Sunday, September 30, 2012

In Plain Sight

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

David Stockman gave this talk the day after the FOMC QE-Infinity announcement earlier this month. As he notes, he was preparing to talk about his upcoming book, he opted to "launch into a full strength tirade about the Fed."

He clearly believes that the recent Fed action is not just another interventionary program. It is time, he urges, for "street fighting" to oppose the destruction of what remains of capitalism.

This is an outstanding speech, and worth watching multiple times.

If (when) the system comes apart, there will surely be many who feign surprise. They will suggest, as they did when the 2008 meltdown occurred, that no one could have forecast such a '100 yr flood.' They are either being ignorant, or hope you are.

The warnings have gone up, and they are in plain sight.

Saturday, September 29, 2012

When Rhetoric Gets Personal

"Your victories and...and your losses are shared by more than you know. Stay with us. Stay the course!"
--Col Harry Burwell (The Patriot)

One sign that you are on the right track is when your opponents get personal. When you are accused of being selfish, uncaring, racist, narrow minded, old fashioned, out of it, etc. it is because your accusers are having trouble coping on an ideological basis. They seek solace in emotion rather than in reason.

Stay the course. You are on the path to truth.

Friday, September 28, 2012

Wilson's Progression

Narrator: Today, while the earth shakes beneath the heels of marching troops, while a great portion of the world trembles before the threats of acquisitive power-mad men, we of America have little time to remember an astounding era in our own recent history. An era which will grow more and more incredible with each passing generation until someday people will say it never could have happened at all. April, 1918. Almost a million American young men are engaged in a struggle which, they have been told, will make the world safe for democracy.
--The Roaring Twenties (1939)

Interesting missive by Ralph Raico (Hayek was his dissertation adviser) on Woodrow Wilson and his craving for 'glorious' power. Given his academic background (the only US president to possess a PhD), Wilson is often portrayed as a peace-loving idealist.

As the Raico demonstrates, his presidential record is anything but pacifist in nature.

Raico also shares tidbits on Edward Mandell House who, from 1911 until Wilson's death, was WW's right (left?) hand man. House was never elected to public office, yet served as Wilson's confidante. This arrangement certainly rhymes with the FDR/Harry 'The Hop' Hopkins arrangement.

Finally, Raico discusses the role of English propaganda in nudging the US into WWI. In the summer of 1914, England cut cables connecting the US with Europe. News from Europe to America was channeled thru London, where censors shaped reports to English benefit. This was brand new info for me.

I find articles like this quite useful. Over the past few years, I've focused considerable self-study on the Depression era. While my ignorance here has been alleviated to some degree, I know much less about the preceding era that laid the foundation for the Depression. Articles like this help fill in the blanks and suggests that more study of the Progressive period might be a worthy next step.

Perhaps Raico's book from which this article was excerpted, Great Wars and Great Leaders: A Libertarian Rebuttal, would be a good start.

Studying Freedom

"I know it, Richard. I know it!"
--Sam Gerard (The Fugitive)

Side-by-side sampling of founding thought vs progressive thought on limited government. This page is from Hillsdale College's Constitutional Reader, which the school is putting online.

Leonard Read believed that, if people spent more time studying the Constitution and its underlying ideas, and compared them to the ideas driving America's current direction, then we would be ok. Read had faith in our capacity to judge truth. He was confident that self-reflection on limited versus unlimited government would reveal self-evident truths to people in contemporary times as it did for people during our founding times.

I think he's right. Antagonism is destructive. Providing resources that people can use in their quest for truth is constructive.

Hillsdale's little side-by-side above is a nice example.

Leonard Read knew that people value freedom only when they figure it out for themselves.

Thursday, September 27, 2012

Excess Capacity

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

Finally got around to downloading older capacity utilization data from the Fed's website. The below graph shows US capacity utilization for the manufacturing sector since 1948, which is as far back as the series goes). Capacity utilization = actual output/potential output.

It is evident that capacity utilization has been trending lower for decades. From 1948 thru the early 1970s, capacity utilization averaged in the mid 80s and periodically pierced 90%. This should not be surprising considering that that this period followed a major world war that found US factory standing.

Beginning in the late 70s/early 80s, CU commenced decline. The early 80s, of course, corresponds to the beginning of the secular decline in interest rates.

Low CU means that you have more supply than you need. Increasingly, we appear to be swimming in excess supply.

Inquiring minds should be asking questions. Why have we been adding more aggregate supply than is necessary to support demand? What has been driving this trend?

Wednesday, September 26, 2012

War of Convenience

"How long is America going to pretend that the world is not at war?"
--President Franklin D Roosevelt (Pearl Harbor)

I increasingly suspect that Statists who are desperate to demonstrate economic progress to their people see war as a convenient alternative right about here. Massive monetary and fiscal interventions have not produced much. In fact, marginal returns of successive program are diminishing.

So if you're a Statist connecting these dots, the FDR playbook might look pretty attractive. Identify some enemies. Provoke them. Rally the masses around an external conflict. Put all non-military personnel to work in arms production to provide the illusion of full employment.

And hope you win.

If you believe in Big Government, is this not the ultimate lesson to be learned from the Great Depression? When all else fails, W-A-R.

Tuesday, September 25, 2012

Entitlement Spending and Business Investment

The light of deep regret
Let me see what I don't get

Nice graph showing negative relationship between entitlement spending and business investment. Over the last 50 yrs, mandatory entitlement spending as a % of GDP has nearly tripled, while net fixed business investment has dropped by more than 50%.

More recently, note the near 50% increase in entitlement spending under the current administration while business investment has hit record lows below 1% of GDP.  Given the recent trends, those forward estimates do not appear realistic either...

The negative relationship is characteristic of socialistic policy. Resources for leveling programs such as entitlements come from personal incomes.  Income that goes toward entitlements means less income for savings. Less savings means less capital that can be allocated toward investment.

Stated differently, entitlement spending crowds out capital formation. The result is capital consumption. Without capital, projects to improve productivity do not get done. Without improvements in productivity, standard of living falls.

Monday, September 24, 2012

Victim Mentality

Some people never come clean
I think you know what I mean
--The Eagles

A victim is someone who has been harmed. Victims can be harmed by the actions of others that injure the victim's person or property in some way (e.g., murder, rape, robbery). People can also be 'victims of circumstance' unrelated to the actions of others (e.g., struck by lightning, disease).

It is possible for people to develop victim mentality. People with victim mentality see themselves as victims regardless of whether they really are. Victim mentality is a learned mindset--learned from past experiences or from observation of others' experiences.

The power of suggestion might also play a role. If people tell you that you are a victim, then you might start believing it.

People who think that they are victims engage in various unproductive behaviors, such as blaming others for problems, believing that success is largely the result of luck, and relishing in the mistakes of others.

Victim mentality is also likely to drive a sense of entitlement. Others are thought to 'owe' the victim for past harms committed. Retribution in the form of suppressing the freedom of others, so that everyone operates with the same perceived handicaps as the victim, is possible.

Victim mentality becomes particularly problematic in democratic societies where government is authorized to redistribute wealth. If enough people convince themselves that they are victims, then this group could become a powerful special interest group that buys political favor and appropriates economic resources produced by others.

There is an argument to be made that such a corrosive situation contributes to our current predicament.

Sunday, September 23, 2012

Buying Elections

"You're gonna need people like us around."
--Sadie Burke (All the King's Men)

When government is authorized to redistribute resources, then markets for political favor arise. Because they have the power to confiscate wealth from some individuals for the benefit of others, politicians sell their influence to those interested in being on the receiving end of redistribution.

Markets for political favor particularly flourish in democratic processes where winners are determined by majority vote. Individuals are prone to organize around common interests in order to increase their bargaining power.

While these special interest groups (SIGs) can bid on political favor at any time, they are particularly active during the campaign phase of election cycles. The primary objective of SIGs during campaigns is to get their candidate into office. Therefore, SIGs must provide resources to help their candidate get elected.

Votes are the most direct resource class in this regard. Using various methods, SIGs can cajole or coerce their memberships to vote for the preferred candidate. The idea is to line up big voter blocs to elect the candidate outright via democratic (majority rule) process.

Internally, however, SIGs may not be able to marshal the critical mass necessary to carry elections themselves. In such cases, SIGs must look externally, and try to sway other individuals or groups in their candidate's direction. Processes for influencing others require additional resources.

Monetary contributions to the candidate's campaign are one such resource class. Individual members affiliated with the SIG or the group itself can write a check directly to their candidate's campaign. They can also contribute money indirectly though a political action committee (PAC). PACs are legally recognized entities that have been organized for political purposes. PACs are merely another form of SIGs.

The advantage of PACs is that, under currently law, more money can be funneled toward a candidate via PAC channels. However, current laws make them subject to government oversight and regulation.

Another resource class that is difficult to monitor and regulate is the 'in-kind' contribution. In-kind contributions are non-monetary resources, such as equipment, housing, labor, and transportation, that can be given to an election campaign. The advantage of in-kind resources is that they are difficult to account for, making them elusive to external tracking.

A particularly nefarious in-kind contribution comes from SIGs with media operations. Media outlets can contribute to campaigns by providing highly visible platforms for exposure, or by slanting journalistic coverage in favor of a particular candidate. Media that are biased toward a particular candidate can lend a significant edge to a campaign while being nearly impossible to quantify or track.

Once again, we are hearing cries that particular SIGs are trying to 'buy elections.' Of course they are. Markets for political favor always arise when governments are authorized to redistribute wealth. People generally prefer to further their interests with the least amount of effort possible, and employing strong armed government agents to take valuable resources from others permits them to do so.

The oft prescribed remedy is to 'reform' processes for campaign contributions. In addition to obvious First Amendment difficulties, such a prescription treats a symptom rather than the cause of the disease.

Campaign contributions will wither if there is no market for political favor. The market for political favor disappears if the authority to redistribute resources is taken from government.

Friday, September 21, 2012

Axiomatic Path

I bought a ticket to the world
But now I've come back again
--Spandau Ballet

A recent piece by Judge Nap reiterates what was said here. Like the Judge, I have been critical of Mitt Romney and his record, but that does not blur the truth in Mitt Romney's recent remarks. Let's review the axiomatic path:

Federal income tax represents forceful confiscation of economic resources generated by productive effort of some individuals for redistribution to others.

This forceful confiscation occurs on a progressive scale, meaning that those with high incomes surrender a larger fraction of their incomes than those with lower incomes.

The progressive scale has 'progressed' to the point where just below half of all adults pay no federal income tax which means, of course, that the other half contributes all of the economic resources to this federal revenue stream. Individual income taxes constitute nearly half of all economic resources confiscated by the federal government.

About half of US households receive some of those economic resources confiscated by the federal government. This percentage has also been growing.

By definition, people who receive economic resources from the federal government are dependent on the productive effort of others.

Because people generally prefer less work over more work, and leisure over work, then it is likely that many people will become comfortable with conditions of dependency on the federal government.

Recognizing this, politicians are likely to expand conditions of dependency in order to win votes.

Dependency, measured in terms of the size of federal government entitlement programs, is likely to increase. Empirical evidence is confirmatory.

Conversely, politicians who threaten the economic resource stream of entitlements are likely to receive less electoral support dependents.

The fundamental problem that Romney's remarks capture is this. When the federal government has the authority to redistribute wealth using a progressive tax mechanism, how is it possible to limit government size and scope when elections are determined by majority vote, and when increasingly more voters act as principals depending on strong armed government agents to confiscate economic resources from others on the principals' behalf?

Thursday, September 20, 2012

Going Their Own Way

Tell me why
Everything turned around
--Fleetwood Mac

Divergence between the industrials and trannies continues to be noteworthy. While the DJI is marking near multi-yr highs, the TRAN has moved to the bottom of its multi-month channel.

Over the past day, Fed Ex (FDX) and Norfolk Southern (NSC) were high profile names in the sector that reported/guided down.

Dow theory suggests that the recent upward thrust cannot be construed as bullish until confirmed by the trannies. With the transports now back down to multi-month support, a decisive break below would add to the drama.

position in SPX

What Romney Also Said

We are matching spark and flame
Caught in endless repetition
Life for life, we'll be the same
I must leave before you burn me
--The Fixx

While popular media has its minions wringing their hands over Romney's '47%' comment, it is largely ignoring other portions of the speech worthy of public discourse. This one is particularly interesting. Excerpt:

"So who is giving us the trillion [dollar loan]? And the answer is that we are making it up. The Federal Reserve is just taking it and saying, 'Here, we're giving it.' It's just made up money, and this does not augur well for our economic future."

Popular media has been hellbent on portraying Romney as some sort of out-of-touch crackpot. So why aren't they tossing this statement, radical indeed from a finalist in the presidential sweepstakes, on the fire to burn him?

Because full fledged public discourse on our monetary ponzi is something that the string pullers don't want.

Wednesday, September 19, 2012

Betting on Disorder

"People had more than they needed. We had no idea what was precious and what wasn't. We threw away things people kill each other for now."
--Eli (The Book of Eli)

As these pages have noted before, gold can be seen as a bet on systemic disorder. When times are perceived as stable, there is less reason to own gold. Economic resources are better allocated toward other ends.

But when times are perceived as unstable, and doubt builds about systemic capacity for exchange and wealth preservation through conventional means, gold becomes an attractive alternative for managing risk.

Bets on systemic disorder have been increasing for more than a decade. After some healthy technical consolidation, it appears that those bets are once more on the rise.

position in gold

Tuesday, September 18, 2012

More Than 47% Accurate

Carlton Whitfield: Closing down those distribution centers would be a big mistake.
Christy Wills: It so happens that those closings are exactly what Mr Prescott wants.
Carlton Whitfield: Well, then Mr Prescott hasn't thought things through very well.
Art Thomas: I'm going to tell *him* that you said that.
Carlton Whitfield: Good!
--The Secret of My Success

This video, perhaps to become known as "The 47% Video," of Mitt Romney speaking to a group of supporters last May has lit up mainstream media and the blogosphere. As usual, however, most of this energy has been directed toward the periphery of the matter in the form of hand wringing, fact checking, and qualifying.

Far less consideration has been allocated to the core ideas underlying Romney's remarks. As I understand it, what he was trying to say is this: For people who do not pay income taxes, it is difficult for them to "connect" to an election platform grounded in reducing income tax burdens. And because the fraction of people not paying income taxes in the US has increased to nearly 50%, with a similar fraction participating in some type of government payout that increases dependence on those who do pay taxes, then a campaign seeking to reverse that trend will face a difficult battle in an election where the winner is determined by majority vote.

These ideas are fundamentally true. They strike at some of the root problems that we face, namely government's authority to redistribute wealth using a progressive tax mechanism enforced by strong armed agents of democratic (read: majority) principals.

Romney should own what he has said, expand on it, and discuss it with the people. Keep it in the forefront; don't back away from it.

Instead, he and the Republicans appear once again to be cowering from a thread of public discourse that this country desperately needs.

Monday, September 17, 2012

Warfare as Economic Stimulus

She had two babies
One was six, one was three
In the war of '44
--Paula Cole

The New Deal did little to 'solve' Depressionary unemployment. By the end of the 1930s, the jobless rate remained in double digits. Folks were bracing for another leg lower in the economy.

Facing his third election in 1940, FDR began to shift government spending toward the military. His rhetoric began to challenge isolationist policies grounded in the horrors of WWI.

By the time bombs were raining on Pearl Harbor, policy makers had already placed their bets on the viability of an economic stimulus plan grounded in warfare.

It seemed to work. Unemployment fell as people went to work either fighting the war or building goods to support it. Factories hummed at a pitch not heard for more than a decade.

No one seemed to question where the capital was coming from to support this effort. Or that the goods being produced did nothing to advance standard of living.

And, of course, we won the war.

Come end of 1945, the US was in a sweet position. The only industrialized country with practically all of its productive capacity outstanding...Pent up demand for both consumer and capital goods...Head chair at post war treaty tables, including the one that was to select a reserve currency for the world...

The lesson seems clear, doesn't it? When a country has been enduring a prolonged economic slump and other policy measures have not worked, crank up the military machine and engage in war.

And hope you win.

With the Fed's recent actions signaling how desperate policy makers are for progress, might the current regime consider war a viable economic stimulus plan?

Sunday, September 16, 2012

Destruction and Division

We both now we're headed for disaster
Our minds say no, but our hearts are talking faster
--Donny Iris

Marc Faber lays it out there regarding last week's FOMC announcement. He's, shall we say, pessimistic.

He notes, that because he has anticipated this kind of behavior and has positioned himself accordingly, the Fed's actions are jacking his portfolio higher. But this leaves Everyday Man behind. In his words,

"The fallacy of monetary policy in the US is to believe that this money will go to the man on the street. It won't. It goes to the Mayfair economy of the well-to-do people and boosts asset prices...Congratulations, Mr Bernanke. I'm happy. My asset values go up but as a responsible citizen I have to say the monetary policies of the US will destroy the world."

Many pages here have made similar observations. Those scratching their heads over the widening divide between rich and poor should be examining the influence of central bank policy on exacerbating differences in income and wealth levels.

Saturday, September 15, 2012

Bond Ghouls Cometh?

Here comes the rain again
Falling on my head like a memory
Falling on my head like a new emotion

With attention focused on whether stocks would follow-thru after their FOMC celebration, long bond yields ripped higher yesterday.  Ten yr Treasury yields jumped 6.5%.

TNX has now pierced resistance defined by both the 200 day moving average and the mid Aug near term highs. The daily chart also looks cup and handle-ish.

In fact, this set-up (coupled with the macro money printing picture) makes it tempting to take a swipe at shorting bonds here.

Bulls argue that this is healthy action--merely money rotating out of govies into riskier assets. Bears counter that the Fed's stated intention to print gobs of money awakens bond vigilantes from a deep slumber, and that leveraged systems can't tolerate big jumps in rates.

Technically, next definable resistance is up at about 2%, where there is an early April gap waiting to be filled.

This situation helps define the corner that the Fed has painted itself into. It wants to print money and thinks it can do so while still keeping bond yields low (by buying bonds with much of that money). However, if other bond holders get spooked, then the only way the Fed can keep those rates lower is to buy them all.

By then, it will be impossible to put the inflation genie back in the bottle.

position in SPX

Friday, September 14, 2012

Getting Real

The cracks between the paving stones
Look like rivers of flowing veins
--The Who

Am buying a tranche of commodities today. I particularly like crude right here. Technically, not as overstretched in the near term compared to other commodities. Plus chart looks cup-and-handle-ish.

Also, seems to me that escalating tensions in Middle East may not be adequately priced in.

In any event, I want more exposure to 'real assets' in lieu of the orgy of money printing.

positions in DBC, DBO, RJA

Voting Stock

I'll move myself and my family aside
If we happen to be left half alive
I'll get all my papers and smile at the sky
For I know that the hypnotized never lie
--The Who

In early June we noted the correlation between the SPX and the Intrade Obama contract. Here is an update:

After yesterday's FOMC announcement, the Obama contract ripped nearly 6 pts (almost 10% higher).

If you do not see what is going on here, then your eyes are wide shut.

position in SPX

Thursday, September 13, 2012

To Hedge or Not To Hedge

Little voice inside my head said
Don't look back
You can never look back
--Don Henley

On the back of today's events, feels like many people are lifting their hedges. Hey, if FOMC bubble blowers have your back, then why not? Moral hazard writ large, my friends.

Must admit that I've pondered this myself. Think I'll keep my hedge on for a while, though. Something tells me in may come in handy yet...

Current position is about 2% net short, with a significant position in precious metals and a smattering of equity long exposure against an index short. Overall asset allocation is roughly 1/3 each long/short/cash with the short bucket slightly favored.

Fortunately, because the metals have been outperforming here, the P/L has been ok despite my sizable hedge.

After chewing thru the FOMC announcement, my dominant thought has been, "I need more gold." (Gold ripped $35 higher on the FOMC announcement)

I did buy a bit before the close. Will look to do more.

position in SPX, gold

Open Ended QE

"Buyin' 'em!"
--Louis Winthorpe III (Trading Places)

Today the FOMC announced QE3, although many people are already calling it 'open ended QE.' The Fed announced that it will buy $40 billion of mortgage backed securities (MBS) monthly, as well as continue its Twist program of converting short term debt holdings to longer term paper. Into year end, the FOMC forecasts $85 billion/month in additional long term debt holdings.

The Fed put no time limit on this program, stating that "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency MBS" as well as "undertake additional asset purchases, and employ other policy tools as appropriate until such improvement is achieved."

The FOMC also pushed out its zero interest rate policy (ZIRP) till mid 2015.

The Fed is essentially saying that it will move heaven and earth in a quest to reduce unemployment. It will move past Treasuries and MBS into other asset classes if necessary in order to move the needle.

If you are perplexed about how buying MBS and other asset classes could change unemployment, you are not alone. After all, Fed window rates are already close to zero, mortgage rates are at 3% or lower, and employment has not ripped higher. What could another few basis points do?

The conclusion must be that it is not about lowering rates. Instead, it seems a baldfaced (sorry Ben) attempt to jack asset prices higher thru direct purchase and pushing investors farther out on the risk curve.

As if on cue, someone from Reuters questioned Bernanke on just this issue at the post FOMC press conference. Ben's answer is that he's going for higher prices in houses and stocks to achieve a 'wealth effect.'

Can't be much plainer than that. The Fed wants to print another bubble.

position in SPX

Wednesday, September 12, 2012

Liquid Vol

You look at me from across the room
You're wearing your anguish again
Believe me I know the feeling
--Paula Cole

Volatility indexes are once again touching levels last seen in mid 2007.

Yes, they can go lower and remain there for some time. I recall many who were long vol back in 2005 agonizing over their positions as their options dripped theta by the day.

One similarity between then and now is high levels of liquidity being poured into markets by central banks. "The higher the liquidity, the lower the vols" is a good general proposition.

The thing to remember about implied volatilities is that, while they can 'trend' lower, they rarely do so higher. Vols typically 'spike' higher, leaving those who chose not to buy cheap volatility (for protection or for spec) in the dust.

Stated differently, in a highly levered system like ours, you never know when liquidity will dry up. If people become risk averse and decide to close projects funded by credit money, then price fall and vols rocket.

This makes vols tough to trade--both momentum and contrarian styles often take a beating.  They also tend to be ineffective forecasting mechanisms, since implied vols express general conditions of greed or complacency but little in the way of condition change.

As such, we can only confidently say the vols right now are getting historically low. Descriptive rather than predictive.

position in SPX

Germany Says 'Ja'

You see the signs, but you can't read
You're running at a different speed
--Robert Palmer

The German constitutional court has ruled in favor of the EU bailout plan. The court specified that any amount of bailout beyond the 190 billion euro contribution must come back to the German legislature for approval. Not sure that is meaningful anymore, as Continental addiction to money printing increases.

The metals are once again up on the news.

position in PMs 

Tuesday, September 11, 2012

Kissed by a Rose on the Gray

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

The blue sky this morning provided an early reminder of the day my world changed. Eleven years ago, a cobalt blue sky became the canvas for sickly gray splatter. My emotional control still weakens whenever I view 9-11 footage. As our priest recounted the story of Tom Burnett this past Sunday, I felt my eyes widening and hands flexing as I once again undertook the vicarious exercise.

I don't like being there.

As unpleasant as these memories are, they do serve a constructive purpose. They remind me that this was the day that I began to asking questions that I had never considered before. Won't freedom suffer if we get serious about securing ourselves from terrorists and other 'national threats'? In fact, isn't there a fundamental trade-off between freedom and safety? Surely, those who wrote the Constitution considered this point that suddenly struck me as 'obvious' and independent of time. What did they have to say on the matter?

And so it began. A quest for truth that won't stop.

I woke up eleven years ago. Although this day always hurts, I am grateful for it.

Monday, September 10, 2012

Democracy and Individual Rights

George: The coach is dimissed by a vote of 68 to 45.
Opal Fleener: I think we should vote again!

These pages have periodically questioned the fit between democracy (i.e., decisions by majority vote) and liberty (search here). Here's a small missive, including a video, that sums the issue.

The primary problem is a simple one. If government (i.e., legitimized force) is simply an expression of what the majority wants, then minorities are forced to do things that they do not want to do. This is not liberty, but 'tyranny of the majority.'

The missive highlights the Kelo v City of New London Supreme Court decision as an example. A woman who did not want to sell her home to developers lost her property when the Supreme Court ruled that the development's benefits to the community exceeded the woman's private interests--essentially the same 'common good' argument that legalized invasive pollution in the 19th century.

The extra sad postscript to Kelo is that the development as planned never got off the ground (after Ms Kelo's house was bulldozed) when corporate welfarist Pfizer (PFE) pulled up its stakes and left town.

Of all ideas built up by education and media propoganda machines, democracy as being compatible with liberty is near the top of the list.

no positions

Sunday, September 9, 2012

Government Size and Economic Growth

Standing in line marking time
Waiting for the welfare dime
'Cause they can't buy a job
--Bruce Hornsby and the Range

Interesting meta study (i.e., study of other studies) on the relationship between government size and economic growth. In their review of both cross sectional and panel studies, the authors conclude that there is close to a consensus that a negative relationship exists between government size and economic growth in developed countries.

The researchers also considered the oft cited anomaly of Sweden and other Scandinavian countries, where these nations seem to prosper despite high taxes. Upon reviewing the data, the authors suggest several explanations. One is that these countries offset the inherent drag of high tax policies with free market policies elsewhere--something these pages have previously considered.

Another explanation is that background factors like 'social' trust,' or the extent to which a culture believes that other people can be trusted, leads people to tolerate redistribution of wealth by government. The authors suggest some empirical support for a positive interaction when both of these factors are present to high degrees.

One explanation not suggested by the authors is trend toward/away from historical market position. For many decades Sweden and neighboring countries operated highly socialistic systems, leading many to collapse under their own weight in the 1990s. Since then free market 'reforms' have been moving growth in positive directions. Essentially, these countries have been experiencing growth from a near death experience. As momentum from the removal of other interventionary barriers stalls, then high taxes and the welfare programs they fund become the binding constraint to growth.

Saturday, September 8, 2012

Benevolent Government

"The hospital is under new management now. Free health care for everyone!"
--John Q. Archibald (John Q)

This video snippet captures the view that government can be benevolent, helpful. While the Left seems to be more vociferous in this view, many on the Right see a benevolent role for government as well. Those with benevolent views of government see that goodness as being expressed in many forms such as welfare programs, socialized medicine, strong military, etc.

But the benevolence crowd forgets or ignores the fact that government is legitimized force. No matter how good hearted the intention, channeling resources through government requires forceful confiscation from some for the benefit of others.

Chanting "we need to be compassionate" while fleecing people at gunpoint scales the summit of folly. Such an approach is not progressive; it regresses toward barbarianism and conquest. 

The truly benevolent solution to social problems is voluntary cooperation between individuals where interests are advanced through mutual exchange.

By putting government between them and their victims, the benevolence crowd outsources to strong armed agents the violence that they inflict on others.

Friday, September 7, 2012

Unemployment Data and Non-Participation

I don't want to work
I just wanna bang on the drum all day
--Todd Rundgren

The headline unemployment number ticked down to 8.1% last month. It did so because non-participants in the labor market hit 30+ yr lows at 63.5%. If we take this number at face value, this means that more than 1/3 of all working age people are not even seeking work.

We do not know why these people are not seeking work. Perhaps they have already accumulated the economic resources that they will need in their upcoming years. Knowing what we know about wealth distribution and savings rates in this country, however, it seems unlikely that the majority of the 1/3+ non-participants possess that level of wealth.

Others may not have the economic resources in their possession but are counting on obtaining them in annuity-like fashion via rich monthly retirement or pension payments that enable the recipients to leave the workforce prematurely and still live comfortably. Many government (e.g., military, post office) and corporate (e.g., early retirement 'packages') workers fit this category.

There is also a fraction of people obtaining economic resources from others, either by charity or by force (read: government). These people are not participating in the labor force because others are working for them. There is some overlap between this group and the 'early retirement' group noted above, particularly w.r.t. government workers who retire early. This is because their pensions are paid by taxpayers.

Whatever the case, people not participating in the labor force represent productive capacity that is not being utilized. This is lost production--lost wealth that could have improved general standard of living. This is an important component of unemployment that is missing from the headline number. People will therefore be likely to neglect pondering the consequences of so many people not working.

Although politically distasteful (since the number will be higher), the most meaningful unemployment number is this one: total number of people not working/total number of people.

This metric provides the best insight into the economic and social consequences of lost productivity on standard of living.

Thursday, September 6, 2012

"We're in this Together"

I'll move myself and my family aside
If we happen to be left half alive
I'll get all my papers and smile at the sky
For I know that the hypnotized never lie
--The Who

Belief that collective goals are larger than the individual has been central to the Progressive movement.

Similar belief fostered growth of the two most tyrannical political systems of the 20th century. Both communism and facism flourished under auspices that goals and achievements of the nation were more important than the pursuits of the individual. Citizens who bought into this notion facilitated some of the world's worst atrocities. Those who pushed back were punished.

There is nothing wrong with putting the concerns of others ahead of one's self. Indeed, 'dying to self' is Christian doctrine.

But reason tells us that doing so must be voluntary. Someone who is forced to work on the behalf of others is but a slave.

Today the political rallying cry is, "We're in this together!" This is the familiar rhetoric of tyrants--of those willing to intrude on the free pursuits of others. These people want to force you to do what they want.

As currently employed, "We're in this together" is a euphemism for compliance at gunpoint.

Wednesday, September 5, 2012

The Fed and Price Stability: Unpilled Version

"You take the blue pill, the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland and I show you how deep the rabbit hole goes."
--Morpheus (The Matrix)

Some great charts on inflation in this post. From the chart on the left, can you guess when the Fed was created? C'mon, no peeking at the chart on the right...

Browse the charts in the post and marvel in relation to the Fed's charter of 'price stability.' Marvel in the sense that somehow we think the Fed has actually been stabilizing prices. As the chart indicates, prices were much more stable pre-Fed.
It seems that we have chosen the blue pill.

Tuesday, September 4, 2012

$16 Trillion Roundabout Now

The muses dance and sing
They make the children really ring
I'll spend the day your way

Federal debt is now north of $16 trillion. The trillion dollar milestones are passing by pretty fast. Borrow and print, print and borrow...

Monday, September 3, 2012

Spending and Debt by Administration

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

As election time approaches, both parties are slinging around claims related to spending and debt by various administrations. Both sides, of course, have a vested interest in making the data shine in their particular direction. 'Truth telling' seems to be the buzzword and when it comes to economic data, politicians typically offer half truths at best.

In politically charged environments, the best way to find truth is to examine the evidence yourself. Using data from and, I took a look at federal government spending and outlays by four year presidential term since 1900.

Some people argue that the first year of an administration should be omitted or credited to the prior administration because spending done in a president's first year is largely passed by Congress in previous years. True about Congressional bill passage, but some of those spending bills are enacted by incoming presidents who could have vetoed them, or pushed for new legislation in the opposite spending direction. It is also possible that incoming presidents could exacerbate spending programs in motion by pushing for more in the same direction. In short, incoming presidents exert enough control to justify the first year's inclusion in analyses of fiscal accountability.

Let's look at the data:

The first thing to notice is that we've come a long way over the past 100 year relative to spending and debt. Single digit $billions have become double digit $trillions. Term-over-term increases in outlays are simply mind numbing, as are increases in debt that predictably followed (but lagged a decade or two) to fund the spending.

Only two times in the past century have federal outlays actually declined. Both followed large wars and could be seen as outlier periods where spending was being brought back to 'normal.' The Harding/Coolidge era is particularly noteworthy in that it was the only administration that oversaw reductions in both outlays AND debt.

Outside these two periods, spending and debt has always gone up. Always.

Partisans who claim that their party's administrations increase spending or borrowing at a lower rate than the other side are out of luck. Using the post WWII era for comparison, I started with Ike's second term and and calculated the average spending and debt % increases for the 6 Democratic administrations and 9 Republican administrations during this period. The averages favor the Democrats, with average % change in outlays for Democratic admins at 30.9% versus 34.5% for Republicans. But t-tests imply that these differences are nowhere close to statistically significant (p = .67). Same with average % change in debt: 27.2% for Dems, 41.7% for Reps, p = .250.

Now we come to the meat of the matter as it relates to the current political debate. Republicans claim that the Obama administration has an abysmal record regarding spending and debt. On an absolute basis this is certainly true: Obama spending = $14.4T (2nd Bush term = $10.2T), debt = $16.0T (Bush2 = $10.0T). The incremental outlays (+$3.5T) and debt (+6.0T) during the Obama administration are literally historic for a 4 yr presidential term.

However, on a relative basis, Obama increases in spending (+32.6%) are middle of the pack and Obama increases in debt (+59.5%), while on the high side of the range, have been seen before. In fact, the Republican administrations of Reagan and Bush consistently ran up high end increases in debt in the 1980s/early 1990s.

The real problem facing the Obama administration is explaining the spending and debt increases relative to GDP (highlighted in yellow at the bottom right of the table). GDP growth has faltered during this administration at +8.8%. This constitutes a record low for an administration since GDP data collection began in 1930. Combine tepid economic growth with large increases in spending and debt and you get alarmingly high ratios relative to GDP. The Obama administration's outlays:GDP (92.1%) and debt:GDP (102.5%) are both non-wartime records. Research suggests that such ratios portend big problems, and the Obama administration has yet to convincingly justify why such an extreme gamble is prudent.

To be fair, not all of this predicament can be attributed to the Obama administration. Socialistic and militaristic policies, and the spending and borrowing to fuel them, have been escalating for many years.

But this administration has been stepping on the gas instead of the brakes -- with predictable and ominous results.

Sunday, September 2, 2012

Cover Me

Times are tough now, just getting rougher
This old world is rough, it's just getting rougher
--Bruce Springsteen

Contrarians are likely raising eyebrows at this week's Barron's cover.

The 'cover indicator' theory states that by the time social trends reach the covers of magazines, these trends are usually nearing their end. Historically covers like the one above have interesting records as harbingers of trend reversals.

Fade trade pending?

position in SPX

Saturday, September 1, 2012

Magnum Force

Captain Briggs: Think things over, Callahan. Get with it. It's a whole new ball game these days.
Harry Callahan: Funny. I never thought of it as a game.
--Sudden Impact

When Clint Eastwood spoke at the recent Republican National Convention, the stage backdrop featured his cowboyesque silhouette with gun in hand.

An appropriate image, I thought. Not because it reflected the 'rugged individual' role that Clint often plays in the movies. But because guns are synonymous with government. All government actions (laws, regulations, rules) must be be backed by the point of a gun lest they would not be credible.

In some cases this is good. The proper role of government is to use its force to protect people against unwanted invasion by others. When government does so, liberty is enhanced because individuals do not have to spend all of their time defending their person and possessions.

In other cases, however, people employ the strong arm of government to forcefully take from some for the benefit of others. This, of course, is bad. It constitutes robbery, slavery, and even death in some cases.

Republicans who believe that their party is one of limited government in defense of liberty are delusional. Past record and current platform demonstrate that this party points guns at people to take, not protect, liberty.

The gun toting image applies perfectly to the Democratic Party as well. Many Democrats appear to be even more delusional than Republicans. Dems often talk themselves into believing that they are non-violent 'peace lovers' and that they hate guns.

Utter nonsense. Democrats are unabashed supporters of Big Government. By definition Democrats must employ gun toting government agents to act in their interests. In a world without guns, the Democratic Party as currently platformed could not exist.

If they were to be completely honest, both parties would post images of government officals holding guns behind convention podiums throughout the program of speakers. Both parties currently campaign on platforms of excessive force.