy's finance minister, who is among the most respected financial minds in Europe, is thinking of stepping down. If he does so, then we may see more fireworks if markets express a vote of 'no confidence.'

Since the financial crisis here two years ago, I have increasing wondered why markets seem unable to discount problems looming right in front of them. The EU situation, like the US credit debacle, was visible for miles. Yet markets ignored the signals until the storm was here.

Scarlett would be proud...

position in SPX

Sunday, July 10, 2011

Missing It

I ain't missing you at all
Since you've been gone away
I ain't missing you at all
No matter what my friends say
--John Waite

In early 2009 incoming chief economic advisor Christina Romer forecast that the Obama administration's American Recovery and Reinvestment Plan would create 3 million jobs by the end of 2010.

Romer, perhaps understanding just how far off her prediction would be, stepped down last year.

With Friday's sad payroll print (add another red dot to the above at 9.2%), it should be clear to all but the most partisan that the administration's program has clearly missed its own benchmarks.

btw, for those partisans that somehow buy the argument being advanced by the adminstration that the $800 billion stimulus program did create 3 million jobs, the math works out to a cost of $266,000 per job.

Of course, acountability for poor results is not a strong suit of government in general nor of this administration in particular.

Saturday, July 9, 2011

Smokescreen of Democracy

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

It is increasingly amazing to me that people associate democracy with liberty. Democracy is a decision making process whereby the alternative that receives the majority of votes is the one that 'rules.' Of course, in some cases where the options are many, it takes merely a plurality to rule.

Unless the vote is unanimous, then democracy results in one entity ruling over another against the dissident's wishes. This, of course, equates to tyranny.

The founders understood this. This is why you will not find the word 'democracy' in any of our founding documents.

Since the Progressive era, history books have been rewritten to suggest otherwise. Today, 'common wisdom' says that democracy is a fundamental principle of a free society.

Don't be fooled by the smokescreen. Democracy is a mechanism by which some can take from others through the use of force.

Friday, July 8, 2011

Machine Head

When it was all over
We had to find another place
Swiss time was running out
It seemed that we would lose the race
--Deep Purple

Once again I find myself chewing thru Isabel Paterson's classic work, The God of the Machine. Paterson was a member of what I might call the Flack Pack. This was a group of talented writers (although I do not think that they hung w/ each other all that much) that sprung from the Depression/New Deal/WWII period who railed against what they say as an increasingly federal government.

Unlike economists such as Hayek and Mises, the Flack Pack was composed primarily of journalists who engaged in deep self study of history, economics, sociology, etc. This enables a perspective that is unique to the period. This group, which included Garet Garrett, Rose Wilder Lane, Henry Hazlitt, Frank Chodorov, and Albert Nock (among others), provide a valuable contribution to a period where writing about freedom and liberty was unpopular among 'intellectuals.' Morever, this group wrote wonderfully; their pure writing style finds few peers.

I wanted to capture one particular passage Paterson makes on pages 69-70. It well captures the reasoning behind the limited government design enacted by the Framers. Here it is, with a few more paragraph breaks to separate the ideas:

"The change from the European basis of government was made by positing that men were born free, that since they began with no government, they must therefore institute government by voluntary agreement, and thus government must be their agent, not their superior. Since volition is a function of the individual, the individuals has the precedent right. Then even if it was presumed that government did equate roughly with the moral shortcomings of humanity, it should still be limited and subsidiary.

"If everyone were invariably honest, wise, and kind, there should be no occaision for government. Everyone would readily understand what is desirable and what is possible in given circumstances, all would concur upon the best means toward their purpose and for equitable participation in the ensuing benefits, and would act without compulsion or default. The maximum production was certainly obtained from such voluntary action arising from personal initiative.

"But since human beings will sometimes lie, shirk, break promises, fail to improve their faculties, act imprudently, seize by violence the goods of others, and even kill one another in anger and greed, government might be defined as the police organization. It would have no existence as a separate entity, and no intrinsic authority; it could not be justly empowered to act excepting to as individuals infringed on one another's rights, when it should enforce prescribed penalties. Generally, it would stand as a relation of a witness to a contract, holding a forfeit for the parties.

"As such, the least practicable measure of government must be the best. Anything beyond the minimum must be oppression."

If I had to explain the thought process behind the original intent of the Constitution, not sure I would need to add much to the above.


Paterson, I. 1943. The god of the machine. New York: G.P. Putnam's Sons.

Circus Circus

"Rome is the mob. Conjure magic for them and they'll be distracted. Take away their freedom and they'll still roar."
--Gracchus (Gladiator)

Hard to see much good in today's surprisingly weak payroll number. That may not stop the bulls from drinking it pretty, however.

Bulls will likely suggest that weak job reports like this one 'demand' more stimulus from the government.

The Wall Street equivalent of Roman bread and circuses...

Also quite convenient--given the recent end of QE2.

position in SPX

Thursday, July 7, 2011

Changing the Rules

"I'm not gonna spend the rest of my life working my ass off and getting nowhere just because I followed rules that I had nothing to do with setting up, OK?"
--Tess McGill (Working Girl)

After Tuesday's downgrade of Portuguese debt by Moody's, the European Central Bank (ECB) today said that it will suspend minimum collateral rules for Portuguese debt in ECB refinancing operations.

A lender's axiom is that borrowers deemed to be greater credit risks must put up more collateral.

As a result of the debt downgrade, ECB rules dictated that Portugal should now be seen as a greater credit risk and must put up more collateral in order to refinance debt. Unfortunately, more collateral is something that Portugal doesn't have.

Facing an inconvenient situation, the ECB did the bureaucratic thing. It changed the rules.

Wednesday, July 6, 2011

Pop Up Blocker

Well the years start coming and they don't stop coming
Fed to the rules and I hit the ground running
Didn't make sense not to live for fun
Your brain gets smart but your head gets dumb
--Smash Mouth

Yesterday Moody's took Portuguese debt down four notches to junk status. Chatter getting loud on Ireland as well.

Not sure how much longer the EU's pop up blockers can mitigate the debt virus...

Tuesday, July 5, 2011

Truth and Human Action

"He chose...poorly."
--Grail Knight (Indiana Jones and the Last Crusade)

Right on cue after yesterday's post, Rothbard discusses the methodology employed to develop the theory in Human Action.

Mises (and other Austrian economists) believed that valid economic theory is not likely to be derived from the empirical, hypothesize-and-test methods common to physical sciences. Economics is a social science with myriad variables in motion at any point. To the Austrians, it seems improbable that empirical methods can generate broadly generalizable contributions to economic science.

Instead, Mises and other Austrian economists prefer methods of praxeology. Praxeology involves applying fundamental axioms of human behavior to phenomena of interest in order to draw generalizable conclusions. Many academics have contested praxeological methods because, well, they don't fit the current paradigm of what constitutes 'science' (insert wink from Thomas Kuhn right here). Plus, as Rothbard notes, by employing praxeology a well-reasoned thinker can come to sound, generalizable conclusions about economics in relatively short order--something that would put legions of economists pursuing tiny empirical research projects out of work.

The basic approach to praxeology is to start with self-evident, uncontestable axioms about nature and human behavior and build generalizable conclusions from there using well-reasoned thought processes. This is akin to getting closer to the truth by building on what we already know to be true (and false).

Rothbard suggests that the fundamental axiom of praxeology is the existence of human action itself. It essentially boils down to this: People act toward some ends. And people employ some means to achieve those ends. This is indeed a self-evident axiom; it would be intellectually dishonest to generalize otherwise. From this fundamental truth, Rothbard argues that 'almost the entire fabric of economic theory' can be generated.

Some have contested that praxeology implies 'rationality' of action--a trait that is not necessarily evident in much human action. Rothbard observes, however, that rationality is not an underlying condition of praxeology. Nothing is assumed about the wisdom of man's ends, or about the correctness of his means. It is only postulated that men act toward some ends, and that they employ some means to try to attain those ends.

It has also been said that Mises' theory attempts to generate political conclusions from economic science. Any reader of Mises knows this is not true. Perhaps more so than any other economist, Mises was careful to separate political beliefs from economic realities. The former is based on judgment systems upon which firm conclusions can never be obtained. The latter, on the other hand, is grounded in natural laws that have predictable consequences.

For example, the content of these pages often implies that capitalism is a 'superior' economic system to socialism because standard of living w.r.t. resource abundance is certain to be higher under capitalism. That capitalism will generate more economic abundance is a predictable outcome grounded in natural law. However, calling capitalism 'superior' to socialism is really a subjective statement of values. It presupposes that people value abundance over poverty. In fact, it is possible that proponents of socialism may prefer the opposite. For example, they might prefer poverty if it can be evenly spread across the populace.

Praxeology, the study of human action, provides machinery for helping us understand the economic consequences of various political actions. Once these consequences are known, individuals can apply their own value judgments.

Monday, July 4, 2011

The Road to Truth

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

Was reading a blog written by some Lefty writer at who was attempting to read Mises' (1949) Human Action.

The writer confessed that he was having trouble chewing thru the book, perhaps because his mind was having trouble with concepts that did not fit his view of the world. This comment stuck out to me in particular:

"...aside from the content of the first two chapters, what struck me most about Human Action was Mises' absolute certainty that he was right, beyond any reasonable doubt..."

Perhaps the writer doesn't realize it, but that is the goal of reasoned thought. Reasoning is the process of getting closer to the truth--to what is right or correct. Reasoning allows us to generate hypotheses or to consider claims made by others--and then test them for their validity. This testing may be done against empirical evidence or by using logic and reason. If we remain intellectually honest during this process, then we will advance closer to the truth over time.

Human Action reflects Mises' life work in pursuing the truth. His writing reflects what he knew was right.

Mises chose the road to truth--a road that beckons to us all.


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

Holiday in the Hamptons

If we took a holiday
Took some time to celebrate
Just one day out of life
It would be, it would be so nice

After it became apparent that Greece would not immediate come apart, stock markets sprinted higher over the past week to the tune of about 5%.

Commensurately, bonds have sold off, suggesting that much of the recent action has been courtesy of asset allocators rotating out of bonds and into stocks.

Is this move durable? Certainly possible. But my sense is that we could be witnessing a 'failing rally' here. Short covering, relief that the EU is still together (for at least a few more days), and a little 'Hawthorne effect' as QE2 comes to an end.

Nothing substantial has occured to lift the macro concerns. In fact, the forces behind those macro concerns continue to intensify. Moreover, sentiment, which was getting a tad too bearish in the near term, has dramatically shifted toward the giddy end of the spectrum in just a few days.

Risk management seems to have joined the crowd headed to the Hamptons on holiday.

As such, I want to use prices to my advantage on any continuation of this rally. This means letting go of more long exposure and looking for nice entries for additional short exposure.

position in SPX

Sunday, July 3, 2011

The First Law

"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)

This weekend we celebrate the 235th anniversay of America's independence. The first law passed by the fledgling US Congress--passed while we were still subjects of the King of England--was the Declaration of Independence.

It declares that our freedoms come naturally from our humanity instead of from government. This was a very radical statement in 1776. At the time, it was presumed that the King granted rights to citizens. It also declared that when governments consistently usurp the natural right of people to be free, it is just for the people to 'throw off' that government in lieu of one that more consistently respects individual liberty.

Those who rose up against the British knew, like Jefferson, that these truths were self evident.

The Declaration of Independence is uniquely American. It defines our belief in the sovereignty of the individual.

These ideas still remain radical and elusive to operationalize.

Those seeking to do so can take solace in the fact that the first law is still law today.

Saturday, July 2, 2011

Asset Allocation Update

Benjamin Martin: May I sit with you?
Charlotte Selton: It's a free country. Or at least it will be.
--The Patriot

Current liquid financial asset allocation as we head into the back nine:

cash 60%
equities 21%
alternative assets 15%
fixed income 4%

Alternative assets include short equity 11% and commodities 4%. Fixed income is short duration.

21% equities + 4% commodities - 11% short equities = 14% net long risky assets

Friday, July 1, 2011

Not a Penny More

"No more!"
--Rick Latimer (The Principal)

Similar to our commentary here, yesterday the judge was also on the case of the intellectual dishonesty that spewed from the president's Wed press conference. At ground zero is the president's claim, echoed by other Democrats and even some Republicans, that not raising the debt ceiling would mean default.

The judge says it more eloquently than I. "This is plainly a bankrupt and unconstitutional way of thinking that cannot hold up to rational interrogation."

Stated differently, and in my words, the president's claim is utter nonsense.

Not raising the debt ceiling would force the federal government to re-prioritize its resources so that debt payments can come out of current inflows. This is precisely what needs to happen.

In 2010, interest expense amounted to about $200 billion, or about 6% of outlays. In 2011, interest expense is forecast to be $207 billion--which if we stuck to 2010 receipts of nearly $2.1 trillion amounts to about 10% of inflows.

By not raising the borrowing limit, government would be forced to hack about $1.5 trillion (nearly 40%) from the budget. This would move us in the right direction.

All that has to occur to put this in motion is for House Republicans to stand fast and say 'no' to the debt ceiling increase. My fear is that they will cave. If they do, then we may lose the last opportunity to turn things around in a proactive manner.

As the judge notes, this summer we can tell the government 'not a penny more.'

Chicken, Minnesota-Style

"Does your father know the governor?"
--Callie Scheffer (Joe Somebody)

Minnesota's government has commenced a partial shutdown after failing to come to terms with a $5 billion budget shortfall. The interesting thing here is that the governor who called for the shutdown is a Democrat. He did so after not being able to come to a deal w/ GOP legislators over taxes and other issues.

This seems an obvious game of chicken. The governor hopes to paint Republicans as bad guys for not budging. However, state workers that are getting furloughed are likely Democrat partisans who could turn on the governor if they lose their meal tickets.

More standoffs are in the wings as state coffers run dry. Let's hope that enough state legislators have the backbone to stand strong in the face of mob pressure.