Friday, November 30, 2012

Not Worth a Dime

Wasted, sacrifice for a new nirvana
Night time, send us on our way
--Icicle Works

When I first saw the title of this article, "Congress Looks At Doing Away With $1 Bill," I presumed it meant that, like the penny, the dollar isn't worth much any more so why keep it around. Just today, in fact, Judge Nap observed that the value of the dollar has declined 93% since the Federal Reserve was created in 1913.

But the point of the article wasn't to suggest the devaluation of the dollar. Instead it was the cost of maintaining paper dollars that deteriorate and wreak havoc on payments systems such as vending machines. the laughable thing about such an initiative is that the estimated cost savings to tax payers, about $4.4 billion over 30 years, is miniscule compared to the $trillions of dollar depreciation done courtesy of federal government monetary printing presses.

So the idea is to make coins. Not from precious metal, of course, but from alloys similar to those that comprise the cheap euro coins.

Were we to return to 90% silver-based dollars last struck in 1935, then the new $1 coins would be about half the size of current dimes.

Thursday, November 29, 2012


Welcome to your life
There's no turning back
Even while we sleep
We will find you
--Tears for Fears

Rothbard reinforces observations made on these pages regarding slavery.

"The interpersonal relationship under slavery is known as hegemonic. The relationship is one of command and obedience, the commands being enforced with threats of violence. The master uses the slaves as instruments, as factors of production, for gratifying his wants. Thus slavery, or hegemony, is defined as a system in which one must labor under the orders of another under the threat of violence."

Rothbard further observes that the slave who does the obeying chooses between 1) subjecting himself to the master, or 2) revolting against the regime of violence by using his own violence or by refusing to obey.

These pages have separated alternative 2) into three subsets--trying to escape the system, shirking, or pushing back.

Rothbard also addresses the argument that the slave might support the system because of some of the benefits (food, shelter, other resources) provided by the master. If that were the case, however, threat of violence would not be necessary. The individual would simply voluntarily place him/herself in the other individual's service. In hegemony, the slave is worse than he would be without threat of violence by the master. The master gains at the expense of the slave.

Wednesday, November 28, 2012

Loss Aversion

I can't come out to find you
I don't like to go outside
They can't turn off my feelings
Like they're turning off the light
--Phil Collins

Re our recent discussion of prospect theory, here is a picture of loss aversion expressed as a 'value function:' We can note several things.

Note that value is defined not in absolute terms, but in terms of change from a reference point A (a.k.a. the 'anchor').

Note the 'S-curve' nature of the value function. At small positive outcomes relative to the reference point, individuals enjoy relatively large gains in perceived value. As positive outcomes get larger, perceived value diminishes. The same thing happens in reverse for negative outcomes. Small negative outcomes relative to the reference point are associated with relatively large losses in value, while large negative outcomes generate incrementally less perception of loss.

Note, however, that the S-curve is not symmetical for gains and losses. The bottom of the S-curve associated with losses is deeper, meaning that negative outcomes are viewed more unfavorably than positive outcomes are viewed favorably. In the diagram, a positive outcome of x is associated with a gain of B, and a negative outcome of -x is associated with a loss of C. The absolute value of C is greater than B.

Axiomatically, when confronting decisions under condtions of risk, "losses loom larger than gains."

Tuesday, November 27, 2012

Theater of the Absurd: Taxes and Investment

Henry Drummond: You know Hornbeck, I'm getting damn sick of you.
E.K. Hornbeck: Why?
Henry Drummond: You never pushed a noun against a verb except to blow something up.
--Inherit the Wind

As the 'fiscal cliff' approaches, I have seen a number of studies and op-eds (including this one by Democratic Party shill Warren Buffett) suggesting that higher tax rates do not impact investment. Such arguments do not pass ECON 101 basics.

Assume an individual makes $1 million in income. Further assume that the individual's total tax rate (fed, state, local, sales, etc) is 40% (could be closer to 50% in some states). The person is left with $600,000 after taxes. Suppose that the individual consumes $400,000, leaving $200,000 in savings.

Now taxes increase 25% to a total rate of 50%. On the same income, the new rate leaves the individual with $500,000 after taxes. If the person maintains a similar lifestyle (consumption of $400,000), then $100,000 remain for savings.

The economy has just lost $100K in savings that could have been invested in productivity improvement.

Any tax increase on income reduces the potential pool of savings that can be used for investment. How can it be otherwise?

Of course, there are no limits to what gets debated in the political Theater of the Absurd.

Monday, November 26, 2012

Value Line

There are things we won't recall
And feelings we'll never find
It's taken so long to see it
'Cause we never seemed to have the time
--Phil Collins

Nice reminder from John Hussman that markets generally remain in an overvalued state. While we have come off the tech bubble highs, valuations remain rich compared to historical levels.

As Dr J frequently notes, overvaluation reduces expected returns moving forward. His models, which tracks very well versus actual returns, suggests prospective 10 yr returns at under 5% annually.

While that might seem attractive given 'risk-free' rates at financial repression levels under 1%, the ride on equities toward an annualized 5% is likely to be bumpy. For example, were equities to revert to mean valuation levels, indexes could easily be cut in half from here.

Those plowing significant monies into stocks here thinking that we're in a 'new normal' do so quite literally at their own risk.

position in SPX

Sunday, November 25, 2012

Marginal Tax Rates

Should five percent appear too small
Be thankful I don't take it all
--The Beatles

Prof John Cochrane at the Univ of Chicago offers some brief thoughts on marginal tax rates. Marginal tax rates are the penalties associated with bringing in streams of economic resources. Those resources may be brought in via production or via transfer payments from others' production.

The top marginal federal income tax rate is currently 35%. For unmarried individuals, this means that 35 cents out of each dollar earned in excess of $388,000 goes to the federal government.

Marginal tax rates are not just a concern for producers trying to determine how much of their production that they will be able to legally keep. Marginal tax rates are also a concern for people who are living fully or partially off the production of others. Because transfer payments phase out with rising income, personal production that exceeds these phase-out points serves as a tax--i.e., it reduces the incoming stream of economic resources.

Thus, people on welfare must worry about marginal tax rates as well. The marginal tax in their case is the loss in transfer payment income incurred when production income increases. If the marginal tax rate is high enough, then it serves as disincentive for getting off the dole.

Cochrane also observes that all taxes must be considered in marginal tax rate calculations - federal, payroll, state, local, sales, excise, and phaseouts. Cochrane suggests this CBO study as one that sheds some light on marginal tax rates facing lower income individuals.

The overarching point here is that in any social system where wealth is redistributed to some degree, both producers and non-producers face marginal tax rates that influence incremental economic calculation.

Saturday, November 24, 2012

Prospect Theory and Progressive Income Taxes

"I don't like losses, sport. Nothing ruins my day more than losses."
--Gordon Gekko (Wall Street)

An important contribution of prospect theory (Kahneman & Tversky, 1979) is the concept of loss aversion. Generally speaking, losses feel more than gains feel good. As such, people will often go to great lengths to avoid or recover from losses.

Loss aversion classically applies to investing and risk management. A 10% decline in a portfolio position stings more than a 10% increase soothes. Investors may dislike the feeling of a losing position so much that they 'double down' on their gamble in hopes that the position will quickly return to 'break even.'

As successful gamblers well understand, a general habit of adding more to losing positions is likely to land you in the poor house sooner or later. As such, the implications of loss aversion on general capacity to invest and hold onto wealth are somewhat ominous...

A tangential application of loss aversion relates to progressive income taxes. Since their advent over a century ago, progressive income tax schemes have typically been justified by 'ability to pay' doctrine. People who earn more income seen as having more discretionary income that can be spared for tax purposes.

When high earners balk at paying higher rates, proponents of progressive income taxes are quick to chastise. "Why should they complain about paying more? They're still making a ton."

But from the high earners' standpoint, they are losing instead of making. While a 40% marginal rate means that a high earner still keeps $600,000 on a million dollars in marginal income, that earner is apt to see it as a $400,000 loss. As such, that earner may go to considerable lengths (e.g., support anti-tax lobbies, tax shelters, off shore accounts, maybe even dial back on production) to mitigate those losses.

Ironically, many of those high earners voluntarily give away large portions of wealth to charity. These donations are likely viewed as gains, perhaps in the form of psychic income, rather than losses.


Kahneman, D. & Tversky, A. 1979. Prospect theory: An analysis of decision under risk. Econometrica, 47: 263-291.

Friday, November 23, 2012

Self Interest

There's so much that we need to share
So send a smile and show you care

An axiom of human behavior is that people act. They act in a way that they think will improve current situation. Stated differently, people act in a self-interested manner.

Self interest is often interpreted in material terms. People act in a manner that improves their material income.

But material well-being is not the only possible objective of self-interested action. People can also act in a manners that generate psychic income--i.e., acts that generate feelings or mental states that improve psychological well-being. For example, acts of sharing or charity may generate good feelings about helping others.

Mother Teresa is often viewed as a very unselfish person due to her lifelong efforts to help others. More likely, she was acting in a manner that generated great amounts of psychic income. Perhaps this income included the secure feeling that she would be well-rewarded by her Creator in the afterlife.

Acts of benevolence are not the only possible sources of psychic income. Hostile acts toward others, such as revenge, sarcasm, murder, robbery, etc., may also improve psychological well being. Feelings of superiority, of being right, of facilitating a more 'just' world all may drive, may drive acts of aggression by people seeking to improve their psychological position.

The next time you think that you or someone else is acting 'unselfishly,' think again.

Thursday, November 22, 2012

Escalating Moral Hazard

"The mother of all evils is speculation - leveraged debt."
--Gordon Gekko (Wall Street: Money Never Sleeps)

One of the best scenes in Wall Street 2 is the meeting at the NY Fed meant to reflect the Fall 2008 situation. Prices are plummeting in all asset classes (especially mortgage-backed securities and associated derivatives), and all big banks face insolvency. The bank CEOs have gathered round the table with government officials with hats in hand. They need a bailout or they are history.

The Hank Paulson look alike Treasury Secretary berates the group for taking too much risk. Chief antagonist Bretton James, who had ironically only months before successfully led an argument in the same room against bailing out a Bear Stearns-like firm for taking excessive risk, now leads the other side of the argument. The fact that the banks took much risk didn't matter, he argued. If the government didn't bail out the firms, there would be no financial system tomorrow.

We know what happened.

So here we are a few years and bailouts later facing yet another 'fiscal cliff.' The argument goes that if government does not intervene with another round of interventions, then the economy goes over the cliff.

It doesn't matter how we got here, politicians argue. We need to save the system so that there will still be a tomorrow.

Every time that we buy into this line of thought, we lever up the system  some more. People see the bailouts, so they take more risk.

We have trapped ourselves in our own moral hazard.

Wednesday, November 21, 2012

Mother Chip Back on the Ship

We thought just for an instant we could see the future
We thought for once we knew what really was important
--Til Tuesday

Started a position in Intel (INTC) this am. Stock has been getting sold hard since late summer, and then broke thru $20 on news that CEO Paul Otellini will be retiring in the spring. Naturally, analyst downgrades followed.

My history with Mother Chip stretches back to the tech bubble glory days, when INTC was my largest and most productive holding. Since then, the name has been back on my sheets more than a few times in more of a trading position. Must admit to a bit of sentimentality each time it does so.

INTC's market cap currently stands at about $96B. Although it used to be debt free, it still holds about $3B in net cash. In each of its last two fiscal years, the company generated over $10B in free cash flow - although achieving similar this FY may be a bit of a stretch. On an enterprise value to FCF basis, the stock seems decently valued. It also sports an attractive 4.6% yield.

The stock is now oversold on multiple time frames--although that doesn't mean is won't get more washed out. In fact, technicals suggest support below at $18ish and $16ish.

Should the stock reach those levels, I'll likely be a better buyer.

position in INTC

Tuesday, November 20, 2012

More Utilization of Less Capacity

"Six bucks and my right nut says we're not landing in Chicago."
--Del Griffith (Planes, Trains & Automobiles)

Brief thought upon returning from trip to Left Coast. Planes out and back filled to the brim--as full as I've seen them and I've flown on many Thanksgivings.

Indicator of economic health? Probably less than at first glance. Why? Airlines operators have cut way back on flights. Entire terminals at CVG are dark. When I hit the parking garage upon return tonite, I was surprised, almost stunned actually, at how empty the parking garage was.

Far cry from the heydays of Thanksgiving travel.

Monday, November 19, 2012

Drowning in Capacity

Let me flow into the ocean
Let me get back to the sea
Let me be stormy and let me be calm
Let the tide in, and set me free
--The Who

That capital spending in the US is at notably low levels should not be a surprise. Interest rates have been driven lower by central bank policies for three decades:

This secular decline in cost of credit motivated diligent borrowing and spending by US corporations. We now face an overbuilt situation, with potential supply out of balance with demand:

Moreover, by borrowing more to live better in the present, we have saved less, thus depleting resources that could serve as capital for future productivity improvement. With current debt so high, it will be difficult to rebuild savings while paying back loans.

Corporations also face regime uncertainty, which further discourages net capital investment.

Given the present environment of high debt, low savings, low capacity utilization, and significant regime uncertainty, the real surprise would be an extended increase in real investment.

Basic economic laws suggest that the chances of such a surprise are low.

Sunday, November 18, 2012

Why Study the Numbers?

You never let me cross to the other side now
I'm tied to the hope that you will somehow

Interesting note as always by Kyle Bass (would recommend reading his actual letter rather than the ZH summary). Just one observation here. Bass asks, "How many market participants actually study the numbers?"

Efficient market hyptheses would suggest that the number are generally well studied and the information appropriately discounted in prices. Of course, we know that markets are less than efficient in processing info.

I'm wondering whether market participants are now prone to study data to a lesser degree than in the past. One hypothesis would be that the environment has become too confusing for many investors, thereby leading them to give up cognitive study of the data. Another hypothesis would be that investors feel threatened in the present environment, thereby leading them to follow others who they feel must have accurately interpreted the data.

Still another, and not althogether unrelated hypothesis, is that investors have grown accustomed to the bailout context, and since they are confident that government has their backs they feel less need to chew thru information.

After all, why expend the effort to assessment market environments if risky behavior is insured by government?

Friday, November 16, 2012

Liquid Twinkies

And the union people crawled away ay ay ay ay ay ay
--Billy Joel

Looks like unions will 'win' their strike vs Hostess Brands. Unfortunately that win means HB will liquidate. 18,000 jobs lost.

Another demonstration that trying to fix price of labor above market results in compulsory unemployment.

Thursday, November 15, 2012

Getting Clinical

No place to be ending but somewhere to start

An Oklahoma clinic provides a glimpse at what competitive medicine can look like. Current health care markets are so hampered that posting of a simple price list of procedures seems almost stunning.

The clinic also encourages non insurance business and cash payments. Great comparison of invoices between this clinic (simple half page) and a local Medicare/Medicaid hospital (multi-page maze of charges) as well.

In today's hampered health care markets, consumers have little incentive to shop for value. Without that incentive, the pressure is off producers to innovate.

The paper file storage area shown in the video looks no different than file areas I visited at major hospitals and clinics when I was involved in a corporate health care improvement initiative in the early 1990s. Given the advances in info tech in the last 20yrs, it is hard to imagine that this time warp would be present if competitive pressures were driving this market.

Obamacare will make the conventional health system worse.

Maybe this OK clinic is an example of an alternative market. What if some producers leave the conventional system and build their own--one that actually caters to the consumer?

Wednesday, November 14, 2012

Sweet Smell of Secession

Relax said the night man
We are programmed to receive
You can check out any time you like
But you can never leave
--The Eagles

Secession is a strategy for coping with oppressive government that has been recognized since the country's founding. It is currently attracting attention because of secession petitions being posted to the White House's We The People website. Petitions have now been posted from all 50 states and have currently amassed nearly three quarters of a million signatures. The Texas petition alone is just shy of 100,000 signatures as of this writing.

The terms of We The People website state that petitions that amass more than 25,000 signatures in 30 days require a response within 30 days, so it appears that the White House staff will be cranking up the form letters.

Generally, the petitions follow a form as well. "Peacefully grant (State Name) to withdraw from the United States of America and create its own new government."

Unfortunately, the president does not have the constitutional authority to approve (or deny for that matter) secession requests. The decision to secede rests with the states themselves. Historically, this has taken the form of conventions where one or more states discuss the issue, and vote on whether to reject the US Constitution and draw up a new constitution. While the actions of Southern states prior to the Civil War are well known, there were several other secession threats prior to 1860.

Judge Nap provides some interesting info on secession and the Constitution in the context of the current Texas secession petition.

I have read several editorials essentially saying, "Go ahead and seceed!" Some for 'good riddance' reasons. Some for 'they'll be sorry' reasons. et al.

Some deja vu, perhaps. When Southern states were undertaking secession proceedings in 1860-1861, editorial sections of Northern newspapers clearly indicate that secession as a Constitutional right was widely respected, if not welcomed (Perkins, 1964). Many of those editorials contained the same 'good riddance' et al. flair popping up today.

Unfortunately, when push came to shove, the federal government would not uphold the rights recognized and respected by people on both sides of the issue, and proceded to use deadly force to reverse the secession movement.

By its actions then, the federal goverment asserted that it has the right to kill people who try to exercise their rights elaborated in the Declaration and protected by the Tenth Amendment.

By their actions today, many citizens disagree with the federal government's assertion.


Perkins, H.C. 1964. Northern editorials on secession. Gloucester, MA: Peter Smith.

Assassinate and Escalate

"We fight over an offense we did not give, against those who were not alive to be offended. What is Jerusalem? Your holy places lie over over the Jewish temple that the Romans pulled down. The Muslim places of worship lie over yours. Which is more holy? The wall? The mosque? The Sepulchre? Who has claim? No one has claim. All have claim!
--Balian of Ibelin (Kingdom of Heaven)

This morning Israel took out Hamas' chief of staff in a precision airstrike. Israel says that the assasination was in response to recent shelling of Israeli soil out of Gaza, which was Hamas' response to recent Israeli aggressions, etc.

Not sure how much longer this thing can escalate before the region gets really hot.

Oil, btw, is up a percent on the news.

position in oil

Tuesday, November 13, 2012

Lincoln Lenses

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

Isn't it amusing that the Left likes to paint those who founded the country as racists while giving Lincoln a free pass, despite overwhelming evidence of Lincoln's racist tendencies?

The difference, of course, is that the Framers endeavored to suppress government in favor of liberty, while Lincoln endeavored to suppress liberty in favor of government.

Lincoln's Big Government practices caught the eye of Statists around the world, including Karl Marx. It shouldn't be surprising that Lincoln captivates today's Left as well.

Lincoln's racism, however, upsets the Left's narrative. So, similar to being unable to view income taxes as a form of slavery, the Left must see Lincoln through a lens that filters out his racist behavior.

Monday, November 12, 2012

Mass Production and Capitalism

I'm not expecting to grow flowers in the desert
But I can look and breathe and see the sun in winter time
--Big Country

In operations management, mass production is often defined as generating high volumes of low variety output. Mises masterfully observes that mass production essentially involves producing for the masses.

Prior to the advent of capitalism, processing methods existed almost exclusively to serve the needs of the upper class. Below aristocracy, people lived in a state of squalor--a condition that held for centuries.

Capitalistic industries changed this because they produced things that could be purchased by the general population. Despite laughable claims by anti-capitalist pundits to the contrary, capitalism, even in hampered form, has alleviated scarcity like no other system. Standard of living has been elevated to levels that aristocrats could not have contemplated a couple hundred years ago.

This article is taken from a series of lectures that Mises delivered to officials in Argentina in 1958. Mises was urging Argentina to turn away from socialism toward capitalism via talks given at the University of Buenos Aires.

In addition to the mass production observation, this lecture on "Capitalism" contains many other nuggets, including:

Producers are not kings in capitalism but servants. The biggest enterprise loses its power and influence when it does not adequately serve customers.

Freedom of competition means freedom to invent something to challenge existing producers in an industry. This might incur developing a 'substitute' industry to challenge encumbent producers (the railroad example). "The development of capitalism consists in everyone's right to serve the customer better and/or more cheaply."

The familiar stories about 'sweatshops' in early capitalism commonly ignore the precapitalism alternatives that workers were escaping, namely starvation and death.

Mises observes that the basic difference between higher and lower classes has narrowed with capitalism. In the 18th century and earlier, the middle class had shoes while the lower class did not have shoes. American's categorized as 'poor' today enjoy more amenities than the wealthly of two centuries ago.

In capitalism, wage rates are not set by employers. They are set by consumers.

Interestingly enough, the term 'capitalism' was coined by one of its greatest enemies, Karl Marx. But that is no reason to reject the term, suggests Mises, because "it describes clearly the source of the great social improvements brought about by capitalism. Those improvements are the results of capital accumulation; they are based on the fact that people, as a rule, do not consumer everything they have produced, that they save - and invest - a part of it."

"Higher standard of living depends on the supply of capital."

This is wonderful piece that should be read in its entirety.

Sunday, November 11, 2012


So many people have come and gone
Their faces fade as the years go by
Yet I still recall as I wander on
As clear as the sun in the summer sky

Have been (very slowly) chewing thru Daniel Kahneman's (2011) book, Thinking, Fast and Slow. Kahneman, along with his late colleague Amos Tversky, won a Nobel in economics for their work on prospect theory (Kahneman & Tversky, 1979)--theory that has made its way into these pages now and then.

This book is essentially an aggregate of Kahneman's research and thought in decision-making and judgment. There are many nuggets that I hope to reflect on here. Right now, I wanted to jot a quick thought on intuition.

Intuition is knowing something without having to engage in large amounts of analysis. Instinct. Kahneman is skeptical about the value of intuitive judgment in many situations. This is because the human mind is subject to many biases (overconfidence, confirmation, anchoring, availability, etc) that lead us to believe something is true when is is false. What we believe to be intuitively correct is often incorrect. Kahneman presents evidence to confirm this.

However, there are situations where intuition obviously 'works.' Chess players, professional athletes, firefighters, and other groups often display uncanny instinctive judgment. Simon (1987), among others, attributes intuition to intense pattern recognition processes, where the mind combs vast previous experiences for situations that match the present case.

High degrees of intuition therefore require practice, experience, and feedback so that individuals can learn relationships between variables and file large numbers of useful cases in memory for future retrieval.

Kahneman suggests that high levels of experience are not enough. The learning environment must be conducive for learning about true relationships between variables. The environment must have a limited number of variables that do not change much over time--as well as small enough lags between stimulus and response to enable the understanding of true relationships.

Stable contexts like chess and firefighting fit this profile. Turbulent contexts like markets and political punditry don't.

As such, Kahneman concludes that making good intuitive judgments about markets and investing/trading decisions is very difficult if not downright impossible.

Not sure I totally buy into his conclusion. After all, it is possible that some individuals are able to identify critical variables and relationships better than others--even in turbulent environments.

That said, the core message from Kahneman is a good one: think twice before acting on your next 'feeling.'


Kahneman, D. 2011. Thinking, fast and slow. New York: Farrar, Straus and Giroux.

Kahneman, D. & Tversky, A. 1979. Prospect theory: An analysis of decision under risk. Econometrica, 47: 263-291.

Simon, H. 1987. Making management decisions: The role of intuition and emotion. Academy of Management Executive, 1(1): 57-64.

Saturday, November 10, 2012

SNAP Together

Your voice will sink 
so please stay off of my back
Or I will attack
And you don't want that

Recipients of foodstamps hit another all time high in August at 47.1 million Americans. The Aug increase (+421) was the highest in one year.

Wonder how many among these 47.1 million indicate that their situation is better today than four yrs ago...

As noted by ZH, the monthly data were released more than a week past the usual release time. Convenient, of course, with the election this past Tues.

Friday, November 9, 2012

After the Vote

I thought of all the times gone by
And laughed aloud at the crimson sky
--Modern English

Domestic equity markets have been for sale since Tuesday's election. After Wednesday's 3% move to the downside (largest this yr), yesterday sliced another 1% followed by a rally attempt this morning that pretty much fell apart this afternoon.

Bulls have to feel uneasy at this end of week position. The indexes ended the week below their 200 day moving averages. While daily stochastics are starting to get oversold, longer horizon charts are nowhere close to oversold. Am starting to eye those June lows as a potential LZ.

Meanwhile, Treasury yields broke lower out of the multi-month pennant pattern. Perhaps July's all time lows are beckoning.

All of this looks like classic 'risk off' activity. The macro factors continue to wag the dog. Not only do we have the next installment of 'fiscal cliff' approaching here with all of its appendages (including higher capital gains and dividend tax rates), but Europe is once again gaining attention now that election is in rear view mirror.

Outside of minor trimming midweek to already modest equity positions, I haven't done much. Does increasingly feel like rallies can be sold. As such, may look for opportunities to add to my index short.

position in SPX

Thursday, November 8, 2012

Wrong Hill

Do you want to know that it doesn't hurt me?
Do you want to hear about the deal that I'm making?
--Kate Bush

Both Republican Party reps and media pundits are busy jabbering about what is 'wrong' with the GOP and how to fix it. One claim is that the GOP is not 'inclusive' enough. Exit polls from Tuesday suggest, for example, that Latinos voted for Obama almost 3:1. The proposed solution is to relax positions on entitlements and immigration in order to capture more of the demographic.

In other words, the GOP needs to offer privilege in order to buy votes.

This is classic big government thinking about how to fix a political party already dominated by big government types. The fundamental problem with the GOP is that it has generally supported the same statist solutions favored by the Democratic Party, perhaps only to a slightly smaller degree. With respect to beliefs about scope of government and sovereignty of the individual, the ideologies of the Republican and Democratic Parties are more alike than different.

As more people find that they obtain resources from others using the strong arm of government, why would voters prefer 'statist-light' candidates when they can elect full strength statists? Moving closer to the full strength statism merely solidifies the nearly One Party design.

Offering something different to voters would mean moving toward the low government scope/high individual sovereignty area of the political landscape.

As much as such a migration agrees with my sensibilities, it seems unlikely to produce much in the current environment. As long as government can take resources from some for the benefit of others, then politicians can dangle their confiscatory power as bait for votes.

When people can vote entitlements their way, they will do so.

Wednesday, November 7, 2012

Breaking Serf

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

Personal 'fast market' today, but wanted to post a thought running thru my crowded keppe about last night's election. Was surprised by the number of voters 'in the middle' who voted to re-elect this president despite his poor record on the economy and no credible economic plan going forward.

The truth underlying the 47% notion is revealing itself. We saw it reflected in the political ads. Easily three quarters of all Obama ads in the last month suggeted either that a Romney presidency would remove some entitlements, or that an Obama presidency would preserve or produce entitlements.

Then we saw it reflected in the vote.

As dependency grows with government capacity to fill that dependency, democratic elections become the means for obtaining economic resources on the backs of others. With dependents capturing majority status, hard not to wonder whether we're passing the tipping point where the system starts consuming itself.

When electoral paths are paved with bread and circuses, there can be little doubt about where the paths lead.

Tuesday, November 6, 2012

Law, Liberty, and Justice

Jack Ryan: You broke the law!
Ritter: You are such a Boy Scout. You see everything in black and white.
Jack Ryan: No, no, no! Not black and white, Ritter. Right and wrong!
--Clear and Present Danger

Have been impressed with articles that I've read in the CATO Journal. Academic, interdisciplinary studies of policy in a liberty context. Am now a subscriber. Given my evolving research interests, I may even consider a future submission...

Meanwhile, there is a particularly fine piece at the end of the current issue authored by CJ editor James Dorn titled "The Scope of Government in a Free Society." Recommended reading. At the end of a well cited section on 'Law, Liberty, and Justice,' Dorn concludes:

"In sum, law, liberty, and justice are inseparable. Law is the use of force to protect our natural rights to life, liberty, and property; liberty is the freedom to act within the law; and justice is the safeguarding of property broadly conceived." (p. 634)

I find this an exceptional summary of law, liberty, and justice in the context of a free society. As Dorn demononstrates, it is consistent with scholarly thought and with the thoughts of the Framers.

Monday, November 5, 2012

Kids Get It

Things they do look awful cold
I hope I die before I get old
--The Who

Was over my sister's house last Sunday watching football with election commercials crowding every break. As sighs went up about how glad we'll be when we would not have to endure election ads any more, my 12 yr old niece exclaimed, "Why don't they use all the money wasted on these commercials to pay down our debt?"

Sharp cookie, my niece.

Increasingly, I suspect that kids and young adults grasp the gravity of our financial situation better than the adults. Because sophistry employed by adults to rationalize problems does not work well on them, kids and young adults are good at seeing problems for what they are. They know that spending all of your money is generally unwise, and that borrowing to spend more is usually very unwise. By observing what is going on at home via strained family finances, they know that debt burdens future lifestyle.

Anxiety is also growing that the mountain of debt being racked up by adults today will need to be paid down by the kids tomorrow.

Indeed, the kids get it. Adults are making increasingly leveraged bets that elevated lifestyles can be maintained with more spending and more debt--rather than dealing with extended periods of austerity necessary to repay debt and replenish savings vital to future productivity improvement. Although kids may not be able to explain it precisely, they are uneasy about the risky nature of adults' bets. They sense the burden that will fall on them if the bets don't pay off.

If the bets fail, then our kids face the consequences of our foolishness.

Sunday, November 4, 2012

Whispers of Deflation

Birds fly in the eyes of the faithless daughter
Broken at the better end
Wasted sacrificed for a new nirvana
Nighttime sends us on our way
--Icicle Works

Looks like an outside down day for the Dow on Fri. Seems a date with the 200 day is imminent.

Meanwhile, gold is breaking down, w 200 day coming into view here as well.

Ten yr Treasury yields continue to work the pennant with preference toward the lower edge.

The charts seem to be whispering deflation.

positions in SPX, gold

Saturday, November 3, 2012


"You are not what you were born, but what you have it in yourself to be."
--Godfrey of Ibelin (Kingdom of Heaven)

Increasingly, it seems, success is being questioned. One argument is that successful people get there because of exogenous factors such as heredity, upbringing, and luck.

If we split luck out into a separate 'error' term, exogenous factors constitute one of three sets of factors in the success equation:

Success = endogenous factors + exogenous factors + error (luck)

Because the exogenous factors are largely predetermined, they resemble a constant term in the success equation--a success baseline of sorts. It seems likely that this success baseline is tiny compared to a person's potential for success.

Achieving success beyond the baseline requires an individual to engage endogenous factors. Skill levels honed through practice. Knowledge gained through learning. Proper attitude such as confidence and persistence.

Those factors under the control of the individual are those that determine ultimate level of success.

Friday, November 2, 2012

Voluntary Servitude

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

In a recent post, we prefaced a decision analysis with the assumption that people prefer freedom over slavery. At first glance such an assumption seems obvious and hardly worth mentioning. But it is possible that some people might prefer conditions that resemble slavery--i.e., conditions that require working for the benefit of someone else without receiving 'market value' benefits in return.

Preference for such a condition cannot be deemed slavery, however, since individuals seek it out on their own volition. Instead, the condition is one of voluntary servitude. What would cause people to prefer voluntary servitude?

We must assume that people who prefer voluntary servitude must not view the situation as asymmetrically as it appears. What seems a lopsided trade, i.e., much required work for little compensation, is actually viewed as a fair exchange through the eyes of the servant.

In fact, the trade may not be lopsided at all. Instead, contractual agreement may stipulate work to be done before or after the compensation. In loan agreements, for example, people often borrow resources from lenders in exchange for a promise to pay back what is owed in the future. Borrowers typically repay their loans out of future production. The borrower is compensated upfront, and then enters a condition of voluntary servitude to work for the lender in order to meet the terms of the contract.

Contractual situations where work and compensation are out of phase are not limited to today's debt-laden world. Historically, people have often been willing to work for others in exchange for security and protection as needed. In religious contexts, people who choose to be 'servants of the Lord' can be seen as exchanging production today for the Ultimate Benefit tomorrow.

Conditions of voluntary servitude may also arise in non-contractual situations. People may feel that they 'owe' others for past actions although no formal agreement was struck. Perceptions of indebtedness may stem from positive actions done by others on the debtor's behalf. For example, children may feel indebted to parents for a positive upbringing and endeavor to pay their parents back by serving them as they age.

Perceptions of indebtedness may also stem from negative actions done by the debtor to others. For instance, people may feel guilty about 'taking advantage' of others at some point in the past. In order to purge those feelings of guilt, debtors decide to work on behalf of those who have been wronged.

It is also possible that some people simply like being controlled by others. They fear or dislike freedom, and prefer situations where they are told what to do.

Finally, it is possible that some people may enter into conditions of voluntary servitude if they think that others will join them in a state of 'shared sacrifice.' They like the idea that all are giving freedom up for what is perceived to be the benefit of the collective. Alone, people may be reluctant to engage in a lopsided trade of much required work for little benefit. But if others do the same, then there is a sense that all are feeling the pain together.

It is unlikely, however, that all people will be willing to engage in shared sacrifice. This may upset some to the point where they will attempt to force dissenters into compliance.

Stated differently, some will be tempted to enslave others.

Thursday, November 1, 2012

Economic Bill of Rights

They gave you life
And in return you gave them hell
As cold as ice
I hope we live to tell the tale
--Tears for Fears

FDR proposed an 'Economic Bill of Rights' during his 1944 state of the union address. Roosevelt proposed that all US citizens have a right to a useful job, a decent home, good education, and adequate medical care. FDR asserted that "all of these rights spell security' and that after war the country should move forward to secure those rights.

The original Bill of Rights are grounded in natural law. They enumerate inalienable freedoms that individuals have from government interference.

FDR's Economic Bill of Rights are not rights at all. They are entitlements to economic resources. Providing such entitlements necessarily require government interference in the liberties that the original Bill of Rights protect. Delivering entitlements requires confiscation of resources produced by some for the benefit of others. Socialism.

Fortunately, FDR could not advance his agenda far because he died before WWII ended. Unfortunately, others have picked up the baton. The notion of entitlements engulfs the political field.

As entitlements grow, liberty declines.

And society crumbles.