Judicial Restraint

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

When seeking to justify his ruling that Obamacare was in fact a reflection of Congress's power to tax, Chief Justice Roberts made it a point to declare that it is not the Supreme Court's "job to protect the people from the consequences of their political choices."

Stated differently, the justice is saying, "The Court declares that this law is a tax, and Congress has authority to tax per the Constitution. If you don't like it, then take it up with Congress"--presumably via the voting booth.

A basis for Roberts' declaration is known as 'judicial restraint.' Judicial restraint is the idea that the Court should defer to the will of lawmakers whenever possible, and employ the Constitution to nullify legislation only in extreme cases. This is because lawmakers are directly accountable to voters who can reward or penalize legislative outcomes. SC justices, on the other hand, are not directly accountable to the people since they are appointed and tenured for life.

An early proponent of judicial restraint was Justice Oliver Wendell Holmes, who believed in "the right of the majority to put their opinions into law." Holmes once said that it was his job to help his fellow citizens go to Hell if they chose to do so via their elective choices.

Hopefully the Creator does not close the door to Hell behind Holmes the doorman...

Not surprisingly, Holmes became a favorite among Progressives. Any proponent of decoupling legal decisions from the Constitution will attract those seeking to advance their interests through political influence.

Judicial restraint possesses some features that seem attractive at first glance. Because judges usually defer to the will of lawmakers, then judicial opinions biased by personal interest seem less likely. Moreover, as Chief Justice Roberts suggested, bad law seems to be in the hands of the people, since they elect the lawmakers.

However, there are several problems with the idea of judicial restraint. If judges are prone to defer to the will of lawmakers, then the interpretive role of the judicial branch seems compromised. Over time, it would seem that lawmakers seeking to exploit judicial restraint would gradually push the limits of the law so that what was once extreme becomes middle of the road and prone to the bench's rubber stamp.

Rather than decreasing the possibility of interested judicial opinions, judicial restraint merely alters the expression of that interest. Judges may be motivated to express deference to laws under review because they have interests similar to, or rewarded by, a legislative body and/or its electorate. Judicial restraint provides cover for a judge's interests.

The real problems with judicial restraint lie in the argument that Chief Justice Roberts employs. If legislators enact 'bad' laws, and the SC defers to these bad laws, then the people's primary peaceful recourse is at the ballot box. But the window to express their displeasure is not immediate. It is every 2 to 6 years, depending on the office and where we are in the election cycle. A tremendous amount of 'bad' could occur in the meantime.

The more serious problem with the argument that bad law should be thrown back in the hands of the people is that, in a democratic election system, the 'people' represent the majority. If judges defer to laws enacted by majority rule, then they are not protecting the rights of minorities who opposed the law. In a positivist system such the one espoused by Justice Holmes above (i.e., the law IS the majority), then protecting the rights of minorities is a non-issue.

But in a system grounded in natural law as is our Constitution, then protection of the rights of the smallest of all minorities, the individual, is the crux of the matter.

Judicial restraint as invoked by Justice Roberts encourages mob rule, and compromises liberty.

Bernank Does Obamacare

A license to love, insurance to hold
Melts all your memories and change into gold
His eyes are like angels, his heart is cold
--Sade

From the creators of the famed Ben Bernank. The economic ramifications of Obamacare. So laughably sad.

Here are outcomes we can predict with near certainty:

costs - higher
quality - lower
wait times - longer

A few more likely outcomes I would have added to the skit. Innovation will likely go down as entrepreurial entry into healthcare sectors will be discouraged. Moreover, rather than supply remaining the same as suggested by the skit, it is likely that capacity will leave the system. Given higher demand/lower supply setup, shortages seem v likely.

Another EU Party

"On any other day, that might seem strange."
--Cameron Poe (Con Air)

Huge lift today in risk assets as the current EU shrimpfest revealed new plans about using the ESM facility to bail out banks sans 'austerity' measures and WITH Germany's support. Right now the plan remains a bureaucratic brief but it certainly fostered much market hope today.

The SPX was up 2.5% and closed at its highest level since early May. Commodities joined the party as well. Crude led the way--up 8%!

I took this opportunity to peel off some peripheral commodity exposure, some of it bought in the hole last week. Just tradin' 'em...

Right now, it's hard to discern whether this EU plan is for real, so it is difficult to discern how durable this rally could be. What I do know is that the solutions being discussed (borrowing, money printing, no deep spending cuts) have next to no chance of righting this situation.

Stated differently, I'm currently of the mind that this rally should be sold. And I plan to do just that if prices continue to march higher. Am particularly interested in shedding some more commodity exposure prior to the Next Time Down.

position in SPX, commodities

Throw It Off

Hey, think the time is
Right for palace
Revolution
--The Rolling Stones

When Democrats were busy jamming thru the health care bill in late Dec 2009 while most people were on holiday, I remember thinking that this reckless behavior might wake some people up. If people realized that this law, and the process employed to create it, was a threat to their freedom, then they would punish these politicians at the ballot box.

That is precisely what happened.

Many folks became engaged in the political process for the first time. The Tea Party movement, a movement based on the founding notions of free markets, fiscal responsibility, and limited government, grew in size and stature. And in November 2010, these people made themselves heard.

The silver lining of yesterday's Supreme Court decision may be that it is awakening yet another fraction of the citzenry, maybe even a critical mass, to the spectre of legalized plunder.

Did yesterday's decision tip the system? The Supreme Court appears to have given government the green light to do whatever it wants thru virtually unlimited power to tax. But is that power truly unlimited? If enough people conclude similarly to the Founders, then they may seek to curb that taxing power. Perhaps people will galvanize to throw off this government at the ballot box. 

Some are calling the upcoming election a referendum on the healthcare law. It may be more appropriately viewed as a referendum on freedom.

Fooled Again

And the parting on the left
Is now the parting on the right
And the beards have all grown longer overnight
--The Who

After discussing our flawed judicial process yesterday, I felt pretty much ready for any ruling rendered by the Supreme Court rendered on Obamacare today. But I must admit surprise. Am still chewing thru the 193 page opinion so my thinking is a work-in-process, but I'd like to share a few early thoughts here.

First, the gist of the ruling. The majority of the Court found the 'individual mandate' to be an invalid exercise of the Congress's power under the Commerce Clause and the Necessary and Proper Clause. This is a very positive finding that should have ended things right there. Indeed, many 'speed reading' members of the media anxious to score the scoop appeared to stop right there and began broadcasting that the Court had struck down the law.

The real eyebrow raiser followed, however. The four liberal judges and Chief Justice Roberts joined to declare the mandate as imposing a tax on those choosing to not buy health insurance, and concluded that the individual mandate should be unheld as within Congress's power under the Taxing Clause.

While I am not (yet) versed on all relevant Supreme Court case law, this ruling struck me as extraordinary when I initially read it--and hours later it still does. It appears to me that 'legislating from the bench' has taken on quite literal meaning here, as a majority of Supreme Court justices have endeavored to rewrite a statute rather than to interpret it. Moreover, it appears that this action places the power to tax in the hands of the judiciary.

The other portion of the ruling, and one that may be a 'sleeper' down the road in its effect, is that 7 of 9 judges concluded that the portion of Obamacare that requires states to expand Medicaid or face loss of Medicaid funding violates the Constitution (10th Amendment et al). It is not yet clear to me precisely what the ramifacations of this ruling might be, but in a vacuum this does affirm the principles of federalism. Can't help but think this might embolden some states to push back more strongly against federal laws that they feel are unjust.

Ron Paul was not surprised by the SC ruling, stating that "the Court has a dismal record when it comes to protecting liberty against unconstitutional excesses by Congress." He observes that everything that government does is in fact a 'mandate.' The broader issue is that "this compulsion implies the use of government force to those who refuse. The fundamental hallmark of a free society should be the rejection of force. In a free society, therefore, individuals could opt out of 'Obamacare' without paying a government tribute."

Attention will likely turn to this fall's election as a means for repealing the healthcare law. Perhaps the most positive outcome of today's ruling that it may motivate more people to engage in the process. Perhaps more people will consider the Tea Party tenet of limited government vis a vis our current position.

Judicial Review and Liberty

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

Citizens of the United States, and the world for that matter, await the Supreme Court's decision on the legality of Obamacare--particularly as it relates to the mandate that individuals must purchase health insurance. The High Court's decision is expected tomorrow.

I am certainly hopeful that the Court strikes down as much of Obamacare as possible.

Regardless of the direction of tomorrow's ruling, however, let me be clear that employing the majority opinion of nine tenured-for-life lawyers to dictate legality is not the basis for the rule of law. It is the basis for discretionary rule by men.

We know this is how the current system works because of the political influence gained by being able to appoint justices to the bench. Judges are appointed who are perceived to be of like mind to the political party that controls the appointment. When a different regime takes control, then it proceeds to appoint judges biased toward other interests.

This is discretionary rule. Discretionary rule was what the Framers sought to avoid.

The rationale behind the Supreme Court's authority is 'judicial review.' Judicial review is not a power granted by the Constitution. Instead it was a power granted to the Supreme Court by, yep, the Court itself in the early 1800s.

If the Framers thought that the Supreme Court should rule on the constitutionality of laws, then they would have surely enumerated this power into Article Three of the Constitution. However, the Framers knew that actions of judges can be politically motivated, and authorizing a federal court to render judgment on the rightness of law would almost certainly deliver power into the hands of the bench and those who decide who sits on the bench.

Interestingly, many Antifederalist arguments were grounded in the thesis that the Constitution as written would permit interested judges to populate the federal bench, which over time would compromise liberty.

The Antifeds were right.

Ruling on Arizona Immigration Law

Let me in, immigration man
I won't toe you line today
I can't see it anyway
--Crosby & Nash

Yesterday the US Supreme Court voted 5-3 to strike down some portions of Arizona law seeking to deter illegal immigration. Mainstream media are widely reporting that this ruling upholds federal authority to set immigration policy and laws.

What isn't being widely reported is that, of the 14 sections that originally comprised the Arizona law, 11 still stand, and the High Court ruled against only a portion of the 12th section. Moreover, the portion of the section that cleared the Court was the right of police to question their immigration status--in and of itself likely to drive many illegal immigrants to leave Arizona.

It should also be noted that last year the Court cleared an earlier Arizona bill that requires employers to electronically verify the immigration status of potential employees.

As such, the Arizona law provides a Court-approved framework for other states that do not want to sit idly by while illegal immigrants help themselves to resources that states have reserved for their citizens.

That said, it is still disturbing that the Supreme Court struck down any provisions of Arizona SB 1070. In his dissenting opinion (begins on pdf p. 30), Justice Scalia argues that there is nothing unconstitutional in the provisions of SB 1070 under Court review.

The Constitution provides that "the Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States" (Article IV, Section 2). However, if one state had particularly lax citizenship standards, then that state would serves as a gateway for unwanted aliens to obtain entry and resources in other states. Therefore, the federal government was given authority "to establish a uniform Rule of Naturalization...throughout the United States" (Article I, Section 8, Clause 4).

As long as states are not in violation of federal law, then the power to exclude unwanted aliens rests with the states. As Justice Scalia discusses, no provisions of SB 1070 violate federal law. Absent such violation, he concludes that Arizona is within its jurisdication.

Moreover, he observes that the primary impetus behind Arizona's legislation has been the inability, or unwillingess, of the Federal government to adequately protect the state's borders. Justice Scalia questions, "Must Arizona's ability to protect its borders yield to the reality that Congress has provided inadequate funding for federal enforcement - or, even worse, to the Executive's unwise targeting of that funding?"

We can confidently surmise how the Framers would answer that question...

Based on events over the past few weeks, it appears that federal priorities to allocate scarce immigration enforcement resources are not the problem here. The Obama administration recently proclaimed that it will exempt some 1.4 million illegal immigrants aged 30 or less from federal immigration law enforcement. Justice Scalia observes that we can confidently conclude that this is not a decision grounded in cost cutting, as the administrative cost of verifying exemption must necessarily be deducted from the cost of enforcement.

Justice Scalia does not mention this, but this situation raises the question of how a president can pick and choose among the laws that he is constitutionally obligated to execute. What President Obama appears to be engaging in is discretionary rule.

Scalia ends by asking the central question: "Are the sovereign States at the mercy of the Federal Executive's refusal to enforce the Nation's immigration laws?" He answers the question by filling the shoes of state attendees to the Constitutional Convention who, if a clause were written into Article 1 Section 8 that the President would obtain discretionary power over the immigration law enforcement, would surely have bailed from the convention.

The Justice concludes that Arizona has rightly moved to protect its sovereignty - not in contradiction of federal law, but in full compliance with it. "If securing its territory in this fashion is not within the power of Arizona, then we should cease referring to it as a sovereign State."

Valid Business Cycle Theory I

Dean Yeager: 'Doctor' Venkman. The purpose of science is to serve mankind. You seem to regard science as some kind of a dodge, or hustle. Your theories are the worst kind of popular tripe, your methods are sloppy, and your conclusions are highly questionable. You are a poor scientist, Doctor Venkman.
Dr Peter Venkman: I see.
--Ghostbusters

Not sure there is a more widely misunderstood phenomenon than the 'business cycle.' The sage Rothbard offers clarity in this regard.

First off, Rothbard observes that, in the 'old days,'  the standing term for all significant declines in economic activity was depression. With the onset of the Great Depression in the 1930s, policymakers and related economists resolved that such a situation should never happen again. Thus, they euphemized depressions out of existence, replacing them with watered down terms such as recessions, downturns, and soft patches.

Today, the popular view of the business cycle is the view made famous by Keynes (although, as Rothbard observes, Marx certainly influenced its popularity). Simply put, booms are the result of excessive consumer spending, and busts are the result of excessive consumer saving. Government is the great overseer, charged with tempering consumer spirits during uplegs, and stepping in to spend in place of austere consumers during downlegs.

Thus, and it is hard for me to type this with a straight face, government action serves to temper business cycle extremes.

Rothbard notes that this theory is problematic on a number of counts. One is that the general economy theory of which Keynesian cycle theory is a part espouses that supply and demand are in equilibrium in the market. Therefore, prices and factors of production are always moving toward equilibrium as well. How is it possible, then, that markets that are generally in equilibrium foster extremes that characterize booms and busts? Lacking a strong response to this question, mainstream economists have largely treated the equilibrium and business cycle theories as mutually exclusive--a primative ignorance reflective of poor science.

Today's economics also fails to explain the peculiar breakdown of the entrepreneurial function during times of depression. The function of the entrepreneur is to invest in productive methods after forecasting the potential payoff in light of the risks involved. The better the forecasting, the more successful the entrepreneur. Over time, entrepreneurs with poor forecasting abilities will be stripped of control of productive resources.

Markets, therefore, have a built-in natural selection mechanism for selecting talented entrepreneurs. Over the average period, we should not observe an inordinately large number of firms experiencing losses. How is it, then, that during economic declines that the business world suddenly experiences an enormous cluster of severe losses? According to mainstream economic theory, a point arrives where busiensspeople, previously adept at economic calculation, suddenly suffering large and unaccountable losses!?

A valid business cycle theory must account for this phenomenon of correlated losses--something that mainstream theory fails to do.

A third problem confronting mainstream business cycle theory is explaining why upstream capital goods industries experience early and more severe declines than downstream retail industries. Stated differently, why are booms and busts much more pronounced in capital goods sectors than in industries making consumer goods? If a decline in consumer goods is the cause of depression, then how is it that retail sectors are the last and the least to fall in economic downturns?

Keynesian business cycle theory is unable to adequately address these issues.

Fortunately, a valid theory of depressions and business cycles does exist although, as Rothbard observes, it remains largely neglected by present-day economists. In an upcoming installment, we will elaborate what is often referred to as Austrian Business Cycle Theory.

Current AA

But you know he'll always keep movin'
You know he's never gonna stop movin'
'Cause he's rollin,' he's the rollin' stone
--Gerry Rafferty

Current asset allocation across all financial security accounts:

cash  54%
equities  14%
fixed income  2%
alternative assets  30%

Alternative assets are ETFs/ETNs linked to commodities (14%) and short equity index (16%).

Deadly Healthcare

You had me down, 21 to zip
Smile of Judas on your lip
--Robert Palmer

The Supreme Court is likely render its verdict on the constitutionality of Obamacare in the next few days. The Intrade contract currently reflects a near 80% chance that the Court will rule the individual mandate unconstitutional. Note that the odds almost doubled since the SC hearings, and have crept higher recently on the back of public snippets from Justices Ginsberg, Kennedy, Scalia, and perhaps others.

While we await, here is an interesting article from a Russian economist who worked on Gorbachev's staff. He highlights (lowlights) the progression (digression) of the Russian healthcare system after the Soviet Union declared 'universal' health care coverage for its people in 1918.

Sadly, while some of his examples are sickening, they were totally predictable once socialized medicine was put in motion. With certainty, we can forcase the following consequences of socialized medicine: Resources will be squandered, quality falls, costs rise.

Standard of living declines.

The author raises another interesting point. Today's comparisons to other systems rarely compare apples to apples. Typically, comparison appearing in the media constitute more propaganda than fact. For example, oft cited stats on higher infant deaths in the US rarely add the important footnote that the US metric is more inclusive than elsewhere.

In fact, governments operating socialized systems are more likely to distort their data to make their systems look better. The author recounts the USSR practice of discharging near death patients so that their expiry would not count as in-hospital deaths.

A couple years back, Sarah Palin observed socialized medicine in the US would result in 'death panels' that would determine who would have access to critical care. While her choice of words may have been unfortunate, her observation was nonetheless on the mark. Health care resources are scarce and must be 'economized.' In unhampered markets, price is the primary rationing mechanism.

Socialized systems have no pricing mechanism. Instead, panels of bureaucrats must decide what health care resources get produced and who gets them.

A natural outcome of this, as the author notes, is a multi-tiered system where those who can can curry political favor get better care than others. He notes examples from Russian, UK, French, and Canadian systems.

These multi-tiered systems that favor special interests have not made it into mainstream media discourse here in the US. There is little doubt as to why, as the biased media realizes that broad awareness of this method of rationing health care resources would turn public opinion even more strongly against Obamacare.

Let's hope that we don't have to experience the squalor first hand before recognizing the deadly (quite literally in this case) flaws associated with increasing the degree of socialization in our health care system.

Stimulus and Response

Living in a fantasy
There's never any room to breathe
--T'Pau

Nice chart of SPX vs Fed intervention. Earlier this week, FOMC voted to extend Twist thru end of year.

With this understanding becoming widely recognized, it seems reasonable to ponder the degree to which it has already been factored into prices.

position in SPX  

Out of Step

Now
The mist across the window hides the lines
But nothing hides the color of the lights that shine
Electricity so fine
Look and dry your eyes
--Joe Jackson

Another review demonstrating the responsiveness of risk assets to Fed stimulus programs. Stocks have moved higher during each of the Fed's three marquee programs (QE1, QE2, Twist) over the past 3 yrs. When the programs ended, so did higher stock prices.

What caught my eye here was the divergence between commodities and stocks. During both QE1 and QE2, stocks and commodities responded higher in kind. During Twist, however, stocks moved higher while commodities did not.

The author posits that commodities didn't respond because Twist was not as much direct money printing as it was a yield curve modification program. Fair enough, but that does not does explain why stocks did move higher with Twist. One macro difference is that the EU implemented LTRO while the Fed was Twisting, but not sure how that would explain the divergence.

During this last round of stimulus, US stocks have generally been trading out of step with other asset categories--both domestic and global.

position in SPX

Campaign Finance Reform

There's nothing in the street
Looks any different to me
And the slogans are replace, by-the-bye
--The Who

When I first started reading this piece, I thought that perhaps it was going to be another argument for some kind of regulation on campaign contributions. Instead, the author zags in the other direction--that trying to govern the contribution process will never work and is in fact unconstitutional. Squelching campaign contributions is a violation of freedom of speech and association.

The real problem, as he notes, is that our government has the power to sell privileges. As long as government officials can sell political favor, then special interests will spend big bucks to purchase it.

Eliminating government power to redistribute wealth, primarily by turning off the resource spigot, and the market for political favor shrinks away.

Oil Leak

"Where we're a little light...is in alternative energy."
--Bretton James (Wall Street: Money Never Sleeps)

Since mid 2009, crude and stocks have been trading pretty much in sync. That correlation began to unravel last May, with oil since plunging more than 25% while stocks have lost maybe 5%.

The last time crude traded significantly weaker on a sustained basis vs stocks was during 2008's swan dive across all markets.

position in SPX

Executive Privilege for the Fast and Furious

"It's the old Potomac two-step, Jack."
--President Bennett (Clear and President Danger)

Attorney General Eric Holder has been under Congressional scrutiny for his role in Operation Fast and Furious, an over-the-border operation supervised by the Dept of Justice that allowed guns to flow to Mexican gangs and other bad people. Those guns were subsequently used to kill Americans and Mexicans.

Congress has been investigating the AG's role in this operation. Holder claims that he had no knowledge of the initiative.

Recently the House Comittee on Oversight and Government Reform subpoenaed the Dept of Justice to turn over 1300 pages of related documents. Holder's DOJ has refused to comply. Yesterday, the House panel voted to hold to hold Holder in contempt.

In a desperate attempt to keep the contempt vote from occuring, the AG asked President Obama to invoke executive privilege to shield the 1300 pages of docs from Congress, and the president has apparently agreed to do so.

Executive privilege argues that the executive branch should be able to withhold information that would interfere with the administration's ability to govern. However, actions done in the name of executive privilege, and associated legal challenges (which have typically centered on the concept of separation of power) have arisen periodically since the country's early days.

Meaningful to the Fast and Furious case is the Supreme Court's decision in United States v. Nixon (1974). Although Nixon attempted to withhold evidence related to Watergate by employing an executive privilege shield, the High Court ruled that executive privilege cannot be used for purposes of shielding wrongdoing.

President Obama is now on the hook to demonstrate that the invocation of executive privilege is proper in this case. Because the Fast and Furious investigation is concerned with wrongdoing, it seems that this will be a tall order.

More importantly, by invoking executive priviledge, Obama has now personally thrown his hat into the ring on a case of poor policy turned stonewalling and now, potentially, coverup.

Tickets Please

I don't know why she's riding so high
She ought to think twice
--The Beatles

Have been racking up buy/sell tickets over the past couple of days. As planned, peeled off relatively high cost shares in JNJ into the recent euphoric rise. The stock now sits at the upper band tag with daily stochastics twisting high. My sense is that chances are good for reacquiring shares lower.

Also trimmed positions in AMAT, CSCO for same reasons. Big lift higher, getting overbought. Meanwhile, cost basis of 'core' position has been lowered.

When things were looking dicey a couple weeks back I put a limit order in on Walgreens (WAG) that never filled. When the stock subsequently rallied with the rest of the market, it appeared that perhaps I had been left behind. However, yesterday the company announced that it had taken a $5 billion ownership stake in a European drug store chain Alliance Boots; the stock fell a coupla percent on the news. This morning a few wire houses downgraded WAG. The stock subsequently fell a few more percent. Bottom line, this morning I was able to initiate a small 'starter' position in WAG at a nice entry price.

This morning PG guided down and the stock was subsequently hammered for nearly 4%. I like this name under $60, and it fell there long enough this morning to add to my small initial position. Should the shares decline further, I'll likely get further involved. In many ways, this stock's characteristics resemble JNJ's. At the right price, I like the idea of building significant positions in these names as 'anchors' to an investment (not trading) portfolio.

This afternoon the FOMC speaks. Given the anticipatory run up ahead of this meeting, seems to me that chance favors a reaction grounded in disappointment. In any event, I plan to be opportunistic based on price.

positions in AMAT, CSCO, JNJ, PG, WAG

Philosophy of Freedom

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

Libertarianism (a.k.a. classical liberalism) is a philosophy grounded in natural rights, including the rights to one's life, wherewithal to produce, and possessions. As Jeffersom wrote, these rights are self-evident and inalienable. Depending on your view, these rights were either endowed by our Creator or are simply a function of our humanity.

The crux of libertarianism is that people are free to pursue their interests as long as they do not forcefully intrude on the pursuits of others. The role of government is to help individuals protect themselves against such forceful intrusion.

Libertarianism espouses peace, personal choice, and voluntary cooperation (a.k.a. trade).

It appears to be the only social and political philosophy to do so. All other frameworks legitimize violent intrusion to some degree. Government is typically the mechanism of such force. Principals seeking to satisfy their interests employ gpvernment as their strong armed agent to force their will on others.

Because people are attracted to schemes that promise something for nothing, it should not be surprising that libertarianism has been marginalized relative to philosophies that legitimize plunder.

Make no mistake, though. Not only are these legitimations morally bankrupt, but they are certain to produce economic disaster over time.

Far Away

There's a world outside every darkened door
Where blues won't haunt you anymore
Where the brave are free and lovers soar
Come ride with me to the distant shore
--Tom Cochrane

Nice one from Dr J this morning:

"In order to establish valuations consistent with prior secular bull market starting points, "S&P 500" would not just be an index - it would be an upside target."

Indeed.

Hope Floats

Meet me in the crowd, people, people
Throw you love around, love me, love me
Take it into town, happy, happy
--REM

Futes pointing north after pro-bailout party won the Greece election. For the moment, the euphoria sides with 'austerity' in a country (and world) that shows no discipline. Seems to me that the shiny, happy feeling will be short lived.

Should the party continue thru the night and into the morning, I'll be looking to sell into it.

Sell hope, buy dispair...

position in SPX

Pots and Kettles

Well I was there and I saw what you did
I saw it with my own two eyes
So you can wipe off that grin
I know where you've been
It's all been a pack of lies
--Phil Collins

Just saw an Obama 2012 commerical claiming that when Romney was governor of Mass the state had high debt and low job creation. Beyond the obvious irony, one has to wonder just how ignorant this administration thinks the US citizenry is.

Can't imagine these ads have positive impact except for the president's base which remains delusional on nearly all economic issues.

The Romney campaign has to be hoping that the president keeps stumping on economic issues.

Armed Carts

It's a free ride when you've already paid
--Alanis Morissette

Cato's Dan Mitchell correctly observes that the situation in Europe brings this satirical cartoon to life. However, the cartoon is not completely accurate. It is missing guns pointed at the heads of those pulling the cart.

Among the most supreme ironies is that many (most) proponents of the welfare state claim to be proponents of peace as well.

Just Like That

"The most valuable commodity I know of is information. Wouldn't you agree?"
--Gordon Gekko (Wall Street)

In the span of a couple days, JNJ has vaulted from the bottom to the top of its trading channel--unusual for such a low beta stock. Primary impetus was a rare triple analyst upgrade day yesterday that sent the stock soaring more than two bucks higher on huge volume. Today saw nice follow-thru.

btw, note the big volume rehearsal higher off the 62ish level on Tuesday--a day before the analyst upgrades. Looks like some folks got the word early...

While I like the price appreciation, I'm currently in acquisition mode. As a buyer, I prefer lower rather than higher prices.

After the quick run up, and stochastics reaching overbought territory, I'll be prone to sell some of my higher cost shares should we jig a bit higher. That will leave me with a lower cost basis for my remaining position, and capital free to take advantage of future price weakness (if/when).

If, instead, JNJ heads to Pluto from here, then I'll participate--albiet in smaller size.

My sense, however, is that chance favors lower prices down the road.

position in JNJ

Ponzi Bonds

Lunatic fringe
In the twilight's last gleaming
This is open season
But you won't get too far
--Red Rider

Fed purchases and Treasury sales of bonds are now so close to one another that anyone can now observe monetization of debt in real time. Hard to imagine that history does not look back on this time in wonderment.

Ponzi on a national scale...

position in BOND

Double Leverage

"Do I laugh now, or wait till it gets funny?"
--Walter Neff (Double Indemnity)

Peter Atwater relates the Spanish bailout plan to the concept of double leverage. Double leverage is using borrowing funds as equity in an already leveraged institution.

But this is nothing new. This is what strategies seeking to solve a debt and spending problem by borrowing and spending more are essentially about.

Classic Ponzi.

As Mr P used to observe, risk is high.

The Worse, The Better

Come up off your color chart
I know where you're coming from
--Blondie

Many sovereign Euro bonds (e.g., Spain, Italy, and France) continued to get smoked last nite. Losses in European bourses, however, were muted.

Here, mkt sold to near flat after the open, then spent the rest of the day marching higher to the tune of 1%+. Felt again like black boxes gaming other black boxes in short squeeze format.

An alternative explanation is the perverse logic that the worse things get in Europe, the more likely that central banks will intervene.

Consummate moral hazard.

position in SPX

Keep on Working

I must admit I was a bit in the red
But if you've never had the pleasure then you could be dead
--Pete Townshend

I found this critique of the 'fluid' Spanish bank bailout plan insightful. Likely helps explain today's market action. After US futes were up more that 1.5% last nite, they began coming in as market participants appeared to be looking under the hood of this bailout proposal.

The more they looked, the more they didn't like what they saw. Markets sold most of the day. At the close, US stock indexes were off about 1.5%. The Euro gave back all of its overnight gains. And Spanish sovereign debt got crushed (on the realization the sovereign bond holders would be suboridinated to the bailout plan's creditors).

In retrospect, the 'tell' here was gold, which never bit on the news here--even on quotes from a BOE guy that central banks should step up their buying of private assets.

All in all an ugly day, which certainly sets up the question: What happens tomorrow?

Wish I knew cookie, but today's action suggests the bailout plan charade may not keep on working.

position in SPX, gold

Too Big to Fail

"I really don't understand why there needs to be so much tension about this. The country is facing the worst economy since the Great Depression. If the financial system collapses, it will take every one of you down."
--Ben Bernanke (Too Big to Fail)

Courtesy of my brother, finally saw Too Big to Fail last nite. Pleasant surprise. One amusing thing was how close the actors came to resembling their real life characters Paulson, Bernanke, Mack, Pelosi, et al.

More to the point were the memories it brought back about the Fall of 2008.  On these pages, I tried to document the events as they unfolded as I saw them. But things were happening so fast that it was difficult to be comprehensive. Moreover, it is hard to preserve the feeling of a market meltdown driven by deleveraging.

This movie does a good job at capturing both the events and the feel. Although I am sure there was some poetic license in some scenes and dialogue, I found the general progression to be accurate and not subject to a great deal of bias or messaging. More descriptive than prescriptive.

The overwhelming feeling I had was the futility of central planning. There is a scene where Paulson (played by John Heard), is getting phone call after phone call from executives and bureaucrats with breaking news of more declines and failures, and demands to make decisions almost instantaneously. No human can do that without making major mistakes.

The other sense (not new) is that these actions fixed nothing. We've were at the edge of the abyss and we will likely return. The folly of trying to solve a debt and spending problem with more debt and spending, and the moral hazard created when propping up poor financial decisions means that a sequel to this film is likely.

In fact, the European version is already in motion.

Is Real Deflation Friendly to Bonds?

The change it had to come
We knew it all along
We were liberated from the fall, that's all
--The Who

In our current fiat money system, the primary source of new money is credit creation. Central banks lend money to big banks and others privy to the central bank window. Those entities turn around and lend to other banks who then lend to other borrowers.

When risk appetite is high, original credit money can pyramid 10x or more thru the system.

Problems arise when lenders (beyond central banks, of course, since CB's assume no risk given the printing presses at their sides) don't want to lend and/or borrowers don't want to borrow. Risk aversion slows fiat money creation to a crawl--and could even cause money supply to decline if loans are paid back or defaulted on.

This is ebb and flow provides fodder for credit/money cycle theory--which is really a theory of business cycle boom/bust. The ramifications that this cycle has on stocks and bonds seems clear to me but misconstrued by other. But perhaps I am mistaken.

Here is my conceptualization and assessment of supporting empirical evidence:

Inflation phase (credit money expands). Stock prices go up as borrowers buy equities with some of their credit money. But bond prices also rise. While conventional wisdom posits that bonds fall during inflation, it does not jibe with theory or evidence. Large numbers of risk seekers, particularly banks, who obtain low cost funds from central banks, will use those borrowed funds to buy bonds that yield more than the cost of borrowing from banks (central or otherwise). As long as a positive spread is perceived, bonds are likely to be well bid as borrowers engage in classic carry trades.

This is precisely what we saw in the 1980-2000 period of massive credit money creation. The greatest bull market in the history of stocks. And the greatest bull market in the history of bonds.

Transition phase (credit money flatlines). When risk appetite starts to wane, it is first likely that those borrowers who purchased assets deemed as relatively risky (e.g., stocks, real estate) will first move down the risk spectrum into the perceived 'safety' of bonds. Borrowers will not close out their debt projects. Instead, they will initially seek to temper their risk profile. As such, stock prices will be under pressure during this period, while bond prices will continue marching higher.

This is what we have been seeing from 2000-present. Stocks have been sideways/lower. Houses are lower. Investment grade bonds (Treasuries, high grade corporates), have been well bid. In fact, long bonds recently touched all time highs.

Deflation phase (credit money declines). When risk appetite turns negative in earnest, carry traders will no longer pursue spreads of any size--spreads which btw have been narrowing as bonds were being bid higher during the previous transition phase. When deep risk aversion sets in, stocks and bonds will both be sold as investors shun all risk. Borrowers pay back or default on loans. Little new borrowing occurs. Money supply contracts in earnest.

While this has yet to occur in earnest in the US during the present cycle, it is happening in Europe. After decades-long inflation, European countries are drowning in debt, and credit markets are shutting down. Policymakers are trying to extend the transitionary phase that has been tracing out since 2008 or so, but interventions are providing temporary respites at best. Moreover, the marginal effectiveness of successive interventions appears to be decreasing.

For those countries at the leading edge of the tide (e.g., Greece, Ireland, Spain, Italy), we are seeing stocks and bonds both slaughtered. Credit money is contracting, and risk assets are getting sold.

From where I sit, the US is still in the transition phase. During this phase, bonds have been a good place to be. But, in my view, many pundits are confusing this transition phase with the deflation phase. They are advising positions in bonds as an antidote to deflation.

But deflation has yet to arrive (check out charts of total money/credit supply if you need proof). If/when deflation materializes in earnest, those who view bonds as a safe haven may be in for the surprise of their lives.

As I see it, the one 'out' that policymakers may elect to avoid outright deflation is to take the monetary system off a credit money basis and put it on a pure printed money basis. If policymakers indeed elect this approach, then they might circumvent the problems of risk aversion that impair credit creation during deflation. Essentially, this approach involves sending money directly to people in boxes--or in today's world, sending people checks.

Imagine those 'stimulus checks' done by recent administrations. These checks would be larger, of course, and more frequent.

I must say that I am factoring this 'nuclear option' increasingly into my probability spectrum. Should this occur, then we would be in the world of Zimbabwe, Argentina, and Weimar. It would also be the world of gold blasting off toward Pluto.

position in SPX, BOND, gold

Spanish Fly

When it gets too much
I need to feel your touch
I'm gonna run to you
--Bryan Adams

Right after US mkts closed last Friday, it was coincidentally announced that a $125 billion bailout was headed toward Spanish banks. Questions about where the bailout funds are coming from remain.

After this weekend, the race to the front of the EU breadline may have turned into an all out sprint.

position in SPX

No Capitulation

But when the wrong antidote
Is like a bulge on the throat
You run for cover in the heat
--The Fixx

Was thinking that we might see a capitulation low this past week but as this article notes, we didn't get it. The SPX rallied this week to recover last week's losses.

Was eyeing 1250 has a potential low followed by 1200. The Fibo 38% retracement lies at 1135.

As the author observes, central banks have been more prone to act when market action gets ugly and we haven't seen that yet.

As such, perhaps this week's upside action was natural action to relieve near term oversold pressure. With shorts blown out, there may be unfinished business on the downside.

Or maybe we've hit an intermediate low and we're into another uptrend.

Either way, shouldn't take long to find out which case is in play.

positions in SPX

Indivisible Freedom

"Knights, the gift of freedom is yours by right. But the home we seek is not in some distant land. It's in us, and in our actions on this day! If this be our destiny, then so be it. But let history remember, that as free men, we chose to make it so!"
--Arthur Castus (King Arthur)

Freedom is often broken into several categories--economic, civil. etc. Separating a whole into parts can be a useful method of study. However, the danger is that the mind begins viewing pieces as holistic entities themselves. If they are presumed to stand alone, then various freedoms, the mind may posit, can be prioritized as to their importance.

As a result, we hear some people say "I'm socially liberal but fiscally conservative." Partisan groups such as the American Civil Liberties Union or the Center for Economic Freedom advocate certain dimensions of freedom.

All too often, a consequence of this approach is loss of freedom. When fighting to keep more of one dimension of freedom, people think they must give up some other freedom. But no compromise is necessary, as liberty in its entirety is 100% inalienable by right.

People act to achieve ends. Human actors believe that those ends will help them flourish. Those ends may be material or non-material (e.g., spiritual) in nature. In the end, however, the nature of those ends does not matter. What matters is that people seek to improve on their current position through action.

The ability to pursue any action or end necessary to further self-interest, whether those interests are materialistic or idealistic, as long as they do not forcefully interfere in the interests of others, is what defines freedom.

Liberty has no partial derivative.

Deflationary Leveling

There's something happening here
What it is ain't exactly clear
--Buffalo Springfield

Toddo reflects on the spectre of deflation using excerpts from sone of his past seminal posts. Todd's posts are always insightful, but his thoughts on deflation (and those of Mr Practical) have been among the 'Ville's strongest contributions to the development of my personal thought process over the past few yrs.

One point excerpted from an early 2008 missive is that deflation is a leveling phenomenon. Deflationary declines in prices increase the purchasing power of those at the bottom of the economic pyramid while vaporizing wealth of those near the top (the rich are overweight financial securities that will get hammered in a broad deflation).

Perversely, broad swaths of the populous have been brainwashed into believing the opposite--that deflation is a bogey that must be avoided at all costs--even if it means borrowing and printing ever more money to do so. Yet, it is precisely this inflation that has been increasing the divide between rich and poor. The poor have trouble making ends meet because their dollars buy less. The rich get richer because money pumping jacks the value of their financial assets higher.

Capitalism is not increasing this divide. Forceful intervention that props up bad decisions at the expense of prudent ones is the culprit.
If people thought more clearly about what is going on here, then my sense is that we would welcome deflationary forces that want to bring the economic system into natural balance. We would be starting down the road to real recovery.

Rights vs Entitlements

We're not scared to lose it all
Security thown thru the wall
Future dreams we have to realize
--Howard Jones

Fine missive on the difference between rights and entitlements. Rights as treated in the Declaration and Constitution referred to the natural freedom to pursue one's interests without interference by others. Such rights do not guarantee that those interests will be achieved. In a free society, there is no guarantee that effort will be met with success.

Today, many claims of rights are really demands for guarantees. Woman's rights, minority rights, collective bargaining rights et al seek are initiatives of special interest groups (SIGs) to get something for nothing. SIGs recruit government, whose only competence is force, to interfere with the pursuits of others in order to better satisfy SIG interests.

SIGs argue that they are entitled to these priviledges. Such entitlements reduce freedom because fulfilling entitlements cannot be achieved without forceful interference into the liberties of others.

It should also be noted that interfering with the productive efforts of some and transferring resources from the productive to the unproductive reduces the incentive to produce. When less is produced, there is less to seize and redistribute. At some point, the State can no longer make good on entitlements.

This, of course, describes our current situation well. Europe has the lead, but we are not far behind.

Johnny John

Things could be different but
That'd be a shame 'cause
I'm the one who could feel the sun
Right in the pouring rain
--Lou Gramm

Interesting that Marc Faber brings up Johnson & Johnson (JNJ) in this interview as an investment likely to outperforrm many others (such as bonds) over the next 10 yrs. As he notes, this stock is not immune from price declines, but it's low beta and high yield make it an interesting prospective investment in the present environment.

Continue to like JNJ--prolly my favorite long term investment name. Wondering whether that 38% Fibo retracement level at $57-58 may not be in the cards. If so, then I hope to 'be there.'

position in JNJ

Spread is the Word

I thought it was clear the plan was we would share
This feeling just between ourselves
But then the music changed
The plan was rearranged
He went to dance with someone else
--Shannon

Interesting dynamic setting up based on the 'risk off' flight to quality taking place in government bonds. Central bank interest rates near zero have attracted scores of carry traders. Carry traders borrow cheap funds from central banks and invest these levered funds in securities thought to return more than the cost of 'carry.' That cost of carry is currently viewed as next to nothing.

When times are stable this is like free money to those who can get their hands on Fed funds. But times aren't always stable.

Assume for a moment that carry traders invest the bulk of their borrowed funds in sovereigin bonds. Carry traders with average risk profiles are likely to spread their buying around--purchasing some some riskier paper (e.g., Greece) as well as 'risk-free' paper (e.g., US, Germany). The riskier paper earns a wider spread which means that it juices profits.

However, if/when turmoil hits riskier sovereigns, carry traders (except for Mr Corzine's shop) quickly dump the Greek paper and pour into UST's and German bunds in size. Lower spread, yes, but less risk of a negative cost of carry on borrowed funds.

All good, except that flight to quality in the extreme such as what we're seeing now begins to compress spread on even the safest of bonds to such narrow ranges that unexpected changes on either end of the trade (i.e., lower prices of bonds; higher borrowing costs) would tank this trade.

I can't help but wonder when the current move into USTs and bunds winds this trade so tight that any disturbance throws the bond market into turmoil.

Also, is it not obvious that FOMC efforts to signal that short rates will be ultra low for years is meant to appease carry traders--to instill confidence that the Fed will not pull the rug out from underneath this group? "You just keep on borrowing and buying, boyz, we've got your back..."

Without that assurance, debt markets would likely already be in chaos.

position in BOND

It's the Stock Market, Stupid

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

The previous post noted the correlation between stock prices and poll numbers. Below we show the SPX and Intrade's Obama wins in 2012 contract.

After watching polls decline commensurate with stocks, this administration has to be terrified of a big, prolonged sell off here.

As Bush demonstrated in 2008, if all the king's horses can't prop stocks above a failing economy, then the Oval becomes a goose egg.

position in SPX

Deflation Cometh?

They say the sea turns so dark that
You know it's time, you see the sign
They say the point demons guard is
An ocean grave for all the brave
--Kansas

Read several 'newsletter' type missives this weekend from John Mauldin, Richard Russell, and David Rosenberg. A common theme thruout: prepare for deflation.

The rhetorical question over the past few years has involved the macro sequence. Will we see deflation before Big Inflation. Or will the printing-presses-gone-wild precede a deflationary bust?

This is not just an academic question. Effectively managing wealth through extreme inflationary conditions (e.g., cash is trash) requires radically different actions than those required to cope with extreme deflation (e.g., cash is king). People seeking to preserve, much less increase, wealth during either extreme will be further ahead if they tilt their investments in the correct direction.

This blog has dedicated many posts to this subject. For a long time, I have favored the 'deflation first' camp. The 2008 credit crisis was largely a deflationary event, thus lending some validation to this view.

Moreover, deflation has lingered in the background despite massive monetary and fiscal stimulus over the past few years. Prices in many categories have not budged much. And people are saving more and hoarding cash despite negative real rates.

The corresponding thesis is that we've been on an artificially induced borrowing orgy for decades. At some point the system can't/won't take on any more leverage, and market forces commence cleansing the system of projects that should never have been taken on and will never see the light of day.

The newsletter trio above thinks that we may be at or near the deflationary point of no return.

Oddly, I'm no longer so sure. The gargantuan interventions that we've seen from policymakers suggest that no intervention will be considered too extreme if conditions get dire enough. Paraphrasing Jim Rogers, policymakers are likely to keep printing money until they run out of trees.

What Jim should have added is that, in the digital age, the supply of electronic trees is infinite.

Further, policymakers have observed that markets respond, at least in the near term, to interventionary actions if bold enough. It is also an election year, and this administration surely sees the correlation between stock prices and the polls.

I am thus inclined at this point to put significant weight behind a scenario that has policymakers trying to move heaven and earth this summer in response to the EU situation and to weakening global economies. Perhaps this is what gold was sniffing out after last Fri's weak job print.

Regardless of the scenario favored, it is foolish to bet exclusively on one scenario. From where I sit, the system could surely break toward either extreme. Currently, I'm assigning probabilities as follows:

Big Inflation   60%
'normal'  10%
deflation   30%

Note that the middle-of-the-road scenario, one that by definition should typically get the largest weighting, is not very likely from where I sit. This is how binary the system has become.

I've been positioning accordingly--meaning that I've been moving some assets out of the deflation bucket (e.g., cash) and into the Big Inflation bucket (e.g., stocks and commodities). Nothing too radical, but enough to rebalance my positions to more accurately express my views.

Like the fluidity of our predicament, my views are constantly evolving as reality unfolds in uncharted waters.

position in SPX, gold, commodities

Charter Flight

You said it can't work, it's a cold world
When you keep it all to yourself
I said you can't hide on the inside
All the pain you've ever felt
--Pat Benatar

This weekend, multitudes of technicians will be scouring charts for hints of what comes next after last week's soft action. Most will focus on daily charts to get a sense of where we're headed.

While that certainly has merit, elongating the time horizon might also suggest some possibilities into what the next few weeks/months might bring.

Below is a weekly chart of the SPX that includes the spring 2009 lows. We can see that last week's move lower finds the index cutting thru its 50 week moving average. The SPX closed at 1278, and the 50 wk MA is now above at 1283.

A range of support rests below. 1250 is about where the uptrend line off the 2009 line lows is currently positioned. Seems to me that a series of 'weak' support lines can be drawn at about 1250, 1200, and about 1135ish--the frame of reference for these primarily being last year's late summer/fall selling escapade.

A Fibonacci framework further emphasizes the importance of the 1135 level. It constitutes not only the closing lows during last year's sell-off, but also a near perfect 38% retracement of the range marked by the spring 2009 lows and the spring 2012 highs.

If we can't hold the 1250 zone over the next week or so, then I wonder if a date with that 1135 Fibo level may be in the cards this summer...

position in SPX

Ruled Out

Weldon: Remember, when you hear the buzzer, there's only one rule.
Crowd: There are no rules!
--Best of the Best 2

Agree w Zerohedge that this is one of the better exchanges among CNBC pundits seen in a while. Santelli proposes that lack or rules, punctuated by govt tendency to alter rules during rough periods, is hurting economic and financial decision-making.

Kaminsky adds that the current interest rate 'rules'--the ZIRP--are clearly not working. Temporary juice to stock markets, but as little long term benefit for the economy (as job, PMI numbers continue to indicate). He wonders why policymakers don't admit the obvious. Me2.

He also notes the necessity of deleveraging. Debt needs to be worked off before markets clear and repair.

Better to bet that policymakers will try to squeeze the rules in the opposite direction: more debt and leverage.

Stress Test

Can't ever keep from falling apart
At the seams
Can I believe you're taking my heart
To pieces
--Duran Duran

Big miss on the jobs number this am coupled w the perpetual flame of Europe has markets running for cover. Flight to safety continues, with 10 yr yields now below 1.5%.

This is not deleveraging. It is the precedent to deleveraging.

In the other corner is gold, which took off like a scalded yellow dog this am after the jobs print and scampered $50 higher.

Defcon levels are rising...

position in BOND, gold, SPX