Tuesday, January 31, 2012

The 'Risk Out' Scenario

I don't want to wait for our lives to be over
I want to know right now what it will be
I don't want to wait for our lives to be over
Will it be yes or will it be...sorry?
--Paula Cole

Interesting proposition by Peter Atwater that the ultimate indicator that a secular bottom has arrived may not be one where individuals have moved out of more risky financial assets and into less risky assets. Instead, perhaps it will be a 'risk out' situation, where market participants flee securitized financial assets altogether.

There is, of course, a decent argument to be made that the probability is non-zero of a systemic meltdown that chases participants away. With systemic leverage thru the roof and issues of re-hypothecation raised by last year's blow-up of MF Global, it isn't that difficult to envision a scenario where the financial system ceases to function. Cascading bank failures, sovereign debt defaults, and other contagious events could bring the system to its knees.

Indeed, a good case for owning physical gold or other 'hard assets' is that they are tangible and outside the 'paper' financial system.

I'm going to keep Peter's proposal in mind. Perhaps the time to 'buy the list' is not when people are selling the list, but when both buyers and sellers have gone home en masse.

position in SPX

Monday, January 30, 2012

Fed Leverage Update

Nothing's so loud
As hearing when we lie
The truth is not kind
And you said neither am I
--Toad the Wet Sprocket

By my math, Federal Reserve balance sheet currently sports leverage of 54:1. That's higher than Fannie, Freddie, Bear, Lehman prior to the 2008 credit implosion.

Indicator of how risk has been socialized, meaning that risk has been transferred from private to public balance sheets.

position in SPX

Portugal Debt Hammered Again

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

Portugal credit spreads are widening significantly this am. Ten yr CDS now pricing in over 70% chance of default.

For better or worse, I kicked much of my long exposure (mostly precious metals) last Friday and entered today's session about 10% net short via equity index ETFs.

position in silver, SPX

Sunday, January 29, 2012

Double Taxation of Dividends

If you drive your car, I'll tax the street
If you try to sit, I'll tax your seat
If you get too cold, I'll tax the heat
If you take a walk, I'll tax your feet
--The Beatles

The Left is once again fixating on dividend income and its tax characteristics. Since 2003, ordinary dividends have been taxed at 15% for individuals in that marginal tax bracket or higher. Although set to expire in 2010, the 15% dividend tax rate was extended thru 2012 by legislation signed into law by the Obama administration.

Liberals detest the 15% dividend tax rate because wealthy individuals who receive dividend income often realize an effective tax rate significantly lower than the current 35% top bracket. This is the gist of Warren Buffett's absurd argument that his secretary pays less tax than he does. Although the reality is that wealthy people pay the lion's share of all taxes in the US, with nearly 50% of all people paying next to no income tax, those on the Left want...more.

In a back-and-forth Facebook thread on this issue that I was observing the other day, someone noted that, while the tax rate on dividends is 15%, dividends are double taxed--once at the corporate level and then a second time when shareholders receive dividend checks. If corporations pay a 35% rate, then total taxes paid on dividend income amount to a 50% rate.

A second contributor, obviously sympathetic to the notion that dividends are undertaxed, subsequently offered two arguments in attempt to refute the double taxation observation. One argument was along the lines of: 'all income is taxed multiple times, so double taxation of dividends is nothing special.' He suggested that a store owner, for instance, could not avoid paying taxes on dollars received from patrons even though the patrons had presumably already paid income taxes on dollars used to purchase goods or services in the store.

This argument is in error.

Income is defined as an individual's rightful share of output gained thru productive effort. Prior to the inception of money, income was measured in terms of tangible production. If I chopped wood for a living, then my income was a fraction of the cordage produced by me that I could rightfully claim as my own.

Although income is commonly measured in units of currency today, it still reflects production claimed as personal property. Since passage of the Sixteenth Amendment in 1913, government can legally tax a fraction of that production claimed as individual income.

The error of the second contributor's claim lies in viewing the transaction between store owner and patron as a one sided transfer of resources. If a patron purchases a box of ceral for $4, the patron plainly does not 'give' after tax income to the store owner. Instead, the patron exchanges his/her income for a quantity of product/services rendered by the store owner.

In addition to the cereal, the patron might pay for the convenience of the store's location, or for the selection that the store offers. Indeed, such service attributes is how retail establishments commonly add value.

The important point is that the store owner has generated new production, The proprietor has provided goods and services that were previously unavailable to the market. The $4 represents the price of the store owner's output in terms of the resources that the patron was willing to trade to get that output. After accounting for costs of business, the store owner hopes to generate a positive income--i.e., his own fraction of output to be claimed as personal property that, under our current system, will be subject to income tax.

As such, this situation describes already taxed resources owned by someone being traded for newly produced resources owned by someone else that have yet to be taxed. There is no double taxation here.

The second argument offered by the second contributor was that taxes on dividends do not constitute double taxation at all. Companies pay taxes, then individuals pay taxes when companies send them dividends. Two different owners, two different taxes.

This is argument is also misguided, as the owners are the same in both instances.

Shareholders are the owners of corporations. When dividends are declared, shareholders receive the payouts. Those payouts typically come from earnings realized from the company's activities. Corporate income is subject to tax when reported. Because shareholders have a rightful claim on corporate earnings streams, any corporate income tax paid is effectively taxing shareholders, because there is now less income available for subsequent distribution to the owners.

To further grasp the impact of corporate taxes on shareholders, suppose that the corporate tax rate was 100% . In this case, corporate shares would be worthless since no cash generating capacity would be available to owners.

Higher taxes reduce income available to shareholders.

Should the company declare a dividend subsequent to paying corporate taxes, then those earnings declared as dividends are once again subject to tax. Currently this is the 15% levied on dividend income.

Dividends are indeed double taxed, because shareholders have ownership claims on earnings taxed at corporate rates as well as dividend payouts taxed at individual rates.

Unfortunately, history suggests that reason is unlikely to sway the minds of liberals in pursuit of a cause. The cause in this case is a redistribution of resources among people using government force, a cause that is at odds with nature.

Taxation of dividends is but one of a litany of rationalizations recited by the Left seeking to legitimize the taking of life, liberty, and property at gunpoint.

Saturday, January 28, 2012

Fairness by Force

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

In another round of 'what if,' the Judge asks, "What if the government persuaded a majority to think that somehow its theft of your property was in pursuit of 'fairness.'"?

Those who value freedom increasingly recognize that when politically motivated people discuss the notion of 'fairness,' then it is time to guard one's wallet.

It takes no genius to reason that a government which forcefully takes from some and gives to others in the name of 'fairness' is the epitome of discretionary rule. Who defines fairness? The king? The majority?

Unless all agree on what 'fairness' means and how it should be enacted, in which case of course government force would not be necessary, then some person(s) will be the subject of aggression.

Fairness by authoritarian rule. Fairness by force.

Friday, January 27, 2012

Capitalism We Have Not

Too many shadows, whispering voices
Faces on posters, too many choices
If, when, why, what?
How much have you got?
--Pet Shop Boys

Nice rejoinder to escalating claims that our current economic system is 'capitalism.' The author also observes that, contrary to popular belief, capitalism is not based on 'rugged individualism' in dog-eat-dog fashion. Instead, capitalism is grounded in voluntary social cooperation.

What we have now is a system increasingly driven by political force.

Debt Ceiling Quietly Increases

These changing years
They add to your confusion
Oh and you need to hear
The time that told the truth
--Level 42

And just like that, the debt ceiling goes up by $1.2 trillion. The new upper bound is now $16.4 trillion. Rick Santelli is correct. Not much noise from the media this time around.

Thursday, January 26, 2012

Coping with Variation in the Human Condition

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

A fundamental axiom of nature is variation. In terms of the human condition, variation is expressed in the differing capabilities and interests among people. It is also expressed in the differing situations in which people are born--some environments being more favorable than others.

Why this occurs is unknown and perhaps unknowable. If you believe in God, then the answer rests in the mystery of the Creator. If you don't believe in God, then the answer rests in the mystery of secular humanity.

Two primary belief systems have evolved in modern times for coping with variation in the human condition. One belief system accepts this variation as part of life. People employ their resource endowments, whatever their nature, to advance their interests. Capacity and resource position can be enhanced thru self-development or thru voluntary exchange with others. Individuals are free to pursue their interests, which of course may include charity and outreach, as long as these pusuits do not forcefully intrude on the pursuits of others.

A second belief system views variation in the human condition as unacceptable. It is unjust that some have been endowed with less resources than others, and it is unfair for those with less to have to work harder to achieve what gifted people might accomplish with less effort. The equitable solution is to even up resources among people--to level the playing field in terms of resources and opportunities. Doing so requires forceful intrusion on the pursuits of others to obtain the resources deemed necessary to even things up.

It should be clear that the first belief system is grounded in the concept of personal liberty. People have a right to pursue their dreams unencumbered by forceful intervention by others. Each person's resource endowment, large or small, is but a starting point for growth based on free choice. This system is also grounded in the principle of non-violence. Individuals engage in peaceful, voluntary exchange with others when it is deemed mutually beneficial. Force is employed only to protect each person's life, liberty, and property from expropriation by others.

The second belief system is grounded in the concept of collective submission. Individual pursuit of happiness is subservient to the interests of others. Those endowed with less are viewed as unlikely to succeed unless they are provided resources. Voluntary dependence is a consequence. Because the resources given to the poor must be taken from the rich, a dominant principle of this belief system is violence--made legitimate thru government agency. Force is required to reduce variation inherent to the human condition. To keep people from pursuing their own interests, authoritarianism must rule.

It should be readily apparent which belief system is in harmony with nature.

But if the second belief system is so unnatural, then why does it predominate society? Perhaps it is because the drivers of freedom and peace conflict with another axiom the pervades human behavior: the urge to satisfy needs using the least amount of effort possible.

The spectre of getting something for nothing has been driving forceful conquest since the beginning of time.

Wednesday, January 25, 2012

Low Fed Rates till 2014 Sparks Gold

Here comes the rain again
Raining in my head like a tragedy
Tearing me apart like a new emotion

In today's FOMC announcement, the Fed signaled that they will be keeping rates ultra low thru most of 2014. Wow, that even raised my eyebrow...

This news put some giddy-up into gold, which vaulted about $50 this afternoon on the FOMC news.

I used this leap to sell my GLD position. It's up about 10% from its lows, price is now filling the gap, and stochastics are getting twisty in the overbought zone.

Am also concerned about the re-hypothecation issues surrounding these metal ETFs on the back of the MF Global situation last fall.

Selling this position puts me just about 0% net long (long metal and ag commodities against short equity index). Feels about right given the current field position of various asset classes.

position in commodities, SPX

Technology and Voluntary Workforce Attrition

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

The title of this missive suggests another piece on technology crowding out labor in the workplace. Instead, the author is more focused on the effect of emerging information technologies such as social networking on propensity to work.

The author posits that the decline in labor force participation is due to people, particularly young people, having more of their needs satisfied by info technology. This in turn is proposed to reduce peoples' need to work to obtain resources, and to reduce the need for products that would otherwise be necessary if people were commuting to, and doing more, work.

While there is some novelty to this argument, the empirical data that he provides do not support it. Jobless and participation rates have been falling for periods longer than Facebook and Twitter have been around, with primary inflection points on/around tech bubble poppage--the beginning of early deflationary action.

Moreover, the proposition that technology makes leisure more attractive compared to work might make more sense if standard of living were high with few obligations to care for. Currently, however, general standard of living is stagnating and debt load is high.

This means that, absent a windfall of innovation that permits efficient payback of debt, people will need to work more in the future in order to approach today's standard of living while paying back what they owe.

While they might lighten the workload a bit, info technologies like social networking seem unlikely to drive large amounts of voluntary attrition from work.

Tuesday, January 24, 2012

Income Mobility vs Wealth Mobility

The world was on fire and no one could save me but you
It's strange what desire will make foolish people do
--Chris Isaak

In a Facebook thread initiated by my sister, a contributor noted that defining 'rich' in terms of 'wealth' (stock of resources) is more appropriate than defining rich in terms of 'income' (flow of resources).

Indeed. But the reality is that 'rich' and 'income' enjoy popular association, as evidenced by the piles of income inequality pieces published in the mainstream press (one dated but still instructive example here by the NYT).

The contributor also discounted the use of income mobility studies to discern the extent that 'the rich stay rich,' arguing that incomes can vary wildly from year to year for individuals. And, to be sure, a rich person could own a stock of resources that generates little income.

I can't be sure, but I believe this person was implying that 'wealth mobility' measures would be more accurate measures of the durability of 'richness' over time.

I am not familiar w 'wealth mobility' studies in kind, but my sense is that they too would reflect significant temporal change. Those who own equities, for example, see big changes in net worth when markets move. And because wealthier people own more equities as well as other risky securities, it stands to reason that top wealth brackets are pretty volatile.

For those unsatisfied with current distribution of wealth, let me submit that the most nefarious activity that favors 'the rich' is the immense government intervention in markets that serves to prop up asset prices. Government intervention in markets clearly benefits the wealthy and helps them stay 'rich.'

The NYT data noted above provide some empirical support. Overlay, for example, a chart of the S&P 500 since the 1970s over the timelines shown and you'll find a pretty good correlation.

Remove monetary, fiscal, and regulatory stimulus that is propping up markets worldwide, and watch the gap between rich and poor narrow.

position in SPX 

Public School Daze

We are matching spark and flame
Caught in endless repetition
--The Fixx

Retrospective analysis of spending/achievement trends in US public schools K-12. Not sure anything could have been more predictable yrs ago than the state of State run schools today.

Yet, we keep throwing more resources down the hole.

Own to Rent

When it feels like the world is on your shoulders
And all of the magic has got you going crazy

A couple weeks back we noted increased govt activity in the housing markets. More today, as plans circulate to get the Federal Housing Finance Authority (read: taxpayers) to provide incentives for investors to buy properties foreclosed by Fannie and Freddie and then rent them out.

More central planning for the housing industry. It does seem pretty clear that we will never learn...

no positions

Monday, January 23, 2012

Non Bank Vaults

"Fact is, all lies, all evil deeds, they stink. You can cover them up for a while, but they don't go away."
--Dalton Russell (Inside Man)

Interesting comment in this missive by James Turk on storing gold in vaults. Turk suggests using non-bank vaults. Banks are in the business of lending. Non-bank vaults (presumably places like Brinks) are in the business of storing. As such, safe-guarding assets is likely to be a more important part of non-bank vault operator business model.

Interesting thought.

Sunday, January 22, 2012

Wickard v. Filburn

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

Roscoe Filburn was an Ohio farmer who was growing wheat on a 12 acre parcel of his farm. He was not selling the wheat; he was growing it on his own land for personal consumption--for baking bread for his family and for feeding his chickens.

The federal government told Filburn to stop growing wheat, claiming that he was producing wheat in excess of the amount permitted under the Agricultural Adjustment Act of 1938. A previous version of the AAA had been ruled unconstitutional by a prior Supreme Court. However, emboldened by turnover in the Court beginning in 1938 that permitted FDR to handpick successors, the FDR administration was at it again.

Filburn sued, claiming that the federal government could not control what he did on his own land. The Commerce Clause granted the government no power in this case, Filburn argued, because no commercial and no interstate activity was taking place.

Incredibly (or perhaps not given that these were FDR's judges), the Supreme Court ruled against Filburn. The court ruled that if farmers were allowed to grow any amount of wheat that they wanted, then their actions in aggregate would affect wheat prices which would, in turn, affect interstate commerce.

Such an interpretation, of course, implies that government could extend regulatory power to no end. Which is precisely what has occured since. Parenthetically, the real issue here is the AAA's power to fix prices, which is totally outside the boundaries of the Constitution and of natural law.

The recently passed healthcare law is grounded on such a broad interpretation of the Commerce Clause. As this case will shortly be before the high court, the issue is whether the judges return to first principles of natural law.

If not, then our system careens farther off the rails.

Saturday, January 21, 2012

Eminent Domain, Unjust Power

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

Eminent domain is power claimed by government to take real estate from owners. The argument is that the land has a 'public benefit' that is greater than the benefit realized by the individual owner.

In the last decade, eminent domain power has been expanded by court cases such as Kelo v. City of New London (2005), where the Supreme Court ruled that homeowners can have their property taken from them by local government and transferred to a private entity deemed to be a jobs creator and tax generator.

Eminent domain in no way can be construed as a just power of government. Just power is power possessed by individuals and delegated in whole or in part to government. Police power is a just power, for example. People have the right to protect themselves, so they can delegate this power to government.

However, people do not have the right to condemn their neighbor's property, no matter how good the intentions. Lacking the power to expropriate property themselves, people cannot delegate the power to government.

Friday, January 20, 2012

Silver Strength

While my imagination's running wild
Yeah, things are getting clearer
--Bryan Adams

The technical picture for silver continues to improve.

With today's +5% jump, white lightning knifed thru its 50 day moving average and left little doubt that it has officially left behind its multi-month downtrend line.

One would think that further upside progress from here will be more difficult--given the damage done on the way down late last year. Using SLV as a proxy, 34ish should serve as significant resistance.

That said, silver is quietly up about 20% from its late December lows.

position in SLV

Soaking the Poor

"I have to believe that when things are bad, I can change them."
--James Braddock (Cinderella Man)

Frank Chodorov explains how incomes taxes work to soak the poor. Using social security as an example, he demonstrates that those who partake in social welfare programs lose thru increased dependence and thru the inevitable inflation that the State must use to pay entitlements.

Do you know what an interesting comparison would be? Examine the progress made in reducing poverty from the country's founding until 1913. Then look at the progress in reducing poverty since then.

Which period was more effective in reducing poverty?

Thursday, January 19, 2012

Getting Sentimental

Don't you know promises were never meant to keep?
Just like the night, they dissolve off into sleep
--Rolling Stones

Wanted to record that Jason's sentiment indicators are getting pretty stretched toward bullish extremes--both near term and long term.

When sentiment gets lopsided, then a trend reversal often approaches.

Couple that with Demark indicators at or near trend exhaustion levels on multiple timeframes, and it seems time to get cautious.

Personally, I added a bit to my index short positions today.

position in SPX

Armageddon Postponed?

"Hey, you guys wouldn't happen to tell us who actually killed Kennedy, would ya?"
--Harry Stamper (Armageddon)

Jim Rogers observes that there are 40 major elections worldwide in 2012. To him, this means big time money printing and stimulus by governments this year in order to buy votes.

Perhaps markets are already betting accordingly...

JR suggests that Armageddon may be postponed until 2013-14--after the buzz wears off.

position in SPX

The Original Tea Party

"These rustics are so inept. It nearly takes the honor out of victory. Nearly."
--Lord General Cornwallis (The Patriot)

Interesting background on the original Boston Tea Party staged in late 1773. The TP was a response to British attempt to monopolize tea trade w/ the colonies via the East India Company, and to exact taxes from this restricted trade. Predictably, a black market quickly formed w/ Dutch tea, which threated the British position.

As a response, the Tea Act was enacted on top of the previously implemented Townshend Acts to collect duties on all tea entering the colonies. Chatter circulated among the colonies that this was but one small step toward comprehensive tax tyranny by the British government.

The Tea Party occured in Boston because this was the only tea port where colonists could not strong arm colonial consigners into withdrawing from reselling tea for the East India Company.

An interesting tidbit is that the Tea Partiers were careful to destroy only the tea. They were mindful of other private property on the boats.

Following the Tea Party, Britain enacted the Coercive Acts (called the Intolerable Acts by colonists) in 1774. These acts sought to more forcefully exert British rule over the colonies. But these acts of force only strengthened colonial resolve against authoritarian rule.

Wednesday, January 18, 2012

The Last Lifeguard

When it feels like the world is on your shoulders
And all of the madness has got you going crazy

Peter Atwater wonders if the IMF represents the last lifeguard. Whether we're talking about $500, $2 trillion, or even $10 trillion (rumored) in lending capacity, we are still talking about laying more debt on top of a debt problem.

Tuesday, January 17, 2012

Stubborn Yields

Confusion nevers stops
Closing walls and ticking clocks

Usually, when market participants are ready to take on risk, they sell bonds and buy stocks. When bonds get sold, their yields go higher. Thus, higher stock prices and bond yields are often positively correlated.

Not this time--at least so far.

As stocks have lifted over the past few weeks, bond yields have not done the same. Ten yr Treasury yields are approaching mid December lows at ~1.8%.

This suggests that there is still lots of deleveraging behind the scenes--investors are swapping risky assets (perhaps assets grounded in Europe) for the safety in US Treasuries.

Stock bulls will argue that this is a positive. "Imagine what will happen to stocks when this pocket of 'de-risking' is past. Demand for stocks will swamp supply!"

Stock bears will argue that this is a negative. "Imagine what will happen to equities when this pocket of stock buying is past. Supply of stocks will swamp demand!"

And so it goes...

position in SPX

Monday, January 16, 2012

Can Markets and Socialism Coexist? Denmark's Case

So hold on, here we go
Hold on, to nothing we know
--The Motels

Cato's Dan Mitchell considers the solid economic performance of Denmark despite major policy contradictions.

On the one hand, Denmark has very free markets as measured by the Heritage Economic Freedom Index, scoring highly in legal structure that protects property rights, lack of regulation, free trade policy, et al. On the other hand, Denmark has stifling fiscal policies, with tax burdens and government spending levels that exceed 50% of GDP.

Mitchell concludes that the only way that the Denmark model 'works' here is that the free market environment pulls an otherwise untenable fiscal situation out of the economic abyss. Were Denmark to reduce market freedom, then the model would collapse.

He also suggests that Denmark moved towards more socialization only after free markets had created large amounts of wealth. This has been the progression in nearly all Western countries: get rich, then expand government. The rich country/big government relationship is sometimes referred to as Wagner's Law.

We should note that Sweden, whose situation we pondered recently, has a similar set-up to Denmark's.

One thing that nags me about these conclusions is that they are based on an assumption that freedom can be categorically managed. Keep market freedom high in order to offset low fiscal freedom. Over time, it is hard for me to see how this can be maintained. Government spending at these levels seem certain to engulf freedoms of all kinds, including those involved in exchange. Indeed, it can be argued that market freedoms are already severely compromised if taxes exceed 50% of GDP.

Measures that comprise the Economic Freedom Index illustrate the contradiction. Mitchell notes that Denmark's free market score is strengthened by country practices that preserve property rights. But taxes exceed 50%! How can property rights be respected when government takes more that half of national income under conditions of force?

This is a nice example of the problems evident with the Economic Freedom Index as measured.

In sum, Mitchell's conclusions seem reasonable on a static basis and assuming that the data employed are valid. On a more dynamice basis, however, it is hard to see how the arrangement currently practiced by Denmark (and Sweden) is stable over time.

Sunday, January 15, 2012

Bullish Resolve

But anything I could have said
I felt somehow that you already knew
--Til Tuesday

The bullish reverse head and shoulders pattern forming recently in the equity indexes such as the S&P 500 (SPX) has indeed resolved to the upside.

The action hasn't been voracious out of the set up, but the tape has a persistent 'buy the dip' tone. Now that SPX 1280 has been cleared, this move technically 'works' to 1360.

I remain slightly net long (long commodity ETFs against short equity index). Should commodities continue to lift with stocks, I'll look to piece out of long exposure and perhaps become net short.

position in commodities, SPX

Saturday, January 14, 2012

Heritage Economic Freedom Index

I would like a place I could call my own
Have a conversation on the telephone
Wake up every day that would be a start
I would not complain of my wounded heart
--New Order

For years the Heritage Foundation has published its Index of Economic Freedom. The Index is meant to capture levels and trends in economic liberty on a country by country basis.

The index of economic freedom is determined by assessing ten components of economic freedom spread across four categories:

Rule of law (property rights, freedom from corruption)
Limited government (fiscal freedom, government spending)
Regulatory efficiency (business freedom, labor freedom, monetary freedom)
Open markets (trade freedom, investment freedom, financial freedom)

For each component, quantitative and qualitative data are used as the basis for a 0 to 100 score. The ten component scores are weighted equally and averaged to get a country's overall economic freedom index.

The just issued 2012 index finds the US sinking lower. The 2012 value of 76.3 marks the third consecutive year that the US economic freedom index has come in below the 80 benchmark deemed to reflect a 'free' condition. The US also slipped from 9th to 10th in the overall economic freedom rankings.

There is much to question about the Heritage assessment methodology. The grading scales have an element of subjectivity as are the data sources chosen as information sources. The resulting measures, therefore, may lack validity. For instance, the scores for business, labor, and monetary freedom seem way too high at first glance. The various components are not independent either. For example, monetary policy is likely to spill into a variety of areas such as limited government, regulation, and open markets.

However, my biggest problem is the equal weightings policy. It is unlikely that each of the ten components contributes equally to the economic freedom construct. Some almost surely matter more than others.

My sense is that the Heritage approach may overstate the true level of economic freedom in the US and understate the true degree of decline.

That said, the Heritage index is one of the best known indexes out there and the general trends are certainly consistent with what is going on.

US economic freedom is in decline.

Friday, January 13, 2012

Radical Responses to the Great Depression

You tell me it's the institution
Well, you know
You better free your mind instead
--The Beatles

Interesting U of Michigan exhibit on docs associated with labor, social justice movements during the Great Depression. As I have been doing a fair amount of self-study of this period, many of the names served up here are now familiar to me.

One lesson that I have learned from other studies, and reinforced by this exhibit, is how organized various flavors of socialism were in the United States by this time. Labor was the primary conduit, but other areas of public policy were in play as well.

I do find the title interesting: "Radical Responses to the Great Depression." Indeed, 'radical' or 'revolutionary' have often been associated with socialistic movements.

But what is so radical about using government to force some to cater to others' needs? This idea is as old and pervasive as human society.

The truly revolutionary idea remains that people should govern themselves. And that individuals should be able to pursue their interests unencumbered by the State.

An Economic Program for American Democracy

We've always had time on our sides
Now it's fading fast

As the New Deal foundered with a new Depressionary leg lower following the election of 1936, FDR was running out of options and rationale for continued government spending. Four years after amassing record deficits and instituting myriad economic programs, the federal government had little to show for the effort. Moreover, the Supreme Court had been striking down various New Deal programs such as the NIRA and the AAA.

Then along came a pamphlet sized book, An Economic Program for American Democracy, written by seven Harvard and Tufts economists in 1938. The book grew from meetings in Cambridge among various instructors and students on the direction of economic policy.

While the academic affiliations lend of air of legitimacy to this work, the actual content is pure drivel. The book cheerleads FDR's New Deal efforts. They probably felt it necessary because the actual results of the New Deal were not laudable by unemotional analysis.

The book's basic thesis was that capitalism in its pure form was over. The capitalism phase was marked by Westward expansion and technological advancements that drove a capitalistic engine of investment. Unfortunately, the frontier was now closed and there were few new technologies (!) to absorb new investment. Absent new investment, the capitalistic system becomes dysfunctional. The authors proposed that the stock market crash in 1929 signified the end of capitalism in America.

To pick up the slack from lack of investment, the author proposed that it was government's role to borrow and spend. This could be done indefinitely in their view because there was no need to pay back the debt. Bondholders, they proposed, are happy as long as they got their coupon payments. In the event that they wanted to sell their holdings, bondholders would be happy as long as the market was liquid.

This process--funding ever more economic intervention thru deficits and debt, could go on forever, the authors said. A mechanism for utopia.

As laughable as this thesis is, FDR and his administration embraced it. Subsequently, they fired up federal government financing operations on a scale previously unseen. Various of the authors of the book, plus the two broad champions of this policy, John Maynard Keynes (the originator) and Alvin H. Hanson (domestic proponent, Harvard), were brought to Washington to advise/implement the program.

Thus, ever growing defictis became institutionalized in the US.


Gilbert, R.V., Hildebrand, G.H., Jr., Stuart, A.W., Sweezy, M.Y., Sweezy, P.M., Tarshis, L., & Wilson, J.D. 1938. An economic program for American democracy. New York: The Vanguard Press.

Thursday, January 12, 2012

Return of Fannie & Freddie

They gave you life
And in return you gave them hell
As cold as ice
I hope we live to tell the tale
--Tears for Fears

Fannie Mae and Freddie Mac were at ground zero in the mortgage market meltdown. These government sponsored entities (GSEs), with their implicit backing from the federal government, helped push borrowing rates below market and foster risk taking on a broad scale.

That all came crashing down in 2007-2008 when market forces began correcting the excesses.

In late 2010/early 2011, it appeared bureaucrats had a rare moment of clarity, with many Congresspeople floating proposals to wind down the GSEs.

That moment was fleeting, however. The end of 2011 found Congress taking steps to increase, not decrease, the Federal Housing Authority's influence on the mortgage market. Increased revenue streams from Fannie/Freddie fees, increase in max FHA loan size, and expiry of tax deductions to private mortgage insurers are all likely to push more biz toward the GSEs.

Moreover, the FHA has been stepping in to back more mortgages. The volume of FHA backed loans has more than tripled over the past 4 years.

When Fannie and Freddie collapsed, each was carrying more than a $trillion in assets against a sliver (~$20-30 billion) in equity. With that much leverage, housing prices did not have to decline much to render the GSEs insolvent and push them into government receivership.

These new actions finds federally sponsored housing entities levering up again.

You can bet that, once again, when these institutions inevitably lock up again, the feds will surely be pointing fingers at the other guy.

position in SPX

Wednesday, January 11, 2012

Big Government and Republicans

We are strong
No one can tell us we're wrong
Searching our hearts for so long
--Pat Benatar

Enjoyed this convo between the Judge and Jon Stewart. JS notes the hypocrisy among most Republican presidential candidates.

Of course, this is not news. Stewart suggests that the divergence between 'small govt' ideals and Republican party behavior has beengrowing for 40 years.

It has been a lot longer than that. In fact, the Repulican party was founded on a big gov't platform called the American System. The American System escalated under the Whig party precedent and became Lincoln's mantra in the election of 1860.

Yes, the Barry Goldwater years offered a rare detour toward small government ideals among Republicans. But the only elected Republican president in the 20th century that embodied the small government ideal in his behavior to a large degree was _____. (fill in the blank)

Nope, not Ronald Reagan. RR certainly waxed poetically about small government but acted otherwise when the rubber hit the road.

Instead, Calvin Coolidge was probably the most hands-off president of the 20th century.

As the Judge observes, there is only one Big Govt party today with two wings that are more the same than different.

There is only one candidate still in the race that differs...

Tuesday, January 10, 2012

Why the Wealthy Own Gold

I may not now what you're going through
But time is the space
Between me and you

Straightforward explanation of why wealthy people own gold. The key point here is that the primary reason to own physical gold (in physical form) is not to speculate in near term price moves.

Instead, wealthy people own gold to preserve their wealth against problems like inflation, bank collapses, and aggression.

Viewed thru this lens, owning gold is less of a 'buy-and-hold' investment strategy and more of a buy-and-will-to-the-next-generation family wealth preservation strategy.

Scarcity and Economic Tradeoffs

Just a little more time is all we're asking for
'Cause just a little more time could open closing doors
--Corey Hart

Most of us have heard the truism that life is full of tradeoffs. This is indeed a truism because nearly every resource necessary to pursue happiness is in short supply. People must choose between alternatives under these axiomatic conditions of scarcity, lest the resources run dry. The heuristic is an economizing one--consume scarce resources in an order that maximizes satisfaction.

Pervasive scarcity thus drives people to be predominantly 'economic' in their behavior, trading off one thing in order to obtain something else deemed to possess more utility.

A class in economics is not necessary to learn this. Pursuing our dreams demands that we learn about making tradeoffs (i.e., economizing) in our daily decision-making.

Monday, January 9, 2012

Misleading Signals from Economic Indicators

I was half in mind
I was half in need
And as the rain came down
I dropped to my knees and prayed
--Style Council

John Hussman offers one of the more thoughtful analyses of leading economic indicators (LEIs) that you're likely to come across. Based on his data, he's pessimistic that recent anecdotal evidence (i.e., downticks in unemployment, upticks in purchasing managers index) are sounding 'all clears' with respect to recession chances.

In fact, Dr J's assessment suggests the opposite: recession appears likely within the next 6 months.

One point I found particularly interesting is that some factors used in LEI analyses tend to 'look good' right up to commencement of a recession. For instance, Dr J notes (see below graph) that payroll growth tends to be positive in 80% of the months where recessions begin! Moreover, payroll growth in the 'recession month' tends to be higher, on average, than the three preceding months.

Obviously, unadjusted payroll growth is not a good standalone predictor of recesssions. Indeed, from the above graph, payroll growth appears to be a lagging indicator of recessions.

Bottom line: be careful what you absorb from the popular press concerning economic indicators and recession potential.

Sunday, January 8, 2012

McCulloch v. Maryland

I may not know what you're going thru
But time is the space
Between me and you

Marbury v. Madison established that the Supreme Court possessed authority for judicial review--a principle wholly consistent with the Constitution's basis in natural law. However, the downside to Marbury was that it gave the Court huge trumping power. Judges with federalist visions could sway law in favor of expand centralized government thru their 'interpretations' of the law.

An early case that demonstrated the court's power to expand federal government was McCulloch v. Maryland in 1819. At issue was whether the United States could charter a bank (polically desirable to inflate away war debts). McCulloch was an employee in the Baltimore branch of the federal bank who refused to pay state taxes that were being levied on federal bank employees. Maryland claimed that the federal bank was not an instrument of the United States because the power to establish a bank is not listed in Article 1, Section 8.

McCulloch (the feds) claimed that the power did exist under the infamous Necessary and Proper clause trailing the end of A1S8. The Supreme Court, still headed by John Marshall of Marbury fame, sided with the feds. The crucial difference between Marbury and McCulloch is that in the former, judicial review was necessary to keep the federal government from expanding, while in the latter, judicial review was applied to expand the scope of federal government.

Marshall's reasoning was flawed on many levels. Marshall argued that the Constitutional Convention created a social compact between the federal government and individual citizens. States, Marshall claimed, do not represent a check on Congress. Marshall's argument was clearly erroneous, as the ratification process itself was state driven, requiring at least 9 state conventions to ratify the Constitution before the documents became the supreme law of the land.

Marshall also argued that, while the Constitution did not explicitly authorize the charter of a federal bank, the Necessary and Proper clause granted Congress implied powers. In his view, Congress has the right to choose any means not expressly prohibited by the Constitution to carry out its powers. This of course violates principles of natural law and the clear intent of the Framers who were clearly suspicious of large central governments. If passages such as the Necessary and Proper clause can be interpreted to empower the federal government with virtually unlimited options, then why go to great lengths to draft a Constitution to begin with?

Marshall's ruling in McCulloch paved the way down the slippery slope toward expanding central government power and contracting local power.

Saturday, January 7, 2012

The Three Fifths Compromise

"Why should I trade one tyrant 3000 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)

In a previous missive we modeled the impact of freedom under persistent conditions of political compromise. The Constitution itself was a document of compromise. While the overall framework is consistent with the workings of natural law, its was political compromise that contributed to many of the Constitution's imperfections.

By far the most glaring imperfection is evident right away in Article 1, Section 2. This is the infamous Three Fifths clause, which declared that slaves were property rather than people, thus denying these individuals of their natural rights. This passage is so far off the rails from the ideas in Jefferson's Declaration that even casual observers have to wonder how it ever made it into the Constitution.

In short, compromise.

The Three Fifths clause resulted from a battle for political power between representatives of Northern and Southern states. It is commonly inferred that Southern states did not want slaves to 'count' wholly. In reality, it was Northerners who fought for having slaves count for less than a entire person. That way, Congressional votes would be weighted in favor of Northern states.

To get a deal done, those who were adamant about abolishing slavery, such as Benjamin Franklin, compromised. Imagine how the history of the United States would have been altered had those people on the side of freedom stuck to their guns. Imagine no slavery in the US beginning in 1787. Imagine no Civil War nearly 100 years labor that claimed more than a half a million lives and destroyed over 1/3 of US property. Imagine no Reconstruction period that embittered the South and inflamed Jim Crow behavior.

When freedom is given up as part of political compromise, natural forces build distortions into society that are ultimately straightened later at considerable cost.

When freedom is compromised, it is never good.

Friday, January 6, 2012

Closing Thoughts on Left Turn

Look in the mirror
And see how you've been taken
You won't surrender
But now you heart is breakin'
--John Waite

Groseclose's Left Turn (2011) closes with some ideas on how to approach a more biased media. Because mainstream media is overwhelmingly biased toward the Left, the 'obvious' solution is to inject more conservatively minded journalists. The problem, of course, is that this commodity is in short supply.

Beyond that, Groseclose suggests that liberal journalists would be more objective if they expanded their network to include more independents and conservatives. This would provide better perspective from which to approach reporting.

I would not be optimistic about this idea, as confirmation bias suggests likes hang with likes. It's psychologically easier to do that.

Finally, Groseclose suggests that media outlets could provide more information to viewers as to the biases of their staff. Reported might report how they voted in past elections. Groseclose mentions that he's piloting a database of media political quotients (PQs) that journalists would voluntarily participate in. Outlets could also collect and report detailed descriptions of the political views of all its journalists.

Historically, when journalists have been asked to disclose their political biases, they are reluctant to do so. "I only report the news as it is." They say. "My political opinions do not influence how I report it."

As Groseclose has demonstrated, however, nothing could be further from the truth.

Imagine that when asked about their stances on gun control or deficit spending, Barack Obama, John Boehner, or Harry Reid replied, "I'm not going to tell you about my position. If I did, it would impair my ability as an objective lawmaker."

Such a response would incite ridicule from voters, most of which would question whether such politicians were worthy of office.

Why should similar standards not apply to the media, asks Groseclose? Good question to ponder...

Fringe Benefits

I can hear you coming
We know what you're after
We're wise to you this time
We won't let you kill the laughter
--Red Rider

More on the AAII sentiment data, this time showing some historical perspective. Note the general behavior in the SPX as this series hits extremes.

As noted yesterday, just one piece of the puzzle, but a piece worth noting...

position in SPX

Thursday, January 5, 2012

Can't Wait for Recess

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

Yesterday President Obama made several high profile appointments, including a czar of the newly created Consumer Financial Protection Board. Per Article 2, Section 2 of the Constitution, the Senate must confirm these appointments. However, a law has since been written (unsure whether it has been challenged in the courts) that gives the president authority to make unconfirmed appointments during Senate recess. Of course, presidents have been exploiting this loophole for years.

The eyebrow raiser here is that yesterday's recess appointments come in conjuction with increasingly loud presidential rhetoric that Obama is willing to bypass Constitutional process to enact his agenda. Indeed, using a I-can't-wait-for-them tone, the president rationalized his appointments yesterday, stating, "When Congress refuses to act and as a result hurts our economy and puts people at risk, then I have an obligation as president to do what I can for them."

As I am currently engrossed in a few books discussing the Great Depression and the New Deal, the president's rhetoric and actions have a deja vu feel to them, harkening back to FDR's eagerness to circumvent the Constitution whenever necessary.

We're still paying for those interventions today.

Sentimental Stretch

I can't turn to the left or the right
I'm too scared to run and I'm too weak to fight
But I don't care
It's all pschobabble rap to me
--Alan Parsons Project

Sentiment measures seek to reflect to extent to which market participants are optimistic (bullish) or pessimistic (bearish). When sentiment indicators reach extremes, they often suggest turning points. For example, if sentiment indicators suggest most market participants are bullish, then perhaps most of the buying has already occured, and supply/lower prices may be around the corner.

There are many measures of sentiment. The prudent market participant usually watches a bunch of these indicators for general trends rather than focusing on a single measure.

That said, the recent weekly AAII sentiment index numbers, which measures bullishness/bearishness of a group of individual investors, suggests extreme levels of bullishness versus historical levels.

As noted, only one piece of the puzzle. But one suggesting that optimism, at least among a particular category of investor, is getting stretched.

position in SPX

Wednesday, January 4, 2012

The Year of the Dragon

Sybilla: What becomes of us?
Balian: The world will decide. The world always decides.
--Kingdom of Heaven

Was emailing with a friend the other day about prospects for the new year. There are sizable problems out there to overcome, to be sure. But one small thing that we may have going for us is that 2012 is the Year of the Dragon.

The dragon occupies the fifth position in the 12 year cycle of animals that constitutes the Chinese zodiac. It is the only animal in the cycle that is imaginary, and is often viewed as the most powerful.

Now, lest you think that I'm coming out of the closet as an astrologer or mystic, let me say upfront that devination and the occult are not my bag. You will not find me pouring over daily horoscope pages nor drawing tarot cards.

The path I have travelled, however, has led me past legends of the dragon, particularly in Eastern cultures. While folklore paints dragons in both protagonist and antagonist lights, I have personally gravitated toward positive symbols that flow from dragon legends. For instance, the dragon is often portrayed as exercising good judgment during times of stress and conflict.

As such, I find myself drawing from dragon symbology periodically as a source of inspiration.

The last time the dragon made its appearance in the Chinese zodiac was the year 2000. Very fitting, it seemed to me, that the dragon's number came up at the changeover to the new millennium. The year 2000 was personally special in many ways. For instance, I completed graduate school that year. It was also the year that my niece was born who, along with my soon-to-be-born nephew, has graced my life in ways too extraordinary for words.

So, as we ring in the new year and face a mountain of challenges, I once again plan on tapping my serpentine friend for occasional inspiration.

If the dragon can help a few of us muster more strength, wisdom, and positive action in the face of difficulty, then it seems the prospects for 2012 have gotten that much better.

Tuesday, January 3, 2012

First Hand Ante

Luck and intuition play the cards with spades to start
And after he's been hooked I'll play the one that's on his heart
--Lady GaGa

The first trading day of the year saw some upside resolution to the reverse head and shoulders pattern forming over the holidays--although a late day pullback drained a bit of glory from the gains.

Would think technicians are eyeing the late October highs of 1285ish as a more definitive indicator that a new leg higher is underway.

By early afternoon, pundits predictably started trotting out the old saws about how the first few trading days of the year often 'forecast' the tape's annual performance. One tidbit I've picked up over the years: Don't succumb to early year urban legends designed to whip the masses into a bullish frenzy.

position in SPX

The Unusual Society

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

In 1776 two ideas built on previously percolating thought were published that shaped the future of what became the United States. Adam Smith published his economic treatise An Inquiry into the Nature and Causes of the Wealth of Nations. Throughout the ages, it was generally assumed that government regulation of economic activity was an absolute must. It was widely believed that economic chaos would result if government did not direct the economy, and that the poor would be especially hard hit without an umbrella supplied by the State.

The dominant economic design in effect in the 1770s was mercantilism. Government regulated economic activity at the most granular level. Price/quantity controls, tariffs, laws prohibiting speculation, no middlemen permitted in commodity trade, taxes, licenses granting monopoly status to the priviledge few, etc.

Much of this intervention was rationalized in the name of helping the poor. Standard of living was pathetic, with average life expectancy in the 20s. It is also important to note that standard of living, particularly near the bottom of social pyramid, had largely been stagnant with little improvement for centuries. Big families were common--in hopes that out of, say 12 children born, a few would survive to advance the family's progress.

Adam Smith concluded that the squalor which had persisted for centuries was caused in large part by the heavy hand of government. Smith posited that general standard of living would advance much more rapidly if government got out of the way, and let the 'invisible hand' of individual buyers and sellers acting in their own best interest drive economic progress.

Stated differently, Smith was suggesting that a primary reason why people remained mired in poverty was government's war on poverty! This was a revolutionary thought at the time which, frankly, remains revolutionary today. In 1776 Smith's work greatly influenced the Framers who were already envisioning a nation where people could pursue their interests unencumbered by the State.

The other idea was published in Jefferson's Declaration the same year. The conceptual basis for Jefferson's work was not exactly new; it had been percolating for more than 100 years via the work of Enlightenment scholars such as John Locke and in pamphlets/writings such as Cato's Letters. As British rule tightened on the colonies in the late 1600s and early 1700s, oppressed colonists became increasingly receptive to the notions of natural law and self-determination. By Jefferson's time, these ideas had been widely diffused in Colonial America.

The ideas that Jefferson wrote into the Declaration, that man's right to life, liberty, and pursuit of happiness came from nature and not from government, and that people were justified in throwing off governments that trampled on these rights, were radical only that they were published in a document that set the course for a new nation. Locke et al's thoughts were no longer theory. They were being operationalized on a truly revolutionary scale.

By the time the Constitution called the federal government into existence in 1787, these two ideas, one economic and one political, had gripped the hearts and minds of the American people.

Thus was birthed a most unusual society. One where it was envisioned that people would manage their own lives with minimal government intrusion. One in which the powers of centralized government were explicitly limited. One in which the principle of individual liberty trumped collective security.

Such a sight the world had never seen.

Monday, January 2, 2012

Economic Liberty and the Constitution

I was halfway home, I was half insane
And every shop window I looked in just looked the same
--Style Council

Here is a well written series on economic liberty and the Constitution, with an emphasis on important Supreme Court decisions that first upheld, then supressed free market principles in the United States.

I plan to summarize some of the cases in other missives, as they dovetail nicely with other works that I have been reading.

The author's overall conclusion is similar to the one reached by Judge Andrew Napolitano's (2005) book Constitution in Exile. For the first 150 years of the United States, the High Court upheld (with a few notable exceptions such as Slaughterhouse 1872) economic liberty as central to the Natural Law concepts embodied in the Constitution.

However, this all came tumbling down during the FDR administration. A court that was barely able to stem mounting socialist sentiments in a series of 5-4 rulings in favor of economic liberty lost it when a swing justice, Owen Roberts, turned his hat around and began siding in favor of New Deal legislation that was constantly making its way thru the courts.

The opinions written by the socialist majorities of the court are truly comedies in flawed reasoning. The opinions written by the dissenting 'Four Horsemen' read like masterpieces in the understanding of natural law and original intent. They would also prove quite prescient in their forecasts of what the New Deal rulings would lead to--as we now know today.

It's essentially been a one way street to depostism and its spoils since.

IP and Scarcity

Watch me clinging to the beat
I had to fight to make it mine
That religion you could sink in neat
Just move your feet and you'll feel fine
--Culture Club

The author makes a cogent point early in this missive. Laws that protect property rights are only necessary if property is scarce. Taking scarce property away from the owner denies the owner the use of the property.

Tangible goods fit this requirement. If an infinite amount of a particular good existed, or if a machine were present to infinitely reproduce the good, then the scarcity problem disappears along with the need for laws that protect property.

Intellectual property does not meet the scarcity requirement, as IP can be infinitely reproduced. All the while, that infinite reproduction does not deny use of IP by the owner (or originator).

Laws that grant monopoly power over ideas and their expression limit progress, and can even be seen as a form of censorship.

IP laws restrict emulation and improvement of ideas--a central mechanism in improving standard of living for all.

Sunday, January 1, 2012

Slip Slidin' Away

We work our jobs
Collect our pay
Believe we're glidin' down the highway
When in fact we're slip slidin' away
--Paul Simon

2012 leads off with the president signing into law the NDAA act--despite his "serious reservations." Almost lost my lunch on that one...

The threat to liberty posed by this bill first birthed Thxgiving weekend is now reality. Due process, I knew thee well.

As we slip further into tyranny as we open 2012.

2011 Personal Finance Review

There used to be a graying tower alone on the sea
You became the light on the dark side of me

Some reflection on progress toward personal finance goals set early in 2011.

My number one goal in 2011 was to build current assets. I regard current assets as financial securities and physical assets that can readily be converted into cash. In my case, this rules out the house and various tax deferred (i.e., IRA, 401k) accounts. For me, current assets include immediate sources of cash (checking, money market accts) as well as 'close' sources of cash (securities held in taxable brokerage accounts, plus precious metals).

Fortunately, current assets increased substantially in 2011. The primary driver behind this was being debt free, a condition in place since paying my house off in late 2010. The influence of being debt free in standard of living and building wealth cannot be overstated. Cash that was previously siphoned off to pay down debt is instead allocated toward consumption, saving, and investment needs in the here and now. From where I sit, one of our Creator's greatest gifts to us was the capacity to be free. Extinguishing debt, for me, was like throwing off chains of bondage. I hope to God that I never carry debt again.

In building current assets in 2011, my original focus was on increasing cash. Cash is the most liquid of all financial assets and promotes maximum flexibility to cope with life's challenges and opportunities. About halfway thru the year, however, it became more obvious to me that central banks around the world are increasingly likely to debase currency in attempt to stave off systemic collapse (with the EU at ground zero). In such a situation, risk associated with holding cash goes up because the purchasing power of cash goes down.

This found me swapping cash for stocks and metal. My general foray into stocks didn't last long, however. After catching some nice moves in stalwarts like JNJ, INTC, MSFT, and CSCO, it became increasingly difficult for me to hold stocks given general valuations and the macro state of the world. By late in the year I had drained most of my brokerage holdings of stock in favor of a blend of precious metals and cash.

I also set a goal to 'trade opportunitistically' in 2011. This was also done with some measure of success. The first half of the year found me long various stocks and commodities to express what initially seemed heightened chances for significant inflation. I also thought that a number of blue chip stocks were showing decent value.

Minds can change with the winds, however, and they did in my case by mid year. My constructive view on valuations turned pessimistic, and I unloaded most of my equity risk over the course of the next few months. The bigger issue were macro ones. Summer found Congress unable to cut spending and debt (both were raised), and the EU coming apart at the seams.

By late July I had a pretty big short side book that worked well when prices started cascading lower. I built and pared this 'hedged' position several times over the next few months as markets heaved to and fro. What I learned is that I could be much more patient with significant long and short exposure when these positions were more or less equally paired. Lower prices were times to lighten up the shorts and take on some longs, while higher prices allowed for the opposite.

The effectiveness of this approach waned some late in the year as my long exposure in commodities underperformed the SPX substantially, causing performance to bleed a bit into the final bell. All in all, though, I liked how this approach performed in the volatile environment that we have been facing, and I plan to carry over this approach into 2012.

Finally, my other 2011 goal was to increase precious metal holdings. Most of my activity here came in the second half of the year in conjunction with my increasingly bearish outlook for fiat currency and financial system stability.

In a future missive, we'll sketch some objectives for 2012.

position in CSCO, SPX