Monday, December 31, 2012

Resolutions for Congress

We - are young but getting old before our time
We'll leave the TV and radio behind
Don't you wonder what we'll find
Steppin' out tonight
--Joe Jackson

Ron Paul offers some New Year's Resolutions for Congress on his way out the door:

Reread Article 1, Section 8 of the Constitution and the Bill of Rights before taking the oath of office at the start of the year. Most legislation developed by Congress is in direct violation of the oath.

End wars overseas. All wars currently being prosecuted are unconstitutional.

End all foreign aid. It creates perverse incentives for both friends and enemies.

Stop accumulating debt. Cease Federal Reserve monetization of federal debt.

Learn more about free markets and their capacity for advancing prosperity far beyond the power of legislation or regulation.

Resolve not to intervene in voluntary contracts between consenting adults.

Stop bailing out failed yet politically connected companies and industries.

Stop forcing people to engage in commerce that they don't want to. Stop prohibiting people from buying and selling what they do want to.

Stop trying to legislate your ideas of fairness.

Protect property rights.

What a fine 2013 it would be if Congress actually took these on.

Sunday, December 30, 2012

Demographics of Freedom

Think the time is right 
For palace revolution
--The Rolling Stones

In 1770s America, it is estimated that less than half of the colonial population favored secession from Britain. I've seen estimates from 1/3 down to 5%. This fraction constituted those people who valued freedom above all else--those aligned with the Live Free or Die idea. Adams, Franklin, Jefferson, et al...they were seen as radicals and extremists.

At least 1/3 of the population were Tories--loyal to Britain. The remaining people were betwixt and between with no significant opinion either way.

This had to have created an interesting dynamic during the Revolutionary War. A minority fighting for the right to be free. Another group of equal or greater size partial to the other side. And a large mass of inertia. Considering the cultural context, our victory is all the more remarkable.

This was not a battle ordained or prosecuted by the majority rule of democracy.

After the US won its independence, people from around the world flocked to America. The draw was not safety. The US was already gaining global recognition as a rough and tumble place. No, the draw was freedom and its seemingly unlimited possibilities. Millions of people left it all behind to immigrate to the Land of Opportunity.

While I have not seen demographic data to this effect, it seems likely that the fraction of Americans partial to the Live Free or Die idea swelled during the 1800s. Immigrants added to the ranks, and many Tories left the country for Canada and other places.

Over the past hundred years, however, the Live Free or Die fraction has been declining. Once again, it appears that those who value freedom among all else are a minority.

The majority is populated by people willing to cede freedom for security--safety of both the physical and social variety. This group is willing to employ the strong arm of government to act on their behalf. As government grows larger in this capacity, freedom gets smaller.

Once again, we have a minority of people increasingly troubled at their loss of freedom.

Saturday, December 29, 2012

Picture of Gold

Nothin's gonna save you from a love that's blind
Slip to the dark side you cross that line
--John Cafferty and the Beaver Brown Band

Gold is getting oversold on both daily and weekly horizons. The weekly chart shows GLD on support at about 160. If it breaks thru, 150 is the next support level.

Not a bad place for some adds, it seems to me. Not only due to the technicals, but also given the macro picture as even more money printing seems likely as part of the 'fiscal cliff' charade.

Should we break to 150 GLD, will likely look at more adds.

position in gold

Friday, December 28, 2012

UK Welfare Trap

Standing in line marking time
Waiting for the welfare dime
'Cause they can't by a job
--Bruce Hornsby

Prof John Cochrane shares more data on marginal taxes associated with welfare benefits (other recent posts here and here). On both carts the horizontal axis denotes gross (i.e., before tax) annual wage income from work and the vertical axis shows after tax annual income from both work and welfare benefits. At current conversion rates, 5000 pounds equals about $8000.

The first chart, representing single workers 25 yrs of age or younger, indicates virtually no reward for 7500/ pounds per yr of gross wages. Approximately 84% of the wages are lost in welfare benefit withdrawals. The way to think about this on the chart is that the flatter the line, the less additional after tax income is gained from more gross wage income.

The second chart, representing single parents with two kids, indicates virtually no reward for work below 5000 pounds/yr of gross wages. Then, after a work tax credit kicks in at about 5000, then a subsequent marginal tax rate of 70-95% for the remainder of the wage horizon. There is little point in taking on incrementally more work past 5000 pounds per yr.

As Cochrane notes, most UK benefits are not time sensitive. Thus, the poverty trap gets passed down thru generations.

Thought provoking example of how disincentives drive productivity (and standard of living) into the gutter.

Thursday, December 27, 2012

Regulating Small Biz Out of Biz

Don't ask me what I want it for
If you don't want to pay some more
--The Beatles

Classic example of how government regulations drive small operators out of business. Approximately 350,000 small tax preparers will be forced to take down their shingles because they do not meet new IRS licensing requirements.

The reduced competition will result in higher costs and reduced innovation.

Wednesday, December 26, 2012

Commitment of Traders Optimism

Ain't got no regrets
And I ain't losing track
Of which way I'm going
Ain't gonna double back
--Lou Gramm

Commitment of traders (COT) data suggest a healthy dose of optimism among equity index futures traders. Traders have not been this long S&P futes in years.

Traders have only been persistently long in three periods over the past five years: late 2006 as we were putting in a rounding top prior to the credit collapse, late 2008 into the lows of the selling cascade, and now.

position in SPX

Monday, December 24, 2012

Drugs and Violent Crime

Things are different today
I hear every mother say
--Rolling Stones

How to achieve more peace on earth? Following Ron Paul's lead on less government intervention, I suspect that the single, most effective action that the federal government can do to reduce violent crime in the US is to withdraw from the 'war on drugs.' Do this and watch shootings et al decline.

If government still feels the need to be involved in drugs to some degree, then it might scrutinize the role of selective serotonin reuptake inhibitors (SSRI) on violent crime. SSRIs are a common class of anti-depressent drugs made popular by blockbusters Prozac (LLY) and Zoloft (PFE). On the surface, the presence of SSRIs in school shootings as well as other violent crimes seems a compelling one.

no positions

More Laws Constitute More Violence

And the men who spurred us on
Sit in judgment of all wrong
They decide and the shotgun signs the song
--The Who

Ron Paul reflects on the aftermath of the Newtown massacre. The Left's emotional calls for more gun control were balanced by the Right's emotional calls for mandatory armed security in schools.

Because government is legalized force, more laws constitute more violence. RP observes that real solutions rest in peaceful cooperation rather than in involuntary force.

Toward the end of his missive, he discusses the tradeoff between freedom and security, a topic of many pages on this site.

"Do we really believe government can provide total security? Do we want to involuntarily commit every disaffected, disturbed, or alienated person who fantasizes about violence? Of can we accept that liberty is more important than the illusion of state-provided security? Government cannot create a world without risks, nor would we really wish to live in such a fictional place. Only a totalitarian society would even claim absolute safety as a worthy ideal, because it would require total state control over its citizens' lives. We shouldn't settle on substituting one type of violence for another. Government's role is to protect liberty, not to pursue unobtainable safety."

Indeed, the American design is one that favors liberty over security--as famously punctuated by Patrick Henry.

Sunday, December 23, 2012

Correlation and Causation

So true
Funny how it seems
Always in time
But never in line for dreams
--Spandau Ballet

Several times recently I have read statements claiming that correlation does not mean causation. Quite true. One morning a few months back I noted a small puddle of water on my basement floor near a corner wall. It had been raining heavily through the previous night. "Rain must be getting in somewhere," I thought.

Before donning the rain gear and heading outside, I decided to inspect the area above the leak, including various pipe runs in the vicinity. That's when I spied a drop of water hanging from copper tubing heading into the hot water heater. Upon closer examination, a slight leak had developed in a joint connecting two pieces of tubing, and the water drops were occasionally squeezing through the joint and dropping to the floor.

I had mistakenly presumed that the puddle on the floor was caused by the rain. Seemed reasonable--particularly because the rain was heavy and there hadn't been much rainfall in weeks. Because the puddle and rain showed up at the same time, their presence was correlated ('co-related'). But the cause of the floor puddle turned out to be something else, rendering the correlation between rain and puddle meaningless (what stats folks sometimes refer to as 'spurious').

Whenever one or more independent variables are regressed on an independent variable, the results bear the limitation that causality cannot be construed from the data alone. Even if a strong relationship between X and Y is detected, we don't know whether X caused Y or vice versa--or whether one or more unaccounted-for variables render the observed X/Y correlation spurious.

In empirical studies, analysts can try to reduce potential for false conclusions by 'controlling' for other variables that might influence relationships of interest. In most social settings, however, it is difficult to control for the myriad variables that might influence the findings.

Unfortunately, much social science research has been moving in the direction of empirical, multivariate studies. Because most of these studies explicitly or implicitly seek to determine/verify cause and effect relationships, the validity of the findings are usually severely limited. Lacking the careful controls of the lab bench, empirical studies are generally incapable of unearthing cause:effect findings that are highly convincing.

Moreover, it is also possible that simple linear models where X is thought to cause Y misspecify true relationships between variables. Senge's (1990) work demonstrated that feedback loops may reinforce or balance real-life systems that reduce directionality between variables.

Given the empirical difficulties, how can accurate conclusions about causality be reached? One way is to favor reasoning over statistics when conducting analysis. For example, the Austrian school of economics employs praexology, the study of human action grounded in a relatively small set of axioms about nature and human behavior, to deduce economic relationships.

For example, we can also deduce that, because people generally prefer leisure over work, and less work over more work, that people will be prone to act in ways that permit acquisition of more income (physical or psychic), with the least amount of effort. The prospect of getting something for nothing is the primary cause of most political behavior because people recognize that their situations can be made better on the backs of the productive effort of others.

We should also note that numerical data are not totally useless in studying causality. In fact, longitudinal series of proposed dependent variables that include known points where independent variables have been changed can be effective ways to investigate cause and effect.

For example, the 200+ year series of federal debt and deficits (two dependent variables) shown a few posts back includes labels of several possible independent variables thought to influence levels and trends of the proposed dependent variables. One of them is war. Because several wars take place over the horizon, and debt/deficits move in similar directions each time, there can be little doubt that war causes higher debt and spending. These patterns are consistent with deductive reasoning that suggests similar outcomes.

Longitudinal data are particularly useful when there is a lag between changes to independent variables and changes to the dependent variable. Back to the debt/deficit chart, note that the labels associated with the institution of the Fed (1913) and Nixon's closing of the gold window (1971) were followed by large increases in debt and deficits--after an initial lag. This lag could have been deduced ahead of time as time associated with establishing new institutional arrangements and routines. We should expect some lag between cause and effect here.

On the other hand, pinning the change in debt and deficits these two independent variables is not as convincing as the war variables that were 'turned on and off' multiple times. To gain more understanding of the effect of the Fed and removal of the gold standard, it would be nice to dismantle the Fed and go back on the gold standard, and then study changes to federal debt and deficits. We can only hope for such an opportunity!

Potentially, then, there is some causal information available from time series data. Studying US homicide rates in relationship to changes in gun control laws and gun ownership can yield some sense of cause and effect. When US homicide rates decline following weaker gun laws and increasing gun ownership, then that is consistent with theoretical predictions of causality.

Of course, studying additional periods of changing gun control laws and gun ownership would be more convincing. While hard to do with US data alone, it is possible to do so by looking at changes in gun control laws and gun ownership in other countries. I am pretty sure such research has been done, but I have only been privy to snippets here and there.

Thus far, the snippet data are consistent with the pattern observed in the US data. The lower the gun controls and the higher the gun ownership, the lower the violent crime. The more situations where such a pattern holds, the greater the evidence of causality.


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

Saturday, December 22, 2012

Monetizing Debt in High Gear

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

Nice observations here by Frank Shostak. Discussing the FOMCs recent announcement to add $45 billion in monthly Treasury bond buys to already $40 billion in monthly mortgage purchases, he estimates that the Fed's balance sheet will grow from $2.9 trillion now to $4 trillion by end of 2013.

This is what 'monetizing debt' looks like when kicked into high gear.

As any reasoned person understands, printing money does not create wealth. The Fed's idea, really the Keynesian idea, is to create credit out of thin air and hope that it stimulates economic activity. Thus far, however, most of the credit created has stayed on bank balance sheets, where banks have been using it to trade in their own accounts.

Shostak states that we should be thankful that the banks are not aggressively aggressively lending all of this credit money, because it would create serious inflationary consequences.

The Fed seems to think that they could easily reverse their easy money policies should aggressive lending begin. This is highly doubtful.

The growing enormity of this problem makes me increasingly skittish about holding cash. In fact, I'm viewing the current weakness in gold prices as an opportunity to swap dollars for metal.

position in gold

Friday, December 21, 2012

Making a Market for Enhanced School Safety

No more running down the wrong road
Dancing to a different drum
Can't you see what's going on
Deep inside your heart?
--Michael McDonald

Nearly all states have laws the prohibit guns in schools. Because violent aggressors prefer to attack weakness over strength and surprise over preparation, the gun free status of schools is a magnet for active shooters. The overwhelming majority of recent mass shootings have occurred in no-carry zones such as schools.

As long as evil walks the earth, defenseless schools will remain targets. Perhaps the bulls eye is growing even larger as shooters-in-the-making scrutinize details from last week's Newtown massacre. It is recognized among law enforcement officials that prospective shooters study past occurrences--including the actions of both shooters and defenders--in order to devise plans that increase the likelihood that evil agendas will be achieved. Given the massive amount of media coverage surrounding the Newtown shooting, future active shooters have been handed plenty of information to advance 'state-of-the-art.'

What has not received much media coverage is that some schools are proceeding differently. Texas law, for example, allows concealed carries in schools with a district's permission. After the Virginia Tech shooting in 2007, the Harrold, Texas school district implemented its 'guardian plan' that allows teachers and administrators to carry concealed handguns.

When asked by a CBS news correspondent post-Newtown whether he realizes that some people are horrified about the prospect of guns in schools with kids, the Harrold superintendent responded, "Sure, but it's a pretty horrific thing that happened the other day. And some people are not horrified. Quite a few people we have in our district, since we have a high transfer district, bring their students to us for that protection."

The idea that he is conveying is a market-based solution for enhanced school safety. Schools decide whether their product is more attractive to buyers if they include enhanced safety features such as employees or contractors carrying guns on the premises. Parents decide whether to send their kids to schools that offer those enhanced security features.

If enhanced safety is perceived as a valuable feature, then schools providing it will be rewarded with more students. If enhanced safety is perceived as holding little value, then those schools will lose enrollment accordingly.

This would not be an all or nothing proposition. Because safety preferences among parent 'buyers' are sure to vary, no single school 'seller' model would win out. Instead, sellers will respond to the market, differentiating themselves around market segments positioned to serve the security needs of particular buyer groups.

The Harrold superintendent notes that he has received numerous inquiries from other districts both in and out of state about starting programs similar to Harrold's. This demonstrates that, even in the highly hampered environment of public schools, market forces are at work.

The most favorable outcome from last week's tragedy would be to encourage these market forces to continue.

Let sellers and buyers (a.k.a. the people) freely acting in their own best interest determine levels of school safety best for them. Should free trade occur here, solutions for school safety will evolve that are as diverse as demand in the market.

Plan B Heads Over the Cliff

"Stay with us. Stay the course!"
--Col Harry Burwell (The Patriot)

Last night Speaker John Boehner pulled a planned House vote on 'Plan B', an alternative proposal to the Democrat's plan for averting the so called Fiscal Cliff scheduled to kick in Jan 1. The speaker could not find enough votes from Reps in his own party.

Many of the holdouts are Tea Party types, perhaps 40-50 strong, who remain adamantly opposed to tax hikes of any kind. This is not sitting well with old school Big Government Republicans.

The next few days should be interesting. Unless the Old Guard can whip Tea Party types into submission, then there will either a) be no compromise passed, or b) Big Government Republicans and Democrats will need to co-sponsor a bill that circumvents the Tea Party.

When Plan B's collapse was announced last night, the SPX dropped 50 handles. It quickly recovered about 2/3 of that. This morning, the SPX has been further closing the gap and is currently off only 11 handles. This market either believes a deal (a.k.a. a stimulative bailout) can still be done, or there are 'non-economic' buyers in the market.

position in SPX

Thursday, December 20, 2012

US Debt and Deficits Since 1792

Darken the city, night is a wire
Steam in the subway, earth is afire
--Duran Duran

Nice graph showing federal government deficits and debt since the country's inception.

The story is the tale of two periods. The first period from 1792-1913 is characterized by declining debt levels (debt largely related to war) and prolonged periods of federal surpluses. There was actually a 20-30 year period of no federal debt following the payoff of Revolutionary/1812 war debt.

The second period, 1913-present, is characterized by rising debt and prolonged periods of federal deficits. Unlike the first period, where spikes in war debt were followed by concerted efforts to extinguish the debt, the second period shows increases in peacetime debt and deficits (New Deal and since 1970s in particular).

As labeled, 1913 corresponds to the founding of the Federal Reserve. It also corresponds to the ratification of the Sixteenth Amendment permitted the federal government to tax individual incomes. These two events have been the Great Enablers, as they have provided the federal government with vast access to economic resources.

The vast warfare and welfare states fed by these resources have an insatiable appetite.

Wednesday, December 19, 2012

Self-Defense Capacity

Daniel Larusso: You mean there were times when you were scared to fight
Miyagi: Always scared. Miyagi hate fighting.
Daniel Larusso: Yeah, but you know karate. 
Miyagi: So?
Daniel Larusso: So, karate's fighting. You train to fight.
Miyagi: That what you think?
Daniel Larusso:...No.
Miyagi: Then why train?
Daniel Larusso:...So I won't have to fight.
Miyagi: Miyagi have hope for you yet.
--Karate Kid

'Peace on Earth' is a wish often made this time of year. It is a wish for a perfectly free society. In a perfectly free society, people pursue their interests unencumbered by the use of force. Perhaps the vision becomes clearer during the Christmas season because it resembles heaven on earth.

Unfortunately, this vision competes against the earthly reality of forceful intervention. In pursuit of personal gain, some people seek to forcefully intervene on the affairs of others. They may intervene directly by using their own forceful measures (e.g., guns), or they may intervene indirectly by employing strong armed agents (e.g., government officials with guns) to do their dirty work for them.

As long as such threats persist, then people have the right to defend their person and property against such attacks. Many people choose to develop capacity for self-defense. Capacity for self-defense includes both mental and physical components. Mentally, individuals can develop awareness of threatening situations as well as the confidence and willingness to fight back if attacked.

Physically, an individual can develop skills for stopping aggressors. In some situations, 'talking down' an aggressor, running away, or signaling self-defense competence may be adequate to ward off attack. In other situations, 'fighting back' is necessary. Skills in hand-to-hand combat and weaponry build physical self-defense capacity.

Throughout history, those with governing power have sought to disarm or limit self-defense capacity. Limitations have commonly focused on keeping state-of-the-art technologies out of the hands of those seeking to defend themselves. When hand-to-hand combat methods were state-of-the-art, their practice was forbidden in many societies--except of course by the ruling class. Bladed weapons naturally followed.

For the last three or four hundred years, the focus has been on guns. In the US, the British started the ball rolling by trying to confiscate long and short guns from the Colonists. The Second Amendment, of course, was written partially in response to their unsuccessful efforts. US citizens have generally understood its implications, having maintained their status among the most well-armed citizenries in the world for the past 200+ years. Today, Americans own approximately 300 million guns (US population = about 315 million).

State-of-the-art as targeted by anti-gun coalition is currently 'assault rifles.' Once again, the primary argument is that people would be just as safe without them. People seeking to build self-defense capacity appear to disagree (and now here).

When securing a FREE state (see Second Amendment), each individual determines how to build self-defense capacity.

Those who forcefully seek to limit those choices become the aggressors.

Tuesday, December 18, 2012

Mass Shootings in the US

They can see no reasons
'Cause there are no reasons
What reasons do you need to be shown?
--Boomtown Rats

On cue with our recent missive on source data related to US homicides, this Reason article presents some time series data on US mass shootings. It also disentangles liberal media efforts to conflate domestic with global mass shootings, and mass shootings with mass killings--all in a thinly veiled attempt to suggest that mass shootings in the US have been increasing.

The data presented by James Allen Fox of Northeastern University suggest otherwise. No upward trend is apparent in US mass shootings over the past three decades. On average, there have been about 20 mass shooting incidents per year since 1980 involving just over one gunman per event and about 75 victims per event.

Why then might it truly seem to some people that mass shootings are occurring more frequently? In an editorial written after last Friday's Newtown shooting, Fox cites a 'seemingly insatiable' drive among journalists to build drama out of tragedy. He also suggests that "our collective memories apparently lose sight of other violent moments in recent history when mass shootings have been closely clustered in time, for the most part out of sheer coincidence."

Combine media obsession with tragic drama, particularly as it relates to gun violence, and technology that streams images of distraught school child victims in real time, and you sear vivid imagery into peoples' memories as if "the tragedy happened in your own back yard."

What Fox describes is a context made-to-order for the availability heuristic.

Monday, December 17, 2012

Availability Heuristic

There seemed no way to make up
Because it seemed your mind was set
And the way you looked and told me
That's a look I know I'll never forget
--Phil Collins

The availability heuristic (Tversky & Kahneman, 1973) is a rule of thumb that people use to judge the frequency and probability of events based on the ease with which examples come to mind. Memories that are, for example, vivid, full of emotion, and/or recent are likely to be favored when estimating frequency or likelihood of occurrence.

This can lead to systemic bias and error in judgment. The classic example is the event of a catastrophe. Catastrophes, by definition, are rare events with extremely negative consequences. Natural disasters, stock market crashes, and unexpected death of loved ones exemplify catastrophe.

Following catastrophes, people are likely to overestimate how often similar events have happened in the past; people are also apt to overweight the likelihood of the recurrence of similar catastrophes in the future.

This is consummate System 1 activity.

In his book, Kahneman recounts a particular time when he was living in Israel. A string of terrorist bombings had occurred--many of them taking place on buses. Kahneman recalls feeling anxious every time his car pulled alongside a bus at traffic intersections--to the point where he was tempted to run red lights to avoid perceived danger. In reality, the actual probability of his being near a potential terrorist event was tiny.

Fear of catastrophic events drive many people to purchase insurance--often after such rare events have already occurred and when insurance premiums are steep.

In the public sphere, politicians understand the availability heuristic well. They know that people are willing to surrender much freedom in exchange for protection against the recurrence of recent tragic loss.

Because those looking to assimilate power relish crises as opportunities, people would be wise to examine their thought processes during difficult times for evidence that the availability heuristic may be selling them short.


Tversky, A. & Kahneman, D. 1973. Availability: A heuristic for judging frequency and probability. Cognitive Psychology, 5(2): 207-232.

Sunday, December 16, 2012

US Homicide Rates

The pressure's on the screen
To sell you things that you don't need
It's too much information for me
--Duran Duran

In the wake of last week's school shooting tragedy in Newtown CT, myriad statistics are being tossed about by both anti-gun and pro-gun proponents. The numbers get confusing in a hurry, particularly when it is possible to cherry pick data that fit an agenda.

Stated differently, there is a partisan tendency to build one's case around information that, while not necessarily wrong, is incomplete. Indeed, the tendency of politicians and media to select 'authoritative sources' that fit a particular agenda was the basis for Groseclose's (2011) work.

As such, I am skeptical of many figures that I read and hear. When possible, I prefer 'source' data'--basic data upon which more sophisticated (and often biased) analyses can be built. Of course, the source data themselves can be biased. For example, these pages have spilled much ink on the bias and manipulation embedded in US government econometric series (e.g., inflation, unemployment, GDP).

Nonetheless, source data expressed as simple time series provide a useful starting point, as they permit scrutiny of fundamental biases of data collection. If the biases are deemed small, then time series can provide useful information on long term levels, trends, and variation. They also may allow for some (emphasis!) degree of causal analysis by inserting events and looking at changes in 'before' and 'after' periods.

Let's start with a basic one here: US Homicide Rates. The US Department of Justice is the gatekeeper, and the data can be found here. These data are likely more trustworthy than federal econometric data because they are based on simple counts rather than surveys and/or formulaic manipulation.

Figure 1 shows total homicides in the US from 1950 thru 2010, expressed as homicides per 100,000 people.

The homicide rate has been trending down for about 20 years and it at its lowest level in 50 years.

Figure 2 breaks down homicides by weapon used. Note that the time horizon here is shorter than in Figure 1. Data were only available from 1980 thru 2008.

More homicides are committed with handguns and other guns (rifles, shotguns) than any other weapon. Knives are next. Over this 30 year horizon, handguns and knives have generally declined as homicide weapons of choice. 'Unknown' weapons have seen the biggest increase.

Figure 3 combines the handguns + other guns categories from Figure 2 to present a cleaner view of gun-related homicides.

Just under half of all homicides employ guns. Over the 30 year period observed, the overall trend is slightly lower.

Combining declining overall homicide rates since 1980 with data on weapons usage indicates fewer gun-related homicides per capita than a few decades back. When one considers that gun ownership in America has markedly increased during this period as have the number of citizens carrying firearms (still looking for source data on both), then it appears that gun control proponents have a difficult case to make w.r.t. gun-related homicides in the US.

Simply put, more guns have not corresponded to more homicides. In fact, the opposite is more likely to be true.

Of course, guns can be employed for other crimes besides murder. We'll explore violent crime in a future missive.

Saturday, December 15, 2012

Anchoring the Poor in Poverty

There will be no more isolation
In our secret separation
--The Fixx

Thomas Sowell discusses two government policies that serve as taxes on the poor. Money printing (inflation) devalues dollars currently in existence. It is often called 'the invisible tax' because it is difficult for many people to recognize.

Rather than confiscating wealth by direct taxes, the State confiscates wealth by using newly printed dollars to procure resources. Subsequently, there are less resources to purchase--and more dollars to purchase them with. Prices go up and purchasing power goes down. The net effect is the same as direct taxes. Wealth has been transferred from private hands to the State.

Money printing disproportionately hurts the poor because low income people operate mostly with cash. Unlike the wealthy, they have little savings that they can convert into assets, such as gold, that hold their value during inflationary conditions. Inflationary conditions leave the poor running on a hamster wheel as they perpetually struggle to keep up with cost of living increases.

Another government-imposed tax consists of loss of welfare benefits. People trying to climb out of poverty while collecting welfare payments can face situations where a marginal dollar of production costs more than staying on welfare. Tax a behavior, and expect less of it (Econ 101). Welfare benefits serve as the poor's version of 'golden handcuffs' that encourage persistent squalor and discourage productivity.

Inflation and welfare anchor the poor in poverty.

position in gold

Friday, December 14, 2012

Behind the Curve

The world looks just the same
And history ain' changed
'Cause the banners, they've all flown
In the last war
--The Who

In its announcement this week, the FOMC identified 6.5% unemployment as the level at which it would consider removing stimulus. Let's see, we have a chronically behind-the-curve institution eyeing a lagging economic indicator for evidence that it needs to reverse a massive money printing campaign.

We also know, from past incidents of hyperinflation, that general price levels tend to rip higher with little prior warning. Confidence in a currency does not erode, it collapses.

Given that set-up, it is likely that the Fed acts to reign in its easy money policy:

a) well before general prices take off
b) in early stages of general price increases, thus keeping further increases in check
c) after general prices are spiraling upward and out of control

Those not yet familiar with the Weimar incident should become so.

Thursday, December 13, 2012

Republics and Democracy

So take that look out of here, it doesn't fit you
Because it's happened doesn't mean you've been discarded
--Big Country

Nice observations (as usual) by Rick Santelli. He notes an important difference between a republic and a democracy. In a republic, sovereignty rests with each individual. In a democracy, sovereignty rests with a group.

The US was founded as a republic.

Majority rule (today's chic word is 'mandate') is not compatible with a republic. In an election where the outcome is 99 to 1, the rights of the 'one percent' are still upheld.

Rule of law, not rule of men.

Wednesday, December 12, 2012

Thinking, Fast and Slow

Don't you forget about me
I'll be alone, dancing, you know it, baby
Going to take you apart
I'll put us back together at heart, baby
--Simple Minds

Finally finished Nobel laureate Daniel Kahneman's (2011) Thinking, Fast and Slow. The book compiles Kahneman's thoughts on judgment and decision-making grounded in 40+ years of inquiry.

There are many interesting points in this book, but Kahneman's primary contribution is his division of human thought into two categorical 'systems.' System 1 renders judgment quickly and effortlessly. It is influenced by emotion and favors intuition over reason. System 1 is comfortable with incomplete information and may even promote it. System 1 can deal with multiple thoughts at a time. It relishes in the here and now, often assuming that What You See Is All There Is (WYSIATI). Most of our thinking is done in System 1.

System 2 is slow, deliberate thought. Effort required for System 2 thinking is magnitudes greater than for System 1 thinking. System 2 is the domain of rational thought. It seeks data and is uncomfortable rendering judgment until data are carefully analyzed. Intuition takes a back seat to reason. When System 2 is engaged, it is difficult to think of anything else. Only a small portion of our thinking is done in System 2.

As Kahneman notes early on, his book is primarily about System 1. Not only is it where we spend most of our thinking lives, but System 1 is also the source of most errors in judgment and mistakes in decision-making.

System 1 is likely a product of our evolution. In prehistoric days when immediate threats abounded, our fast thinking System 1 was a ticket to survival. Although there are far fewer immediate threats to our livelihood today, System 1 still dominates our thoughts. This should probably not be unexpected. An axiom of human behavior is that we generally prefer less effort to more effort, and System 1 requires much less effort than System 2. Nevertheless, System 1 can be a source of error and bias.

Most of Kahneman's book discusses these various errors and biases, e.g., the availability heuristic, insensitivity to reversion-to-the-mean effects, anchoring, prospect theory, loss aversion, the endowment effect, confirmation bias, intuition, overconfidence, possibility and certainty effects in small probability situations. Most of these discussions are interesting.

Kahneman does not offer much in the way of overcoming or eliminating these biases. To be sure, he suggests that self-awareness of the potential for error (e.g., initial price points will likely serve as anchors) and outside feedback (e.g., from mentors, coaches) may mitigate some System 1 mistake.

By and large, however, Kahneman thinks that these biases are part of our humanity and therefore intractable. In fact, some of the solutions that he offers near the end of the book for taking decisions out of the hands of individuals 'for their own good' was reminiscent of discussions I heard two years ago at the NEFE conference.

An opposing view would be that, despite the headwinds in our face blown by System 1, humans do possess self-awareness and capacity for improvement.

Nonetheless, this is a thoughtful book that is well worth the read.


Kahneman, D. 2011. Thinking, fast and slow. New York: Farrar, Straus and Giroux.

Tuesday, December 11, 2012

Trannie Channel

"You're going the wrong way!"
--Screaming driver (Planes, Trains and Automobiles)

For the past few months, the Dow Jones Transportation Index ($TRAN) has been trading in a well defined channel bracketed by 5225 on the upside and 4875 on the downside.

Today the Trannies reversed off the highs in the 5225 area to close near the lows. Whether this reversal marks a tradeable high remains to be seen.

Dow theorists have been waiting for a decisive break out of this channel (either way) for some hint about the future direction of the tape. Perhaps they will be waiting some more.

position in SPX

Soaring SNAP

And as I try to make my way
To the ordinary world
I will learn to survive
--Duran Duran

After last month's belated report indicated more than 400,000+ Americans joining foodstamp rolls, this month's number soared by another 600,000+. That's the biggest jump since May 2011.

The number of Americans on foodstamps now approaches 48 million.

Monday, December 10, 2012

The Santa Clause

"You're a hallucination brought on by alcohol...Russian vodka poisoned by Chernobyl."
--Frank Cross (Scrooged)

The Mises editor selects a timely excerpt from Mises (1949) framed in the Obama administration's current proposal to increase taxes on wealthy Americans. As the editor notes, 'soaking the rich' not only consumes capital, thereby lowering standard of living over the long term, but it does not significantly alter our perilous financial course in the near term.

Mises summarizes at the end of the passage:

"An essential point of the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole doctrine of interventionism collapses when the fountain is drained off. The Santa Claus principle liquidates itself."

No, Virginia, there is no Obama Claus.


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

Sunday, December 9, 2012

Sour Apple

You need love, but you're afraid that if you give in
Someone else will come along
And sock it to you again
--Jackson 5

Haven't done much chart-gazing recently but the Apple (AAPL) chart stuck out in a brief review this weekend.

After exploding off mid November lows for a quick +15%, the stock has given back nearly all of it. Prices once again approaching the 510-520 support zone that defines the base for a multi-month head-and-shoulders pattern.

Should prices decisively melt thru this support, then would think bears would lean against the event in an attempt to push the tape lower.

position in SPX

Saturday, December 8, 2012

Pearl Harbor Mythology

"How long is America going to pretend that the world is not at war?"
--President Franklin D Roosevelt (Pearl Harbor)

Yesterday marked the 71st anniversary of the Japanese attack on Pearl Harbor. Like all my age, I learned the history book version. Surprise attack. 3,000 American killed. FDR's Day of Infamy speech. A declaration of war clearly justified because, as FDR said (see last para), the attack was unprovoked.

Those who cast objective eyes on this period know better. As Robert Higgs observes, the US government had been busy for more than a year trying to provoke either Japan or Germany into firing the first shot. The government needed this because most Americans had no taste for war following the carnage of WWI. Like all politicians, US government officials knew that the path to the public support is paved with crisis and fear. An 'unprovoked' attack would surely reverse public opinion and galvanize the citizenry behind the war effort, they reasoned.

Embargoes, weapons sharing, and cooperative combat operations were designed to draw out Japan and Germany. Stated differently, these actions were meant to provoke attack.

The diary entry of Henry L Stimson, US secretary of war stated it well. "The question was how we should maneuver them [the Japanese] into firing the first shot without allowing too much too much danger to ourselves." Stimson wrote that entry on November 25, 1941, approximately two weeks before Pearl Harbor.

Why did FDR and Co so desperately want war? As recounted by John T. Flynn, war was seen as a way to jumpstart an economy that, despite New Deal policies, was still floundering. FDR began steering federal funds toward defense sectors in 1938. He also commenced his strategy to provoke the enemy and get public opinion on his side.

The amazing thing is that evidence of what went on is clear to anyone who can turn pages and click mice. Yet, people and the media prefer the myth that FDR and the United States courageously fought The Good War.

Friday, December 7, 2012

Selling the Fiscal Cliff Drama

Roll up, roll up for the mystery tour
--The Beatles

Made a far amount of sales today, particularly on the taxable side of my sheets. Technicals suggest indexes are getting stretched on a daily basis.

Although my view is that the drama surrounding the 'fiscal cliff' is mostly media hype, and that a miserable compromise is likely to be obtained, I think that markets are betting on same. A compromise would constitute more extend-and-pretend, which markets would like--at least for now. I may be wrong, but seems to me that markets are assigning a high probablity to this outcome. "We've always compromised in the past," markets are reasoning.

If true, then huge sustainable advances following any kind of agreement would be unlikely since markets have already anticipated this outcome and have priced it in. In fact, it could be a sell-the-news event. Am reminded of the action following the summer 2011 compromise.

My sense is that markets are not discounting the opposite--that no compromise is reached and we head over the 'cliff.' Should that scenario occur, as unlikely as it seems to me, then a nasty sell-off may commence.

It is also end-of-year time, and tax loss selling might intensify--particularly in dividend paying names that will be hit by tax increases related to end of year developments and the Obamacare 'surtax' on investment income. I own a few of these names any many of them appear extended--so I'm viewing this as an opportunity to lighten up on the taxable side.

More cash in current accounts feels good moving into year end.

position in SPX

Thursday, December 6, 2012

Stepping Out of Intel

We - are young but getting old before our time
We'll leave the TV and radio behind
Don't you wonder what we'll find
Stepping out tonight
--Joe Jackson

There is little in the corporate world that I detest more than levering up to buy back stock. Earlier this week Intel (INTC) announced that it was selling ~$6 billion of debt, primarily to repurchase shares. Looks to me that this will place INTC's balance sheet in a net negative cash position--probably for the first time in its history.

A bullish thesis for stocks here is that cheap borrowing costs put a floor under share prices as companies float low coupon debt and buy back stock with the proceeds. Buying back shares is a losing proposition in general, and especially so when a) stocks are generally overvalued, and b) you weaken the balance sheet to do so.

I don't want to own a company that engages in such foolishness. As such, my small INTC position is being held for sale.

position in INTC

Wednesday, December 5, 2012

The Endowment Effect

Out on the road today I saw a Deadhead sticker on a Cadillac
Little voice inside my head said
Don't look back, you can never look back.
--Don Henley

The endowment effect (Thaler, 1980), also known as status quo bias, is the general phenomenon of valuing a good more once it is owned. After I take property into my possession, I will demand more to give it up than I would pay to acquire it.

The endowment effect is more prominent for goods that we plan to own or use rather than those to be traded or exchanged.

Examples are widespread. A few that come randomly to mind:

a) Wanting to hold onto stocks once purchased because you are now an 'owner' in the company. Gekko understood the endowment effect when he warned Bud Fox to avoid getting "sentimental about stocks."

b) Being reluctant to part with items in your possession even if you don't use them often, such as old clothes.

c) Not being able to shake past memories that are good. Nick Carraway: "You can't repeat the past." Gatsby: "Why of course you can."

d) Negotiations. Neither side wants to surrender it already has.

e) Entitlements. People want to keep transfer payments that are already streaming their way. One reason why entitlement 'reform' is so difficult.

Essentially, the endowment effect is an expression of loss aversion. Letting go of a possession is viewed as a loss, and the pain of letting go is to be avoided.


Thaler, R. 1980. Toward a positive theory of consumer choice. Journal of Economic Behavior and Organization, 1: 39-60.

Tuesday, December 4, 2012

Tax the Rich Math

"Son, your ego's writing checks your body can't cash."
--Commander Tom "Stinger" Jordan (Top Gun)

Prof Williams demonstrates the math associated with 'taxing the rich' as a means for fixing our fiscal problems.

The federal government spent $3.7 trillion in 2011. Let's try to pay for that by soaking the rich:

1) 100% marginal tax rate on incomes above $250K = $1.9 trillion

2) Confiscate the net worth of America's top 400 billionaires = $1.3 trillion

The combined $3.2 trillion still puts us short a month or two of fed spending. Next year we won't be able to cover the $1.3 trillion in wealth taken from the rich this year. When it's gone, it's gone.

Moreover, as WEW observes, federal govt liabilities are growing at about $8 trillion (yep) annually. Currently confiscating all AGI of earners making $66K+ and all of 2011 corporate profits does not cover just the growth in liabilities.

Apparently we're witnessing the 'new math' of liberals. The new math of socialism.

Tea Party Purge

"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)

House leader John Boehner appears to be purging fiscal conservatives from key finance committees. Many of these Republicans have strongly opposed Boehner's tendency to surrender ground on spending and debt increases--particularly during last summer's debt limit talks.

Given the current state of the party, I cannot imagine a dumber thing that the GOP could do. The party continues to position itself closer to the statist Democratic Party. But unless they fully merge into a One Party system (not out of the question), why would voters select Statist Lite when they can get Statist Full Strength?

The ideological divide between Big Govt Republicans and Tea Party types made it easy to predict this situation years back. It is becoming increasingly clear that the ideologies are incompatible.

Redistricting of this country's political landscape seems inevitable.

Monday, December 3, 2012

Lower Wages, Lower Savings

The truth is never far behind
You kept it hidden well

The trend in wages and savings has been down for decades. Maintaining or improving standard of living has thus required borrowing consumption resources from others.

Obviously, this is not a steady state situation. Resources borrowed must either be a) paid back, which requires a chunk of future income to be allocated toward debt service, or b) not paid back via default or inflation, which takes wealth from creditors.

Either way, this is likely to suppress future consumption and future savings--both of which take a bite out of standard of living down the road.

Sunday, December 2, 2012

Kids and Cake

"How old are you again?"
--Joe Scheffer (Joe Somebody)

It's time for cake at a seven year old's birthday party.  Several of the child's school friends are there along with parents. When slices of cake are passed around the table, one kid concludes that his slice is the smallest of the lot. The kid prefers more cake.

Responses to this situation include:

a) Cry out, "No fair, they got more cake than I did!" and look to the parents for a more favorable distribution of cake.
b) Take cake from another child's plate.
c) Seek to trade with another kid for a larger slice of cake.
d) Be thankful for the slice received, eat it, and move on.

Which responses are more child-like?

Which responses are more adult-like?

Saturday, December 1, 2012

Higher Taxes Reduce Prospective Returns

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

Recently we observed that higher taxes reduce capital available for investment--despite Warren Buffett's ridiculous claim. More taxes mean less savings. Less savings mean less investment.

Prof Cochrane adds another dimension. Investment projects will look less attractive because discounted cash flow analysis will yield smaller prospective after tax returns on projects that are subject to higher tax rates. More simple math that seems to escape Mr Buffett.

Thus, the smaller amounts of capital still around after higher tax rates will be less likely to be put to work.

Friday, November 30, 2012

Not Worth a Dime

Wasted, sacrifice for a new nirvana
Night time, send us on our way
--Icicle Works

When I first saw the title of this article, "Congress Looks At Doing Away With $1 Bill," I presumed it meant that, like the penny, the dollar isn't worth much any more so why keep it around. Just today, in fact, Judge Nap observed that the value of the dollar has declined 93% since the Federal Reserve was created in 1913.

But the point of the article wasn't to suggest the devaluation of the dollar. Instead it was the cost of maintaining paper dollars that deteriorate and wreak havoc on payments systems such as vending machines. the laughable thing about such an initiative is that the estimated cost savings to tax payers, about $4.4 billion over 30 years, is miniscule compared to the $trillions of dollar depreciation done courtesy of federal government monetary printing presses.

So the idea is to make coins. Not from precious metal, of course, but from alloys similar to those that comprise the cheap euro coins.

Were we to return to 90% silver-based dollars last struck in 1935, then the new $1 coins would be about half the size of current dimes.

Thursday, November 29, 2012


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

Rothbard reinforces observations made on these pages regarding slavery.

"The interpersonal relationship under slavery is known as hegemonic. The relationship is one of command and obedience, the commands being enforced with threats of violence. The master uses the slaves as instruments, as factors of production, for gratifying his wants. Thus slavery, or hegemony, is defined as a system in which one must labor under the orders of another under the threat of violence."

Rothbard further observes that the slave who does the obeying chooses between 1) subjecting himself to the master, or 2) revolting against the regime of violence by using his own violence or by refusing to obey.

These pages have separated alternative 2) into three subsets--trying to escape the system, shirking, or pushing back.

Rothbard also addresses the argument that the slave might support the system because of some of the benefits (food, shelter, other resources) provided by the master. If that were the case, however, threat of violence would not be necessary. The individual would simply voluntarily place him/herself in the other individual's service. In hegemony, the slave is worse than he would be without threat of violence by the master. The master gains at the expense of the slave.

Wednesday, November 28, 2012

Loss Aversion

I can't come out to find you
I don't like to go outside
They can't turn off my feelings
Like they're turning off the light
--Phil Collins

Re our recent discussion of prospect theory, here is a picture of loss aversion expressed as a 'value function:' We can note several things.

Note that value is defined not in absolute terms, but in terms of change from a reference point A (a.k.a. the 'anchor').

Note the 'S-curve' nature of the value function. At small positive outcomes relative to the reference point, individuals enjoy relatively large gains in perceived value. As positive outcomes get larger, perceived value diminishes. The same thing happens in reverse for negative outcomes. Small negative outcomes relative to the reference point are associated with relatively large losses in value, while large negative outcomes generate incrementally less perception of loss.

Note, however, that the S-curve is not symmetical for gains and losses. The bottom of the S-curve associated with losses is deeper, meaning that negative outcomes are viewed more unfavorably than positive outcomes are viewed favorably. In the diagram, a positive outcome of x is associated with a gain of B, and a negative outcome of -x is associated with a loss of C. The absolute value of C is greater than B.

Axiomatically, when confronting decisions under condtions of risk, "losses loom larger than gains."

Tuesday, November 27, 2012

Theater of the Absurd: Taxes and Investment

Henry Drummond: You know Hornbeck, I'm getting damn sick of you.
E.K. Hornbeck: Why?
Henry Drummond: You never pushed a noun against a verb except to blow something up.
--Inherit the Wind

As the 'fiscal cliff' approaches, I have seen a number of studies and op-eds (including this one by Democratic Party shill Warren Buffett) suggesting that higher tax rates do not impact investment. Such arguments do not pass ECON 101 basics.

Assume an individual makes $1 million in income. Further assume that the individual's total tax rate (fed, state, local, sales, etc) is 40% (could be closer to 50% in some states). The person is left with $600,000 after taxes. Suppose that the individual consumes $400,000, leaving $200,000 in savings.

Now taxes increase 25% to a total rate of 50%. On the same income, the new rate leaves the individual with $500,000 after taxes. If the person maintains a similar lifestyle (consumption of $400,000), then $100,000 remain for savings.

The economy has just lost $100K in savings that could have been invested in productivity improvement.

Any tax increase on income reduces the potential pool of savings that can be used for investment. How can it be otherwise?

Of course, there are no limits to what gets debated in the political Theater of the Absurd.

Monday, November 26, 2012

Value Line

There are things we won't recall
And feelings we'll never find
It's taken so long to see it
'Cause we never seemed to have the time
--Phil Collins

Nice reminder from John Hussman that markets generally remain in an overvalued state. While we have come off the tech bubble highs, valuations remain rich compared to historical levels.

As Dr J frequently notes, overvaluation reduces expected returns moving forward. His models, which tracks very well versus actual returns, suggests prospective 10 yr returns at under 5% annually.

While that might seem attractive given 'risk-free' rates at financial repression levels under 1%, the ride on equities toward an annualized 5% is likely to be bumpy. For example, were equities to revert to mean valuation levels, indexes could easily be cut in half from here.

Those plowing significant monies into stocks here thinking that we're in a 'new normal' do so quite literally at their own risk.

position in SPX

Sunday, November 25, 2012

Marginal Tax Rates

Should five percent appear too small
Be thankful I don't take it all
--The Beatles

Prof John Cochrane at the Univ of Chicago offers some brief thoughts on marginal tax rates. Marginal tax rates are the penalties associated with bringing in streams of economic resources. Those resources may be brought in via production or via transfer payments from others' production.

The top marginal federal income tax rate is currently 35%. For unmarried individuals, this means that 35 cents out of each dollar earned in excess of $388,000 goes to the federal government.

Marginal tax rates are not just a concern for producers trying to determine how much of their production that they will be able to legally keep. Marginal tax rates are also a concern for people who are living fully or partially off the production of others. Because transfer payments phase out with rising income, personal production that exceeds these phase-out points serves as a tax--i.e., it reduces the incoming stream of economic resources.

Thus, people on welfare must worry about marginal tax rates as well. The marginal tax in their case is the loss in transfer payment income incurred when production income increases. If the marginal tax rate is high enough, then it serves as disincentive for getting off the dole.

Cochrane also observes that all taxes must be considered in marginal tax rate calculations - federal, payroll, state, local, sales, excise, and phaseouts. Cochrane suggests this CBO study as one that sheds some light on marginal tax rates facing lower income individuals.

The overarching point here is that in any social system where wealth is redistributed to some degree, both producers and non-producers face marginal tax rates that influence incremental economic calculation.

Saturday, November 24, 2012

Prospect Theory and Progressive Income Taxes

"I don't like losses, sport. Nothing ruins my day more than losses."
--Gordon Gekko (Wall Street)

An important contribution of prospect theory (Kahneman & Tversky, 1979) is the concept of loss aversion. Generally speaking, losses feel more than gains feel good. As such, people will often go to great lengths to avoid or recover from losses.

Loss aversion classically applies to investing and risk management. A 10% decline in a portfolio position stings more than a 10% increase soothes. Investors may dislike the feeling of a losing position so much that they 'double down' on their gamble in hopes that the position will quickly return to 'break even.'

As successful gamblers well understand, a general habit of adding more to losing positions is likely to land you in the poor house sooner or later. As such, the implications of loss aversion on general capacity to invest and hold onto wealth are somewhat ominous...

A tangential application of loss aversion relates to progressive income taxes. Since their advent over a century ago, progressive income tax schemes have typically been justified by 'ability to pay' doctrine. People who earn more income seen as having more discretionary income that can be spared for tax purposes.

When high earners balk at paying higher rates, proponents of progressive income taxes are quick to chastise. "Why should they complain about paying more? They're still making a ton."

But from the high earners' standpoint, they are losing instead of making. While a 40% marginal rate means that a high earner still keeps $600,000 on a million dollars in marginal income, that earner is apt to see it as a $400,000 loss. As such, that earner may go to considerable lengths (e.g., support anti-tax lobbies, tax shelters, off shore accounts, maybe even dial back on production) to mitigate those losses.

Ironically, many of those high earners voluntarily give away large portions of wealth to charity. These donations are likely viewed as gains, perhaps in the form of psychic income, rather than losses.


Kahneman, D. & Tversky, A. 1979. Prospect theory: An analysis of decision under risk. Econometrica, 47: 263-291.

Friday, November 23, 2012

Self Interest

There's so much that we need to share
So send a smile and show you care

An axiom of human behavior is that people act. They act in a way that they think will improve current situation. Stated differently, people act in a self-interested manner.

Self interest is often interpreted in material terms. People act in a manner that improves their material income.

But material well-being is not the only possible objective of self-interested action. People can also act in a manners that generate psychic income--i.e., acts that generate feelings or mental states that improve psychological well-being. For example, acts of sharing or charity may generate good feelings about helping others.

Mother Teresa is often viewed as a very unselfish person due to her lifelong efforts to help others. More likely, she was acting in a manner that generated great amounts of psychic income. Perhaps this income included the secure feeling that she would be well-rewarded by her Creator in the afterlife.

Acts of benevolence are not the only possible sources of psychic income. Hostile acts toward others, such as revenge, sarcasm, murder, robbery, etc., may also improve psychological well being. Feelings of superiority, of being right, of facilitating a more 'just' world all may drive, may drive acts of aggression by people seeking to improve their psychological position.

The next time you think that you or someone else is acting 'unselfishly,' think again.

Thursday, November 22, 2012

Escalating Moral Hazard

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

One of the best scenes in Wall Street 2 is the meeting at the NY Fed meant to reflect the Fall 2008 situation. Prices are plummeting in all asset classes (especially mortgage-backed securities and associated derivatives), and all big banks face insolvency. The bank CEOs have gathered round the table with government officials with hats in hand. They need a bailout or they are history.

The Hank Paulson look alike Treasury Secretary berates the group for taking too much risk. Chief antagonist Bretton James, who had ironically only months before successfully led an argument in the same room against bailing out a Bear Stearns-like firm for taking excessive risk, now leads the other side of the argument. The fact that the banks took much risk didn't matter, he argued. If the government didn't bail out the firms, there would be no financial system tomorrow.

We know what happened.

So here we are a few years and bailouts later facing yet another 'fiscal cliff.' The argument goes that if government does not intervene with another round of interventions, then the economy goes over the cliff.

It doesn't matter how we got here, politicians argue. We need to save the system so that there will still be a tomorrow.

Every time that we buy into this line of thought, we lever up the system  some more. People see the bailouts, so they take more risk.

We have trapped ourselves in our own moral hazard.

Wednesday, November 21, 2012

Mother Chip Back on the Ship

We thought just for an instant we could see the future
We thought for once we knew what really was important
--Til Tuesday

Started a position in Intel (INTC) this am. Stock has been getting sold hard since late summer, and then broke thru $20 on news that CEO Paul Otellini will be retiring in the spring. Naturally, analyst downgrades followed.

My history with Mother Chip stretches back to the tech bubble glory days, when INTC was my largest and most productive holding. Since then, the name has been back on my sheets more than a few times in more of a trading position. Must admit to a bit of sentimentality each time it does so.

INTC's market cap currently stands at about $96B. Although it used to be debt free, it still holds about $3B in net cash. In each of its last two fiscal years, the company generated over $10B in free cash flow - although achieving similar this FY may be a bit of a stretch. On an enterprise value to FCF basis, the stock seems decently valued. It also sports an attractive 4.6% yield.

The stock is now oversold on multiple time frames--although that doesn't mean is won't get more washed out. In fact, technicals suggest support below at $18ish and $16ish.

Should the stock reach those levels, I'll likely be a better buyer.

position in INTC

Tuesday, November 20, 2012

More Utilization of Less Capacity

"Six bucks and my right nut says we're not landing in Chicago."
--Del Griffith (Planes, Trains & Automobiles)

Brief thought upon returning from trip to Left Coast. Planes out and back filled to the brim--as full as I've seen them and I've flown on many Thanksgivings.

Indicator of economic health? Probably less than at first glance. Why? Airlines operators have cut way back on flights. Entire terminals at CVG are dark. When I hit the parking garage upon return tonite, I was surprised, almost stunned actually, at how empty the parking garage was.

Far cry from the heydays of Thanksgiving travel.

Monday, November 19, 2012

Drowning in Capacity

Let me flow into the ocean
Let me get back to the sea
Let me be stormy and let me be calm
Let the tide in, and set me free
--The Who

That capital spending in the US is at notably low levels should not be a surprise. Interest rates have been driven lower by central bank policies for three decades:

This secular decline in cost of credit motivated diligent borrowing and spending by US corporations. We now face an overbuilt situation, with potential supply out of balance with demand:

Moreover, by borrowing more to live better in the present, we have saved less, thus depleting resources that could serve as capital for future productivity improvement. With current debt so high, it will be difficult to rebuild savings while paying back loans.

Corporations also face regime uncertainty, which further discourages net capital investment.

Given the present environment of high debt, low savings, low capacity utilization, and significant regime uncertainty, the real surprise would be an extended increase in real investment.

Basic economic laws suggest that the chances of such a surprise are low.

Sunday, November 18, 2012

Why Study the Numbers?

You never let me cross to the other side now
I'm tied to the hope that you will somehow

Interesting note as always by Kyle Bass (would recommend reading his actual letter rather than the ZH summary). Just one observation here. Bass asks, "How many market participants actually study the numbers?"

Efficient market hyptheses would suggest that the number are generally well studied and the information appropriately discounted in prices. Of course, we know that markets are less than efficient in processing info.

I'm wondering whether market participants are now prone to study data to a lesser degree than in the past. One hypothesis would be that the environment has become too confusing for many investors, thereby leading them to give up cognitive study of the data. Another hypothesis would be that investors feel threatened in the present environment, thereby leading them to follow others who they feel must have accurately interpreted the data.

Still another, and not althogether unrelated hypothesis, is that investors have grown accustomed to the bailout context, and since they are confident that government has their backs they feel less need to chew thru information.

After all, why expend the effort to assessment market environments if risky behavior is insured by government?

Friday, November 16, 2012

Liquid Twinkies

And the union people crawled away ay ay ay ay ay ay
--Billy Joel

Looks like unions will 'win' their strike vs Hostess Brands. Unfortunately that win means HB will liquidate. 18,000 jobs lost.

Another demonstration that trying to fix price of labor above market results in compulsory unemployment.

Thursday, November 15, 2012

Getting Clinical

No place to be ending but somewhere to start

An Oklahoma clinic provides a glimpse at what competitive medicine can look like. Current health care markets are so hampered that posting of a simple price list of procedures seems almost stunning.

The clinic also encourages non insurance business and cash payments. Great comparison of invoices between this clinic (simple half page) and a local Medicare/Medicaid hospital (multi-page maze of charges) as well.

In today's hampered health care markets, consumers have little incentive to shop for value. Without that incentive, the pressure is off producers to innovate.

The paper file storage area shown in the video looks no different than file areas I visited at major hospitals and clinics when I was involved in a corporate health care improvement initiative in the early 1990s. Given the advances in info tech in the last 20yrs, it is hard to imagine that this time warp would be present if competitive pressures were driving this market.

Obamacare will make the conventional health system worse.

Maybe this OK clinic is an example of an alternative market. What if some producers leave the conventional system and build their own--one that actually caters to the consumer?

Wednesday, November 14, 2012

Sweet Smell of Secession

Relax said the night man
We are programmed to receive
You can check out any time you like
But you can never leave
--The Eagles

Secession is a strategy for coping with oppressive government that has been recognized since the country's founding. It is currently attracting attention because of secession petitions being posted to the White House's We The People website. Petitions have now been posted from all 50 states and have currently amassed nearly three quarters of a million signatures. The Texas petition alone is just shy of 100,000 signatures as of this writing.

The terms of We The People website state that petitions that amass more than 25,000 signatures in 30 days require a response within 30 days, so it appears that the White House staff will be cranking up the form letters.

Generally, the petitions follow a form as well. "Peacefully grant (State Name) to withdraw from the United States of America and create its own new government."

Unfortunately, the president does not have the constitutional authority to approve (or deny for that matter) secession requests. The decision to secede rests with the states themselves. Historically, this has taken the form of conventions where one or more states discuss the issue, and vote on whether to reject the US Constitution and draw up a new constitution. While the actions of Southern states prior to the Civil War are well known, there were several other secession threats prior to 1860.

Judge Nap provides some interesting info on secession and the Constitution in the context of the current Texas secession petition.

I have read several editorials essentially saying, "Go ahead and seceed!" Some for 'good riddance' reasons. Some for 'they'll be sorry' reasons. et al.

Some deja vu, perhaps. When Southern states were undertaking secession proceedings in 1860-1861, editorial sections of Northern newspapers clearly indicate that secession as a Constitutional right was widely respected, if not welcomed (Perkins, 1964). Many of those editorials contained the same 'good riddance' et al. flair popping up today.

Unfortunately, when push came to shove, the federal government would not uphold the rights recognized and respected by people on both sides of the issue, and proceded to use deadly force to reverse the secession movement.

By its actions then, the federal goverment asserted that it has the right to kill people who try to exercise their rights elaborated in the Declaration and protected by the Tenth Amendment.

By their actions today, many citizens disagree with the federal government's assertion.


Perkins, H.C. 1964. Northern editorials on secession. Gloucester, MA: Peter Smith.

Assassinate and Escalate

"We fight over an offense we did not give, against those who were not alive to be offended. What is Jerusalem? Your holy places lie over over the Jewish temple that the Romans pulled down. The Muslim places of worship lie over yours. Which is more holy? The wall? The mosque? The Sepulchre? Who has claim? No one has claim. All have claim!
--Balian of Ibelin (Kingdom of Heaven)

This morning Israel took out Hamas' chief of staff in a precision airstrike. Israel says that the assasination was in response to recent shelling of Israeli soil out of Gaza, which was Hamas' response to recent Israeli aggressions, etc.

Not sure how much longer this thing can escalate before the region gets really hot.

Oil, btw, is up a percent on the news.

position in oil