Friday, February 28, 2014

Mandatory Licensing

Franz Sanchez: In this business, there's a lot of cash. And a lot of people with their hands out.
Kwang: In a word: bribery.
Franz Sanchez: Exactly. He took the words right out of my pocket.
--License to Kill

Mandatory licensing is government-imposed restriction on who can provide medical, legal support, financial advice, and other services. The standard argument in favor of mandatory licensing is that it protects consumers from low quality or high cost provision of such services.

As Jeff Miron observes, however, this argument is not convincing by itself. Because it raises the cost of doing business, particularly for entrepreneurs seeking to enter an industry, licensing limits the quantity of services available to consumers.

It also raises price and reduces innovation in markets. Entry barriers raised by licensing serve to protect the franchises of those with licenses. Competition is reduced, thereby reducing productivity gains that improve efficiency and spark innovation.

Thus, consumers pay more and get less.

Licensing, certification, or other credentials that signal certain levels of competency are not bad in and of themselves. Consumers might find them valuable in reducing search costs, for example.

But licensing should be market (voluntary), rather than government (force), driven. If consumers find licenses useful, then they will reward producers that have them.

When government requires licensing, then a small number of people benefit while large numbers of people are hurt over time.

Thursday, February 27, 2014

Dietary Change

If you want to make the world a better place
Take a look at yourself
Then make a change
--Michael Jackson

When I began studying martial arts over twenty years ago, I made commensurate changes to my diet to reflect a healthier way of life. I reduced consumption of fried foods, red meat (including those tasty half pound Wisconsin bar burgers), snacks (particularly chips), sweets of all kinds. I dramatically increased consumption of fresh vegetables and fruit.

Combined with my exercise regimen, the results were fantastic. Higher energy levels, low body fat, better speed and stamina. My diet was basically salads, pizza, Subway sandwiches, bananas/apples, and an occasional bowl of cereal.

I was also hungry a lot. This seemed a 'good' hunger--the kind you get from the body efficiently burning the fuel that it has been fed.

I maintained this diet for the better part of 15 yrs.

Over the past few years, however, the routine slipped. Pizza gave way to soup and other canned/boxed processed foods. More snacks--particularly crackers of various types. Less salad and less fresh vegetables. Sweets--candy, cookies, pie, cake, ice cream-- became a regular habit, particularly as nightly 'dessert.'

One positive was ditching soda in favor of water (I had been consuming at least a six pack of diet soda per day). However, water gradually expanded into fruit drinks and even chocolate milk--with commensurate increase in simple sugar intake.

While I've held the line on red meat and fried foods, it is accurate to say that my diet drifted toward more processed foods, less fruits and veggies, more wheat-based carbs, and more sugar.

Recently, some cumulative effects became apparent. Sluggishness, increase in midsection body fat, general lack of hunger--although it seemed there was always room for more snacks and sweets.

Not liking how this situation 'projected,' I have made some changes.

About two weeks ago, I began consuming less processed food. I'm starting to buy broccoli, cauliflower, and carrots by the pound again. Big salads. Snacks have been cut--particularly crackers. I want less wheat-based (gluten) carbs coming from bread, pasta, crackers, etc and more carbs from sources like vegetables (e.g., potatoes), rice, beans. Cookies, pies, cakes, and other sweets are on their way out.

Perhaps it's just a Hawthorne Effect, but I feel much better already. More energy, lighter on my feet, that hungry feeling again. The salad days...

Not sure where this goes, and I doubt that I'll mirror the 'original' diet of years ago.

I am certain, however, of my body's signal that the process has been pointed the right direction.

Wednesday, February 26, 2014

Obscuring the Obvious

I wear my sunglasses at night
So I can, so I can
Forget my name while you collect your claim
--Corey Hart

Interesting missive by Minyanville's Jeff Cooper on current stock market position. Major indexes are at or near all time highs. High flyers are flying high in deja vu style. Companies are making acquisitions using bloated treasury stock as currency. Momentum traders have grown accustomed to chasing vertical moves.

"Don't fight the Fed" and "Buy the dip" have become the dominant heuristics at trading desks worldwide.

However, volatility is on the rise. And as Jeff observes, volatility often precedes trend reversals. "The caricature of price action can obscure change," he deftly adds.

He concludes:

"It's dreamland sprinkled with $50 billion condos in New York City. The Federal Reserve's infusion of trillions of dollars into the system benefits the banks and the wealthy at the expense of everyone else. Remember that the constituency of the Fed is its member banks, not the public. When politicians turned over money creation to the Central Bank, it turned over the economy to the bankers."

As observed on these pages, we are in the midst of the greatest wealth transfer in the history of the world. Those lining their pockets at the expense of others will do all in their power to keep the party going.

Rest assured, however. This party is not perpetual. At some point, pent up natural forces will overwhelm their restraints and move the system to a more balanced position. Wealth will journey back toward its rightful owners.

Although current price action makes this change so difficult to see, it will appear obvious in retrospect.

position in SPX

Tuesday, February 25, 2014

Civil War Death Toll

Col Robert Gould Shaw: What are you doing?
Col James M. Montgomery: Liberating this town in the name of the republic.

Typical death toll estimates for the Civil War range from 500,000 to 600,000. However, there is reason to believe that male military-related death actually exceeded 800,000. If civilian casualties resulting from war crime and other acts of aggression are factored in, then the total Civil War death toll approaches one million.

In 1860 the population of the United States was estimated to be 31.4 million.

More Americans died as a result of the Civil War than in all other US wars combined. The socio-economic effects of this degree of mortality on the people of the time, and on subsequent generations, will likely never be fully understood.

Monday, February 24, 2014

Gold Gaining Strength

We are strong
No one can tell us we're wrong
Searching our hearts for so long
--Pat Benatar

Gold has made a nice run over the past few weeks. The 1200 level may have signified a classic 'double bottom' after being probed twice in the last six months or so.

Prices have pierced the downtrend line in place since 2012. The 50 day moving average is the near term bogey at 1350ish. If that falls, then 1400 becomes the next technical level of lore.

While weekly stochastics are approaching oversold levels, they are by no means 'twisty,' suggesting that there may be more energy in the current move.

position in gold

Sunday, February 23, 2014

Wealth and Production Systems

It's my own design
It's my own remorse
Help me to decide
--Tears for Fears

There is only one way to elevate general standard of living: more production of things people want. Production alleviates scarcity and allows people to better pursue their interests.

The greater the production, the greater the wealth. The greater the wealth, the higher the general standard of living.

There are two general approaches to production. One way is for individuals to decide what they will produce, and then voluntarily trade production with each other. To the extent that people specialize (i.e., produce a narrow range of outputs) in their production, then trading helps them acquire from others the diversity of goods that helps advance their interests.

Producers are pressured from two sides. Producers who do not make what people want are penalized by buyers through lower prices and reduced patronage. Competition also pressures producers to become ever more innovative and efficient in what they produce for the market.

This approach focuses production on wealth-building and keeps it focused as times change.

The other approach to production is by fiat. Central authority decides what gets produced and how it is distributed. Individual decisions are not part of the picture. Production decisions are made by force. Distribution is no longer accomplished through voluntary exchange. People are told what they will have.

No price signals come from the market to persuade producers to make more or less. There is no competition among producers to drive innovation and efficiency.

Clearly, this approach is not focused on wealth building and remains static in dynamic times.

Why, then, do we constantly seek to funnel production through this second approach?

Saturday, February 22, 2014

Dumb Citizens, Smart Voters

"Appeal to their emotions. Make them laugh. Make them cry. Make them mad--even if they get made at you. But for heaven's sake, don't try to improve their minds."
--Jack Burden (All the King's Men)

Using recent remarks by the first lady as an example, this post discusses a central irony of social democracy. The same people deemed as incapable of making 'correct' choices w.r.t. everyday decisions are seen as capable of making 'correct' decisions when voting.

Stated differently, how are citizens who are incompetent in areas like economics able to identify bureaucrats who are competent in areas like economics? 

This observation can be extended to the rulers themselves. If people are generally prone to making bad choices and must be governed, then who governs the governors who, because they are people, will be prone to making those bad choices?

Friday, February 21, 2014

Condoning Lawlessness

Hello darkness, my old friend
I've come to talk to you again
--Simon & Garfunkel

Judge Nap discusses President Obama's federal lawlessness and lack of congressional intervention.

As the supreme law of the land, the Constitution delegates "all legislative powers" to Congress. All. The Constitution also requires the president to swear to "faithfully execute the Office of the President of the United States" and "preserve, protect, and defend the Constitution of the United States."

As such, presidental law writing and/or failure to enforce laws passed by Congress is unconstitutional and violates the oath of office.

The Judge lists some of the ways that Obama has broken the law:

Bombing Libya without a declaration of war from Congress.

Creating a new set of rules outside of Congress to permit 11 million illegal immigrants from being deported.

Using drones to kill people without either a) declaration of war from Congress on the country housing the targets or b) affording the targets due process.

Broad spying on the US public without a law authorized by Congress.

Dozens of changes made to the Affordable Care Act without congressional approval.

Moving to permit the Department of Homeland Security to monitor movement on public roads by photographing license plates of all motor vehicles.

Save for isolated actions such as Senator Rand Paul's class action lawsuit that sues the NSA over its spying program, Congress has been condoning the president's lawlessness by doing nothing.

As the judge observes, congresspeople who do not challenge this president's unlawful behavior have failed their oaths of office as well. They are unfit to govern in a free society, and should be removed from office.

Thursday, February 20, 2014

Legitimized Evil

The powers that be
That force us to live like we do
Bring me to my knees
When I see what they've done to you

Professor Williams addresses the legitimation phenomenon inherent to socialism. Enacting socialism requires forcibly using some people for the benefit of others. Because many people do not like to think of themselves as evil-doers, they concoct language and social processes that legitimize their use of aggression.

His example demonstrates.

Suppose that elderly people in a neighborhood possess neither the physical nor monetary means to keep up their residences. A democratic (i.e., majority rule) vote produces a law that requires people in the neighborhood to perform households tasks for the elderly. Not doing so results in fines and imprisonment.

Outsiders looking in are likely to condemn such a law as a form of slavery. Some are being forced to labor for others.

Suppose that, instead of forcing people to work in the elderly's homes, the law requires people to surrender a certain amount of money that would be given to the elderly so that they could pay people to maintain their residences. Again, the penalty for not doing so includes fines and imprisonment.

Prof Williams suggests that many would be ok with this law, despite the fact there is little difference between the two laws except for the mechanism of servitude. In both cases, some are being forced to labor for the benefit of others.

Using government agents to perform the monetary transfer in the second case conceals the aggression, thereby making this law palatable to many. That the law resulted from democratic process also makes some people feel better.

Of course, majority vote can not make moral acts that are immoral. A 99-1 vote does not give the ninety nine license to force the one dissenter into slavery.

Socialism relies on pretense to legitimize processes of evil.

Wednesday, February 19, 2014

Fed is Treasury Pharaoh

All the Japanese with their yen
The party boys call the Kremlin
And the Chinese know
They walk the line like Egyptians

Last year, the Fed bought more Treasuries than all foreigners combined. The below graph shows top holders of Treasuries and their holdings in 2012 vs 2013.

Former league leaders China and Japan are now distant #2 and #3 to the Fed. After them, all other buyers seem tiny.

Could the US sovereign debt issuance pyramid be more obvious?

no positions

China's Gold

Straddle the line
In discord and rhyme
--Duran Duran

Chinese demand for physical gold has been increasing. Historically, it has consistently outpaced COMEX physical delivery of gold--by orders of magnitude.

Over the past couple of years, however, Chinese appetite for physical is such that it is inhaling gold at a rate that approaches annual world production.

What might China know?

position in gold

Tuesday, February 18, 2014

Presidential Myths

Time respects no person
What you lift up must fall
They're waiting outside
To claim my tumbling walls
--John Mellencamp

There may be no social position more subject to myth than leadership roles. Yesterday on President's Day, Judge Nap took on myths surrounding presidents Theodore Roosevelt, Woodrow Wilson, and, particularly, Abraham Lincoln.

The interesting thing about myths surrounding these people is their imperviousness to reason and evidence.

Meanwhile, revisionists keep chipping away at the fa├žade...

Monday, February 17, 2014

Inflation and Language

Drawn into the stream
Of undefined illusion
Those diamond dreams
They can't disguise the truth
--Level 42

Thought provoking piece (takes a while to download, source page is here) by Dylan Grice on the influence of inflation on language. Grice posits that because inflation involves the devaluation of money, and because money is based on trust, devaluing money devalues trust. It also devalues language.

Using Google ngram word count analysis, Grice demonstrates hyperbolic-like growth in use of arcane, hallow, and euphemistic economic and financial terms alongside the massive growth in inflationary credit money over the past three decades.

Among his interesting observations are:

Wealth vs liquidity. Blurred differences between old school tangible, productive wealth (e.g., farmland, businesses) and new age intangible, liquid wealth (e.g., financial securities). He suggests that many of today's investors confuse liquidity with wealth.

Risk vs volatility. Risk can be defined as potential for loss while volatility can be seen as variation in price. Many 'risk managers' are currently focused on managing volatility rather than risk.

Money vs capital. Grice cites a book excerpt where the author claims that "financial capital is abundant. The scarce resource is no longer money" and that at some point central banks may need to "print more capital."

As Grice observes, money is not capital. Capital comes from economic resources that have been set aside rather than consumed. Money is merely printed paper, or numbers created by computer keystrokes.

Grice astutely observes, "Capital comes from savings, and the policy of cheap credit with its inflation of time preference has encouraged spending, not saving. Scarce capital is growing even scarcer."

That observation is so important that it should be read repeatedly until completely understood.

He continues, "One day, the price of capital will reflect its underlying scarcity because one day it must."

Dylan Grice has mined a real gem, it seems to me. Inflation has not only devalued money but it has devalued language and understanding related to money. In particular, people are prone to confuse money with capital, even at the policymaker level.

When language itself becomes grossly distorted, it is likely that related behavior becomes grossly distorted as well.

Sunday, February 16, 2014

Categories of Income Mobility

"Your grandfather scratched the mill out of the naked earth."
--Mary Rafferty (The Valley of Decision)

A common problem with income distribution studies is that they tend to be static in nature. They ignore income mobility--or the extent to which individuals move up or down the income ladder.

Markets that exhibit high degrees of income mobility are generally desireable because of their capacity for rewarding success and punishing failure.

Income mobility can be categorized according to the time horizon associated with moving significantly on the income ladder. Intergenerational mobility is the extent to which offspring move up or down the income ladder compared to their parents. Parents may not be mobile because they are busy working and saving in jobs that do not offer much advancement potential. They subsequently pass their savings down to their children who use those resources to advance their productivities and incomes.

This can work in reverse, of course. Parents can borrow and spend into oblivion, thereby leaving little inheritance for their children.

Income mobility can also be intertemporal. Intertemporal mobility refers to the extent to which individuals who start with low [high] income can move up [down] the ladder in their lifetimes.

An interesting finding of mobility research is that income mobility tends to be much greater during unstable economic periods. Those people concerned about income 'fairness' should therefore relish economic uncertainty because "deep recessions are the fairest years of all" in terms of the poor advancing and the wealthy getting crushed.

One technical note about mobility research that measures movement between fractional income groups (e.g., income 'quintiles') is that the middle income groups are more likely to experience mobility because, being in the middle, these groups can move in either direction. Those in the extreme buckets can only move up or down.

This measurement artifact sometimes leads to the faulty conclusion that the poor are stuck at the bottom and the rich are secure at the top when, in fact, it is a mathematical consequence of people in these groups only being able to move in one direction.

Saturday, February 15, 2014

Prescriptive Force

Life is demanding
Without understanding
--Ace of Base

"We need to do this..."

In the context of politics, 'we' often means 'you.' The 'we' is often a euphemism for principals contracting with strong armed government agents. The prescription involves how those agents should apply aggressive force to limit the freedom of others.

What drives so many people to prescribe the use of aggressive force on others? Is it a vision so grand that some people are willing to use force to achieve it?

Or is it simply the desire to control others--the timeless drive for conquest?

Friday, February 14, 2014

Pareto Principle

"I'm not anxious to die, sir...just anxious to matter."
--Rafe McCawley (Pearl Harbor)

I first learned the Pareto Principle while studying quality management principles in the late 1980s under the tutelage of Joseph Juran and his institute.

Vilfredo Pareto was a European renaissance man of the 1800s--engineer, philosopher, economist, etc. In the 1890s, Pareto observed that the distribution of real estate-related wealth in Italy was not even. Instead, approximately 20% of the people owned about 80% of the land.

Juran suggested that many social phenomena are distributed in this fashion. In a long list of problems, a few of them usually offer the majority of payback. For sales people, a minority fraction of clients usually bring most of the commissions. Of the many things that you want to do on your personal bucket list, only a few of them are likely to really matter.

Juran called this the 'Pareto Principle.' or the '80/20 Rule.' The trick to being effective, he suggested, is being able to 'separate the vital few from the trivial many.'

In other words, you need to be good at prioritizing...

The Pareto Principle can be pictured by a special type of bar graph called a Pareto chart. Typically, the vertical axis represents some measure of cost, value, contribution, or opportunity while the horizontal axis includes categorical items sorted from high to low by the vertical axis variable.

A distribution reflects the Pareto Principle when the bars associated with the first couple of items are are relatively tall and the remaining bars quickly taper toward the horizontal axis. The overall effect resembles a 1/x hyperbolic shape:

Once aware of it, you might notice the Pareto effect more often. In the last day or so, I've recognized Pareto-like patterns in the distribution of Fortune 500 company revenues, in a ranking of debtor nations, and in an analysis of US individual annual income.

The Pareto Principle is a useful tool for both the analyst and for the effective liver of life.

Thursday, February 13, 2014

Interest Rates and Savings in Hampered Markets

And you thought it was only in movies
As you wish all your dreams would come true
It ain't the first time believe me, baby
I'm standing here feeling blue
--Led Zeppelin

In the Q&A session following her first "Humphrey-Hawkins" testimony before Congress, new Fed chair Janet Yellen apparently said (I can't find a Q&A transcript) that interest rates on bank instruments like savings accounts and CDs were low because there is excess savings in the economy relative to demand.

In unhampered markets, this is likely to be true. High supply of savings relative to demand would reduce the price of credit and encourage more borrowing.

In the current market environment, however, interest rates are not moving freely based on savings supply and demand. Interest rates are instead being suppressed by Fed interventions. Central planners are trying to fool markets. By forcing interest rates below market, they are sending a false signal to market participants that savings are more abundant than they really are in attempt to elevate consumption in the here and now.

This is a foolish thing to do in an economic environment that already lacks savings. High interest rates that would naturally occur in this environment would be encouraging people to save more. The resources that people set aside would provide capital formation for future investment.

Artificially suppressed interest rates discourage savings at precisely the time that people should be building savings. By consuming ever more of today's production and saving ever less, we engage in capital consumption. Capital consumption hamstrings future productivity growth which, in turn, restricts future standard of living.

Yellen's remarks reflect a lack of economic understanding that is unfortunately all too common among the Federal Reserve bureaucracy.

Wednesday, February 12, 2014

Unilaterial Obamacare Revision

"How dare you come into this office and bark at me like some little junk yard dog? I am the President of the United States!"
--President Bennett (Clear and Present Danger)

As the president continues to unilaterally alter aspects of the ACA statute, debate escalates over whether these executive actions are legal.

One way to frame the situation is that the executive branch thinks that it has been given the power to revise laws at its discretion, particularly when implementation of a law becomes difficult. It will continue to do so unless challenged by Congress.

The juvenile corrollary is the kid who keeps doing bad until checked by the parent.

Ron Paul believes that it is unlikely that Congress will check the misbehaving child unless prompted to do so by the people.

Meanwhile, interesting question posed here. Given the Obama administration's departures from the letter of the law, what stops a future Republican administration from simply waiving the law entirely?

This is the problem with discretionary rule. Changes are arbitrary and positivistic. What is law depends on who is in charge.

Tuesday, February 11, 2014

Has GDP Been Contracting?

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

Since 1994, reported GDP has grown ~2.6% annually. The blue series on the graph below shows the annual percentage changes in reported GDP during this period.

The reported GDP number is sometimes referred to as 'real' GDP, meaning that it has been adjusted for price inflation. The 'headline' price inflation number, the CPI-U (consumer price index-urban), has increased ~2.4% annually since 1994. (The actual 'GDP deflator' has averaged less than this (2.0%) during this period, but that is a story for another day).

What if price inflation is under-reported? Suppose that it has been under-reported by 3% since 1994 (which may be conservative).

If true, then the 2.6% reported annual GDP increase over the last 20 yrs turns into 0.4% average annual decline. The red series on the above graph shows the annual percentage changes in GDP adjusted for 3% underreported price inflation. Viewed from this persepctive, changes in GDP over the past decade have largely been negative--meaning that output has been declining rather than advancing for the better part of ten years.

Test this proposition empirically. Has your cost of living been increasing greater than 2.4% per year? Is it easier or harder to make ends meet now compared to a few years ago?

If GDP has actually been declining rather than increasing, then conditions of general economic malaise are much easier to explain.

Monday, February 10, 2014

CBO and Resource Dependence

She said that living with me
Is bringing her down, yeah
For she would never be free
When I was around
--The Beatles

Professor John Taylor wonders why the CBO waited so long to report its estimated negative effects of Obamacare on motivation to work. After all, it is well known that large welfare programs provide disincentives for work. Higher marginal tax rates associated with leaving welfare for productive work is one important mechanism for keeping people unemployed.

Prof Taylor's question about the CBO is a rhetorical one, of course. The situation reflects a classic application of resource dependence theory (Pfeffer & Salancik, 1978). Any government agency, even one that claims to be 'non-partisan' such as the CBO, depends on the State (whether controlled by Democrats or Republicans) for resources.

This suggests that not only has the CBO's estimate of 2 million disincented workers by 2020 been delivered late, but it is also probably too low.

It is unlikely that CBO will bite feeding hands.


Pfeffer, J. & Salancik, G.R. 1978. The external control of organizations: A resource dependence perspective. New York: Harper & Row.

Sunday, February 9, 2014

Limited Government

"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)

Limited government was the original idea behind the formation of a federal government of the United States. The Constitution enumerated a small list of powers that the central government was permitted to exercise. If the power wasn't enumerated, then the federal government did not legally have it.

However, skepticism of central government was so pervasive that many states agreed to ratify the Constitution only if a list of fundamental rights that would be free from government infringement was amended to the Constitution. This list, of course, became known as the Bill of Rights.

What about issues not covered by either the Constitution or the Bill of Rights? The Ninth and Tenth amendments clearly state that those powers are retained by the states and their people.

Our ancestors clearly did not trust centralized government or the types of people that government attracts to office. This is why the framers did not endow the federal government with a blank check to do whatever government officials "thought was right."

Subsequent events clear demonstrate that their skepticism was justified and prescient.

Saturday, February 8, 2014

Rational Basis Judiciary

"The truth is what I say it is."
--Senator Charles F. Meachum (Shooter)

In this interesting discussion about the judicial branch's lack of adherence to the Constitution when making rulings, the concept of the 'rational basis test' is brought up. The rational basis test considers whether a government action can be reasonably related to a legitimate interest of government. What is 'reasonable' and 'legitimate,' of course, is up to the Court to decide.

The rational basis test became vogue as the Supreme Court was reassembled in the late 1930s to do FDR's bidding.

As observed by the interviewee, the rational basis test encourages judges to "collaborate with the government in coming up with hypothetical justifications for a law in order to bend over backwards and uphold whatever the government is doing."

Sophistry in place of substance.

Discretionary rule in place of rule of law.

Friday, February 7, 2014

Executive Lawlessness

Let me be your ruler
You can call me Queen Bee
And baby I'll rule, I'll rule, I'll rule, I'll rule
Let me live that fantasy

In his State of the Union message last week, President Obama promised that "wherever and whenever [he] can take steps without legislation to expand opportunity for more American families, that's what [he's] going to do."

As an American citizen, Mr Obama can act in many ways to expand opportunity for others. For example, he could donate part of his salary to needy families. He needs no legislative backing to do so.

However, what the president is signaling here is intent to act by issuing executive orders. Although the Constitution makes no explicit provision for the issuance of executive orders, the chief executive of the executive branch of the federal government has traditionally thought to be within his pervue to issue orders that enable him to execute laws developed by Congress. For example, the president might order the establishment or continuance of committees that advise the executive branch on technical issues associated with implementing particular laws.

Presidents have acted accordingly. FDR holds the record, issuing more than 3,500 executive orders during his administration.

However, executive orders that establish new laws or defy extant laws are not constitutionally valid. The presidency is not a lawmaking position. The president has no constitutional power to act unilaterally.

Yet, when President Obama overtly states that he intends to "take steps without legislation," it is difficult not to construe that this is precisely what he intends to do.

In fact, President Obama has already done so. Judge Nap offers the example of executive orders issued by the president related to immigration prior to the 2012 election that had no basis in congressional law. The president has also materially changed the law thru orders related to killing purported enemies of the United States by drones, and to changing requirements specified by the Affordable Care Act statute. Thorough documentation of this administration's attempts at expand executive power is being developed by a Congressional committee headed by Senator Ted Cruz (TX).

When presidents act without Congressional approval, they are practicing rule by fiat. Discretionary rule was clearly a situation that our American ancestors feared and endeavored to avoid.

Thursday, February 6, 2014

Market Cap to GDP

First class and fancy free
She's high society
She's got the best of everything
--Tal Bachman

Over a decade ago, Warren Buffett offered the ratio of stock market capitalization to GDP as an effective measure of overall equity value. It is hard not to like the aggregate, macro feel of the numerator and denominator components. Moreover, the denominator is a bit harder to manipulate than some other valuation metrics such as the P/E ratio.

Doug Short provides an updated glimpse of the mkt cap:GDP metric in this missive.

His ratio of Wilshire 5000 market cap:GDP is shown above (FRED worksheet here).

By this metric, today's stock market valuations have surpassed the peak prior to the 2008 credit collapse. Current valuations are higher than any time since 1970 save for the late 1990s run-up prior to the bust.

Note also that the slopes of the declines following the two previous peaks are much steeper than the slopes of the advances that preceded the peaks.

position in SPX

Brute Fear

All our times have come
Here, but now they're gone
--Blue Oyster Cult

Nice multi-panel display that adds to our collection of market extreme graphics. Margin debt, valuation, macro, sentiment...

The set up has market sage Richard Russell fearing an epic wipe-out:

"Since infancy I've always been ultra-sensitive to danger. For this reason I've never been caught in a primary bear market--my sensitivity to impending danger (and Dow Theory) has always saved me and my subscribers. But this time my unconscious fear is unrelenting, and it won't leave me alone.

"Finally, I've admitted it to myself. I'm afraid we're in a primary bear market in the economy and the stock market. I believe it's going to be an absolute 'brute.' And I'm afraid of what might lie ahead."

position in SPX

Wednesday, February 5, 2014

Capitalism Requires Capital

I've been laid off from work, my rent is due
My kids all need brand new shoes
So I went to the bank to see what they could do
They said, sir, looks like bad luck's got a hold on you
--Simply Red

A point that seems to be lost on many: capitalism requires capital. The lifeblood of capitalism is savings, from which capital for investment springs.

Capitalism cannot and does not exist in an environment where savings rates are negative. In truly unhampered markets, declining savings would drive the price of borrowed money (i.e., interest rates) higher to better conserve and ration the savings supply that did exist. Higher interest rates would also signal opportunity associated with saving.

Stated differently, it is highly unlikely that savings could disappear--or fall to extremely low levels--in a capitalistic system.

Our present high debt, low savings environment is far removed from capitalism.

Tuesday, February 4, 2014

Lopsided Sentiment

Chuck Scarett: How are you feeling today?
Joe Scheffer: Confident!
--Joe Somebody

More evidence of lopsided sentiment. Investor's Intelligence % bulls and % bears:

CBOE put:call ratios:

Sentimental extremes are contrarian in nature. The more lopsided the market sentiment, the greater the likelihood of major trend reversal.

position in SPX

Drop Zone

And there's some chance we could fail
But the last time someone was always there for bail
When will we fall down
--Toad the Wet Sprocket

Recent support gave way in decisive fashion yesterday with the SPX down 40 handles. Big volume too.

Today's early bounce off the multi-month uptrend line seems intuitive. Not sure today's early green is in Hoofy's best interest, though. If the intraday action reverses, then things could get dicey as more bulls rush toward the exits.

The 200 day moving average is below at 1710ish. The SPX has not been below its 200 day since November 2012.

position in SPX

Monday, February 3, 2014

Cathedral Builders

"No matter how bad things get, we don't steal."
--Jim Braddock (Cinderella Man)

People have two general choices for improving their economic conditions. They can choose aggression, where either they themselves or their strong-armed agents forcibly take resources from others.

Or they can choose non-aggression, where they produce economic resources and engage in trade with others. They also save--i.e., they restrain consumption today in order to fund better standard of living tomorrow.

Because programs of aggression can yield more per unit of effort, the way of force tempts many. As temptation grows, ethical problems associated with aggression are ignored or rationalized away.

People who choose non-aggressive approaches for improving their economic conditions take the high road. They are not interested in get-rich-quick schemes. They refuse to improve their standards of living by taking property from others.

Instead, the non-aggressors are 'cathedral builders.' They are engaged in great self-funded construction projects that may not be completed in their lifetimes.

Economic cathedral builders may be poor, scraping together initial resources for setting the underlying foundation. Or they may be rich, buttressing structure that stretches skywards. Poor and rich builders help each other as they engage in trade to obtain resources that advance project progress.

When they get old, the present generation of builders passes along their work-in-progress to the next generation who take up the work.

Absent the economic cathedral builders, society's long term prospects are grim.

Sunday, February 2, 2014

Andre Reed HOF

And it won't matter now
Whatever happens to me
Though the air speaks of all we'll never be
It won't trouble me
--Toad the Wet Sprocket

Former Buffalo Bills great Andre Reed was elected to the Pro Football Hall of Fame this week. The wide receiver was finally elected after nine years of eligibility and eight years as a finalist in the voting.

Reed's numbers speak for themselves. Eleventh all-time in career receptions (951), 13th in receiving yardage (13,198), 13 seasons (including 9 consecutive) with 50 or more catches, seven straight Pro Bowls (1989-95).

The Buffalo Bills were one of the best teams of the era. They went to four straight Super Bowls (1990, 91, 92, 93) although they lost them all.

I admired Reed and his team because they never gave up. Their comeback playoff win against the Houston Oilers in 1993 was one of the most memorable highlights of that sports era for me.

Heartfelt congrats to AR on this Super Bowl Sunday.

Saturday, February 1, 2014

Top Labels

"All is fair in love and war...and this is revolution!"
--Jerry Travers (Top Hat)

Prior to this post, here are all key words that have appeared at least 300 times in the labels list at the end of posts appearing on this blog:

intervention  619
debt  510
media  505
government  502
risk  456
socialism  402
technical analysis  385
inflation  382
reason  362
freedom  354
Fed  317
sentiment  316
liberty  312

Surprises: media, risk, reason. Didn't think those tags had been used that often.