Friday, August 31, 2012

Positive Thinking and Economic Recovery

It's time for the good times
Forget about the bad times

Many pundits have proposed that what we need to break out of this economic funk is optimism. If more people would just view our situation favorably, then we would get the economic activity necessary to lift things.

A positive view is certainly a good thing. But optimism must go hand-in-hand with capability. An athlete who 'thinks positive' but does not develop winning habits and skills is unlikely to succeed.

Durable economic growth comes from improved productivity. Improved productivity comes from investment. Investment comes from capital formation. Capital formation comes from savings. Savings comes from putting aside a portion of income rather than consuming it.

We suffer from a death of savings. In fact, we are consuming more than our current incomes permit (read: we are borrowing resources from others to increase our standard of living today). Because our consumption exceeds income, then we have no savings in the aggregate at the country level.

Isolated pockets of real savings that do exist (mostly in the hands of wealthy individuals) are being forcefully sought by others to accomodate current standard of living in the face of declining capacity to borrow.

Thus, instead of capital formation, our current situation is one of capital consumption. Capital consumption is a death knell to economic recovery. Durable recovery is unlikely until debt is paid down and savings are increased.

No amount of 'positive thinking' will change that economic reality.

Thursday, August 30, 2012

Golden Promise

Never had a doubt in the beginning
Never a doubt
--Naked Eyes

Peter Schiff discusses the gold standard in light of the Republican Party's plank to give the standard another look. Of course, this plank may be a mere jesture to Tea Party types who the Republicans desperately need in order to win the upcoming presidential election. It can also be interpreted as part of the legacy of Ron Paul.

In any event, it is good that this idea is on the table. Schiff reviews the gold standard's removal in the 20th century and the subsequent consequences. The gold standard instills discipline on government, prohibiting politicians from overstepping limited government bounds. All things forecast from the gold standard's removal, which was completed with Nixon's actions in 1971, have come to pass. Exploding deficits, massive borrowing, gigantic money printing, and general standard of living that is stagnant/declining.

Given our current monetary and fiscal positions, arguments claiming that a return to the gold standard would constitute a 'step backward' seem downright laughable. The gold standard is the friend of liberty. It is the enemy of big government and forceful aggression.

Serious public debate about the merits of the gold standard would likely open a lot of eyes. Whether they realize it or not, Republicans have now become accountable for making this happen.

position in gold

Wednesday, August 29, 2012

Ideas Over Persona

"I'll make public opinion out there within five hours. I'll blacken this punk so that he'll - You leave public opinion to me."
--James Taylor (Mr Smith Goes to Washington)

Political rhetoric often takes the form of attacking people rather than debating ideas. This is especially true when the other side's ideas are better than yours. Making it personal creates a distraction, and many people fall for it.

It hasn't always been this way.

After the Constitution was drafted and sent to the states for ratification, the debate focused on ideas. The primary issue was the proper scope of central government and its relationship to freedom. The Federalists preferred the scope expressed by the Constitution. The Anti-Federalists thought that the scope expressed by the Constitution threatened liberty.

The two sides engaged in idealogical debate. The debates were primarily local, taking place in town halls and taverns across the states. Hundreds of essays written by proponents of each side fueled the debate. The Federalist views were more organized. Many were famously bound into The Federalist Papers authored by Madison, Hamilton, and Jay.

The Anti-Federalist views were less centralized but widely circulated nonetheless. (Scholars have since aggregated many of these into Anti-Federalist collections.)

An interesting characteristic of these papers is that they were written anonymously and signed in pseudonym. Writers assumed various pen names, some from classical antiquity such as Publius and Brutus, others from patriotic symbols such as Federal Farmer and Sentinel.

Anonymity helped focus the debate on ideas rather than the person. After an idea was published, follow-on or counter pieces remained on issues rather than detouring into personality.

The result is perhaps the finest discourse on the size and scope of government in relationship to freedom that this country (and the world) has ever seen.

It seems to me that the core issues debated by the Federalists and Anti-Federalists are once again before us. What is the proper size and scope of central government? Is liberty truly an inalienable right, or is individual freedom merely an outdated fad of a past time that is inappropriate for the modern world?

Staying focused on the core ideas, rather than straying into attacks on the person, would be a much more productive endeavor for the future of this country.

Tuesday, August 28, 2012

Rhetorical Contempt for Gold

Hold tight, wait till the party's over
Hold tight, we're in for nasty weather
--Talking Heads

Nice article that includes discussion of the Left's 'rhetorical contempt' for the gold standard. The argument that declining prices, as facilitated by a gold standard, are 'bad' is perhaps the most laughable. The author also focuses on the argument for the autonomy of central banks, rather than people voting thru their own actions--i.e., converting to gold when they do not trust monetary policy.

The gold standard imposes discipline on the State. The State of course does not want this, and tries to convince the public that such discipline would be bad for them.

What I find most ironic is that the Keynesian argument persists despite exploding debts, rocketing money supplies, and eroding standards of living that have occured during increasingly Keynesian regimes.

Arguments the favor of the State and monetary debasement as the way to wealth never cease to amaze.

Sunday, August 26, 2012

Monetary Illusion

We always wish for money
We always wish for fame
We think we have the answers
Some things ain't ever gonna change
--John Waite

Prior to the advent of money, people traded a portion of their production (i.e., income) to further their standards of living. Someone who chopped wood for living, for instance, might trade some wood for bread produced by the baker. The exchange rate (i.e., price) might have been 20 loaves of bread per half cord of wood.

Money simplified these transactions. Instead of tracking hundreds of product-for-product exchange rates, people could track product-for-dollar (or any paper currency) exchange rates. The price of that half cord of wood and 20 loaves of bread may have been $40. Fungibility was also improved, as it became easier to price potential trades that had previously been difficult to estimate.

Over the years, one drawback of pricing goods in dollars has been that people forget that the key to general standard of living is not the quantity of money in circulation. Instead, wealth is grounded in production--production of goods deemed valuable to consumers. The greater the production of goods deemed valuable to consumers in advancing their interests, the greater the general standard of living.

Measuring the value of production in terms of money obscures this reality. Economic activity or wealth gauged in dollar terms can be misleading because it is possible to change the amount of dollars in circulation. If/when the number of dollars is changed, then it is likely that some degree of mispricing will follow--until people can accurately determine how many dollars are representing production. This determination may require significant time and may be difficult if the quantity of dollars is frequently changing.

Moreover, those who happen to get control of newly printed money have an advantage since early users can purchase more goods per dollar before people are able to accurately adjust prices to account for the increased money supply. This phenomenon might be labelled first user advantage.

In a situation like the present one where the quantity of dollars is steadily rising, it is likely that many people think that they are better off than they really are. They are assessing economic position in terms of proliferating paper dollars rather than in tangible resources. Plus, some of their economic position is being lost to the first users of those dollars who take possession of scarce resources at low prices.

People would do well to remember that general standard of living ultimately depends on production of resources deemed valuable to consumers, not on monetary manipulation.

Saturday, August 25, 2012

Bank Runs During Inflation

"How come the bad guys always have the good cars?"
--Ray Hughes (Running Scared)

Bank runs are often associated with deflation. Using the Depressionary Bailey Building & Loan vision, people rush to withdraw bank deposits when confidence is lost in bank solvency. Solvency is typically questioned when it is suspected that bank investments and loans have gone bad (read: decline in price), thereby limiting the ability to make depositors whole. The greater the price decline, the smaller the price decline necessary to wipe out bank equity.

However, banks runs can also occur during inflationary periods. Here, the primary concern is not bank solvency. Rather, depositors are worried about the value of their cash on deposit. If prices rise steeply, people will begin to withdraw their deposits and convert their paper currency into tangible goods and hard assets.

Initially I was thinking that people withdrawing cash in size from banks during inflation would reinforce a vicious inflation cycle. But would it? As folks withdraw cash, banks would seemingly have to sell assets to maintain their reserve ratios. This would put downward pressure on prices--at least the price of financial assets.

The issue seems to be the fractional reserve characteristic of modern financial systems. Its design is inflationary. Depositors pulling money from banks, whether it be for inflationary or deflationary concerns, ultimately seems deflationary.

Friday, August 24, 2012

Rape and Abortion

Maybe we'll be all right
It's a sacrifice

The central issue in the Judge's article here is whether rape is a valid justification for abortion. The Judge argues that it is not.

I certainly agree that the ruling of Roe v Wade was wrong. Similar to the Dred Scott case which ruled that the rights of blacks were not protected by the Constitutional, Roe v Wade declared that the rights of fetuses in the womb are not worthy of Constitutional protection either.

As such, millions of people have been slaughtered via abortion.

The Judge argues that even when conception results from the heinous crime of rape, the rights of the fetus merit equal protection under the law. I understand his point. The baby committed no crime. Why should it be killed because of someone else's crime?

However, pregnancy is not a risk-free endeavor. Among those risks is the possibility of death from childbirth. When a man and woman voluntarily engage in sexual intercourse, the woman chooses to assume those risks should she become pregnant. Except for extreme cases, such as when an unforeseen complication threatens the life of the mother (requiring the terrible choice of saving one life at the expense of the other), the fetus's rights should be protected.

But in the case of rape, the woman does not freely make that choice. Instead, the risks associated with pregnancy have been forced on her. A woman placed in this situation has the right to choose whether to assume those risks or to abort them. The fetus's rights cannot supercede the mother's when the fetus is conceived involuntarily.

As such, I believe that the Judge is wrong in this case.

Thursday, August 23, 2012

Silver Separation

Passengers in time
Lost in motion, locked together
Day and night by trick of light
I mus take another journey
We must meet with other names
--The Fixx

With the metals gapping higher again today, decided to take sell a trading position in SLV taken months back.

Metals seem to be sniffing new rounds of money printing, and this may be only the start of the move.

However, prudence suggests that gappy moves like this coupled with toppy oscillators and a move to the 200 day MA 9 (see graph) are where trades should leave the ride. Besides, still holding some GDX for a trade (trigger finger getting itchy here too) along with some CEF as a core (read: not tradeable) position.

position in GDX, CEF

Newsflow Indicators

You don't have to shout or leap about
You can even play them easy
--Ringo Starr

Hadn't seen these 'newsflow' indicators before. Suggestion is that they tend to be leading indicators (~ 3 months), ahead of such measures as production and other economic strength metrics.

Somewhat counter intuitive in that we often speak of media headlines as being contrarian indicators of general sentiment (e.g., cover story indicators). We don't know the method used for these newsflow indicators, however. If it employs some sort of content analysis over many daily articles, then there may be some merit.

The data suggest that an 'economic rough patch' (thx Elmer) lurks ahead.

Another data point...

Wednesday, August 22, 2012

Gold's Big Picture

"Nothing wrong with that one right there."
--Dave Patterson (The Rookie)

Usually markets that are up 400-500% catch the public eye. Not so with gold. Although the yellow metal is up over 4x since 2000, there continues to be no shortage of detractors. Classic example from liberal media here.

The current argument is that gold is down this year despite all of the fear and money printing. So gold must not be such a safe haven after all...

Elongating the time horizon tells a different story. That's one pretty chart. Prices over the last year can be seen as consolidating in declining pennant fashion. Healthy behavior.

Textbook technical analysis suggests that pennant will likely resolve in direction of prevailing trend.


position in gold

Tuesday, August 21, 2012

Convertibility Risk Rationale

The deception 
With tact
Just what are you trying to say?
--The Fixx

It appears that the growing argument for ECB buying of sovereign debt is to stave off 'convertibility risk' of the euro. This, of course, is nothing more than a rationalization for monetizing debt.

Gold jumped to 3 month highs today on the news.

position in gold

Compassionate Evil

"There will be a day when you will wish that you had done a little evil to do a greater good."
--Sybilla (Kingdom of Heaven)

It is difficult not to wonder whether proponents of government programs truly understand that they vote to employ strong armed agents that force some to give up property (broadly construed to include life, wherewithal to produce, and property) for the benefit of others.

Yes, I understand the power behind the something-for-nothing temptation and the rationalization it drives. But do people seriously believe they are showing 'compassion' when they force others to comply with their wishes at the point of a gun?

Monday, August 20, 2012

Bagging SWAG

Keith Frazier: Let's just try to keep everybody calm, okay?
Dalton Russell: Don't I sound calm to you?
Keith Frazier: Yeah, you do.
--Inside Man

This article makes the case for SWAG (silver, wine, art, gold) as a hedge against building inflation pressure. Wine's not my bag, but the others certainly make sense. Suggestion here is for 20% of assets in SWAG.

Although the argument 'for' gold et al has been getting more airplay, the number of people who have actually acted on the idea of swapping cash for tangible assets remains very small. Somewhat surprising given golds 4x increase in a decade.

High end SWAG markets, like truly rare paintings and old coins, have been on fire as 'smart money' converts cash into classic rarities.

position in gold, silver

Sunday, August 19, 2012

Cash Conundrum

You're devastating in the dark
You could be tearing me apart
But you still feel the same
Lost like tears in the rain
--Ric Ocasek

"How much cash should I hold?" This is among the difficult decisions facing investors (broadly defined to mean any individual with residual income after consumption) at our present juncture.

The 'easy' part of the answer is to set aside at least enough cash to handle 6-12 months of living expenses. Once this 'emergency fund' is taken care of, use further cash residuals to pay down debt--first credit cards, then car loans, and perhaps even extra on monthly mortgage payments if applicable.

If you are fortunate enough to have checked off these items and still have spare cash to work with, then you might consider adding more to retirement accounts although, personally, beyond making sure one contributes enough pretax income to meet an employer's match, I'm chilly to channeling lots of present day capital into tax deferred retirement instruments (rationale here).

Beyond the IRA route, investors with left over income face two general choices: a) invest in 'taxable' asset classes like equities, bonds, real estate, commodities, collectables, etc, or b) build additional cash (or cash near-equivalents such as CDs or T-bills).

Few financial professionals advise the cash route. They argue for asset classes like stocks and bonds because of belief that these asset classes will outperform cash over time--due to either compelling valuation or because inflation gnaws at the value of cash. The first argument, that stocks and bonds possess compelling valuations here, finds little sympathy with me. From where I sit, stock and bond values are closer to (or at) historic highs.

I am sympathetic to the inflation argument, however. It is easy to build the case that, on top of the $trillions already created out of thin air, governments worldwide have little choice but to try to print their way out of massive debt. Huge increases in the supply of paper currencies will destroy the value of paper money relative to the value of things. Think Weimar, or Argentina, or Brazil. Hard assets in particular, such as gold, seem advisable under these circumstances.

The counter argument is that there is not that much 'free' cash, i.e., true savings, on hand. The world is highly leveraged, meaning that most money that has been 'printed' is linked to a liability somewhere. If people become risk averse and no longer want to live with their debts, then the 'cash' on hand will evaporate as people use it to close out debt projects or address margin calls.

Indeed, a good argument can be made that we have been inflating for decades, and that people have been intelligently shedding cash in favor of debt that gets paid back with currency less valuable than when the debt was taken on. Stated differently, a debt super-cycle IS an inflation super-cycle.

If that super-cycle is coming to an end, then, by definition, it should be replaced by a deflationary phase.

The problem is this. If one accepts the thesis that we've been inflating for years and debt has reached extremes that make it difficult to add more debt, then one still has to explain how deflation occurs when governments around the world still control the monetary printing press. Won't governments just keep printing to keep the system from collapsing into the deflationary abyss?

The answer to that question is the ultimate answer to the question of how much cash to keep on hand. There is a compelling case for a veritable paper blizzard ahead. But the contrarian in me suggests that cash in its true 'saved' form is already scarce and thus should be valuable in the future.

position in SPX, gold

Saturday, August 18, 2012

Lending Others' Property

Everybody plays the fool sometimes
There's no exception to the rule
--Aaron Neville

When individuals do not consume all of their income, they can lend out some of their savings to others. The borrower then repays those resources, usually with interest, in the future.

In a fractional reserve, fiat money system where credit is created out of nowhere, banks do not primarily lend savings--since they lend out far more than they collect in deposits. Yet, borrowers take control of economic resources.

Is this magic? Where do those economic resources come from if they don't come from depositor savings?

They come from you and I.

Banks lend our resources without our consent. Borrowers pay banks for do doing so. If borrowers don't pay back the loans, then it is you and I, not the banks, that are the primary loss takers.

Friday, August 17, 2012

Hot Potato

Like sitting on pins and needles
Things fall apart
It's scientific
--Talking Heads

While it is well known that today's investor has a shorter time horizon, the below graph (source here) provides perspective on just how much average time horizon has changed.

Fifty years ago, average holding period of stocks was 5+ years. Average holding period has been declining since the late 1970s. Now, stocks are held less than a year on average.

Note that during the 1920s, average stock holding period was also low.

What might the 1920s and the last 20+ yrs have in common?

position in SPX

Thursday, August 16, 2012

Two Dimensional Politics

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

As election banter heats up between 'liberals' and 'conservatives,' I am reminded of the imprecision in viewing the political spectrum in one dimension--i.e., liberals on the 'left' and conservatives on the 'right.'

If all political systems were grounded in big government, then a uni-dimensional scale might be appropriate. After all, ideologues on both left and right desire large powerful governments although perhaps for different reasons (although I am not convinced that their motives essentially differ).

As we've proposed before, the universe of possible political stances seems more appropriately sketched in two dimensions. One dimension is scope of government. By nearly all empirical measures (e.g., federal government spending), today's liberals and conservatives prefer a large government scope with little observable difference between the two political stances.

The other dimension is sovereignty of the individual. Here, conservatives may believe a bit more in individual sovereignty (although much of this belief seems confined to talk rather than action). But because both groups believe in big government solutions, even if the two ideologies  differ slightly on the individual sovereignty scale, today's liberals and conservatives are relatively close in two dimensional political space.

The two dimensional model of the political landscape also helps us locate the political philosphy now doing battle with today's liberal and conservative mainstream. This philosophy resides at the nexus of belief in small government scope and high individual sovereignty. This political philosophy is today referred to as 'libertarianism.' In the days of the country's founding, someone sympathetic to this philosophy was called a 'liberal' (this is before the term was hijacked by the modern left).

The libertarian ideology of small government scope and high individuals sovereignty is grounded in natural law. It is the philosophy elaborated by Aquinas, Locke, Sidney, Trenchard, Gordon, et al, adopted by Jefferson and the framers, and captured today by the Tea Party movement.

On a two dimensional scale, libertarianism is appropriately portrayed as distant from today's liberal and conservative philosophies. A nice example is how a libertarian like Ron Paul is treated in mainstream political circles--i.e., like an alien or quack.

As in the days of the country's founding, libertarianism constitutes the radical political position.

Wednesday, August 15, 2012

Administering a Hand

"They want what every first-term administration wants: a second term."
--Robert Ritter (Clear and Present Danger)

Some believe that stock markets are betting on a Romney victory and that an Obama victory would spell trouble for the markets. This seems unlikely.

During its first four years, the Obama administration has been busy pumping cheap credit, bailing out poor economic decisions, and raising entry barriers to new competitiors--all things favorable for encumbent profits. Whenever it appears that the nascent recovery (now four years 'nascent') and markets are rolling over, policymakers add even more stimulus.

The above picture shows that markets understand a Helping Hand when they see one.

Moreover, there is little evidence to suggest that the Romney/Ryan ticket is more credible/motivated than the current administration in reversing economic deline and fiscal collapse.

As we have noted before, this administration knows that it needs markets higher. And markets know that the administration knows it.

position in SPX

Tuesday, August 14, 2012

Vol Fall

Am I right side up or upside down?
Is this real, or am I dreaming?
--Dave Matthews Band

After Monday 7% crush lower, US equity volatility indexes are touching lows last seen in 2007.

While not timing devices, low implied vols reflect complacency among market participants. Investors are seeing less need to pay up for downside protection.

Expectations of another fix of stimulus seem quite high. Moral hazard...

position in SPX

Monday, August 13, 2012


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

Comments are getting louder that things are becoming more 'polarized.' Many such comments are aimed at Washington, where it seems increasingly difficult for politicians from across the aisle to work together, to reach agreement, to compromise.

I'm pretty sure that Mises would say that this is to be expected. He would say that the polarization of society could have been forecast one hundred years ago, when the world seriously began marching down the path to socialism.

Socialism puts control of economic resources in government hands. Governments around the world have been busy redistributing economic resources from present production as well as borrowing resources from future production to deliver even more political favor to special interest groups.

The resulting debt is becoming insurmountable, meaning that it is becoming increasingly difficult to preserve standard of living while paying off lenders of real economic resources. Governments have therefore resorted to printing money and buying their own debt. Like all Ponzi schemes, 'monetizing debt' creates no new economic resources. Instead, it literally papers over the problem, creating temporary illusion that things are better than they are.

The bottom line is that present-day economic resources available for socialistic redistribution are running thin. Standard of living is rolling over.

Unfortunately, billions of people have become dependent on the government handouts that are drying up. These dependents are willing to vote for government officials willing to forcefully take ever more wealth from others in order to deliver resources that the dependents think they are entitled to.

Those still in possession of economic wealth therefore face more frequent shakedowns from strong armed government agents. Consistent with Rand's Atlas Shrugged phrophesy, this is driving many producers to leave the system. Continuation of this phenomenon assures that productivity will decline.

The polarization that we are witnessing reflects an escalating battle over economic resources--resoures that are becoming increasingly scarce. Socialism has been destroying the voluntary cooperation between individuals upon which free societies and productivity depend. That cooperation is being replaced by unproductive opposition that is becoming increasingly forceful.

Polarization of society is wholly consistent with the endpoint of socialism proposed by Mises: chaos.  

Sunday, August 12, 2012

Specialization and Free Markets

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

Specialization, or focusing production on a narrow set of outputs, is often proposed to flourish in free market environments. Specialization involves repetitive work; this repetition enables learning-by-doing improves productivity over time. The result is typically the high volume/low variety model of mass production. And there are few symbols more associated with free markets than the mass producing operation.

High levels of commitment to particular technologies are required to enact specialized production strategies. Because repetitive work can often be automated, specialized production processes usually carry high amounts of capital equipment designed for narrow use. Moreover, repetition is habit forming, and habits are hard to break. As such, significant capital commitments tend to lock producers into their strategies, and inertia makes their repetitive habits difficult to revise if environments change.

Problematically, environments are constantly changing in free markets. Competition drives innovation that, as Schumpeter famously observed, destroys existing production structure as it creates new production structure. This dynamic is likely to wreak havoc on specialized producers locked into narrow production technologies and rigid in their ways. High degrees of specialization in free market environments seem a risky proposition.

Perhaps high degrees of specialization are a better fit with environments that are stable and predictable. Stability and predictability are common objectives of interventions that characterize hampered markets. The Federal Reserve, for instance, intervenes in markets in the name of 'price stability.'

One would think that specialized producers would in fact encourage interventions that institutionalize stability. Indeed, we see 'big business' (i.e., specialized high volume producers) partnering with government to 'stabilize' markets. (too big to fail, anyone?)

One would also think that markets perceived as stable would attract specialized operators in droves. Indeed, we see 'big businesses' engaging in epic levels of outsourcing peripheral operations in order to focus more on their 'core' specialties.

The 'common wisdom' proposition is this: The less hampered the market environment, the higher the degree of specialization.

Here, we're exploring the plausibility of a rival proposition: The more hampered the market environment, the higher the degree of specialization.

More exploring to follow...

Saturday, August 11, 2012

Generalization vs Specialization

"What I do have are a very particular set of skills, skill acquired over a very long career."
--Bryan Mills (Taken)

From an economic standpoint, the natural state of the world is scarcity. This scarce state is reduced through production. Production combines labor, materials, and technology into outputs that can be consumed.

Two general strategies are available to producers. One strategy is to generalize. People who are 'jacks of all trades' are generalists, meaning that they produce many different things. If someone is isolated from others (e.g., the Robinson Crusoe scenario), then that person has no choice but to diversify production. If the isolationist does not produce a variety of outputs such as shelter, food, drink, and clothing, then this individual is unlikely to survive much less thrive.

Achieving a state of self-sufficiency could be desirable when markets are uncertain or underdeveloped. But self-sufficiency has its costs as well. Because they frequently shift between products, generalist producers lack the learning-by-doing repetition that permits mastery. Standard of living may therefore suffer.

The second general strategy available to producers is specialization. Specialists focus their productive efforts on limited types of output. Focusing production enables the learning-by-doing that improves productivity (i.e., more output per unit of input) over time.

Specialization is of little use in isolationist situations since, by definition, the specialist cannot produce the variety of output necessary to satisfy even basic existence.

However, when it is possible to trade with others, the specialization strategy becomes particularly interesting. Multitudes of people can focus their efforts on narrow product lines and achieve high levels of productivity through specialization. If these individuals can subsequently exchange their specialized output with the specialized output of others, then standard of living is likely to rise for all.

This, of course, is the essence of trade theory. People are better off when they employ specialization production strategies, and then trade their output on the market.

But trade theory has its problems. One common assumption is that markets are unhampered. Producers are free to choose their production strategies, and buyers and sellers are free to engage in totally voluntary exchange. But we know that modern markets are not free; they are hampered to some degree. They are subject to government interventions that restrict volunatary production and exchange. These interventions distort decision-making among both producers and consumers.

Even if markets were in fact unhampered, then trade theory seemingly still has problems. Free markets are processes of creative destruction, where competition among producers drives innovation that renders current methods and outputs obsolete. The more dynamic the market, the less likely a specialization seems likely persist.

Here is what I'm wondering. Does trade theory have it backwards? Is it truly a good idea to pursue specialization production strategies in free, unhampered market contexts? Don't free market dynamics penalize specialization in the long run and reward at least some degree of generalization that permits adaptability?

In fact, is there not an argument to be made that hampered environments are actually better fits with specialization--at least in the short run? After all, hampered environment reduce competition and impair innovation, thus slowing down the 'creative destruction' engine that puts specialization at risk. Managers may be more likely to want to specialize when there is less perceived risks to specially configured operations. When market rules are being 'fixed' by government, then specialization may abound.

Many other important issues seem to trail this line of thought. For example, in addition to gains in standard of living from specialization, there are likely some losses due to 'creative destruction.' How the gains and losses net out over time seems an interesting issue. Moreover, in hampered market environments, producers might over-specialize if they are lulled into a false sense of security by regulatory regimes. The spectacular rise in outsourcing, an expression of specialization, in the midst of ever-increasing government intervention of the past few decades, might be indicative of this. The false sense of security comes from incorrectly relating near term stability that might accompany a set of government intervention with long term instability that comes from pent of market forces 'letting go.'

The other implication of this thoughtstream is that there may be more merit to generalization than meets the eye...

More in future posts.

Brain Dead

"All right. If you're not here, speak up."
--Alex Jurel (Teachers)

There are few better examples of the waste inherent in socialism than federal government involvement in education. Since the Department of Education was 'upgraded' to cabinet-level status in the 1950s, public school costs have gone up and quality has gone down.

Not sure there many things more predictable than dismal performance of State run schools.

Moreover, and just as predictably, US public schools have become a cesspool for special interests and government sponsored jobs. Since 1970, US public school employment has risen nearly 100% while enrollment has increased less than 10%.

Constitutionally, of course, there is no enumerated power over education granted to the federal government...

If/when we get serious about de-socializing government and eliminating bloat, federal government involvement in education is low hanging fruit.

Friday, August 10, 2012

Capitalism is Not Pro-Business

Always searching for the real thing
Living like it's far away
Just leave all the madness in yesterday
You're holding the key when you believe it
--Michael McDonald

Nice video on whether capitalism is 'pro-business.' In unhampered markets void of force and fraud, producers are free to produce what they want and charge what they want. However, they must please consumers. Producers that do so are likely to make a profit.

Not only do they provide incentive, but profits also signal value, and encourage producers to improve quality and reduce prices to the market.

Producers unable to turn a profit are by definition destroying value (output value < input value), an undesirable thing in a world of scarcity. Unprofitable firms cannot persist in unhampered markets. Instead, unprofitable firms must cede productive resources to operators who may do better.

This is all good for society. Consumers get more of what they want and producers are rewarded for doing so. Those rewards motivate productivity improvements so that more abundance is produced in the future. Moreover, incompetent producers cannot waste scarce resources for prolonged periods, which further improves standard of living prospects.

But today's markets are far from the unhampered ideal. Whether they are labeled hampered, mixed, managed, controlled, etc, today's markets are subject to forceful interference by government. Bailouts, subsidies, and regulations are some of the forms that such government interference take.

Ironcially, while they are often done in the name of the consumer, government interventions are prone to do just the opposite. Competition goes down and inefficiency is institutionalized among producers. Special interests, such as certain big businesses or union groups, benefit from government intervention at the expense of others.

The presenter in the video offers the example of Wal-Mart (WMT), a company that came out in favor of higher minimum wages a few years ago. While nicking WMT, higher minimum wages hammer cost structure of small competitors in a disproportionate fashion. Minimum wage laws put mom-and-pop shops at a competitive disadvantage. Moreover, wage laws raise entry barriers to entrepreneurs thinking about getting into the sector. Consumer welfare suffers.

Big business backing of Social Security in the 1930s provides another example of the phenomenon.

Supporters of capitalism are not pro-business, particularly big business. Supporters of capitalism are are pro-people--i.e., people voluntarily engaging in production and trade without force or fraud.

no positions

Thursday, August 9, 2012

Who is the Thief?

"These people are contractors."
--Alourdes Galindo (Shooter)

One person hires a second person to rob a third. Who is the thief?

A person votes for a government official to forcefully take property from another person.

Who is the thief?

Wednesday, August 8, 2012

Lagging Trannies

George Bailey: You know what the three most exciting sounds in the world are?
Uncle Billy: Breakfast is served, lunch is served, dinner is-
George Bailey: No, no, no. Anchor chains, plane motors, and train whistles.
--It's a Wonderful Life

Have been eyeing the lagging performance of the trannies versus the Dow. What we have here is a classic technical 'nonconfirmation.'

In classic Dow Theory, you want the industrials and the transports to move in synch. Currently, the industrials are marking highs for the move while the transports remain mid-range. The industrials are well above their 50 and 200 day moving averages while the transports are struggling to remain above theirs.

Maybe the trannies will soon play ketchup. Or maybe the lagging trannies are a BRF (Big Red Flag).

position in SPX

Ultimate Property Rights

Saladin: Who defends?
Imad: Balian of Ibelin, the son of Godfrey.
Saladin: Godfrey? Godfrey nearly killed me in the Lebanon. Truly, I did not know he had a son.
Imad: It was his son at Kerak.
Saladin: The one you let live?
Imad: Yes.
Saladin: Perhaps you should not have.
Imad: Perhaps I should have had a different teacher.
--Kingdom of Heaven

One astute point made by John Locke in his Two Treatises of Government is that each of his is the product of the Creator. Each of us is the Creator's property, furnished with facilities meant to do the Creator's pleasure.

Each is therefore "bound to preserve himself, and not to quite his station wilfully." Thus the right to self-defense.

It therefore follows that people should restrain themselves from "invading others' rights."

While we often speak of the property rights of each individual, the ultimate property rights belong to the Creator.


Locke, J. (1824). Two treatises of government. London: C and J Rivington.

Tuesday, August 7, 2012

Off the Deck

He's got a brand new car
Looks like a Jaguar
It's got leather seats
It's got a CD player, player, player

Multi-month downtrend in 10 year yields has been decisively broken. TNX is approaching near term resistance just below 17 (1.7%).

Action in bonds corresponds to the SPX moving thru 1400, and first Fed repos since 2008.

position in SPX

Monday, August 6, 2012

Freedom and the Agency Problem

Sue-Ellen looks so upset
This isn't the first time
And it won't be the last
There's things going on behind her back
Oh, they'll give you a heart attack
--Flesh for Lulu

It is sometimes said that freedom isn't free. The underlying truism relates to axiomatic human behavior. Humans prefer leisure over work, and less work over more work. As such, humans are inclined to seek opportunities to satisfy their needs on the backs of others, a.k.a. seeking something-for-nothing.

Absent being objects of charity, seekers of something-for-nothing will be tempted to forcefully invade the person and property of others in order to achieve their interests. These invasions constitute acts of violence and include murder, slavery, and robbery among others.

The purpose of government in a free society is to help individuals protect themselves against violent assault from those seeking something-for-nothing. Government is authorized to use force in order to help people pursue their interests without unwanted intrusion by others.

Unfortunately, people in government are not immune to something-for-nothing temptation. Some government officials will be tempted to use the strong arm of government force to satisfy their own interests. The more productive the citizenry, the more likely the phenomenon.

It is therefore necessary that people who want to remain free cannot dedicate 100% of their energies toward pursuing their interests. Some fraction of time and attention must be allocated toward keeping an eye on government, so that those authorized with use of force do not turn that force on people in a manner that restricts their liberty.

Essentially, what we have here is a classic agency problem. Freedom loving principals have retained strong armed agents to assist in protection of person and property. Since the agents' goals may differ from the principals,' it is necessary for the principals to monitor agent behavior to ensure that the agents are acting in manners that support liberty. As some anti-federalists forecast long ago, government will be quick to exploit lapses in vigilance here.

But government behavior may be difficult to monitor--particularly as the distance between government and citizenry grows. As such, freedom loving principals must complement monitoring with incentives or disincentives that keep government agent mischief in check. These incentives/disincentives might include the power to re-elect at the ballot box, sanctions for violating the law while in office, social pressure (protests, etc), pulling more government to the local level, and, in extreme cases, throwing off government in violent fashion.

The costs of monitoring and incentivizing government agents are key reasons why freedom is not free.

Stop and GIGO

Been running so long
I've nearly lost all track of time
In every direction
I couldn't see the warning signs
--The Go Gos

Zerohedge shares a new indicator for me: % change in real GDP vs % change in railcar loads of waste/scrap.

Last time railcar loads of garbage dropped this much was during the credit market meltdown.

Sorta gives new meaning to the notion of garbage in, garbage out.

Sunday, August 5, 2012

When Questioning the Fed Goes Local

"While the truncheon may be used in lieu of conversation, words will always retain their power. Words offer the means to meaning, and for those who will listen, the enunciation of truth. And the truth is, there is something terribly wrong with this country, isn't there?"
--V (V for Vendetta)

This story recently aired on a local news show. When local media outlets begin airing pieces that question the Federal Reserve, then it is hard not to feel an uptick in optimism.

Ron Paul's 'audit the Fed' bill has passed the House and now sits on the desk of Senate majority leader Harry Reid (NV). One would think this bill would proceed to the Senate floor given Reid's part on-the-record comments that the Fed should be audited. But, surprise, surprise, Reid has recently changed his tune and now vows not to introduce the bill for a vote.

Politics and integrity are the stuff of oxymorons.

Regardless, increasing public awareness of the Federal Reserve will be central to Ron Paul's legacy. As more people at local levels come to understand the damage that this institution has done to freedom, then social power grows and State power weakens.

At some point this social power will topple the Harry Reids of Washington.

Saturday, August 4, 2012

True Law is Not Relative

Stuff that works, stuff that holds up
The kind of stuff you don't hang on the wall
Stuff that's real, stuff you feel
The kind of stuff you reach for when you fall
--Guy Clark

Prior to the start of class one day, I recall a fellow student asking my high school humanities teacher, "Is everything relative?" Raising his eyes in a dry gaze, the teacher replied, "Certainly not."

Progressives like to argue that, because the Constitution was developed in a different era, it is not relevant to modern times. 'Progress' requires governance crafted for today, for situations that the founders did not anticipate.

The Progressive argument is a flavor of positivism, a legal philosophy grounded in the notion that a law is valid if it can be enforced. Law is left to the discretion of the enforcers. Law, according to Progressives, is a relative thing.

But durable law is not relative. Rather, it is grounded in natural law that does not change with the direction of the wind. The founders understood this truth. Their experience with the discretionary rule of England merely validated what they had learned from their study of history.

Their study of Rome included the writings of Cicero, the great defender of the Roman republic and master of political philosophy. Cicero wrote:

"True law is right reason, consonant in nature, spread through all people. Is is constant and eternal...There will not be one law at Rome and another at Athens, one now and another later; but all nations at all times will be bound by the one eternal and unchangeable law..."

Cicero knew that effective law is timeless.


Cicero, M.T. "On the Commonwealth." In J.E.G. Zerzel (ed.), On the commonwealth and On the laws. Cambridge: Cambridge University Press, 1999, pp. 71-72.

Friday, August 3, 2012

Conditions that Attract Violent Aggression

"Boards don't hit back."
--Lee (Enter the Dragon)

The recent 'Batman' theater shooting in Aurora CO provides a sobering reminder of two conditions that attract violent aggressors.

Aggressors are drawn to conditions of perceived weakness. Assailants rarely attack targets perceived to be of equal or greater strength. Instead, they are much more likely to accost targets thought to be incapable of defending themselves when attacked. In the case of the Aurora shooting, the theater was a posted no concealed carry establishment - attractive to any assailant wishing to commit a violent act with a gun without having to deal with return fire.

Aggressors are drawn to conditions of surprise. Assailents are unlikely to assault targets who have been forewarned or otherwise prepared to deal with an attack. Aggressors like surprise. Surprise causes people to delay defensive responses until they can collect their wits. In many cases, surprise attacks can freeze victims who are overcome with fear. In the Aurora case, the shooter almost certainly anticipated a surprise advantage. Choice of venue, film subject, garb, entry pattern, initial behavior as described by witnesses, etc suggest that the shooter believed that his targets would not be able to respond quickly to his assault.

As usual, most of the discussion following the shooting has involved gun control. It does not take a PhD in criminal economics to determine that laws making it more difficult for individuals to defend themselves increase the probability of violent crime. Whatever the technologies of violence that laws seek to control, those wishing to do violence to others will acquire those technologies on black markets which inevitably form for any outlawed product. Perceiving conditions of weakness as outlined above, relatively well armed aggressors will then proceed to assault weakly armed obedients of the law.

As the founders understood, gun control laws impair the capability of individuals to defend themselves.

For those wishing to improve their self-defense capacity, the more relevant discussion involves how individuals can reduce conditions of weakness and surprise that might give aggressors a perceived advantage.

Thursday, August 2, 2012

Dividend Stock Euphoria

Hey now, hey now
Don't dream it's over
Hey now, hey now
When the world comes in
--Crowded House

Drawn from this missive, the chart below indicates the premium being paid for 'blue chip' dividend paying equities. Blue chip in this case means those companies with high payout ratios, implying that the dividends are relatively safe.

Investors are paying up for yield. The chart indicates that PEs for blue chip dividend payers are at 50 year highs.

The driver of this behavior is 'financial repression,' the term being assigned to the zero interest rate policies (ZIRP) by central banks world wide. Before the current state of financial repression, investors in need of income had various fixed income alternatives to choose from that provided a stream of cash at low or moderate risk.

In the face of ZIRP, those fixed income instruments have been bid thru the roof, driving down their effective yields. As such, income-starved investors have been pouring into dividend paying stocks to get income. Sectors that typically pay high dividends such as utilities, health care, and consumer staples have been hitting new price highs for months.

I must confess that I have been partial to some dividend paying stocks myself, but have been trimming my exposure in these names into the recent buying euphoria. It's becoming increasing hard for me to hold 'em in the current environment...

Future historians will surely highlight this ZIRP period as a textbook case of central planning gone wrong. By suppressing interest rates below market, central bankers are forcing capital into investment choices with risk/reward profiles that have altogether been distorted. In the case of dividend paying stocks, investors are paying ever higher prices for ever smaller streams of cash--a recipe for disaster for instruments that have relatively uncertain cash streams and principals.

What central planners really seem to be planning is an epic capital wipeout.

position in SPX

Promises, Promises

Second time around, I'm still believing
The words that you said
You said you'd always be here
--Naked Eyes

After last week's dovish central banker chatter, the FOMC and ECB meetings have come and gone with no movement toward easier policy. Thus far, domestic stocks have largely shrugged off the lack of CB action.

This suggests that there's an awful lot of hope out there. Of course, hope springs eternal for addicts. The next fix is always just around the corner.

Hard not to wonder what happens if/when this hope leaves the tape.

position in SPX

Wednesday, August 1, 2012

Government Debt Markets as Slave Markets

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.

Bond buyers exchange an amount of capital today for the borrowers' promise to pay back principal and interest in the future. Essentially, the borrower is obligated to work for the lender in the sense that a portion of future production, to the extent that it is valuable, legally must go to the lender to settle the debt.

In the private sector this exchange is voluntary, meaning that the lender does not force the borrower into the arrangement of servitude. When buying corporate bonds, for example, creditors do not hold guns to the heads of companies and say, "we order you to sell us your bonds and work for us." Corporations voluntarily enter into this arrangement. Stakeholders in corporations, such as shareholders, employees, customers, and suppliers, who do not like the terms of a debt arrangement are free to walk away.

The same is true of individuals who borrow to fund, say, a house. Servitude is entered into voluntarily.

It is different, however, in the realm of government debt.

Government debt can only be repaid on the backs of the citizenry. When buying government bonds, creditors are relying on government force to coerce citizens into working for the creditor. Taxpayers who do not like the terms of a government debt deal are not free to walk away. Instead, they are forced into the arrangement with guns pointed at their heads.

Because the exchange is not voluntary, are not government bond buyers essentially contracting with strong armed government agents to force people into conditions of servitude? Is not the market for government debt a market for slavery?

no positions