Saturday, November 30, 2013

T-Note Yield Pattern

All you got is this moment
The twenty first century's yesterday
You can care all you want
Everybody does, yeah, that's ok

Prospective reverse head-and-shoulders pattern tracing out in 10 yr yields.

For many chartgazers, the 3% level (TNX 30) is the level of lore that would signify a brave new world if breeched.

no positions

Friday, November 29, 2013

Exhorting Aggression

"The Rome that you speak about does not exist."
--Alecto (King Arthur)

As I chewed through the Apostolic Exhortation recently authored by Pope Francis, it sometimes felt like I was re-reading sections of Marx and Engels (1848). This was particularly the case in early portions of Chapters 2 and 4.

As these pages recently observed, the Church, being composed of human beings, is influenced by the same proclivities that drive individuals, such as the desire to get more for less.

If the Pope would like to see more charity in the world, then he surely is in a position to ask that of Church members out of their own volition. But neither the Pope nor anyone else on earth has standing to force some to surrender resources for the benefit of others.

But that does not mean that even a pope will not be tempted to do so.

When the Pope invokes State power to do the Church's bidding, then the Church becomes principal to aggression.

Thursday, November 28, 2013

Giving Thanks for Property Rights

"Welcome to the New World, Captain."
--Jack Ryan (The Hunt for Red October)

In September of 1620, over one hundred colonists sailed from England on the Mayflower. Their destination was the New World. Forty one were Pilgrims from Holland seeking religious freedom. Eighteen were indentured servants bound as slaves for seven years. The remainder were mostly Anglicans from England seeking economic opportunity.

The group was funded by a joint stock company with a group of London merchants. In the alliance, each adult settler was granted a share in the company, and each investment of 10 pounds also received a share. At the end of seven years, accumulated earnings from the colony would be divided among the shareholders.

Until that division, the company decreed a communistic system of production and distribution. Each settler would contribute his/her all to the common store and draw from it according to need ("from each according to his ability, to each according to his needs").

The Mayflower landed at Plymouth in mid-December 1620. By the end of winter, half the colonists were dead. Hardship defined the next two years. Harvests were meager. Famine persisted.

The popular story is that the colonists didn't know how to farm and that it wasn't until local indians showed them the ropes that things turned around.

In reality, the major reason for the persistent hardship, for the "starving time," was the communism imposed by the company. William Bradford (1952), who became governor of the colony in 1621, wrote:

"The experience that was had in the common course and condition, tried sundry years and that amongst godly and sober men, may well evince the vanity of that conceit of Plato's...that the taking away of property and bringing community into the commonwealth...was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort. For the young men, that were most able and fit for labour and service, did repine that they should spend their time and strength to work for other men's wives and children without any recompense. The strong...had no more in division of victuals and clothes than he that was weak and not able to do a quarter the other could; this was thought injustice...Upon...all being to have alike, and all to do alike, they as good as another, and diminish...the mutual respects that should be preseved amongst men...Let none object this is men's corruption...all men have this corruption in them."

Bradford is describing a classic 'tragedy of the commons' problem. People acting in their own best interest deplete shared resources despite knowing that depleting common resource pool will hurt the group's long term interest.

In order to survive, the colony changed the rules. In 1623, communal property was replaced with private property. Each family was permitted to cultivate its own plot of land. Bradford wrote:

"The Governor (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves...And so assigned to every family a parcel of land...This had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and too their little ones with them to set corn; which before would allege weakness and inability; whom to have compelled would have been thought great tyranny and oppression."

When the Plymouth colonists finally sat down to celebrate that first Thanksgiving dinner, some perhaps said prayers of thanks for learning the lesson of property rights.


Bradford, W. 1952. Of Plymouth Plantation. New York: Knopf.

Wednesday, November 27, 2013

Negative vs Positive Freedom

No more running down the wrong road
Dancing to a different drum
Can't you see what's going on
Deep inside your heart?
--Michael McDonald

Proponents of the State have argued that there are actually two types of freedom: negative and positive. Prof Williams discusses the difference.

Negative freedom refers to absence of interference or coercion when people pursue their interests. This type of freedom is consistent with natural law and was the basis for the Constitution and the Bill of Rights. A right is a freedom the exists simultaneously among people while imposing no obligation on another. My right to free speech imposes no obligation on you except that of noninterference.

Positive freedom refers to possessing enough resources to act as one wishes. Under this view, people have a 'right' to things like housing, food, and healthcare. However, such things cannot be rights in the historical sense. Providing people with things that they did not earn though production imposes obligations on other people who do produce.

In negative freedom designs, the only legitimate use of force is for defensive purposes. People have the right to defend themselves against aggression and can apply counterforce to do so. Government's role is to help people defend their life, liberty, and property from attack.

In positive freedom designs, offensive force is legitimized to take resources from some to give to others. Government becomes a strong arm for aggression.

Upon examination, then, positive freedom is not freedom at all. Instead, the words are consistent with the bait-and-switch language strategy practiced by Statists. Use a term that people have affinity for and define it in opposite terms. Say 'freedom' but mean 'force.'

Positive freedom requires offensive force. Forcibly using some people to serve the purposes of another is the essence of slavery.

Tuesday, November 26, 2013

Jobs: Worse than the Headlines

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

Two interesting charts borrowed from a recent post by Prof John Taylor. First is the headline unemployment rate adjusted for workforce participation rate taken from this paper.

If we adjust for the number of people leaving the work force, which has been increasing, then the headline unemployment number would be more than 3 pts higher. Moreover, the gap between headline number and the adjusted number is increasing.

The other chart shows change in the percentage of working age population that is actually working following two recessions: the recent Great Recession and the Recession of '82--which btw happens to be when I first entered the workforce.

Unlike the period following the Recession of '82 when increasingly more of the working age population went to work, the end of the Great Recession has seen fewer working age people with jobs.

When will we realize that current economic policies are not only not improving matters...but making things worse?

Iran Progress

"When we're forced to go back in a couple of years, and please quote me on this, we'll be squared off against a shattered Iraq, a hopeless Afghanistan, and a nuclear Iran. How many troops are we going to need then? I guarantee you'll be adding some zeros."
--Senator Jasper Irving (Lions for Lambs)

Although I am critical of the Obama administration on most fronts, I applaud its leadership in brokering an interim deal with Iran regarding its nuclear weapons.

The agreement calls for Iran to curtail high level uranium enrichment and neutralize some rich uranium stockpiles in exchange for a reduction in trade sanctions. If Iran follows through on its promises, then its capacity for developing nuclear weapons will be reduced.

Predictably, hawks from the Right, and Israel, are protesting that the deal goes nowhere far enough. For example, Iran can still enrich uranium under this agreement. In addition, experience with other 'rogue' nations such as North Korea suggests that Iran could simply use this agreement as a smokescreen and proceed with its nuclear build-up.

Such arguments miss the mark. Neither the United States nor any other country or collection of countries has the right to dictate nuclear policy to another sovereign. Even if nuclear capability is directed toward weapon development, owning weapons is not an act of aggression. Weapons can be rightfully used for defensive purposes.

Many Second Amendment proponents hypocritically oppose weapon build-ups in other lands. The right to bear arms is not peculiar to the US. All have the right to build defense capacity as they see fit. The law tells us that perceiving someone else as a threat does not justify pre-emptive force to quell that threat. That other person must attack or must reasonably be perceived as on the cusp of initiating attack before counterforce is justified. If pre-emptive force is applied to neutralize a perceived threat that has not attacked, then that pre-emption is an act of aggression rather than of self-defense.

I would agree that the present deal with Iran does not go far enough--but in ways that both the hawks and this administration would not admit. A truly radical response to Iran's nuclear program would be this: totally withdraw all trade sanctions with Iran today. Encourage free, unhampered trade with Iran--and with all countries for that matter.

As such, from where I sit, the best part of the present deal is that trade sanctions have been reduced.

Perhaps Iran--and the US--and the world--can learn that the best interests of people in all countries are served when individuals engage in voluntary, peaceful exchange.

Monday, November 25, 2013

Inflation: A State-Induced Phenomenon

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

Inflation, whether classically defined as expansion of the money supply incommensurate with underlying production or currently defined as a general increase in prices (nice review of the evolution of the inflation term here) is a phenomenon of the State. The State owns the printing press and creates money by fiat. The consequence of that money printing is an increase in prices.

Sometimes prices increase quickly and sometimes they increase slowly. There are various reasons for inflation's varied effect on prices. One is that there are many categories of prices--i.e., goods and services, commodities, securities, real estate, etc. Newly printed cash might flow toward a particular category while leaving others relatively unaffected--at least for a while.

For example, the Fed is currently printing about $1 trillion annually as part of its Quantitative Easing (QE) program. Much of that cash has been going straight to banks. Banks, being the first users of the cash, have elected to use it to speculate in stocks and other financial markets. It should not be surprising that stock prices are hitting all time highs while goods and service prices have remained muted. QE cash has flowed primarily thru securities channels, thus pushing up prices in that category.

Another factor that varies inflation's effect on prices is confidence in the currency. If people feel that currency is maintaining its purchasing power, then they will be more inclined to hold onto it. When people hold onto money, prices do not increase and might even decline. However, if they lose confidence in a currency's purchasing power, then people will try to get rid of it like a hot potato. Prices rip higher as people do so.

The State hopes that prices increase at rates that people take for granted or do not notice. That way, the State can print cash to fund its interests without fear of reprisal. If it can do so, the State possesses the perfect tool for confiscating resources: an 'invisible tax.' As long as people don't notice or can't see it, then the State will use it to pick as many pockets as possible.

The State, however, has a few problems. One is that, like most thieves, State always desires more. If a particular amount of inflation is working, then why not increase it a little? As such, the State is likely to escalate its money printing ways until it is finally found out.

Another problem the State faces is that it does not not have complete control over the factors that influence inflation's effect on prices. Although stock and other security prices have been primary outlets for QE-induced inflation, at some point other price categories are likely to reflect inflation as well. For example, high priced securities might be sold, and sellers might spend the proceeds on, say, goods and services which will push those prices higher. Banks might also elect to make more loans that effectively put QE cash into the hands of consumers which, again, pushes goods and service prices higher.

It is also possible that people begin to lose confidence in the dollar. In 1920's Germany, money printing practices of the Weimar Republic were in broad view. Yet it took years before citizens connected the dots and realized that this inflation would destroy the purchasing power of the money in their wallets and in their bank accounts. Once confidence broke in the institution known as the German mark, we witnessed a rise in prices like the world has not since seen in an industrialized country.

Inflation is a State-induced phenomenon. Inflation lines the pockets of the State and its interests--until the State loses control of it.

Sunday, November 24, 2013

Church as Aggressor

"By religion I have seen the lunacy of fanatics of every denomination be called the will of god. I have seen too much religion in the eyes of too many murderers."
--Hospitaller (Kingdom of Heaven)

The Church is a worldly institution composed of human beings. It is therefore affected by the same proclivities that drive all individuals, such as the desire to get more for less.

If the Church sees the opportunity to use the force of government to advance its worldly agenda, then it will be tempted to do so.

When it does to so, the Church is like any other principle hiring strong armed agents to do its bidding.

The Church, in such situations, becomes the aggressor.

Saturday, November 23, 2013

Bad Law

Always on the run
Toward the rising sun
--Bad Company

Bad law, law grounded in discretion and faction, never lasts. Because it opposes the natural rights of man, bad law requires aggression to enforce. But that aggression tilts society further out of balance.

Chaos builds until bad law is thrown off.

Friday, November 22, 2013

Fifty Years from Dallas

"The organizing principle for any society, Mr Garrison, is for war. The authority of the state over its people resides in its war powers. Kennedy wanted to end the Cold War in his second term. He wanted to call off the moon race and cooperate with the Soviets. He signed a treaty to ban nuclear testing. He refused to invade Cuba in 1962. He set out to withdraw from Vietnam. But all that ended on the 22nd of November, 1963."
--X (JFK)

In second or third grade, I checked the book Meet John F. Kennedy out of the library. Although I surely encountered bits and pieces beforehand, this book was my formal introduction to the story of a man, seemingly one with much talent and promise, who was gunned down in mid-stride.

I liked reading about his achievements but was thoroughly saddened by the ending. I read the story over and over, perhaps hoping that events would turn out differently. The book was my favorite. So much so that our next door neighbor, who was a librarian, gave me a copy as a Christmas present.

Fifty years to the day after John F. Kennedy was assassinated, I know much more about the story. I am more versed in JFK's personal life and in his politics. And I am infinitely more knowledgable of the events and evidence surrounding that November day in 1963.

No one who seeks the truth can be satisfied with the official narrative of JFK's assassination. Jacob Hornberger summarizes the issues much better than I.

He also offers a nice bibliography of important findings from those who have been on the evidence path for years.

As tragic as that day in Dallas was, the assassination of JFK now offers people a chance to gauge how well they can think independently.

Thursday, November 21, 2013

Blue Skies and Contrarian Thinking

Always slipping from my hands
Sand's a time of its own
Take your seaside arms and write the next line
Oh I want the truth to be known
--Spandau Ballet

Nice interview with Jim Rogers on the coming collapse driven by money printing. Wanted to reflect, however, on comments at the beginning of the exchange. The interviewer asks JR to what he attributes his success as an investor.

He answered that he has learned to, "think against the crowd."

"When everybody says the sky is blue, I at least urge you to go and look out the window." Most people accept the claims of others without testing them for validity. If the claims of others are tested, you'll often find that the sky isn't blue.

On the other hand, if you see that the sky is blue outside, and everybody knows the sky is blue, then it's time to start thinking that "Well maybe tomorrow the sky will not be blue?"

"So I have learned that, for whatever reason, to know that change is coming, to know to think against the crowd, that the crowd is nearly always wrong, and to try to think for myself."

Engage your brain, and don't be dependent on the collective mindset.

Wednesday, November 20, 2013

Adverse Selection and Obamacare

"Some people just see you coming, I guess. They take one look and you and say, 'Oh boy...fresh meat!"
--Carla (Vision Quest)

Adverse selection occurs when information assymetries exist between buyers and sellers, resulting in undesirable outcomes for either the buyer or seller. These undesirable outcomes drive supply and/or demand from the market.

In economics, Akerlof (1970) elevated awareness of adverse selection by using information assymetry concepts to explain the frequency of 'lemons' in used car markets. Because buyers lack detailed knowledge about the quality of used cars for sale, they are generally not willing to 'pay up' for high quality cars. Owners of used cars see this, and are unwilling to put high quality used cars on the market. Less good cars on the market lowers the average quality of used cars on the market, which causes buyers to revise their average bid lower. As the bad drives out the good, the market spirals downward in quality and price.

Those familiar with Gresham's Law--the axiom that the production of bad money (e.g., fiat paper currency) drives out the good money (e.g., gold and silver coins--which people will take off the market and hoard)--should recognize the parallels. There are also parallels to the agency problem.

Akerlof's lemons problem aside, the term adverse selection originated years ago in the insurance industry. Here, information assymetry tilts toward the buyer. An adverse selection problem arises because high risk consumers, who are more knowledgable about conditions that might result in a claim, are more likely to purchase insurance policies than low risk consumers.

To cope with adverse selection, insurers collect background information on potential policy holders and run actuarial analyses to assess risk. By doing so, insurers seek to reduce information asymmetry. However, insurers might not know what information to collect to accurately assess risk, or government regulations may restrict what kinds of information insurers can be collected, thus leaving them exposed to more risk. To compensate for the unknown, insurers will be prone to increase policy prices although such increases may also be restricted by regulators. As such, providers might reduce supply or even choose to leave the market entirely.

People are getting a real time lesson in adverse selection as myriad problems surface with the Obamacare rollout. Key requirements of the law include a) insurers must provide coverage to all applicants while only being able to utilize some individual-specific information for pricing policies, b) all health insurance policies must be qualified (i.e., they must meet minimum standards specified by the federal government), c) all citizens are required to purchase health insurance (a.k.a. "the individual mandate") unless a special waiver is obtained from the government.

The design of Obamacare relies on pooling younger, healthier people (who currently pay no or low rates) with higher risk policyholders in order to reduce the adverse selection problem. However, getting the healthy demographic to literally buy in is certain to be a challenge. Fines associated with not buying a qualified policy are likely to be worth it to many Americans.

But the challenge associated with getting healthy into the risk pool just increased mightily. As ACA provisions have kicked in, insurers have begun increasing premiums and dropping coverage of many previous policy holders (two very predictable consequences, btw). The resulting uproar found people challenging the promise made by President Obama and his administration on many occaisions that people would be able to keep their existing insurance plans if they liked them.

The uproar reached such a feverish pitch last week that a few dozen Democrats sided with the Republican-controlled House to pass a bill permitting insurers to continue selling plans that would not be permitted under Obamacare. Absent such a legislative fix, defections by congressional Democrats fearful of political fallout from their constituencies could sound the death knell for the ACA right here.

But Obamacare's death spiral may be underway regardless. Incentives for the healthy to enroll have just decreased further. Adverse selection is set to bias the pool even more toward high risk enrollees. This will put more upward pressure on policy premiums.

If insurance commissions refuse to approve insurer rate increases, then capacity leaves the system. If rate increases are approved, then adverse selection kicks into high gear, concentrating more risk in the insured pool and making it even more costly to insure enrollees.

The bad drives out the good in a spiral toward market failure.

All of this in front of the midterm elections...


Akerlof, G. 1970. The market for "lemons": Qualitative uncertainty and the market mechanism. Quarterly Journal of Economics, 84: 488-500.

Tuesday, November 19, 2013

Manipulated Jobs Data

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

The October 2012 jobs report featured a much larger decline in unemployment than expected. This 'surprise' was convenient for the Obama administration, seeing as this report may have been the most important data release leading up to November's presidential election.

More than a few people raised eyebrows. The report motivated analysis of job trends and costs on these pages.

Reports are surfacing that the jobs data were being manipulated during Obama's first term and that the manipulation escalated in the months prior to the 2012 election.

For a first term administration that wants a second term, then the downside to fudging economic data is small. Unless you get caught in the act just prior to the election when votes are most prone to influence, you're likely to calculate that you can deflect the problem if it ever arises. If the news breaks one year after the election, then no big deal. The election has already been decided. Press the blame to down to obscure, low level bureaucrats and move on.

As long as government is permitted to produce or distribute information, manipulation should be expected. 

Monday, November 18, 2013

Why Should Majority Rule?

Even while we sleep
We will find you
Acting on your best behavior
Turn your back on Mother Nature
Everybody wants to rule the world
--Tears for Fears

A commonly employed heuristic when making government-related decisions is democratic, or majority, rule. Individuals or issues that muster the most votes rule the day.

People have rationalized the use of majority rule in various ways. Some suggest that the results of democratic process represent the will of the people. This is obviously incorrect, as outcomes reflect the will of a fraction of people--the dominant coalition.

Others argue that decisions made by democratic rule are fair because they permit all to 'participate in the process.' But under democratic rule the 'process' constitutes determining who gets control of the strong arm of government to satisfy interests by aggression. It is difficult to comprehend the fairness of any outcome resulting from such a process.

Instead, making decisions by democratic rule invites faction-building and corruption. It invites discretionary rule by whatever majority takes charge.

Those who favor majority rule in government-related decisions have yet to adequately answer the question: Why is majority rule a valid decision rule in the context of government?

Sunday, November 17, 2013

No Work, No Eat

Got to pay your dues
If you wanna sing the blues
And you know it don't come easy
--Ringo Starr

In today's second reading, Paul delivers one of the more noteworthy and blunt lines in scripture: "Anyone unwilling to work should not eat."

We were not put here to live off the backs of others. We were put here to be productive. What exactly 'productive' means, Paul tells us, is a private matter between each of us and the Creator. However, it is clear that we are expected to make the most of what we have regardless of our level of talent.

While the literal context of Paul's words is the economic sphere, the notion of working for reward is applicable to mental and spiritual development as well. We must work our minds in order to get closer to truth. Others cannot do this for us.

Spiritually, we must work toward nurturing a loving relationship with God and with others. Such relationships don't come easy.

While, as Paul observes, people can set good examples for others to imitate, and assist those who are struggling, a particular approach, however benevolent, cannot be forced on others.

Each of us must decide on our own. To be willing to work. To be willing to struggle.

Saturday, November 16, 2013

Truth is Not Born from Authority

"Do you know what lies in the Holy Land? A new world. A man who, in France, had not a house, is, in the Holy Land, the master of a city. He who was master of a city begs in the gutter. There, at the end of the world, you are not what you were born, but what you have it in yourself to be."
--Godfrey of Ibelin (Kingdon of Heaven)

Truth is the daughter of time, not of authority.

A person may be of great power and possess impressive credentials. But what that person says or writes does not necessarily reflect the truth.

Truth comes from understanding reality as it is, not as someone says it is or would like it to be. It comes from testing what you perceive against what you already know to be true, and adding to your understanding bit by bit.

Worldly authority cannot decree truth.

Instead, truth reveals itself over time to those who openly pursue it.

Friday, November 15, 2013

Disconnected Stocks

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

Stock prices continue to distance themselves from economic reality. Bulls argue that because stock prices are forward looking, higher prices are merely a harbinger of future economic strength.

But bulls have been saying that for years. Their economic recovery perpetually remains just around the corner.

Meanwhile, policies aimed at stimulating business activity by 'wealth effect' techniques (i.e., drive stock prices higher-->make people feel richer/more confident-->cause them to spend more) appear to be losing whatever marginal effectiveness they may have had previously. Gauges of economic sentiment are disconnecting from stock prices. Small business optimism here:

Consumer confidence here:

What is driving stock prices? The relationship between central bank balance sheet levels and stock prices is obvious:

But now this relationship is disconnecting from GDP:

What happens when pent up market forces act to close the gap?

position in SPX

Thursday, November 14, 2013

Anarchy and Minarchy

"Why should I trade one tyrant three thousand miles away for three thousand tyrants one mile away? An elected legislature can trample a man's rights as easily as a king can."
--Benjamin Martin (The Patriot)

Anarchy is self-rule. Anarchy is not lawlessness. It is people ruling themselves with no government intervention.

Minarchy is rule by a formal government of limited (MINimal) scope. Minarchists such as Bastiat confine the proper scope of government to helping individuals protect their interests from aggression by others. This suggests three legitimate roles for minarchical government: to protect individuals from domestic aggressors, to protect the country against foreign invaders, and to provide a judiciary for resolving legal disputes.

The founders sided with minarchy. Jefferson wrote that effective government design helps secure people's natural rights. The framers subsequently crafted a Constitution that defined the limits of central government.

A counter-belief, one voiced by many Antifederalists, is that it is impossible to constrain centralized government to constitutional limitations. Over time, government will find ways to grow beyond its legitimate boundaries. When it does, government becomes aggressor rather than defender.

How would anarchists provide for protection against aggression and for resolving disputes? Rothbard, Block, and others suggest privatizing everything--including police, military, and the courts.

While I understand the rationale, and am more sympathetic to these arguments than previously, I'm not there yet. Privatizing police and military seems plausible. However, it is difficult for me to see privatizing courts. The problem that plagues today's courts is that they are subject to interest and discretion. It is hard to see how that changes with courts in private hands. In fact, it is easy to envision interest and discretion escalating in the private court scenario--due to human tendencies to seek more for less.

It seem more reasonable to ground public courts in natural law rather than in positivism. Ways to do that include employing super-majority or unanimous decision rules when rendering legal opinions (as juries do) that make it harder for factions to flourish, and to encourage processes of nullification and secession when confronted with judicial activism.

The law, it seems to me, is one thing that must remain public (side note: the origins of the word "republic" come from Latin concepts of "public thing" or "public matter").

That said, I am increasingly sympathetic to the possibility that the anarchists may be correct. It may be practically impossible to restrain the State's hunger for power. And to be sure, minarchist designs have not been durable throughout history.

Of course, anarchical designs have been less durable yet.

Wednesday, November 13, 2013

Scary Accurate

I have climbed highest mountain
I have run through the fields
Only to be with you
Only to be with you

A few months back we discussed log periodic bubbles, a concept shared by John Hussman for modeling bubble-like behavior. At the time, Hussman noted that stock market behavior was tracking the log periodic model well, although the analog had not reached completion.

This week Dr J updated market performance versus the model. I'd be lying if I said I was not impressed by how close the SPX has been tracking the model. Scary accurate.

The apex of the model stands at about SPX 1900 which, if the SPX follows the analog to completion, is forecast to be reached in January.

Hussman notes that we are already in the zone of 'finite time singularity'--meaning that previous market peaks have been reached at similar relative levels. The SPX 1900 apex represents the extreme case.

In other words, as Dr J notes, "Risk dominates. Hold tight."

position in SPX

Tuesday, November 12, 2013

Carrie Carrie Quite Contrary

'Cause the next time that he cheats
Oh, you know it won't be on me
--Carrie Underwood

"Hey, do you have that Obamacare?"

Carrie Underwood turned a few heads when she asked co-host Brad Paisley that question at the CMA awards last week. The duo then fired up a laptop and sang "Obamacare by Morning" while they waited for to load.

Camera shots into the crowd showed some surprised faces and a few not-too-happy.

As the duo delivered their final and clinching lines, "Obamacare by morning. Over SIX people served," my dominant thought was wow...newfound respect for C&W.

This type of thing enrages liberals and almost certainly has them scurrying to dig up dirt on Underwood et al. Why? Because the reflexive response of statists to criticism about Big Government programs is to disparage the critics. Rather than debating the substance of competing ideas, this group aims to make it personal.

Therefore, were I Carrie Underwood, I'd be bracing for some retaliation.

Meanwhile, she can count at least one new fan.

Monday, November 11, 2013

Central Problem of Central Planning

I can't stand this indecision
Married with a lack of vision
Everybody wants to rule the world
--Tears for Fears

GMU Prof Walter Williams identifies the central problem of Obamacare or any centrally planned program for that matter. Effectively allocating resources to satisfy consumers requires more information processing capacity than any bureaucracy, no matter how intelligent its members, possesses.

In unhampered markets, producers must monitor prices, changes in consumer taste preferences, innovations, and hundreds of other variables. They must then process that information and nimbly respond to meet the needs of the market. Consumers, not producers, hold the keys to market success. It is the producer's job to listen, learn, and adapt to market dynamics.

It is impossible for a remotely located planning board to approach the effectiveness of thousands of spontaneous, complex, and creative actions made by local actors in pursuit of satisfying consumer needs.

Prof Williams wonders whether DC planners are too arrogant to grasp that fact, or whether they simply don't care because they have the power to coerce.

Either way, the outcome is the same: lower standard of living.

High Wire Act

"Hey, you're telegraphing that wheel kick."
--John Kreese (Karate Kid III)

Nice vintage pic of a Cincy street corner laden with telegraph wires. People looking up saw 'high tech'--the leading edge of telecom.

Imagine telling those people about the forthcoming wireless age.

Sunday, November 10, 2013

Shell Game of Money Printing

I follow you around but you can't see
You're too wrapped up in yourself to notice
So you choose to look the other way

BU Professor Larry Kotlikoff reflects on the specter of hyperinflation in the US. He makes many sage points, but here I wanted to focus on a subset of them. We'll consider others in a future post.

Kotlikoff describes the general Quantitative Easing (QE) process. Treasury prints bonds and sells them to the public (including the banks). The Fed prints money out of thin air and buys the newly printed bonds from the public. The public winds up with the same cash it did initially. Who gets the newly minted cash created by the Fed?

The Department of the Treasury. The outcome of this shell game is no different than if Treasury had printed the cash itself.

Of course, the idea that central government simply prints money to finance its projects would be objectionable to many. So government operates a nefarious shell game to keep the public in the dark as much as possible.

"And what they are doing, these days, is printing, out of thin air, 29 cents of every $1 being spent by the federal government."

This process is clearly unsustainable. When enough people figure out that about 30 percent of government spending is being financed via the printing press, folks will rush to unload dollars, sending goods prices and interest rates into orbit.

Meanwhile the dirty little secret about QE remains hidden from the masses. QE is part of a shell game that enables the federal government to finance its out-of-control spending habit.

Saturday, November 9, 2013

Club Fed

Relax said the nightman
We are programmed to receive
You can check out any time you like
But you can never leave

Statist: You are a member of a club called 'society.' You must pay your dues to the club.

Individual: When exactly did I join the club and when did I agree on my membership dues?

Statist: You became a member by vestige of your existence. You did not agree to the dues you pay. Instead, others have determined how much you must pay based on your ability. The more ability you have, the more you pay.

Individual: But I'd rather not be a member. Instead, I will be a good neighbor to those in the club. I will not forcibly invade the pursuits of club members. I will trade with them.

Statist: That is impossible. We have a contract. Pay your dues, or the club will take action against you.

Friday, November 8, 2013

Green Light for Higher Yields

Bill Harding: Going green.
Dusty Miller: Greenage.

Long bonds getting pounded today. Ten yr yields have moved decisively thru resistance defined by the two month downtrend line and the 50 day moving avg.

Absent an afternoon reversal, the technical light has turned green toward a challenge of the Sept highs.

no positions

Thursday, November 7, 2013

Statist Mentality

Say that you'll never, never, never need it
One headline why believe it?
Everybody wants to rule the world
--Tears For Fears

Why do some people prefer using state intervention over peaceful cooperation to get what they want? Several explanations are plausible.

Getting more for less. The most straightforward answer is that by employing strong armed government agents who can take from some for the benefit of others, statists can obtain more of what they want than could be obtained through individual effort and voluntary exchange with others. Many of the other explanations offered below can be seen as more specific forms of getting more for less.

Power and control. Statists like to control the behavior others. They gain psychic income by watching the state wield power over the governed.

Envy and resentment. Statists resent the skills, possessions, positions of others. State force provides a mechanism for reducing what is seen as excessive and unfair advantage.

Low self confidence and self esteem. Statists do not believe that they can succeed in a free society. Instead, they seek the support of the state.

Lack of trust in others. Because they do not trust others, statist believe that the state must constantly oversee and regulate the behavior of people.

Empathy. Statists empathize with the problems of others. State force is seen as a mechanism for reducing what is seen as unfair disadvantage.

Guilt. Some statists feel guilty about the skills, possessions, positions that they have been blessed with or have achieved or developed. Rather than voluntarily sharing those gifts with those less fortunate, statists employ the strong arm of government to take their benefits away. in addition, they want government to act in similar fashion against other 'people of privilege.'

Conceit. Statists feel that they know what other people want and need more than the people do themselves. Statists feel that they can use their superior knowledge and intellect to improve the lives of others through the application of government force.

The pathology that governs statist mentality is likely influenced by a blend of such factors.

Wednesday, November 6, 2013

Evidence-Based Central Banking?

Frank Dulaney: Counsel for the prosecution has already used this witness to establish the state of mind of the deceased. He opend the can, your honor.
Judge Burnham: And I do see worms crawling all around you, Mr Garrett.
--Body of Evidence

Evidence-based management is grounding practices and decision-making in the latest and best knowledge of what actually works (Pfeffer & Sutton, 2006). John Hussman's review of several theories and beliefs upon which current Fed policies are based provides a sense of how well those policies are grounded in evidence.

One theory is the infamous Phillips Curve, which posits that unemployment declines with higher inflation. Beyond the weak theoretical argument upon which this relationship is proposed, the empirical evidence shows that, if anything, there is a positive relationship between inflation and unemployment.

Another belief is that quantitative easing (QE) reduces unemployment. Again, ignoring the weakness of a theoretical argument positing that printing money to buy bonds will add jobs, the empirical evidence shows no effect of QE on jobs growth.

What about the wealth effect? Empirical evidence shows a positive relationship between change in the S&P 500 index and GDP growth. Casting aside the spuriousness of this relationship, the durability of any manipulated effect, and the idea that this relationship can be perfectly manipulated by central bankers, the estimated size of the effect is small. Each 1% change in the SPX is associated with 0.05% of GDP change. As such, driving stock prices up by 50% might generate a temporary increase of 2.5% in GDP.

Of course, to the extent that the increase in asset values was artificial, movement in the opposite direction should be expected as well.

It is difficult to imagine central bank policies being further removed from the concept of evidence-based management.


Pfeffer, J. & Sutton, R.I. 2006. Evidence-based management. Harvard Business Review, 84(1): 62-74.

Tuesday, November 5, 2013

Yields Approaching Downtrend Resistance

I've never seen you look like this without a reason
Another promise fallen through
Another season passes by you
--Big Country

Long bonds selling off again, and 10 yr yields are approaching resistance defined by the short term downtrend--which also happens to correspond to the 50 day moving avg.

If yields break thru, then technicians will more seriously consider the possibility of a retest of early September's high at about 3%.

no positions

Monday, November 4, 2013

Obamacare and Escalation of Commitment

There's a room 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

Recount of the decisions over the span of 3 years that sealed the fate of the Obamacare website rollout. This is classic Staw (1976, 1981), Fox and Staw (1979) stuff. Bureaucratic error exacerbated by political calculation leads to escalating commitment to a failing course of action.

Moving forward, we can be confident about a couple of things. One is that this administration is 'all in' regarding Obamacare and likely sees no alternative but to barrel ahead regardless of cost.

The other is that the bureaucratic errors and economic costs will continue to escalate until the program collapses under its own weight.


Fox, F.V. & Staw, B.M. 1979. The trapped administrator: Effects of job insecurity and policy resistance upon commitment to a course of action. Administrative Science Quarterly, 24: 449-471.

Staw, B.M. 1976. Knee deep in the big muddy: A study of escalating commitment to a chosen course of action. Organizational Behavior and Human Performance, 16: 27-44.

Staw, B.M. 1981. The escalation of commitment to a course of action. Academy of Management Review, 6: 577-587.

Sunday, November 3, 2013

Fall Back Time

"The one thing I learned in jail is that money is not the prime asset in life. Time is."
--Gordon Gekko (Wall Street: Money Never Sleeps)

Today God gifts us with an 'extra hour' as we 'fall back' in time. How nice it would be to have an extra hour every day.

But what we do with that extra hour? Would we use it to be more effective? Or would we waste it?

A subtle reminder today that time is our most precious commodity.

Saturday, November 2, 2013

Capacity Will Leave

If you leave, I won't cry
I won't waste a single day
But if you leave, don't look back
I'll be running the other way

Axiomatic to economics is that price ceilings, i.e., market interventions that restrain price, drive supply from the market. Price controls, regulations, and other hampering mechanisms reduce incentive for producers to produce.

Some suppliers merely cut back on production. Other producers leave the system. Entrepreneurs thinking about entering the industry look elsewhere for opportunity.

Escalating reports of hospitals, docs, and medical supply makers withdrawing from the health care system governed by Obamacare should therefore not be surprising. The regime's price controls and stifling regulatory burden will drive capacity from the system.

The consequences for healthcare consumers under Obamacare: higher prices, lower quality, reduced access, and shortages.

Friday, November 1, 2013

Journalistic Error

"A journalist makes himself the hero of a story. A reporter is only a witness."
--Jim Cleary (Deadline U.S.A.)

Whenever reading an article or watching a TV show that reports on topics that I know something about, I nearly always recognize errors in the covereage--often big ones. Sometimes the errors are misstatements of fact. Other times analyses or claims are presented that are easily refuted by reason or by evidence.

Generally, the more knowledgeable I am on a subject, the more errors I detect in journalistic coverage about that subject.

This leads me to question how much error is in media that I consume that I don't know much about...

Journalists face two problems that impair the accuracy of their work. One is that journalists often traffic in a range of topics. They can't possibly develop the depth of knowledge commensurate with specialists or masters in the fields that they cover.

Journalists are also subject to their personal biases that lead to filtering in data that fit their view of the world and filtering out data that do not. While this filtering may be unintentional and reflexive, it causes journalists to only see part of the issue or story.

To overcome these shortcomings, journalists might do things like hang with people with different ideological backgrounds in order to deepen knowledge and reduce filtering tendencies, but such remedial actions are often difficult to implement.

As such, people should consume media with the following proposition in mind: the more complex the topic covered by journalists, the greater the frequency and magnitude of journalistic error.