Monday, April 30, 2012

Gender Differences in Income

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

The Obama administration has trotted out a 'War on Women' campaign seeking to divert attention from key issues (e.g., economic performance) and to rile its base in an election year.

A common argument of 'women's rights advocates' is that women earn less than men in the US. Indeed, when total income earned by females/# of labor force females is compared to total income earned by males/# of labor force males, then income per woman is about 75% of income per man. This is 'proof,' claim women's rights advocates, of unfair, discriminatory practices in the workplace.

This claim must overcome many counters. From a pure reasoning perspective, discriminatory practices against women cannot persist in markets where factors of production trade freely. If it were true that women were being underpaid for their production by certain bigoted employers, then other employers more interested in improving their profits would offer greater pay and hire these productive workers for the benefit of their operations.

Bigotry of any kind (gender, race, nationality, etc) is penalized by the profit motive which necessarily is blind to any difference beyond productivity and performance.

Claimants of discriminatory pay practices must explain how such discrimination is able to persist under existing market conditions.

A more empirical counterargument posits that lower pay/woman is the result of various choices that women make regarding their income-producing capacity. For example, and as observed here, women generally select different educational choices than men and make career decisions more in the context of primary child raising responsibility than men. Studies that control for these various factors show little difference in earnings between women and men.

Claimants of discriminatory pay practices must explain why such empirical studies are not valid.

Sunday, April 29, 2012

Intellectuals & Society

Ellsworth Toohey: Mr Roark, we're alone here. Why don't you tell me what you think of me in any words you wish.
Howard Roark: But I don't think of you.
--The Fountainhead

Recently finished Intellectuals and Society by Thomas Sowell. Intellect is different from intelligence. Intellect is the ability to grasp and manipulate complex ideas while intelligence (wisdom) is the ability to combine intellect, knowledge, experience, and judgment to produce coherent understanding.

Intellectuals refers to an occupational category--people who deal primarily with ideas. Writers and academics would be examples. Intellectuals are dealers of ideas, not users of ideas. Unlike some people who apply complex ideas (e.g., engineers), an intellectual's work begins and ends with ideas.

Sowell distinguishes between intellectuals and intelligentsia. Intellectuals produce ideas; intelligentsia distribute ideas. Thus, the intelligentsia (e.g., media) are channels for distributing the products generated by intellectuals. I like to think of them as part of the same supply chain. One upstream; the other downstream.

I found the first half of Sowell's book particularly interesting. He discusses the lack of verifiability and accountability of the intellectual's typical output, and the lack of reasoning typically applied by the intelligentsia as they disseminate intellectual ideas. Marx's work is a classic example.

He then works thru the impact of intellectuals in various domains such as economics, social welfare, academia, and law.

Where Sowell lost me a bit was in his discussions of intellectuals and war. His primary claim is that intellectuals have typically been anti-war (with notable exceptions including the prosecution of wars such as WWI and WWII under Democratic regimes). The distribution of antiwar sentiment thru the intelligentsia has generally produced a naive public that permits bad guys like Hitler and Saddam to get head starts on military campaigns.

However, Sowell fails to argue convincingly why any 20th century war actually required US involvement--an implied assertion throughout. Nor why hawkish policies such as trade embargoes did not exacerbate propensity for war.

Also, Sowell does not touch much on why intellectuals as a class think the way they do (anti-freedom, pro-socialism, anti-business, pro-government). More thoughtful treatment can be found elsewhere.

That said, Sowell's book is a worthy read. The cites alone are worth the price of admission, and present a compelling body of evidence generally damning to the intellectual class. I hope to draw from this work as my thought processes continue to develop.


Sowell, T. 2009. Intellectuals and society. New York: Basic Books.

Saturday, April 28, 2012

Dividend Blues

Every time that I look at you
I can't see the future
'Cause you know I know baby
That I don't wanna go

I've been feeling more constructive about cash generating blue chip stocks that pay dividends. Have done some valuation work on various candidates finds three buckets:

signif overvalued: XOM
about fairly valued: INTC, JNJ, MRK, PG
seemingly undervalued: AMAT, CSCO, MSFT

These valuations are based on using performance over the past few yrs for forecasting free cash flow growth in the future. The danger in doing this, as frequently observed by John Hussman, is that the past few yrs have been abnormally generous for corporations. By historical measures, corporate profits currently stand at rich extremes.

As such, my forecasts may not be as conservative as I think.

My bigger concern is the macro picture. In a debt swamped world, periods of deleveraging are likely. When deleveraging occurs, securities are sold across the board regardless of valuation. That little voice inside my head is whispering 'patience' when it comes to taking on equity risk here, as better price points seem probable.

Policymakers have suppressed interest rates around the globe, largely in hopes of pushing people into risk in search of return. Count me among those considering the prospect of owning stocks here despite considerable big picture concerns.

positions in CSCO, JNJ

Friday, April 27, 2012

In the Tank

"These walls are funny. First you hate 'em. Then you get used to 'em. Enough time passes, you get so you depend on them. That's institutionalized."
Ellis Boyd 'Red' Redding (The Shawshank Redemption)

Insightful missive from an Old Conservative type proposing that even libertarian-oriented think tanks like the Cato Institute are unable to shrink the government Leviathan. Why? Think tanks operate in the Iron Cage of big government. Limited government principles are likely to give way to compromise in response to institutional pressure.

Stated differently, small government think tanks are unable to reverse big government policy because they become 'institutionalized.'

He offers some thought provoking prescriptions for the government train wreck that he believes inevitable. First, learn as much as possible about the philosophies of limited government and economics (think: Mises). Second, stay plugged into the news as a reminder that government is as stupid and treacherous as theory suggests. Next, identify a non special interest resistance group (non SIG) to support in a grassroots manner. Finally, get involved in local politics under the constitutional-era belief that the most effective political action is taken locally.

P.S. Note that he cites Howard Buffett as the previous generation's Ron Paul in Washington. Like father, unlike son...

Thursday, April 26, 2012

Austerity Absurdity

Joe Scheffer: That hurts!
Chuck Scarett: I know it hurts!
--Joe Somebody

There is an absurd thread woven thru some of the commentary that I frequent. It goes something like this. Following the credit collapse we tried programs of 'austerity.' But when we cut spending, saved, and started to pay down debt, economic activity didn't improve. In fact it got worse. Thus, austerity doesn't work. It's like kicking ourselves when we're down. The better approach is to resume borrowing and spending.

It's tempting to label this twisted logic, but there is nothing remotely logical about this stream of thought. Yet, it is being uttered by 'smart' people who should know better.

Prolonged periods of borrow-and-spend (read: consuming more than income permits) elevate standards of living beyond levels attainable to people who live within their means. Elevated standards of living can only persist if people somehow become more productive in the future, enabling them to pay back their borrowings AND maintain high living standards.

Such productivity improvements are unlikely, however, due to the fact that, by definition, periods of borrowing for consumption deplete savings. And savings provide the capital necessary for productivity improvement projects.

It is more likely, therefore, that periods of 'austerity' will follow prolonged periods of borrow-and-spend. People will need to consume less as they work to replace resources borrowed from lenders in past periods. Lower consumption during the 'payback period' lowers demand, which curtails economic output.

This is the bust that follows the boom.

Concluding that austerity is an unacceptable response to over-consumption is among the most juvenile of propositions. That it is central to Keynesian theory speaks volumes about the intellectual capacity, or honesty, its proponents.

Wednesday, April 25, 2012

No Protest Law

I must have dreamed a thousand dreams
Been haunted by a million screams
But I can hear the marching feet
They're moving out into the street

Earlier this year the president signed H.R. 347, known as the Federal Restricted Buildings and Grounds Improvement Act of 2011, into law. Provisions of this law make it illegal to protest near the president or other government official as determined by the Secret Service.

As noted by Judge Nap, this is clearly a violation of the First Amendment, which states that "Congress shall make no law...abridging the freedom of speech...or of the right of the people to peaceably assemble."

Only the latest episode from an administration that wants to silence its detractors.

Tuesday, April 24, 2012

Institutional Control

"What you know you can't explain, but you feel it. You've felt it your entire life, that there's something wrong with the world. You don't know what it is, but it's there. Like a splinter in your mind, driving you mad."
--Morpheus (The Matrix)

This video makes you think about the extent to which current events are random vs planned. I am reminded of institution theory (e.g., DiMaggio & Powell, 1983), which posits that actors are prone to bend to external pressures emanating from their 'institutional fields.' Rather than a single conspiratorial-type plan being executed, the impetus may be collective rationality acting to produce isomorphism--i.e., like responses among many, seemingly independent individuals.

It appears planned; in reality, it is merely people acting alike in response to external pressures.

Consider the case of the Tea Party inductees into Congress as a result of the 2010 election. Most if not all of them intended to behave in a manner consistent with Tea Party values of limited government, free markets, and fiscal responsibility. However, some have since taken up behavior consistent with the Big Government types that they campaigned against. Plausibly, pressures exerted by the institutional field of the federal government drove some Tea Partiers to modify their behavior, perhaps even unknowingly or under some self-justification. These people became 'typical politicians' once positioned in an institutional field that exudes politics.

An institutional perspective provides one explanation of why individual freedom remains rare in the course of human history despite the fact that liberty is a self-evident inalienable right. Axiomatic urges to get something for nothing encourage isomorphic behavior that crowds out liberty and voluntary cooperation in favor of coercion and control of others.

It is not a conspiracy against freedom. It is people employing a similar strategy to satisfy their needs. That strategy is to enslave others.


DiMaggio, P. & Powell, W. 1983. The iron cage revisited: Institutional isomorphism and collective rationality in institutional fields. American Sociological Review, 48: 147-160.

Monday, April 23, 2012

Cover Me Crazy

But the thrill we'll never know
Is the thrill that'll getcha
When you get your picture
On the cover of the Rolling Stone
--Dr Hook

Given the historical track record of the infamous magazine cover indicator, Barron's cover this week, which states "Mostly Sunny," should give bulls cause for pause.

The cover story, entitled Reason to Cheer, presents some interesting data in Barron's quarterly Big Money poll of porfolio managers. Some of the highlights:

55% bullish / 14% bearish overall
favorite stock: Apple (AAPL)
81% bearish US Treasuries
14% bullish corporate bonds
43% bullish USD / 14% bearish
17% bearish Europe
10% bearish real estate
30% bullish gold/ 39% bearish

Have actually thinking about dipping a toe into some low-med duration fixed income exposure for my 401k via Pimco Total Return Fund--one of the few alternatives offered by TIAA-CREF that looks even remotely compelling. The Barron's poll numbers suggest that may not be a crazy thing to do here...

Inflation is a Fiscal Phenomenon

"I hate having to go along with everything my friends say."
--Claire Standish (The Breakfast Club)

Dr J makes a number of salient points, as usual. For whatever reason, this one jumped out at me:

"significant inflation is not a monetary phenomenon as much as it is a fiscal one."

Nice point. You'll hear many 'experts' call inflation 'always and everywhere' a monetary phenomenon. As John observes, this simply is not so. Fiscal mischief generally drives money printing.

Inflation in Everything

Joe Scheffer: I got a promotion today: Director of Internal Communications.
Meg Harper: Really?
--Joe Somebody

Interesting missive that observes devaluation in things other than money, including clothes sizes, hotel rooms, grades, job titles. Suggests inflation as a socionomic phenomenon that is perhaps best viewed as a strategy for avoiding reality.

Sunday, April 22, 2012

Money Management and the Agency Problem

"Best defense, no be there."
--Myagi (Karate Kid)

The previous post describes an 'agency problem' (Alchian & Demsetz, 1972; Fama, 1980; Jensen & Meckling, 1976). Lacking either skill, motivation, or time, an investor (the principal) retains a professional money manager (the agent) to invest capital. Because it is difficult for the investor to understand precisely how the money manager is behaving, the possibility exists that the money manager may not be acting with the investor's best interests in mind.

Even if the money manager prefers to act in the client's interest, institutional pressures may drive alternative behavior. Institutional pressures arise to some degree in any social setting. Categorically, these pressures are of normative (widely held prescriptive rules that govern behavior), mimetic (copying what appears to be effective behavior), and coercive (do this lest you will be punished) nature.

The career risk that Grantham discusses is largely shaped by these institutional pressures. The 'iron cage' famously elaborated by DiMaggio and Powell (1983) suggests the difficulty that even well meaning money managing agents will encounter when trying to effectively serve their investing principals.

The best solutions to this agency problem are likely found outside of the institutional field of professional money management. Investors who 'do it themselves,' for example, are less prone to the herding that Grantham discusses. For example, individuals can make concentrated bets that fly in the face of standard portfolio theory. They can also radically alter asset allocations in short order to express a macro view of the world--a macro picture that may be subject to frequent revision in today's turbulent context.

Both of these actions are frowned upon in the professional investment community.

Most individuals will of course argue that they possess neither the time nor the skill to make investment decisions themselves. Thus, they need to retain a specialized professional.

Those that value superior investment returns, and understand the difficulty of achieving them in the institutional field of professional money management, may decide that self-management of their economic future is worth the effort.


Alchian, A.A. & Demsetz, H. 1972. Production, information costs, and economic organization. American Economic Review, 62: 777-795)

DiMaggio, P. & Powell, W. 1983. The iron cage revisited: Institutional isomorphism and collective rationality in institutional fields. American Sociological Review, 48: 147-160.

Fama, E.F. 1980. Agency problems and the theory of the firm. Journal of Political Economy, 88: 288-307.

Jensen, M.C. & Meckling, W. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3: 304-360.

Saturday, April 21, 2012

Safety Dance

We can dance if we want to
We can leave your friends behind
Cause your friends don't dance
And if they don't dance
Well, they're no friends of mine
--Men Without Hats

Jeremy Grantham discusses 'career risk' for money managers. The prime objective of money managers is to keep their jobs. To achieve this, investment professionals must never be wrong on their own.

Consider a 2 by 2 decision matrix. The horizontal axis is an investment pro's portfolio positioning for clients relative to 'consensus' positioning with the choices being similar and different. The vertical axis is actual market outcomes relative to forecast outcome with alternatives being in-line and divergent.

Investment pros will prefer to position clients similar to the consensus. If markets perform in-line with the forecast, then positioning clients similar to the consensus secures money manager jobs. If market performance diverges from forecast, then positioning clients similar to the consensus, is unlikely to result in many client defections--because all investment pros were wrong.

On the other hand, positioning clients differently from consensus is a high risk proposition. If markets perform in-line with the forecast, then positioning clients differently results in underperformance versus the general industry. Clients are likely to defect. It is only when market performance diverges from forecast that positioning clients differently from consensus may provide positive payoffs.

It should be apparent that the 'dominant strategy' for investment pros is to run with the pack--to position clients similar to others. Such positioning reduces career risk.

Grantham posits that this is why market volatility is many times the volatility of underlying fundamentals that should drive stock price. He also suggests that three ways that investment pros can reduce their herding impulses are waiting for blood in streets before buying, staying reasonably diversified, and not using leverage.

These prescriptions do not seem very compelling. Waiting for blood in the streets is inconsistent with the notion of herd behavior. By definition, buying when others are selling is contrarian behavior that investment pros are unlikely to do. Diversification is in fact the de facto practice of investment pros and seems therefore destined to generate mediocre returns. Nothing new there. And, while no leverage is a good idea, many if not most money managers do not employ much leverage.

The bottom line is that money managers operate in an institutional iron cage that is hard to escape.

Gap Hitter

Meg Harper: You're having a panic attack. You know what that means?
Joe Scheffer: Sounds pretty self-explanatory.
--Joe Somebody

Apple (AAPL) has now filled the gap below $580. Volume has been picking up on the way down. The stock is nearly on top of its 50 day MA.

The stock is now off about 10% from its all time high earlier this month. If AAPL is to be the market tell as theorized, then we should expect broader indexes to follow soon.

position in SPX

Friday, April 20, 2012

Today's Slaves

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

Slavery can be defined as being forced to work for the benefit of others. It is the antithesis of liberty, where people are free to pursue their own interests.

As such, slavery as practiced in the US, primarily in Southern states, for most of the first century of the country's existence was so glaringly wrong. How could a nation founded on the principle of liberty get it so wrong?

It's simple, really. A fundamental axiom of human behavior is aversion to labor. When presented with an opportunity to obtain economic resources produced by someone else--without commensurate exchange of one's own productive effort, then people are inclined to consider the prospect.

Stated diferently, people are constantly on the lookout for the chance to get something for nothing.

Slavery is one of those get-something-for-nothing propositions. Force someone else to work for you.

In fact, slavery is really a specific category of theft. Theft is the taking of someone else's property against his/her wishes. Property is broadly construed to include life and wherewithal to produce as well as one' personal possessions. As such, murder (expropriation of life), slavery (expropriation of wherewithal to produce), and robbery (expropriation of possessions) all constitute theft.

Textbooks tell us that, in the United States, slavery was abolished with the ratification of 13th Amendment in 1865. Yet, people's axiomatic desire to get-something-for-nothing persists. As such, it is more likely that one form of slavery has been replaced by other institutions with similar characteristics.

One of those institutions is the income tax. In the US, the income tax was institutionalized in 1913 by the 16th Amendment. The income tax gives someone else legal claim to a portion of an individual's productive effort. 'Legal claim' means that this situation is enacted under conditions of force.

Because this condition surely consitutes theft of wherewithal to produce and its economic outcomes, there is no fundamental difference between the taxation of income and blantant slavery as practiced in the Old South.

Currently, about half of all adults in the United States pay income taxes. These people are today's slaves. They are enslaved by those in the other half.

Thursday, April 19, 2012

WEW on Markets & Entrepreneurship

I starting drifting to a different place
I realized I was falling off the face of the world
And there was nothing left to bring me back

In this 2005 speech, Professor Williams explains free markets and entrepreneurship in straightforward terms that anyone can understand. The sad thing is, statements like the following:

"In truth, in a free society, income is earned through pleasing and serving one's fellow man."


"In a free economy, the pursuit of profits and serving people are one and the same."

are likely to appear so foreign to what many people have been exposed to thru propaganda channels that they are liable to dismiss these truths out of hand.

WEW's view of money as 'certificates of performance' would be a good one were it not for government's capacity to generate dollars by fiat. Fiat currency permits government to give dollars to people who do not perform. Stated differently, fiat money enables those who do not work to make claims on resources produced by people who do work. Moral hazard...

One more reflection on Prof Williams' observations. He notes that:

"Whether an entrepreneur makes a profit depends essentially on two things. The first is whether he is producing a good that consumers value and are willing to pay for; the second is whether he's using the scarce resources of society in the most efficient manner to produce the good."

When designing a system to maximize general standard of living, one would be hard pressed to devise more relevant design parameters than the two articulated above.

A system that motivates production of output that people want, and does so in a manner that conserves scarce resources, promotes wealth and prosperity.

Wednesday, April 18, 2012

The Great Divider

"It's all for nothing if you don't have freedom."
--William Wallace (Braveheart)

When Barack Obama was running for president four years ago, many of his supporters hailed him as The Great Unifier, or something to that effect. It was predicted that he would unite the country around common causes toward a greater good.

Fast forward to today. Currently the country stands more divided--perhaps at historical extremes. President Obama is part of the divisiveness, attacking groups that oppose his view of the world. Only his more ardent supporters, blind with loyalty, would claim that that president has fulfilled the predictions about his unification potential.

The easier prediction four years ago would have been forecasting an increase in divisiveness if unity was sought by increasing government action.

Because liberty is an inalienable right, people seek to pursue happiness as they see fit. Since people differ in their interests, motivations, capabilities, etc, it is unlikely that people will be ever be fuly united in the literal sense. However, people are prone to cooperate with each other in a volunary manner. People come together and trade when both sides perceive that they will be better off.

In a free society, then, people 'unify' on their own to engage in mutually beneficial exchange.

Trouble arises when government is employed to promote oneness. This is because government is force. Using government as an instrument for unity is using force 'to bring people together.' Such an action opposes natural law. People will naturally push back at actions which threaten their liberty. Divisiveness grows.

Stated differently, the greater the government intervention, the greater the divisiveness. Given the immense interventions enacted by the federal government under this administration, our lack of collective 'unity' should be of no wonder. It is a natural response to the use of force.

A free society fosters unity through voluntary cooperation and trade. A despotic society tries to force unity through government coercion.

Tuesday, April 17, 2012

Jump Turn

I get up, and nothing gets me down
You got it tough
I've seen the toughest around
--Van Halen

Another big inter-day market swing. This time the direction was up, primarily it seems on the news that there were buyers today for a Spanish debt offering. Apparently, this sparked relief that Spain will not implode today.

While equity markets have been rounding high, volatility is characteristically doing the opposite--rounding low.

When we start seeing big strings of inter-day reversals, it often suggests a market that's getting ready to make an extended move. As to which direction, we'll have to wait and see.

position in SPX

Monday, April 16, 2012

The Rain in Spain

You've got to give her some faith, hold her tight
A little tenderness, you gotta treat her right
--Bryan Adams

John Mauldin wonders whether the probs in Spain, previously thought to have been pushed out at least a year, will reveal themselves much sooner.

Me2. Until last week, markets seemed pretty much unfazed by the happenings in Spain over the past month.

Hard not to theorize that market discounting mechanisms have been impaired by central bank money printing. Every systemic problem finds markets crying for another fix...and central banks providing it. Markets are thus assuming ever more relief in a classic moral hazard setup.

However, Spanish market market participants seem to be waking up to reality, as Spanish stocks have now given back nearly all gains off the Spring 2009 lows.

Will US markets follow?

position in SPX 


Come out of things unsaid
Shoot an apple off my head

A week or so back, we opined that AAPL could serve as an interesting 'tell' in lieu of a market turn. Well, the action in AAPL has turned, um, sour.

After hitting its head on a $600B market cap last week, the stock has reversed nearly 10% lower. Today it was off about 4% on chunky volume. Looks like it's ready to fill the gap below $580ish.

Hard to see major indexes holding their ground if this name continues to trade heavy.

position in SPX

Fewer Retirements Hurting Jobs?

Out in Bethlehem they're killing time
Filling out forms
Standing in line
--Billy Joel

Have heard various pundits recently opine that one 'problem' with the current job market is that older people continue to work instead of retiring, Consequently, they are staying in jobs that 'should' be passed on to younger people. Because retired people no longer 'count' in the unemployment figures as currently measured, then jobless numbers are 'artificially high.'

The logical extension of this thought process is to have everyone retire--thus making the job market really strong!

The faulty argument is a variation of Bastiat's Broken Window Fallacy.

A retired person at any age who is capable of working represents lost productivity. Like the broken window that must be fixed, retirees are non-productive entites that must be supported. Retirees may be self-supported. More likely, however, is that they will require the support of others to some degree.

In either case, retired people are net consumers of resources rather than net generators of resources. The earlier that people retire, the larger the draw on resources.

Society is better off when all people capable of working are working.

Sunday, April 15, 2012

Soft Stalwarts

"Just another clue"
--Benjamin Franklin Gates (National Treasure)

Maybe nothing, but thought it interesting that two 'safety' stalwarts failed to hold higher levels this week. Procter & Gamble (PG) broke to multi-year highs a month or so back on announcement of a big downsizing project. The stock was holding higher on declining volume (bad sign). Last week it dipped below the breakout line on higher volume (another bad sign). Support has once again become resistance.

Johnson & Johnson (JNJ) has been battling the $66 threshold for the past year. A week or so back it was able to push thru. Like PG, however, the volume was not impressive and it too fell back thru support this past week. The stock now sits on its 50 day MA. If it break much below this level, then the ascending wedge pattern that has been in play will also be in jeopardy.

All of this may be insignificant. However, these are typical 'go to' names in the face of market weakness that we saw last week. Yet they didn't find much love.

position in JNJ

Saturday, April 14, 2012

Hedging It Old School

Do you remember
When you got your lucky break?
You've looking back now
And it seems like a mistake
--John Waite

Interesting convo w old school hedgie Michael Steinhardt. Steinhardt was early to the  industry, and holds one of the more spectacular performance records in hedge fund history. Returning over 20% annually (after fees) to investors with only one or two down years in over 30 yrs of operations.

In this interview, Steinhardt is critical of the Fed, particularly as it relates to robbing savers of interest rate income. He also correctly observes that there is little economic gain to show for $trillions of intervention.

He is also introspective on Wall Street overall, suggesting that the industry has changed to being less performance driven and lacking 'noble goals.' Steinhardt said that he and his partners used to ask themselves what good they were doing for the world thru their investment activities. Their answers revolved around the notion of shifting capital to more efficient uses.

Steinhardt thinks that, in today's Wall Street world, this is no longer the case.

Friday, April 13, 2012

Tax the Rich Folly

Maybe someday
Saved by zero
I'll be more together
--The Fixx

Rick Santelli (vid here) continues to be the only Bubblevision pundit type to lay it out there re our current fiscal situation. As he demonstrates, heavily taxing millionaires hardly dents our debt--perhaps funding one months worth of debt.

He also notes that at the rate our debt is increasing, such taxes mean less and less.

This administration's tax the rich policy could not be more misguided. Any real capital that remains in our system likely resides with the wealthy. We can not afford to confiscate it. Confiscating this capital and consuming it for near term needs eliminates the primary driver of productivity improvement and standard of living increase for the long term.

Reducing spending, paying down debt and saving to build capital is the path to freedom. Our current approach is the path to despotism.

Tax-the-rich rhetoric does, of course, underwrite political theater for an administration campaigning on a class warfare platform.

Spanish Fly in the Ointment

Maximus: Are you not entertained? Is this not why you are here?
Crowd: Spaniard! Spaniard! Spaniard!

We've now seen a few days of +/- one percent swings in the major indices. The return of interday volatility has me alert for trend exhaustion/reversal.

Starting to get some hints that coincident and trailing economic indicators may in fact be rolling over per Dr J.

Plus, it's raining in Spain. EU probs seem once again headed to forefront.

position in SPX

Thursday, April 12, 2012

Nocking Schools

So the years go on and on but nothing's lost or won
What you learn is soon forgotten
They take the best years of your life
Try to tell you wrong from right
But you walk away with nothing
--38 Special

In this 1931 essay, Albert Nock hits on one of the failed assumptions driving compulsory education and public schooling in the US since the beginning of the Progressive era. That assumption is that all people are educable and that they can be taught to similar degrees.

Such an assumption must hold when you are trying to push millions thru the system. The fundamental tradeoff in production is between volume and variety. If you need to educate more students, then you need to do so in a standardized manner.

As Nock notes, we've been pretending as if this assumption is valid, despite evidence from nature to the contrary. And that pretense has created the wasteful process that is our school system.

Tuesday, April 10, 2012

Uneasy Does It

Growin' up, you don't see the writing on the wall
Passin' by, movin' straight ahead, you knew it all
--John Parr

Mises makes an astute (as always) observation: The fundamental driver of human action is the urge to remove uneasiness as far as possible.

In a way, this touches 2.1, 2.2, 3.2, 3.3, and 4.1 on our axiom list.

Stated differently, if we were totally comfortable, then we would feel little need to act.

Sunday, April 8, 2012

History Un-Lochnered

I must have dreamed a thousand dreams
Been haunted by a million screams
But I can hear the marching feet
They're moving into the street

For someone who is purportedly a constitutional scholar, President Obama continues to demonstrate how little he seems to know about constitutional case law. Last Monday he claimed that, should the Supreme Court repeal Obamacare, that it would amount to judicial activism.

When responding to a related question at a Tuesday press conference, the president sought to clarify his statement from the day before:

"Well, first of all, let me be very specific. Um, we have not seen a court overturn a law that was passed by Congress on a economic issue, like health care, that I think most people would clearly consider commerce. A law like that has not been overturned at least since Lochner, right? So we're going back to the Thirties, pre-New Deal."

First, let's get the plainest of details straight. The Thirties were not pre-New Deal, Mr President. FDR's New Deal programs, which essentially built on Hoover's interventionary programs, began in 1932.

Second, Lochner was decided in 1905. The case was Lochner v. New York. The title alone tells us that this case did not involve a law passed by Congress. Lochner involved a baker who was appealing a conviction over a state statute seeking to limit workers' hours. The Supreme Court overturned the conviction, citing that the NY law violated the principle of "liberty of contract," implicit in the due process clause of the Fourteenth Amendment.

Lochner was not a Commerce Clause issue. It is telling that Mr Obama links Lochner with the Commerce Clause, however. Big Govt politicians reflexively reach for the Commerce Clause as a loophole to justify any government intervention that even remotely touches trade.

Third, the Supreme Court was still actively overturning congressional legislation related to commerce in the 1930s. In A.L.A. Schechter Poultry Corporation vs the United States (1935), affectionately known as the "sick chicken case," the Supreme Court ruled that the National Industrial Recovery Act, one of the key components of FDR's early New Deal legislation, exceeded Congress's authority under the Commerce Clause.

It was not until FDR was able to pack the court in the late 1930's that the real era of judicial activism began.

Perhaps that's when President Obama's reputed constitutional expertise kicks in as well.

Saturday, April 7, 2012

Cave In

"Endangered dirt. That's a new one."
--Riley Hale (Broken Arrow)

Started positions in gold miners (NEM, GDX) a little over a month ago. Since then, they've been a house of pain. Down about 25%.

Technically, daily charts are washed out. But on a monthly basis, hard to make the case for severely oversold. On the bullish side, it's possible that many miners are tracing out mammoth reverse head and shoulders patterns (shoulders more like double shoulders). If this pattern is valid, then the second right shoulder is currently being traced out.

Many continue to talk about how cheap miners like NEM are. Perhaps, but my valuation work finds NEM generating about $1 billion in FCF annually over past three years. I might be willing to pay $15 billion for that. However, NEM's enterprise value is ~$25 billion. Implication: have to factor in signif FCF growth to justify the current price tag. Not exactly a conservative approach...

One noteworthy positive is NEM's near 3% yield--a nice little oasis in today's yield desert.

Have noted in past posts that I'm become less enamored with the bullion ETF's due to 're-hypothecation' issues. Mining shares are an attractive alternative, as property rights are better defined. As such, I may add more mining shares shortly.

position in CEF, GDX, NEM

Friday, April 6, 2012

Farming Out Government Purchases

"Oil can what?"
--Scarecrow (Wizard of Oz)

Consummate JR in this CNN interview. His thesis is that governments will try to buy markets higher in the major election year. Some data suggest it has been working.

Of course, things didn't work out so well in 2008...

JR continues to pound the table for agricultural commodities. I do like this idea, as ags have been flat to down over the past yr--largely out of step w gold, oil.

Have been adding to my ag position over the past coupla months.

position in CEF, DBA, RJA

Thursday, April 5, 2012

Dressing Down the Fed

"Sir, let me take this moment to compliment you on your fashion sense, particularly your slippers."
--Chris Knight (Real Genius)

Last month the NY Fed invited Jim Grant to say a few words. Seems the Fed wants to be seen as an entity that willing to listen to its critics. Pretty funny.

JG didn't pass on the opportunity to let it fly. Grant brilliantly puts the Fed's actions today in the context of the 1913 charter. This perspective clearly demonstrates that the Federal Reserve is far beyond its original scope.

Grant stops short of the ultimate prescription, which in Paulian language would be for the Fed to dismantle itself. Perhaps Grant is afraid that the Fed would take him seriously. After all, as he notes, the Fed's escapades have essentially kept him in business.

Wednesday, April 4, 2012

Ring Bell, Salivate

"Nice doggy. Cute little pooch. Maybe I've got a Milk Bone."
--Louis Tully (Ghostbusters)

Image below taken from Peter Atwater's Minyanville missive. Pretty much tells all you need to know about the driver behind rallies these days.

As Peter wonders, will the underlying Pavlovian assumption (Fed intervention = mkt rally) continue to be perceived as valid?

postion in SPX

One Bad AAPL

You need love but you're afraid
That if you give in
Someone else will come along
And sock it to you again
--Osmond Brothers

Domestic markets open weak this am on the back of yesterday's unexpectedly hawkish FOMC talk as well as renewed EU focus (Spanish bonds getting splattered).

My growing sense is that the near term fate of the equity markets is tied to Apple (AAPL). The moonshot rise in this mega-cap now means that it has outsized influence on the major indexes. Its strength has served to bouy the general tape in the face of slowing momentum.

Should AAPL break down, then the tape will likely follow.

position in SPX

Tuesday, April 3, 2012

Judicial Activism

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

Perhaps sensing what growing numbers are sensing after last week's oral arguments, President Obama stated that a Supreme Court ruling that strikes down Obamacare would amount to judicial activism. This is an ironic statement coming from a president with a hefty interventionist record himself. When measured in terms of spending, debt, regulations, bailouts, willingness to go 'over the heads' of Congress, etc, it can be construed that this president approaches FDR in activist tendency.

It is true that President Obama is not the first to toss claims of judicial activism toward the Supremes. Claims of activist judges have been around since the early days of the republic, although they have been escalating over the past 100 years.

However, it is unusual to hear activist claims muttered by a Democrat. More often than not, judicial activism is more likely an accusation of people who have opposed Supreme Court rulings that have favored liberal agendas.

What exactly is judicial activism? In simple terms, it is judges "taking the law into their own hands." The role of judges is to rule in accordance with the law. When judges rule in a manner that cannot be reasonably construed as lawful, then the ruling is activist in nature.

How one view 'law,' then, becomes central to evaluating the presence of judicial activism.

There are two primary views of what constitutes law. One view is that there is natural law that governs human action in the context of the functioning universe. This law gives rise to 'self-evident truths' as expressed by Jefferson, and certain axioms of nature and of human behavior that any social system must cope with. While not a perfect reflection, the Constitution is based upon a foundation of natural law.

A second view of law is the positivist view. Positivism proposes that there is no natural or moral basis to law. Instead, laws are 'posited' by human beings and are valid if they are enforceable. A popular expression of positivism is democracy. If a law can be enacted by majority vote, then it is legitimate.

The ink was barely dry on the ratified Constitution before interested parties sought to replace natural law with positivist law. The milestone case of Marbury v. Madison made it clear that the best path to implement positivist law was through the courts. Get a majority of Supremes to vote in favor of your proposal and, voila, your proposal becomes law--regardless of whether it aligns with natural law or not.

Thus, laws began to march to the Supreme Court for judicial review. Initially, and with a few notable exceptions, the Supreme Court defended the Constitution and natural law. Over time, however, presidential authority to appoint judges fostered the inevitability of a high court packed with interested positivists.

By the time of the New Deal, positivists were ruling in favor of laws, in cases such as Wickard v. Filburn, discarded by previous courts. The written opinions of assenting judges applied either a) tortured logic seeking constitutional justification for their verdicts, or b) arguments that this was a new era where the Constitution no longer applied.

This was judicial activism in its classic form. And cries of such could be heard from people who understood the consequences of moving away from natural law.

However, positivists literally ruled the day. From the early 1940s to the mid 1990s, not a single law passed by Congress was ruled unconstitutional by the Supreme Court.

Now, much of what passes as law is grounded in precedents legitimized by activist judges. Proponents of those laws, such President Obama, defend them on grounds that legal precedents validate them.

This is positivism at its finest. Because a similar law was deemed legitimate by previous group of judges, then that precedent justifies a the new law. And if that precedent is not upheld, then it is 'judicial activism.'

It should be readily apparent to the reasoned mind that precedents grounded in positivism are not valid precedents at all. Rather, they are but steps in a random walk away from freedom toward tyranny.

Monday, April 2, 2012

High Corporate Profits Explained

Well I know nobody knows
Where it comes and where it goes
I know it's everybody's sin
You got to lose to know how to win

In his weekly letter, John Hussman observes that the high corporate profits currently observed are a function of spending at both consumer and government levels. Building on a recent study done by GMO, Dr J notes "the primary way to boost corporate profits to abnormally high - but unsustainable - levels is for the government and the household sector to both spend beyond their dreams at the same time."

Seems a Keynesian's dream.

Unfortunately, following dreams comes the wake up.

position in SPX

Sunday, April 1, 2012

Iron Cage of Professional Finance

"Ever wonder why fund managers can't beat the S&P 500? Because they're sheep, and sheep get slaughtered."
--Gordon Gekko (Wall Street)

During last week's RISE conference, it was hard not to conclude that consistent outperformance by finance industry professionals is difficult if not impossible. In their quest for alpha, professional money managers must cope with standard industry practices (getting stronger with the CFA craze), regs and compliance, and career risk concerns--all of which drive behavior toward central tendency.

Subtract the fee structure, and principals who invest capital thru professional agents seem likely to under perform indexes over time.

Given the current industry context, seems to me there are three primary ways to outperform:

1) Concentrated positions. Among professionals, portfolios of less than 30 positions are rare. As such, professionals are unlikely to consistently beat benchmarks by significant margins. Yet, successful investors who do not employ professional money managers nearly always operate concentrated portfolios.

2) Bold changes to asset allocations. In the industry, asset allocation changes are considered radical when they are adjusted by 5%. Ten percent swings are almost unheard of. As we have seen, however, instability in the current macro environment has been rewarding swift and large adjustments in asset allocation. For example, those who have been able to move out of risk assets such as stocks during deflationary downdrafts have been able to sidestep steep draw downs.

3) Hedging. Pairing long positions with short positions ensures some variety in portfolio correlation. Hedging may also enable longer holding periods for positions as it tempers the urge to sell favored positions by mitigating drawdowns.

In the investment industry, the only firms capable of such freedoms are hedge funds. However, even hedgies are under increased pressure to comply with institutional rules. Professional money managers in other segments are destined for the Iron Cage that constrains performance via institutional norms.

This situation also spells opportunity for individual investors.

position in SPX