Wednesday, November 30, 2011

Bazooka Time

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

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

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

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

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

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

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

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

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

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

position in SPX, gold

Coordinated Action

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

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

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

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

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

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

position in SPX, gold

Tuesday, November 29, 2011

Examples of Distortion Theory

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

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

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

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

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

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

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

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

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

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

Monday, November 28, 2011

Skeptical Spectacle

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

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

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

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

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

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

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

position in SPX, gold, silver

Cash Rich, Balance Sheet Poor

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

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

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

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

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

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

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

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

position in commodities

Sunday, November 27, 2011

Loan Ranger

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

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

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

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

Friday, November 25, 2011

Distortion Theory of Media Bias

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

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

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

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

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

Groseclose states:

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

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


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

Thursday, November 24, 2011

The Forgotten Man

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

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

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

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

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

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

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

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

Wednesday, November 23, 2011

Democracy, Compromise, and Progress

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

This article makes a number of thoughtful points.

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

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

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

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

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

Doing so maximizes the chance of progress.

Sacrificial Lamb

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

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

More substantial support rests at about 1120ish.

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

position in SPX

Bids Wanted Bunds

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

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

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

Tuesday, November 22, 2011

Marbury v. Madison

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday, November 21, 2011

Penalty Flag

I took it all for granted
But how was I to know
That you'd be letting go
--Bryan Adams

Last week's question about which way the pennant pattern in major market indexes would break has been answered. The pattern has resolved to the downside.

The reason being assigned to the rhyme this morning is the budget supercommittee's (gotta like that term) failure to come to an agreement over $1.2 trillion in spending cuts. No deal inked by Wed means across-the-board cuts of like amount commencing in 2013.

This sets up the 2012 elections as a referendum on Big Govt.

Of course, other issues are weighing markets as well. Europe is still on fire, and fallout from the meltdown of MF global is wreaking havoc in commodity markets.

Personally, am leaning slightly net long--about 5-7% of liquid assets. In other words, the value of long positions (primarily commodities) outweights the value of short positions (SPX index short) by a small amount.

Should stock slippage continue another 30 SPX handles or so, I'll start looking to cover some of my short position (support resides in SPX 1120-1140 range). With precious metals getting slapped around today (gold and silver both off 3-4%), am itching to add to those positions as well.

positions in SPX, gold, silver

Sunday, November 20, 2011

Median Voter Theory

Trying to make sense of it all
But I can see it makes no sense at all
Is it cool to go to sleep on the floor?
I don't think that I can take anymore
--Stealers Wheel

Median voter theory (Black, 1958) says that that when you take a group of voters and line them in rank order from farthest Left to farthest Right, then the voter in the middle, i.e., the median, gets his/her way in terms of policy.

Consequently, if you're a politically motivated journalist, then your target audience is median voters, or moderates.

Combine this theory with the findings from Crawford and Sobel's (1982) model. The farther away a politically motivated journalist is from a centrist ideology, then it is more likely it is that the journalist will exaggerate the truth and report inaccurately. This is because the journalist is trying to win over moderate receivers, who by definition differ in political ideology from senders positioned farther toward the edges of the political spectrum.

Given that survey research finds that an overwhelming majority of journalists lean Left (e.g., Lichter, Rothman, & Lichter, L.S. 1986; Povich, 1996), hopefully you can see where this takes us theoretically w.r.t. predicting the general direction of bias in the media.


Black, D. 1958. The theory of committees and elections. New York: Cambridge University Press.

Lichter, S.R., Rothman, S., & Lichter, L.S. 1986. The media elite. Bethesda, MD: Adler & Adler.

Povich, E. 1996. Partners and adversaries: The contentious connection between Congress and the media. Arlington, VA: Freedom Forum.

Saturday, November 19, 2011

Strategic Information Transmission

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

An important contribution to theory on media bias is Crawford and Sobel's (1982) model of 'strategic information transmission.' This is a model grounded in game theory.

In the game, the Sender of information (e.g., a journalist) has some information that a Receiver (e.g., a media consumer) does not know. The Sender transmits a message to the Receiver. After digesting the message, the Receiver chooses a policy which affects the well-being of both players.

Crawford and Sobel (1982) undertake some high powered math to demonstrate the results of the game, but the implications of their results can be understood intuitively.

Suppose that you're a moderate voter who is completely uniformed about two candidates, a Republican and a Democrat, in an upcoming election. You want to learn who is the best candidate. You have three information sources, each of whom has studiously researched the candidates, to choose from: a) a far Right blogger, b) a far Left blogger, c) your brother, who is politically moderate like you. Each of these sources knows your position on the political spectrum.

Who are you likely to select as an information source? Your brother, of course, because you trust that, given his position on the political spectrum, his information will be useful, and he has little incentive to exaggerate.

Another result of the Crawford and Sobel (1982) is less obvious. If you would happen to seek out the far Right blogger, his thinking goes like this: "You probably believe that I'll exaggerate the virtues of the Republican, and you'll therefore discount the positive things that I say about him. So, if I want you to be accurately informed, then I need to exaggerate my message even more." The sender exaggerates/receiver discounts dyad is likely to escalate until the information provided is severely distorted.

The same process applies if you seek out the Left blogger.

The end result is that both bloggers, even with honest motivation to accurately inform you, have incentives to exaggerate simply because they know that you don't trust them.

Importantly, there is no inborn character trait that makes the Left or Right blogger less honest than your brother. The key is that your political stance differs from those of the bloggers.

Interestingly, if your political values would happen to migrate Left, then according the model this would cause the Left blogger to exaggerate less, and become the most honest of the three information sources.

The lesson: journalists who have political values most similar to their audience have the most incentive to report truthfully.


Crawford, V.P & Sobel, J. 1982. Strategic information transmission. Econometrica, 50(6): 1431-1451.

Friday, November 18, 2011


Sometimes I feel, sometimes I feel
Like I've been tied to the whipping post
Tied to the whipping post
Tied to the whipping post
Oh Lord it feels like I'm dying
--Allman Brothers

A few missives back we discussed legal philosophy surrounding Natural Law. An opposing legal philosphy is Positivism.

Positivism says that laws do not require a moral basis to be considered valid. Instead, laws are 'posited' by humans, and they are valid if they are enforceable. Essentially, laws are those commands that people can be coerced into obeying.

Under Positivism, all rights are granted by government. Those same rights can be taken away at the discretion of the government.

Unlike the Natural Law legal framework, Positivists deny the presence of a higher 'natural' law to which human law must conform in order to be considered valid.

A common expression of Positivism is democracy, where laws are enacted by 'majority rule.' The group that marshalls a majority vote has its way with no constraints. As we have noted many times on these pages, this is destructive to freedom.

Positivists fear that judges will strike down laws passed by majority vote under the auspices that the law is not in accordance with Natural Law. If we are to err to any side, say the Positivists, it should be to the side of the collective knowledge and experience of the majority.

It should be clear that enacting Positivist law requires that dissenting minorities obey out of fear of the government.

The implement of Positivism is the truncheon.

Thursday, November 17, 2011

Bass Fishing

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

Kyle Bass holds his composure well in this interview (part 1, part 2) with a hostile BBC interviewer. Like many Big Govt types, the interviewer wants to implicate Bass in causing market meltdowns or profiting from the pain of others.

She also seemed to scold him for 'betting against government for personal gains.'

It would have been very hard for me to stay as diplomatic as Bass was in his replies. Bets against government will decline if governments decrease their behavior worthy of betting against.

We are on the verge of a global margin call; market forces will reverse the profligate behavior of governments regardless of what bureacrats want to do.

Precious comment in part 2, where Bass equates owning gold to owning a put against the idiocy of the political cycle.

Nicely said.

position in SPX, gold

Wednesday, November 16, 2011

Slant Quotient

"Like everyone else you were born into bondage. Into a prison that you cannot taste or see or touch. A prison for your mind."
--Morpheus (The Matrix)

Previously, we examined Groseclose's (2011) political quotient (PQ) as the basic building block for measuring the degree of liberal bias in the media. Because it measures the extent to which the roll call votes of Congresspeople align with the agenda of the liberal interest group Americans for Democratic Action (ADA), the PQ cannot be directly determined for media outlets.

Groseclose needed a way to link the bias exhibited by politicians to the bias exhibited by media outlets. He did so by using citations to think tanks. To give their positions more legitimacy and credibility, politicians embed think tank citations when giving speeches. Journalists have the same need for legitimacy and credibility, so they embed think tank citations in their stories.

Think tanks are a useful data source because they span the politican spectrum from far Left to far Right. And because politicians as well as journalists are likely to support their points of view with 'authoritative' sources that espouse similar views (courtesy of confirmation bias/selective reasoning), it is likely that those on the Left will prefer citing Leftist think tanks and those on the Right will prefer citing Rightist think tanks (although that is not a direct hypothesis put forth by Groseclose & Milyo 2005).

Groseclose and Milyo's (2005) analytical method basically proceeded as follows. First, scan the Congressional record over a period of time for instances where members of Congress cited a prominent think tank or policy groups (using an authoritative source, the researchers had established a list of about 200 such organizations). Next, record the PQ of that member of Congress.

The stories of media outlets over a similar period of time were also scanned in search of citations to the same list of think tanks.

In Table 1 of their paper, Groseclose and Milyo (2005) list the 50 most cited think tanks by media outlets, along with the average PQ of Congresspeople who cited the same think tank and the number of times those Congresspeople cited the source was cited. When scanning the list, one takeaway is that the average PQ of Congressional citations matches conventional wisdom about the ideological positions of various think tanks. For example, thinks tanks broadly considered to lean 'conservative' (e.g., Heritage Foundation, Christian Coalition, National Right to Life Foundation) were associated with low PQs, while think tanks broadly considered to lean 'liberal' (e.g., NAACP, Sierra Club, Common Cause) were associated with high PQs.

It is also worth noting that among the top ten think tanks cited by the media, four of them were assoicated with PQs above 60 while only one was associated with a PQ below 40. I calculate the average PQ associated w/ the top ten cited sources to be 55.8. In other words, the most popular think tank sources used by media outlets lean Left.

Another preliminary indicator of media bias comes by comparing the PQs of the top ten media-cited think tanks with the top ten Congress-cited think tanks. Four of the top ten think tanks cited had a PQ less than 40, and the average PQ of the top 10 sources by Congress was by my calcs 47.3 (altho also by my calcs the difference between the two means was not significant using a simple two-sided t-test (p=.22)). The findings suggest that the media is more liberal than Congress, although the differences captured by this rudimentary analysis are not conclusive.

It is after this rudimentary phase that the two PhDs earn their pay. To conduct a more thorough, generalizable analysis, Groseclose and Milyo (2005) essentially use a series of regression models to estimate the degree of liberal bias in the media. The methods are beyond our scope here, but the basic thought process is: "I know that there is a significant relationship between a Congressperson's PQ and the extent to which that person cites various think tanks. So if I have data on the extent to which a particular media outlet cites various think tanks, then I should be able to estimate a PQ for that media source."

Groseclose (2011) calls this estimate the Slant Quotient (SQ). The higher the SQ, the more liberal the media outlet. An SQ of zero means that a media outlet sounds about as conservative as a speech by Michelle Bachman. An SQ of 100 means that the outlet sounds about as liberal as a speech by Nancy Pelosi. An SQ of 50 means that the outlet is perfectly centrist, displaying the same level of liberal bias as the typical American voter.

Here are SQs of variou media outlets. We'll discuss more in the future, but it should be apparent from a cursory scan of the data the media is biased Left, and significantly so.


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

Groseclose, T. & Milyo, J. 2005. A measure of media bias. Quarterly Journal of Economics, 120(4): 1191-1237.

Tuesday, November 15, 2011

Right Triangle

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

The eyes of many traders are glued to the 'flag' or pennant' pattern forming in the SPX. Among the traders that I follow, it seems that most anticipate an upside resolution to the pattern.

Classic technical analysis says that chance favors resolution the direction of the previously prevailing trend. Yes, we've rallied off the early October lows, suggesting that the prevailing trend is up.

A counter view is that we've been experiencing only a bear market rally since October. A broader time horizon suggests a series of 'lower highs' since spring--in which case the primary trend could be interpreted as down.

In any event, we should get an answer pretty soon...

position in SPX

Insider Trading in DC

"Ah, Mr Gekko, that's not what I do. I could lose my license. If the SEC found out, I could go to jail. It's inside information, isn't it?"
--Bud Fox (Wall Street)

As pathetic as 60 Minutes is at 'investigative journalism,' once in a while the show does good work. Such is the case with last Sunday's segment on insider trading in Washington.

Essentially, there is no law prohibiting federally elected officials from trading on information that they are privy to in their government jobs. In the private sphere, of course, those who trade using non-public information are subject to prosecution in Gekko-like fashion.

A current high profile example involves the former head of hedge fund Galleon Group Raj Rajaratnam, who was sentenced to 11 years in prison and ordered to pay over $150 million in fines after being convicted of insider trading.

Ironcially, if Mr Rajaratnam had made the same trades as a member of the US Congress, no criminal proceedings would have been no criminal proceedings at all.

In a bipartisan effort, 60 Minutes staff cornered both current House Speaker Boehner and former House Speaker Pelosi on their trading behavior. There are many more where those came from.

It should also be noted that, although 60 Minutes deserves a shout out for bringing this issue to the masses, the good folks at Minyanville were on the case here months ago.

When a mainstream outlet like 60 Minutes finally decides to pursue a story like this, one has to wonder whether the time is ripe for reversing the Double Standard that Washington enjoys.

Monday, November 14, 2011

Income Mobility

Out in the woods
Or in the city
It's all the same to me
When I'm driving free
The world's my home
When I'm mobile
--The Who

Nice little missive warning against concluding much about 'income inequality' from distribution of income studies like the one recently issued by CBO.

An important limitation of income distribution studies is that they group earners by category. For example, earners are often filed into one of five categories, top 20%, next 20%,..., bottom 20%. Thus, when CBO reports change in income for the top 20% compared to change in income for the bottom 20% over a given period, it is tempting to conclude that individual incomes in each group changed, on average, by that amount.

Such an approach is prone to faulty conclusions because it ignores the influence of income mobility. Income mobility measures the extent to which individuals move between categorical brackets.

Citing findings from a recent income mobility study by Treasury, the author demonstrates that many individuals tracked over periods of time move in directions opposite those suggested by the static distribution of income studies. In the Treasury study, for example, incomes of those in the top one and five percent in 1996 were actually lower in 2005, while those in the bottom 20% in 1996 saw their incomes increase on average by 91% in 2005.

Static income distribution studies miss the dynamic effects of income mobility as the situations of individuals change over time.

Sunday, November 13, 2011

The Parable of the Talents

"A king may move a man. A father may claim a son. But remember that, even when those who move you be kings or men of power, your soul is in your keeping alone. When you stand before God you cannot say 'but I was told by others to do thus' or that 'virtue was not convenient at the time.' This will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

In the cycle of scripture readings constituting Ordinary Time in the Catholic church, today's gospel came from Matthew 25. The passage is often called 'The Parable of Talents.'

Before leaving on a trip, a master trusts portions of his wealth, measured in 'talents,' to three servants. He gives 5 talents to one servant, 2 talents to a another, and 1 talent to a third.

While the master is away, the servant with 5 talents invests them and makes 5 more. The servant with 2 talents also doubles his money.

The servant with 1 talent, however, does nothing with his small trust. Instead, he buries it in the ground.

Upon return from his trip, the master congratulates the two servants who had wisely invested their talents, and tells the pair that, because they have done well with 'small matters,' they will be entrusted with more opportunities in the future.

To the third servant, the one who did nothing with his talent, the master has no kind words to say. He berates the servant for taking no risk at all. At the very least, the master notes, the talent could have been put in the bank where it could have earned at least a small, low risk return.

The servant is then shown the door.

This story resonates with me more than any other passage in the Bible. From where I sit, the lessons are many:

1) Our Creator bestows 'talents' with each of us.

2) For reasons unexplained, the distribution of talent is uneven. Some are given more talents than others.

3) Regardless of the level of endowment, each of us is expected to employ the talents that we are given to the best of our ability.

4) If we do so in small matters (here on earth), then we will be rewarded in large matters (the afterlife).

5) Those who squander their talents on earthly matters will not be rewarded in the hereafter.

The most interesting twist in the story to me is that the servant endowed with the least number of talents is the one that gets hammered by the master. In the spirit of 'social justice,' one would think that the master would pick on the most richly endowed servant for not doing more, and cut the lesser endowed servants some slack.

The message seems to be that, even if our talent endowment is meager, the Creator expects that we do our best with it. No quarter will be given to those who squander their talents, however modest those talents may be.

Friday, November 11, 2011

Eternal Law, Natural Law, and Natural Rights

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

Laws that govern the functioning of the universe can be thought of as Eternal Law. Scientific rules of physics, chemistry, biology, et al govern eternal law. These rules are self-evident--whether or not we understand or misunderstand their workings. The truthfulness of Eternal Law requires no explanation or proof in order for it to exist.

Human command cannot alter Eternal Law. As stated by Sir Thomas More's character in Robert Bolt's play A Man for All Seasons, "Some men think the Earth round, others think it flat...But if it is flat, will the King's command make it round? And if it is round, will the King's command flatten it?"

Natural Law governs human behavior in the context of Eternal Law. People have yearnings which they seek to fulfill. In the natural state of the world, people are in possession of reason and free will that can be employed in pursuit of desired ends.

Natural Law is flouted when one individual or group interferes with the pursuits of another individual. For example, confiscation of property is wrong in the context of Natural Law because it impairs human endeavors that produce things and/or trade for other things to enrich life.

When government interferes with the natural order of things, even if the beneficiaries of that intervention constitute the majority, someone will always pay the price of having his/her human nature transgressed upon.

Stated differently, government intervention is certain to violate the freedom of at least one individual.

The rules of social interaction necessary to allow individuals to pursue their inclinations are known as Natural Rights. Natural Rights are not granted by the government. As Jefferson famously observed, these rights are unalienable, and include the rights to life, liberty, and the pursuit of happiness. These rights are granted to us by our humanity, not by government.

Natural Rights are grounded in the principle of nonaggression. We are free to choose and pursue our interests, but only to the extent that our actions do not infringe upon the freedom of others.

Natural Rights can be expressed in various forms: speech, religion, assembly, association, self-defense, etc. However, all of these freedoms are extensions of one central right: the right to own property. Property begins with one's own body, and extends to our freedom to use it in pursuit of our interests and to enjoying the fruits of our pursuits.

As sagely noted by Rothbard (1982), an individual does not have a 'right to freedom of speech.' Instead, the person has the right to rent an assembly hall and speak to those who enter and listen, or to publish a pamphlet and distribute it to those willing to read it. What the individual has is property rights, including the right of free contract and the right to trade--be that trade in goods or ideas.

An important implication is that those who refuse to recognize some aspect of property rights are essentially denying the validity of all Natural Rights. It is inconsistent, for example, to claim a right to free speech while disparaging the right to tangible property.

Of course, such inconsistency is constantly on display among politicians and their special interest groups.


Rothbard, M.N. 1982. The ethics of liberty. Atlantic Highlands, NJ: Humanities Press.

Thursday, November 10, 2011

Escape Route

Forty seven dead beats living in the back street
North, east, west, south--all in the same house
Sitting in the back room waiting for the big boom
I'm in a bedroom waiting for my baby
--Escape Club

The more I ponder the global macro situation, with particular attention on Europe, the more I feel the urge to move more dollars out of the banking system. As my buddy Fil observes, if people begin lining up to take their money out of European banks, then it will be game in a matter of days.

At that point, depositors either a) lose their wealth in a deflationary bank collapse, or b) lose their wealth in a hyperinflationary confettifest of money printing to return nominal balances to depositors.

Either way, wealth gets destroyed.

That's Europe...not our problem, you say. Perhaps. But the world is an interwoven one. There is more than one row of dominos that links the European finanical system to the US. Moreover, it is easy to visualize a fraction of US citizens edging their way toward the exits of domestic banks should a full fledged European banking crisis be plastered across CNN.

In a banking system leveraged 10:1 or more, it would not take much loss of confidence to render the system insolvent.

In any event, I've been buying more precious metal recently. Today I bought my first physical silver in more than three years.

position in gold, silver

Wednesday, November 9, 2011

Italy on the Margin

Lunatic fringe
I know you're out there
You're in hiding
And you hold your meetings
--Red Rider

Turmoil is increasing in Italy. Yesterday a major London clearing house raise margin requirements on Italian sovereign debt, sparking a wave of bond selling. Longer dated Italian sovereign debt is marking new lows this am. Commensurately, Italian swap spreads are blowing out.

Italy PM Berlusconi is rumored to be stepping down soon. My buddy Fil shares some thoughts on the consequences.

Markets around the world are listening to some chin music as a result. Stateside markets have opened down a coupla percent.

position in SPX

Tuesday, November 8, 2011

Collective Bargaining is not a Right

"Let me explain something to ya, sonny boy. Nothin' moves off these docks without it don't get loaded by the union. I don't see no union people around here. Do you?"
--Tony Two Toes (Eraser)

Perhaps the biggest issue on the ballot in Ohio today is Issue 2. Issue 2 is a referendum on Ohio Senate Bill 5, a bill signed into law earlier this year. Similar to a law passed in Wisconsin last year, SB5 is mired in controversy because it seeks to cuts costs related to workers on the state payroll.

Naturally, people linked to public worker special interest groups do not like SB5. Deep union pockets have spent millions on propaganda ahead of the election. Similar to protests over the Wisconsin law, a primary argument against SB5 is that it takes away worker 'rights' to collective bargaining.

But no person or group possesses a de facto right to bargain collectively. In fact, no person or group possesses a right to bargain at all. Bargaining is a negotiation between entities. This negotiation is voluntary. If one side of the table chooses not to bargain with the other side, then there is nothing that the other side can do to force negotiation.

But that is precisely what public worker unions would like to do. They want to keep the law bent in their favor to force the union's position to the table. They would like to write the law so that the other side of the table, the taxpayer, has no choice but to bargain with the union.

Indeed, the 'right' that is being violated under the arrangement that the unions favor is called freedom of association. Freedom of association means that you or I have the freedom to decide what friends I keep, what groups I belong to, and who I choose to do business with.

Freedom of association is a right that is borne from our humanity. It is not granted to us by government. It is protected by the Fourth Amendment, which secures individuals against unlawful seizure.

Once again, the Left has twisted around the issue. What they claim is a 'right to bargain' issue for public sector workers is really a 'right to associate' issue for the taxpayer. Any law that mandates a 'closed shop' strips taxpayers of their freedom to negotiate with any party they choose, and to choose to walk away if desired.

Silver Cup

Cromwell: I have evidence that Sir Thomas, when he was a judge, accepted bribes.
Duke of Norfolk: What? Goddammit, he was the only judge since Cato who didn't accept bribes! When was there last a Chancellor whose possessions after three years in office totaled one hundered pounds and a gold chain?
--A Man for All Seasons

Silver appears to be tracing out a cup and handle-ish pattern. Added to my SLV position this am and may add a bit more around here.

Should SLV start to 'fill the gap' precipitated by the mid Sept meltdown, then a trade 'works' to 38ish.

position in SLV

Monday, November 7, 2011

Al Dente

Steve: Still don't trust me?
Stella Bridger: I trust everyone. It's the devil inside them I don't trust.
--The Italian Job

Italy continues to look like the next EU hotspot. Italian sovereign debt is marking new lows this am. Chatter is getting louder that the Italian prime minister Berlusconi and his administration are on the way out.

Contacts from my network that know the situation suggest that income administrations are likely to make Berlusconi look like the austerity king...

Democracy, Inconsistency, and Conscience

I see the problem start
I watch the tension grow
I see you keeping it to yourself
And then instead of reaching conclusions
I see you reaching for something else

Nice essay on the immorality of democratic voting.

One must conclude that those who advocate 'majority rule' voting must not believe in the property rights and the rights of the individual. Iinstead, they must believe that property is the domain of the collective to be forcefully redistributed at the whim of majority interest.

It is difficult to understand how the consciences of these people are not constantly haunting them. They must struggle with questions such as:

How can I justify forcing a minority, even a single dissenter, to give up their property to me and my cohort? How is this not outright theft--like highwaymen accosting the lone traveler?

If I do not respect an individual's right to property, then how can I honestly claim other personal rights, such as speech, religion, etc? What is the source of the personal rights that I do claim?

The inner conflict must be severe.

Sunday, November 6, 2011

Judge's Orders

How can we find out more
Who owns the keyless door
Where does the circle end
Who are the unwatched men

The judge continues to operate in the zone, this time w/ a letter to the OWS crowd. He suggests three demands that the OWS people should focus on if they want the federal govt to stop killing people and to cease picking winners and losers:

1) End the Fed
2) End the wars
3) End the income tax

Doing that essentially starves the beast.

The judge explains that the current 99/1 propoganda is a class warfare ruse to distract the OWS from the real issue: the complicity between strong interest groups and the federal govt. He says,

"You are not poor because ten percent are rich. You are poor because the federal government has taken up all the oxygen of success in the room. You are poor because of decades of federal mismanagement that has laid ruin to our economic system. Capitalism did not make you poor. The lack of capitalism did. Your inability to pursue your entrepreneurial dreams unmolested by the government is the crime the government has committed against you."

The judge remains one of the very few in mainstream media who exhibit mastery of the priniciples upon which this country was founded.

Saturday, November 5, 2011

Moral Irony

"Must men go to jail because they find themselves at odds with a self-appointed prophet?"
--Henry Drummond (Inherit the Wind)

The hypocrisy on display daily by the Left and the Right is sometimes jaw dropping. Take, for example, each side's views on 'morality.'

The Right often seeks to employ government as an agent for imposing a moral code of conduct grounded in organized religion. The Left often seeks to employ government as an agent for imposing a moral code grounded in a secular morality. Each side constantly warns the other: "Don't try to impose your morals on me!"

Yet that is precisely what both sides attempt to do.

Most ironic of all, both sides seek to use government, the world's strongest arm, to coerce the other side into normative submission.

The use of force to impose a moral code may be the most immoral act of all.

Friday, November 4, 2011

Political Quotient (PQ)

Kay Chandler: You're not a Democrat, are you?
Dutch Van Den Broeck: What if I am?
Kay Chandler: We talk. I give you books to read
--Random Hearts

Central to the method for measuring media bias in Groseclose (2011) is the political quotient (PQ). The PQ is a number, generally between 0 and 100, that reflects how liberal an individual is. The higher the number, the more liberal.

The PQ estimates the extent to which an individual agrees with endorsed positions of Americans for Democratic Action (ADA), a liberal interest group. Thus, to determine liberal media bias, the PQ employs criteria selected by liberals.

This is an attractive approach, because it reduces the contestability of what constitutes the liberalism construct. Liberals are defining it themselves. Stated differently, the PQ metric garners considerable validity because it is difficult to contest that the ADA issues are not a legitimate representation of the liberal political agenda.

The PQ of members of Congress can be estimated in a straightforward manner. Whenever an issue supported by the ADA (here is a current list of ADA issues) comes up for vote in the House or Senate, then a Congressperson's liberal bias is expressed by whether his/her roll call vote sides with the ADA's endorsed position.

The PQ is basically the number of times that an individual's roll call vote sides with the ADA position, divided by the total number of ADA-related issues put to a vote. In his method, Groseclose normalizes the scores so that a 50 represents the score of the average member of Congress (here is a list of some well-known politicians and their PQs).

Thus a PQ greater than 50 implies greater agreement with the liberal political agenda than average, or someone who is 'more liberal.'

People who don't happen to be members of Congress can estimate their PQs by assessing how they would have voted on the same issues. Here is a quiz that employs roll call votes taken in the House and Senate in 2009 on ADA-centric issues. Assume some margin for error here, as more accurately pinning down your 'real' PQ may require a larger sample size of roll call issues.

One concern that I have with this approach is that it assumes a unidimensional scale for measuring political bias. Of course, this is a common assumption that facilitates positioning political bias as being on either one side (Left) or the other (Right).

As we've noted on these pages, it is more likely that political beliefs are more appropriately captured on multidimensional rather than on unidimensional scales--which means that the oft referred to 'political spectrum' is more accurately thought of as a 'political landscape.'

Consequently, the PQ scale may commingle groups that have importantly heterogenous beliefs. For example, a libertarian might vote in favor of ADA agenda items related to particular social and foreign policy issues, while voting against ADA agenda items related to economic and fiscal policy issues. On the PQ scale, then, libertarians might appear as moderately liberal.

Groseclose, for example, estimates libertarian Ron Paul's PQ as about 31. However, it is difficult to view Paul's position on the PQ as completely consistent with the well-known politicians bracketing him on Groseclose's example list.

That said, Groseclose's PQ scale offers a worthy building block for estimating media bias. We'll discuss how in future posts.

Thursday, November 3, 2011

Executive Order

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

American presidents have been issuing executive orders ever since the ink was drying on the Constitution. Early executive orders were informal and undocumented. It was not until 1907 that executive orders were formally numbered and archived (at that time, orders back to the Lincoln administration were retroactively captured as well).

There is no Constitutional provision that explicitly permits executive orders. When challenged, presidents claim that they are merely acting in accordance with the 'executive power' clause (Article 2, Section 1). This is a problem because the framers clearly intended for the legislative branch of the federal government, Congress, to be in charge of lawmaking. Because there is a gray area between making law and executing it, any president seeking to 'take the law into his own hands' possesses a potential vehicle for doing so in the executive order.

A straightforward conclusion of anyone who has studied this country's founding is that the founders did not intend for the executive branch of the federal government to possess as much power as it does today. And it is easy to posit that the executive order has been a primary mechanism for presidents to assimilate power.

Which president holds the record for most executive orders? I was fairly certain of the answer before looking it up. FDR issued an astonishing 3,466 executive orders during his tenure. His successor, Truman, was the second most active with 893. The 4000+ orders issued by these two administrations are more than all executive orders issued by subsequent administrations combined.

The backdrop of the FDR and Truman administrations was the Great Depression and WWII. It is during such times--times perceived as crises--that people are more willing to cede power to a central authority (Staw, Sandelands, & Dutton, 1981). It follows that rulers hungry for power will exploit those times. The executive order can help a president circumvent the Constitution and consolidate power.

This leads to the following proposition: The more difficult the times, the more likely that presidents will employ executive orders.

In the past few weeks, it seems increasingly clear that the Obama administration wants to use executive orders to implement its agenda. The president has been stating that he 'does not want to wait for Congress,' and argues that the tough times that we live in demand that he take action.

Of course, he also has an election coming...

Hard not to sense an FDResque deja vu moment. And if our proposition holds, we're likely to witness a tidal wave of executive orders from a president who, as famously stated by his former chief of staff, will not want to let a crisis go to waste.


Staw, B.M., Sandelands, L.E., & Dutton, J.E. 1981. Threat-rigidity effects in organizational behavior: A multi-level analysis. Administrative Science Quarterly, 26: 501-524.

End Zone

"You have no idea what men of power can do."
--Scott Pritchard (No Way Out)

Wondering about the plan hatched last wk in the euro zone? This explains it pretty well.

Another 'debt w/ more debt' proposal...

Wednesday, November 2, 2011

Left Turn

I break tradition
Sometimes my tries are outside the lines
We've been conditioned to not make mistakes
But I can't live that way
--Natasha Bedingfield

I recently completed Tim Groseclose's Left Turn, a book on liberal bias in the media. Groseclose is a rare bird. He's thrived in the big league academic world, a world dominated by liberals, despite being a vocal conservative. He is a full professor at UCLA, and holds joint appointments in the school's political science and economics depts. Previous appointments include CalTech, Stanford, Ohio State, and Carnegie Mellon.

He has been interested in media bias for some time, but it was his 2005 paper coauthored with Jeff Milyo (Univ of Missouri) that elevated his work to elite levels. The paper, "A Measure of Media Bias," was published in the Quarterly Journal of Economics. Currently in its 126th volume, QJE is a mecca for academics who aspire to place economic-oriented research in top tier journals.

In the paper, Groseclose and Milyo present their approach for measuring media bias. That approach in large part forms the basis for Left Turn.

What makes the original paper's publication in QJE even more interesting is that the journal is controlled by editors at Harvard, a bastion for liberal bias in the arts and sciences. What this implies is that Groseclose and Milyo's work was rock solid in its approach, lest it would have been unable to navigate the editorial gauntlet that surely was looking to riddle holes in the paper (those who have been thru the process understand what this means).

Stated differently, as much as Groseclose and Milyo's (2005) work likely ran counter to the beliefs of QJE editors and reviewers, the editorial staff could not find a legitimate reason to reject the paper--unless the staff was to turn intellectually dishonest.

Interestingly, it was after the publication of this paper in QJE that prestigious institutions around the country began offering Groseclose endowed chairs. Groseclose chose to remain at UCLA, where he is currently the Marvin Hoffenberg Chair of American Politics.

Not surprisingly, the media has failed to widely embrace the findings of the original paper or the subsequent book. But Groseclose's (2011) Left Turn is a compelling and interesting read. In posts to come I plan to record some of my key takeways so that I can hopefully retain them more effectively.


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

Groseclose, T. & Milyo, J. 2005. A measure of media bias. Quarterly Journal of Economics, 120(4): 1191-1237.

Tuesday, November 1, 2011

Democratic Despotism

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

Many people believe that the framers designed a democratic form of government for the United States. These people are mistaken. Democracy is a form of governmennt where government acts based on the will of the majority.

The framers were deeply aware of political history, and they knew that governments grounded in majority rule were destined to self-destruct. One reason is that, like any individual, people who comprise majorities seek to satisfy their interests using the least amount of effort possible. And, if given the opportunity to grow wealthier by political means rather than through productive effort, majorities will vote themselves more weath thru use of government force. Special interest groups perpetually wrestle to gain majority control of government's wealth redistribution mechanism.

That wealth comes out of the hides of the minority vote, who are forced to comply at the point of a gun.

When push comes to shove, therefore, majorities trample the rights of minorities in democracies.

The framers knew that the only form of government where people could be treated equally under the law and maintain freedom was a constitutional republic. Citizens elect from among themselves those people judge as most apt to represent their interests. But because the constitution is written in manner that places strict limitations on what central government can do, majorities or even supermajorities cannot employ government as an instrument to better their condition on the backs of minorities.

Majorities could not rule minorities if the supreme law of the land, the Constitution, was respected.

The framers assumed, of course, that the Constitution would be respected. This has proven to be a bad assumption.

Absent respect for the Constitution, government has become a wealth redistribution agent for any group that can marshal political favor from Washington. Those who ride that special interest wave are, of course, vocal proponents about the virtues of democracy.

However, democracy's primary feature, despotic dominance of the many over the few, can hardly be considered a virtue.

Greek Surprise

"I'll give you ten thousand dollars for driving me to Paris."
--Jason Bourne (The Bourne Identity)

In a move said to have 'blindsided' many, the Greek government has called for a referendum (a.k.a. a vote of confidence) on the bailout plan recently hatched by EU officials.

The word is that the 'voluntary' 50% writedowns on Greek debt may have been palatable to many external holders of Greek debt, but those inside Greece holding their own country's bonds, including Greek banks, don't want to take the haircut. For one, it would render some Greek banks insolvent.

The theme from Wall Street types in my personal circle is that, while they were largely skeptical that the plan put together last week would hold up, they are surprised by how fast it is unraveling.

That surprise is being reflected in markets worldwide. Sovereign debt of many Euro countries like Greece and Italy is getting crushed today. Stock markets are listening to chin music as well. The SPX is down about 2.5% in early trading.

Seems to me that domestic stock markets are in a precarious situation currently. Shorts have been squeezed out, hedgies have been buyin' 'em after feeling 'underinvested, and there has been a general movement toward more 'risk on' out of euphoria that the EU didn't collapse in early Oct.

Perhaps the collapse was merely postponed by a month or so.

From where I sit, if the SPX can't hold 1220 support, then it looks pretty vulnerable for a downside whoosh.

position in SPX