Saturday, March 31, 2012

Notable Quotables

Top three quotes from RISE:

3) "2012 will be the year of de-fearing."--Bob Doll, equity chief, BlackRock.

2) "We need millisecond resolution. The second you fall behind, you get smoked." High frequency options trader.

1) "We are financial social workers."--Financial advisor to high net worth clients.

Friday, March 30, 2012

Primary Market Segments for Investment Firms

"Now you can focus on the big ticket retail."
--Lynch (Wall Street)

There are two general customer segments for investment firms. One is institutional. The institutional segment is highly driven by short term performance. Firms that manage money for institutional clients gear interaction to quarterly performance report. This may be written only with little personal interaction. The firm may utilize the same 'model' portfolio across institutional clients.

The other segment is high net worth (HNW) individuals. These clients may not have investment performance goals, at least not in the near term. They are often more concerned about 'lifestyle' objectives, such as funding college educations or estate development. Due to the variety of client goals and risk preferences in this bracket, portfolios vary widely and are managed on an individual basis. Model portfolios, if developed, serve primarily as a reference or starting point for investment decisions.

Institutional accounts offer potential for scale economies and, being larger than HNW accounts, can be more lucrative in terms of management fees. But institutional accounts are 'high maintenance' in that they require more handholding with institutional clients. Because institutional clients typically possess a shorter time horizon, they are also more fickle to near poor near term performance. HNW accounts require more work but tend to be much stickier.

Investment firms might specialize in institutional or HNW business, or they might blend their book of business.

Thursday, March 29, 2012

On the RISE

There is freedom within
There is freedom without
Try to catch the deluge in a paper cup
--Crowded House

Am attending the RISE conference at UD for second year. Day One is panel day at the UD Arena. Missed the morning sessions on economy and US equities. Did catch tail end of morning keynote by Morgan Stanley chief strategist, David Durst. PM sessions included altervative investments, 2012 predictions from Robert Doll, chief equity strategist at BlackRock, and international markets.

Will reflect on some sessions separately, but did want to note here that the sentiment by the speakers was universally bullish. The basic thought is that institutions and investors are underinvested in stocks. They are holding lots of cash and low yielding sovereign debt. Thus, stocks represent the best house in the neighborhood--whether that neighborhood is good or bad.

Moreover, central banks are acting in synchronized fashion with easy money, which provides more wind at the back of equities.

Skepticism is in order. The general bullishness expressed last year on panel day was pretty much dead wrong.

position in SPX

Wednesday, March 28, 2012

Duration Mismatch

There's a place where the light won't find you
Holding hands while the walls come tumbling down
When they do
I'll be right behind you
--Tears for Fears

Carolinie Baum is essentially describing our duration mismatch problem. We're financing long term obligations with short term debt. We've been doing this because of the artificially low short term rates which lowers the cost of borrowing.

The risk is that short rates rise when we have to refinance. This would be like financing a 30 year mortgage one year at a time using near term interest rates.

Should this happen at the US sovereign level, then interest expense explodes higher--assuming that the bond markets even are open to us at that point...

Tuesday, March 27, 2012

Slanted Times

I feel so good tonight
Who cares about tomorrow
So baby, you'd better believe

Drivel like this demonstrates why the NYT consistently places among the most biased of media outlets. The article seeks to paint a Georgetown prof, who has long argued the unconstitutionality of various federal laws, as an isolated opponent of Obamacare. And that, somehow, he has 'helped drive the question of the health care law's constitutionality from the fringes of academia into the mainstream American legal debate and right onto the agenda of the United States Supreme Court.'

Fringes of academia? The question of Obamacare's constitutionality is apparent to anyone who has read the Constitution and understands the principle of limited government. Challenges to the constitutionality of Obamacare were being organized while the legislation was being jammed thru Congress in late 2009.

It does not take long before the reader of this piece can confidently surmise that the authors are hostile to the notion of the unconstitutionality of Obamacare.

The article employs tactics so frequently seen by left slanted media. Isolate an issue and wrap it up in a person (target). Make that target seem out step and perhaps a bit eccentric. Cite other sources/precedents that add to the sense that this target must be 'wrong'--making the issue itself seem wrong. Never deep dive into an investigation of the validity of the target's argument/claims.

Exit, slant left. Goebbels would nodding approve.

Monday, March 26, 2012

Overvalued Conditions Persist

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

I continue to vibe with John Hussman's comments on valuation. His thoughts are must reading for anyone investing/trading on a top-down market valuation thesis. Few better than Dr J in this area.

His work continues to show stocks priced to return low returns with high risk (potential for loss) at these levels. Wholly agree. I reach similar conclusions using my discounted cash flow methods on individual companies.

He also rants about pundit/media comments on using untested, short horizon arguments on valuation. That rant feels good, I'm sure. But seriously, John, should we expect anything different from the pundits/media. Lack of rigor. Short term. That's all these people know how to do.

Dr J's work also reminds us that the higher prices go here, the lower the prospective returns and the higher the risk. I suppose that's why that little voice has been chirping in my ear to raise cash.

position in SPX

Sunday, March 25, 2012

Interest Rates and Deflation

And I know, baby, just how you feel
You got to roll, roll, roll with the punches
And get to what's real
--Van Halen

Common 'wisdom' is that interest rates should decline during deflation. But we've shown that interest rates have been declining during secular inflation.

It seems more likely that secular deflation can only occur if interest rates rise. This is because low interest rates continue to promote inflation (i.e., expansion of money and credit), and governments will take this avenue every time if permitted.

The EU situation demonstrates what occurs when low interest rates are no longer part of the picture. Defaults, insolvencies, austerity, and general price declines. This is deflation.

My growing sense is that people piling into bonds as a deflation hedge may be rudely awakened when bonds tank along with stocks in a secular deflationary decline.

position in SPX

Saturday, March 24, 2012

The Real Invisible Hand

If I told you what it takes to reach the highest high
You'd laugh and say, 'Nothing's that simple.'
--The Who

Anyone with eyes can see that price based inflation (i.e., CPI) is under-reported. But even at an under-reported 2% annual rate, sage Richard Russell notes:

"Compound 2% inflation year after year, and you know what's happening? You've effectively wiped out the middle class."

Perhaps inflation is the real Invisible Hand.

Friday, March 23, 2012

Dumb Money

So forget all that you see
It's not reality
It's just a fantasy
--Aldo Nova

Jacob Hornberger discusses one of the many laughable comments made by Ben Bernanke during the Fed chair's recent GWU classroom lecture. BB declared that a gold standard would be unworkable in part because of the changing ratio between gold and paper dollars.

As Mr Hornberger notes, the gold standard as specified in the Constitution did not include paper money. Money was to be precious metal. And indeed gold and silver coins were essentially our monetary system for the first 100+ years.

It has been the gradual distancing of the USD away from gold that has destroyed money's store of value and compromised freedom.

Statists throughout history have learned that inflation is the most favorable way to transfer wealth in their direction. Unlike taxes or borrowing, both of which get to be politically distasteful, inflation tends to be 'invisible' to people on a daily basis. And, as the saying goes: out of sight, out of mind.

Layer on top of that the propaganda spewed by government and their central bank cronies, and you have a world largely incapable of seeing robbery in broad daylight.

Thursday, March 22, 2012

Voices Carry

I try so hard not to get upset
Because I know all the trouble I'll get
--Til Tuesday

For a couple of days now, that little voice has been whispering that it's time to start raising cash. Seems absolutely wrong in full view of strong stock markets and inflation spectre. On the other hand, that may be the perfect time (less crowded).

Besides, that voice has served me in good stead in the past. Will be working to get those cash balances higher over the next month.

position in SPX

Do the Fade Away

So glad we've almost made it
So sad they had to fade it
--Tears for Fears

Barton Biggs has been one of the better fades over the years. He's now 90% net long. Has me itching to kick my upside hedge...

position in SPX

Wednesday, March 21, 2012

The Great Santelli

"Are you coming my way, Rich?"
--Cromwell (A Man for All Seasons)

Rick Santelli continues to joust w other talking heads on Bubblevision. Snaps to him for refusing to toe the Party line. Diogenes would be proud.

Tuesday, March 20, 2012

Correlation between Stocks and Treasuries

We run through the day
And stare at the night
Is your head full of noises?
Well, for me it's just like the 4th of July
--Roger Daltrey

A comment on yesterday's post suggested that the stocks and Treasuries showed low or negative correlations over the past 30 years. These data seem to be misleading to some degree.

Below are plots of the 30 yr Treasury bond and the SPX for the past three decades.

Since 2000, Treasuries have trended up, while the SPX has been up and down. Crossing a positive trending series with an up/down series may produce a negative statistical correlation. Note, however, that this does not translate into a symmetrical bonds up/stocks down effect to a significant degree. Since 2000 bonds are up about 50%, while stocks are down less than 5%.

In the 1980s and 1990s, there can be little doubt that both bonds and stocks moved higher. Bonds roughly doubled while the SPX saw a 15x increase. Here the skew favors stocks, but the correlation between the two series is certainly a positive one.

Correlations may differ depending on the time horizon of the data (days, weeks, months, years). My sense is that perhaps daily correlations between stock and Treasuries are lower than monthly correlations.

Summing up, I am not precisely sure why statistical correlations indicate a negative relationship between stocks and Treasuries during this period. Although the past decade has muddled the relationship somewhat, the overall trend in both of these series over the past 30 years has been up.

position in SPX

Financial Repression

"You're from Receiving, aren't you?"
--Brantley Foster (The Secret of My Success)

Carmen Reinhart (of This Time is Different fame) writes one of the more cogent pieces to appear on op-ed pages that I can recall. What separates this piece from typical op-ed drivel is linking assertions to tests of truth, using logic and/or empirical evidence.

Reinhart discusses the onset of policies being deployed by governments and central banks that help liquidate debt burdens and ease debt service. She terms these policies 'financial repression' because they are essentially taxes on bondholders and savers.

Financial repression is the consequence of massive buildup in debt around the globe. Reinhart's Fig 1 shows that central govt debt among developed nations is at its highest peacetime level ever--nearly 100% of GDP. Factor in private sector debt and unfunded liabilities and the degree of leverage is much higher.

The important thing to note is that the spike higher to record debt levels came in response to problems caused by already high debt levels. The credit crisis of 2007-2008 was 'fixed' by adding more debt to the system. This, of course, is classic Ponzi--both unsustainable and unstable.

Reinhart observes that large debt:GDP ratios have been reduced throughout history via some combination of: economic growth, austerity (spending cutbacks), debt default, inflation, and financial repression. She also notes that the last two options are only viable for debts denominated in domestic currency. Indeed, for those countries that do have control over their own printing press, inflation and financial repression have been the preferred avenues for coping with the debt overhangs since 2008.

A focal point of financial repression is central bank intervention that keeps nominal interest rates lower than market. All else equal, this reduces government interest expense and leads to deficit reduction. However, when central bank intervention results in negative real interest rates (as is now the case), then this action amounts to a transfer of wealth from creditors to debtors--in the present case from savers to governments.

As Reinhart notes, this is a tax that is largely invisible and discriminatory, thus it is likely to be politically palatable to policymakers and to the masses.

Reinhart also touches on the growing practice of 'monetizing debt,' although she does not term it that. Her Fig 2 indicates that sovereign (and GSE) debt is increasingly owned by government entities rather than by 'outside' market players. This "means markets for government bonds are increasingly populated by nonmarket players, calling into question the information content of bond prices relative to their underlying risk profile--a common feature of financially repressed systems."

Nice point. Financial repression also amounts to distortion of information. Market truths morph into...false signals that have a propaganda feel to them.

Not only do savers have their capital robbed from them during financial repression, but information that might help those people regain their footing is taken from them as well.

Reinhart think financial repression will be with us a long time. My sense is that the time period may last only until the chaos unleashed by financial repression drives systemic collapse.

Monday, March 19, 2012

Direction of Interest Rates During Inflation

Neo: Why do my eyes hurt?
Morpheus: You've never used them before
--The Matrix

Many people associate deflation with falling interest rates. However, a quick look at T-note yields over the past 30 years suggests a secular decline in rates.

Few would suggest that the past three decades have been deflationary. A better case can be made that we've seen more inflation (i.e., expansion in the supply of money and credit) during this period than at any time in US history.

So what gives? The first thing to keep in mind is that the current state of markets cannot be described as free. Instead, they are subject to perpetual manipulation by policymakers. What this means is that any behavior and its expression in prices has been distorted. Risk/reward perceptions in free markets differ significantly from risk/reward perceptions in hampered markets. Indeed, this axiom is one of the key reasons that policymakers intervene.

Since the early 1980s, the Federal Reserve has been pressing interest rates lower thru FOMC monetary policies. Lower credit costs have created an orgy of borrowing and debt. This leverage has been deployed into asset markets, stocks, real estate, and bonds. Yes, debt assets have been bid up along with stocks.

Parenthetically, this situation has been exacerbated by the fact that the dollar has enjoyed reserve currency status during this period. We can be confident that buying of US Treasuries would have been less over the past 30 yrs had the dollar not enjoyed reserve currency status.

What we're saying here is that the correlation between stocks and bonds has been positive over this 30 yr period. It has not been negative as is often suggested by pundits.

In times where credit is made artificially easy, all financial assets are likely to go up in correlated fashion for a prolonged period of time. The somewhat counterintuitive proposition reads like this:

When interest rates are artificially suppressed, a significant portion of the borrowed funds will go into government bonds, which pushes interest rates still lower.

In periods of secular, credit based inflation, interest rates decline rather than rise.

It is interesting what should occur when this secular trend reverses. Something for a future missive...

Sunday, March 18, 2012

What's In Your Wallet?

Say you don't need no diamond ring
And I'll be satisfied
Tell me that you want those kind of things
That money just can't buy
--The Beatles

At first glance a new dollar bill looks about the same as an old dollar bill. Closer scrutiny reveals significant difference.

Old paper dollars were redeemable in precious metal. The silver certificate shown above could be redeemed for .77 oz of silver (the amount of silver in a silver dollar).

Today, dollars are redeemable for...nothing.

Saturday, March 17, 2012

Erin Go Broke

Bill Harding: Going green.
Dusty Davis: Greenage.

What's the greenback looking like on this St Patty's Day? Daily and weekly charts show the USD in the middle of a multi-year trading range.

Elongating the time horizon to 20 years, the USD is well off its highs with a head and shoulderish look. Perhaps consolidating before continuing the move lower.

A good argument can be made that the only thing keeping the dollar aloft is beggar-thy-neighbor policies worldwide, which is turning all fiat money into so much confetti.

Friday, March 16, 2012

Watch for Floaters

"We are being detoured into the land of make believe."
--Horatio Caine (CSI: Miami)

Funny quote from Fleck tonite: "Isn't it funny how quickly we have gone from an 'all Europe all the time' environment to 'never heard of it.'"

Drown a problem in enough printed money and the problem disappears.

Until the DBs start floating, that is.

Under Pressure

It's the terror of knowing
What this world is about
Watching some good friends
Screaming 'Let me out'
--David Bowie/Queen

Amity Shlaes cites historical instances where prices stay subdued in light of inflationary policies, then suddenly take off. There have been other times (e.g., US in the 1920's) where monetary expansion never moved consumer prices significantly. Instead, booming money and credit supplies may lift prices of other categories, such as real estate or stocks.

Since the early 1980s, the US has witnessed a gargantuan expansion of money and credit (the original definition of inflation). For most of that period, cheap credit has fostered borrowing, much of which has gone into capacity addition. Capacity is another word for potential supply.

As such, if artificially cheap credit has spawned massive increase in capacity, then why are we eyeing consumer prices for signs of increase? After all, ECON 101 suggests that we should expect consumer prices to remain soft in the face of increased supply. Only after the excess supply is absorbed should we expect upward pressure on prices to a significant degree.

Right now capacity utilization remains below long term averages. Unless the federal government starts sending money to people in boxes (which can't be totally dismissed), then perhaps the 'CPI' remains subdued until utilization rates move higher.

But, as Ms Shlaes observes, there's enough monetary expansion in the system that, when they're ready to move, prices may likely explode higher.

Thursday, March 15, 2012

Apple's Parabolic Frolic

"He's going vertical, so am I."
--Maverick (Top Gun)

Intraday high for AAPL = $600.01. Currently trades at a mkt cap of about $552 billion.

Bids the question of who holds the all time record for highest market cap. Does AAPL have it? Can't recall whether MSFT, CSCO or someone else may have claimed the title during the tech bubble days. Or if XOM may have the high water market during the crude spike.

position in CSCO

Wednesday, March 14, 2012

Novelty of Truth

"He was not a looney. He was the sanest man I ever knew in my life."
--Ted Spindler

Have to crack up when I watch vids like this. As Jim Grant makes comments, caption underneath reads things like:

"Grant: Fed's policy is about manipulation of interest rates."

"Grant: Fed suppressing price mechanism."

As if the truth of these statements is somehow contestable. Would be like me saying:

"Ford: Gravity suppresses man's ability to fly."

"Ford: People die when they get old."

Reason and empirical truths can only be seen as novel when people are not engaging their brains and thinking for themselves.

Tuesday, March 13, 2012

Jedi Word Trick

"To avoid being blamed for the nefarious consequences of inflation, the government and its henchman resort to a semantic trick. They try to change the meaning of the terms. They call 'inflation' the inevitable consequence of inflation, namely, the rise in prices."
--Ludwig von Mises

Frank Shostak observes, as we have here many times, that inflation is not a general increase in prices. He goes a step further, however, by suggesting that inflation is not even about an increase in the money supply that exceeds an increase in the supply of goods.

Instead, inflation constitutes an increase in paper money supply, period. This is because paper money is not wealth. However, it constitutes a claim on wealth. Thus, people who get hold of newly created paper money first can take possession of wealth that they had no part in creating.

Inflation is not about a general increase in prices. Inflation is the creation of money out of thin air. It is an act of embezzlement.

Paper money does not create wealth. It facilitates wealth transfer. We are currently engaged in the biggest act of wealth transfer in the history of the world.

Monday, March 12, 2012

Divergence Between Leading & Lagging Indicators

Drawn into the stream of undefined illusion
Those diamond dreams, they can't disguise the truth
--Level 42

Dr J's latest missive, which focuses on the divergence between leading and concurrent/laggin economic indicators. His analysis suggests that downward path of leading indicators suggest deterioration in concurrent/lagging measures in next 8-12 weeks (coupla months).

Weakness is likely to emerge slowly and then accelerate. Relative to jobs, for example, his model would forecast positive but reduced payroll growth in March, followed by net job loss in April.

Should concurrent/lagging indicators continue positive, then perhaps this time is really different. Am with Dr J however in not betting on that outcome.

position in SPX

Sunday, March 11, 2012

EU Moral Hazard

"It's easy to get in. It's hard to get out."
--Gordon Gekko (Wall Street: Money Never Sleeps)

One does have to question how the recent 'controlled writedown' on Greek bonds coupled with the declaration that Greece has indeed defaulted will play out in subsequent EU country situations.

Why would anyone buy sovereign debt if bureaucrats can arbitrarily determine who gets paid and how much gets paid out in case of fiscal problems? Seemingly, borrowing costs should be on their way up.

There is also the ongoing question of ability to hedge. Yes, this time a credit event was declared but only after significant modifications to debt contracts. Next time, perhaps CDSs will be declared null and void (as was rumored in the Greek case).

Sovereign debt holders seeking to hedge risk will need to find another way to hedge. Otherwise, they will play smaller.

So far, however, we've seen the opposite. Sovereign credit spreads have been screaming tighter since LTRO operations commenced.

Once again, it appears that central bank intervention is dulling the risk assessment mechanism of sovereign debt holders. Why worry about risk of buying these bods if both sides of the trade will be made whole by the central banks?

Moral hazard as far as the eye can see.

position in SPX

Saturday, March 10, 2012

State of Physical Metals Market

The ice age is coming, the sun's zooming in
Engines stop running, the wheat is growing thin
--The Clash

Interesting comments from a long time precious metals dealer. He describes the market during the 1980 spike higher in gold. Buyers lining up outside before the doors opened. Indiscriminant buying. Buying gold because is was fashionable or because prices going up.

Classic euphoric behavior.

Little of that bubble-icious behavior today. In fact, today he sees more selling pressure. The typical seller is stressed financially and needs to sell assets. 'Dishoarding as a culture.'

Lots of overseas buyers today. Gold and silver leaving the country.

He also suspects that, when monetary crisis gets going, his business will be crazier than in the late 1970s. Stress on the financial system will have people desperate to convert even 'junk' metal into economic resources. Suggests careful thought on proper form of precious metal to hold.

Sad to think that pre 1933, nearly all US households owned gold as a matter of everyday exchange. Today, next to none.

Friday, March 9, 2012

It's Official

Today is gonna be the day that they're gonna throw it back at you
By now, you shoulda somehow realized what you gotta do

This afternoon the ISDA (International Swaps and Derivatives Association) has ruled that the recent Greek sovereign debt payout re engineering constitutes a credit event. Simply stated, Greece has officially defaulted.

Not much initial reaction in markets as everyone looks at each other wondering who is short Greek CDS.

position in SPX

Rand Paul's Budget Proposal

The traffic crawls, the sirens scream
You look at the faces, it's just like a dream
--Glenn Frey

Just chewed thru Rand Paul's 2013 budget proposal (scroll down to the bottom for the actual budget doc). This is by far the most coherent and credit plan that I've read w.r.t. serious fiscal improvement.

Thought the biggest limitation was his assumptions about GDP growth in out years. But perhaps not. As our fiscal situation improves, real output should respond favorably to the movement toward unhampered markets.

Chances of this plan being implemented even close to as is? Prolly zero on a proactive basis. However, Sen Paul's measures are consistent with what will occur when market forces take over the playing field, and we have to respond on a reactive basis.

The problem with reacting instead of proacting is that we'll have little control over the pace and magnitude of the remedial measures.

Thursday, March 8, 2012

Risk Sensors Switched Off

"I've been having this nightmare. A real swinger of a nightmare, too."
--Bennett Marco (The Manchurian Candidate)

As usual, Jim Grant makes a number of salient points. Perhaps the most important one is at about 2:20 when he notes, "by repressing interest rates, the Fed is in effect dulling the risk sensors of the entire market place. Is this good?"

Of course not. The Fed is prodding people to take excessive risk. Excessive in that it is more than free markets would encourage at this juncture. The number and implications of the distortions that flow from this interventionary are impossible to determine with certainty. But we can be confident that they amplify the myriad distortions of past policy interventions seeking to do the same thing.

Grant also observes that the impact of central bank inflationary policies should not necessarily be immediately evident in consumer prices. We have been noting such in these pages for years. It is impossible to predict precisely where fiat money will go when it is printed. We don't even know if it will be spent. Indeed, freshly printed money may stay in people's pockets or on bank balance sheets while people assess the environment.

If it is spent, that spending may go to pay down debt. If spent in this manner, cash actually can have a deflationary effect (cash retires debt; less debt is deflationary).

Newly printed money might also be spent to buy stocks, bonds, real estate. Indeed, financial institutions who typically get newly created credit money first from the Fed are often highly motivated to spend it on securities--particularly in environments where they know the Fed will come to their rescue should their investments go bad.

Yet, we have been induced into thinking that it is consumer prices (e.g., 'core CPI') that we should be watching for signs of inflation.

Mr Grant is almost too kind in his assessment that we may be watching the wrong indicators. It seems that we're behaving like brainwashed pawns, incapable of seeing evidence that sits plainly in front of us.

Our risk sensors have been switched to the off position.

Wednesday, March 7, 2012

Corporate Tax Shakedown

There ain't no victory at sea 
Unless it's mutiny
--Jay Ferguson

Peter Schiff demonstrates the oppressive nature of the US corporate tax system. Let's have a look.

Assume a US corporation earns $1,000,000 in a year. Taxed at 35%, the corporate keeps $650,000 while the government pockets $350,000.

This is a tax on shareholders because those shareholders had rightful claim on the $million profit.

If the corporation pays dividends at a 40% payout ratio, then shareholders get $650,000*.4 = $260,000. The remaining profits, $650,000 - $260,000 = $390,000 is called 'retained earnings' and is kept with the corporation as resources to generate future economic value and perhaps future dividends for shareholders.

At current tax rates, shareholders pay $260,000*.15 = $39,000 in taxes on the dividend payout.

This is the second tax, a.k.a. double taxation, of dividends. From a shareholder's perspective, the effective tax rate is 35% + 15% = 50%.

Schiff then compares the cash flows:

Shareholders: $260,000 - $39,000 = $221,000
Government: $350,000 + $39,000 = $389,000

On an annual basis, shareholders get about 22% of the corporation's million dollar profit while assuming all the risk. Government takes nearly 39% while assuming no risk.

Whether this is morally right is certainly a worthy issue for debate. What is not debatable, however, is the advisability of this from an economic standpoint. Tax policy such as this discourages entrepreneurship and risk-taking. As such, productivity improvement is likely to be far less than what would be possible if risk takers were able to keep the full benefit of their action.

The drag on productivity improvement in turn serves as a drag on standard of living. Less food. More disease. Fewer houses.

In short, less wealth applicable to advancing the human condition.

Tuesday, March 6, 2012

First Down

I made a pilgrimage to save this human race
Never comprehending the race had long gone by
--Modern English

Domestic stock markets saw their first 1%+ down day in months. European markets fared worse, with many bourses down more than 3%.

Technically the near term uptrend in many major indexes can be regarded as broken. Also, we are back below the 1360 level - previous support now becomes resistance.

If this selloff gathers steam, then downside milestones include SPX 1320 (50 day MA) followed by support at 1290. Below that, 1260 appears substantial support. That would constitute an 8% decline from last weeks highs if/when.

My growing sense is that the highs for the move have been put in. However, a bounce that retraces much of today's downside in the next couple of days would not surprise me (knee jerk dip buyers plus frustrate the shorts). Should that occur, I'll be looking to trim long exposure and add short exposure. Currently net long to the tune of about 5%.

position in SPX

The National Public Education Channel

"His brain has not only been washed, as they say. It has been dry cleaned."
--Dr Yen Lo (The Manchurian Candidate)

Rothbard draws an excellent analogy about the problem of compulsory education. Instead of using newspapers, I will employ 'public media network' to better reflect today's choices.

Suppose that the federal government proposed using taxpayer money to create a nationwide public media network and compelled all children (or all people for that matter) to view/read/listen to them. The government would also outlaw all private outlets that did not comply with standards set by a government commission on what children ought to be exposed to.

As Rothbard observes, the American people would likely regard such a proposal with horror. And yet, this is precisely the sort of regime that the government has established in the sphere of educational instruction.

Monday, March 5, 2012

Education: Free and Compulsory

We don't need no education
We don't need no thought control
No dark sarcasm in the classroom
Teacher, leave them kids alone
--Pink Floyd

This monograph by Rothbard should be required reading for all 'educationalists' and others who believe in the folly of government run schools and compulsory education (pdf here). This would never happen, of course, because of the psychic pain that would be inflicted upon proponents of forced education would be hard to endure.

The flow of this monograph is consummate Rothbard. He first deduces rationale for education, the various options available (parent vs outsource, etc), and the theoretical problems with the outsourcing option when it comes to knowledge building and freedom. He then reviews the history of publics schools and compulsory education beginning in the 1500s with Martin Luther in Germany and John Calvin in Geneva. I found this excellent perspective.

The purpose of the present missive is not to provide a book report. The interested reader can chew thru this work in an hour or so.

Here, I would like to present some propositions or predictions that should follow from instituting public schools and compulsory education. Stated differently, imagine that you could forecast the potential consequences of compulsory education overseen by the State before it became operational in the US. What would you forecast, based on the logic and deductions that Rothbard presents--primarily in the first half of his monograph?

-->desire for 'equality' will set classroom pace and performance at average level, reducing development of variety among individuals. Dullards 'too fast' and gifted 'too slow' will get discouraged; average will get discouraged as they observe performance of the gifted. Any attempts to compartmentalize thse groups will exacerbate the effect.

-->reasoning and individualism will be repressed in favor of groupthink and collectivism.

-->market for alternative education processes that specialize/tailor to particular learner segments and interests will be underdeveloped.

-->parents will become less responsible and engaged in education of their children when State takes control over the process.

-->there will be ongoing movements for standardized curricula and evaluation methods.

-->curricula will include content and techniques for inculcating reverence to the State. Thought control.

-->public schools will prove unable to differentiate and respond to particular tastes like private school alternatives.

-->private school alternative will be positioned at high end of educational spectrum. Private alternatives for dullards will be less likely because public schools will have monopolistic position of this segment.

-->students will fear making mistakes, which in turn will reduce their learning capacity and erode joy of learning.

-->social stigma associated with home schooling will increase.

-->collectivist groups such as labor unions will rise in support of public schools.

-->mandatory teacher certification increases groupthink among instructors and impair entry of novel thoughts and educational processes.

-->critical thinking and reasoning capacities will be underdeveloped in society.

-->people will prefer opinions of experts or majority opinion rather than thinking for themselves.

-->general performance on standardized tests on core competencies (e.g., three R's) will stagnate or perhaps decline over time.

-->gradeflation or calls for grade abolishment will increase.

-->propaganda movements touting the importance of compulsory public school education will increase.

-->costs will rise, facilities will fall into disrepair, innovation will stagnate - predictable to all State run bureaucracies.

-->proponents of public schools will continually seek the strong arm of government to expropriate more and more economic resources from taxpayers.

Have not all of these propositions garnered empirical support?


Rothbard, M. 1999. Education: Free and compulsory. Auburn, AL: Mises Institute.

Inequality and Progress

I break tradition
Sometimes my tries are outside the lines
--Natasha Bedingfield

Some great lines from a great little book written by George Harris in 1897. Like many cogent works from this period, this book could have been written yesterday. Written yesterday in that it addresses misconceptions and popular tripe about 'equality' that persist to this day.

Just a couple of passages:

"The rudimentary societies are characterized by the likeness of equality; the developed societies are marked by the unlikeness of inequality or variety. As we go down, monotony; as we go up, variety. As we go down, persons are more alike; as we go up, persons are more unlike...equality is decline toward the conditions of savagery...variety is advance toward higher civilization.

"Every step of progress means the addition of a human factor that is in some way unlike all existing factors. The progress of civilization, then...must be an increasing diversification of individuals that compose society."


Harris, G. 1897. Inequality and progress. Cambridge, MA: Houghton, Mifflin and Company.

Sunday, March 4, 2012

Financial Illiteracy

"This is US history. I see the globe right there."
--Jeff Spicoli (Fast Times at Ridgemont High)

Just one more study to toss on the pile of evidence showing that kids are financially illiterate. Similar findings have been reported for years with little improvement trend.

Billion$ of resources have been thrown at this problem over the last decade. But few 'educators' seem to realize that financial markets are complex social systems likely to render traditional pedagogical techniques ineffective for skill building. This is because skills required to navigate complex social systems rely on tacit knowledge that is difficult to codify. Building decision-making skills via traditional classroom methods is unlikely to work well.

Learning platforms that immerse learners in the complex environment are likely to make more progress. Experiential learning is one approach. Learning by doing. One downside of employing this approach for developing economic and financial skill is that the cost of mistakes can be high. Tuition is steep.

An alternative is observational, or vicarious, learning. Here, students learn by watching the behavior of role models. This is essentially the apprenticeship model where learners 'shadow' experts while they do their thing. This model is a time tested way of building complex skills. It has been around for thousands of years.

Once hard to do in many school environments, technology is now available to put students in front of experts over long distances. I've been involved with research suggesting that it is indeed possible to employ web-based technologies for improving financial literacy (e.g., Ford, 2006; Ford et al., 2007).

The biggest problem we may face in this regard is locating appropriate experts. It is not like kids have a ton of role models to observe and learn from when it comes to appropriate financial decision making.

Ironically, the federal government, which continues to role out programs aimed at improving national financial literacy, provides the worst possible example when it comes to prudent financial behavior. It is the classic 'do as I say but not as I do' situation.

When someone asks you why our kids are financially illiterate, one of the best answers you can give is: "Because the adults are."


Ford, M.W. (2006). Outside the lines: Exploring student use of web-based vicarious learning about financial markets. Journal of Business and Leadership, 2(2): 325-333.

ord, M.W., Kent, D.W. & Devoto, S. (2007). Learning from the pros: Influence of web-based expert commentary on vicarious learning about financial markets. Decision Sciences Journal of Innovative Education, 5(1): 43-63.

Shoulder Work

"You know what we get to do today, Brooks? We get to play baseball!"
--Jimmy Morris (The Rookie)

Premature for sure, but gold may be tracing a reverse head and shoulders pattern dating to the late summer meltdown last year.

Work on the right shoulder could have commenced with last week's mini 'flash crash.'

Should such a pattern be in play, and should the right shoulder seek 'symmetry' with the left shoulder, then gold could melt another $100 or so from here into the $1600ish level.

After a long abstinence, am warming to the miners for playing the gold trade. Part of this shift relates to the re-hypothecation issues possible w/ the precious metal ETFs. With the miners, property rights are better established. Have established small positions in GDX and NEM, and am awaiting further developments.

position in gold, GDX, NEM

Saturday, March 3, 2012

There Ain't No Bears in There

Did you ever sleep in a bear pit
With apple cores and mice along?
Did you ever lay on ice and grit
Or search for a place where the wind was gone?
--Pete Townshend

Analysis of Rydex asset levels. The Rydex Asset Ratio ((Bear assets+ MMF assets)/Bull assets) is at a 10 year high. Bearish assets are at a 10 yr low.

Historically, high points in the Rydex Asset Ratio have decent correspondence with market tops.

position in SPX

Friday, March 2, 2012

Stimulus Tax

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

The other day, Juan Williams waxed poetic about the economic stimulus enacted under the Obama administration. He failed to consider the effect of the $trillions of money/credit created by the Fed and other central banks worldwide.

Stated differently, he does not account for inflation. Since 2009, base money (above) has more than tripled. This is inflation as classically defined: expansion of the supply of money/credit above the pace of productivity improvement.

Lew Rockwell astutely notes that inflation is a tax. This tax is typically 'invisible' to Everyman because value degrades slowly; it does not get taken out of each paycheck like withholding to the IRS.

Lew also observes that the current inflation remains largely trapped in our financial system. If/when that money leaks into peoples' wallets, then prices of goods and services (the popular metric of inflation today) will surely surge.

Make no mistake, the 'tax cuts' that Juan Williams touts as part of the 'successful' Obama stimulus have been more than offset by the $trillions in purchasing power lost by the govt printing press.

The Fed's Performance Review

Caught up in circles
Confusion is nothing new
--Cyndi Lauper

Presentation by UGA prof George Selgin that analyzes Fed performance against its own stated goals (full employment, stable prices, etc). Prof Selgin demonstrates that the Fed fails miserably on its own performance review criteria.

He also notes that bureacrats, economists, and other allies of the Fed continue to espouse that the Fed is achieving its goals--a position that is completely unsound.

He suggests that those who formed the National Monetary seeking monetary system reform on the back of the Banking Panic of 1907 should be disappointed at the fruits of their efforts. More than a century after the Fed's creation, the data suggest that the objectives behind the establishment of this institution are not being met. In fact, conditions have likely declined.

This assumes, of course, that the stated objectives of the Fed are in fact the real objectives of the designers. This assumption is certainly constestable.

Thursday, March 1, 2012

Of Dice and Men

"Mess with the bull and you get the horns, you know what I'm sayin'?"
--Watts (Some Kind of Wonderful)

Confidence seems to be growing that there's no way the present administration will take its foot off the stimulus pedal in an election year. It follows, therefore, that the path of least resistance for stocks should continue to be up.

People have short memories.

Similar bravado was voiced in early 2008, the last year of the previous administration. They'll pull out all stops to keep things going thru the election, it was asserted.

The Bush administration gave it the Harvard try, of course. As in the fairy tale, though, all the king's horses couldn't keep things from coming apart.

Sure, politicians can and will try to move heaven and earth in order to stay in power. It often works for a while, of course. That's why politicians of all colors head to the stimulus casino.

The Obama administration is betting big that it can keep markets propped up thru November. Perhaps accompanying that bet is a prayer that the dice roll doesn't come up snake eyes like it did for the previous administration.

position in SPX