Thursday, July 31, 2014

Gut Check Time

Chains of love
Got a hold on me
When passion's a prison
You can't break free
--Bon Jovi

First big down day in a while with the Dow down 300+ and the SPX draining nearly 40 handles on last nite's Argentine bond default, continued Portuguese bank unease, potential Fed tightening, and Lord knows what other potential catalysts. The Dow, in fact, is now red for the year.

Bulls argue that the market was due for a breather. Bears counter that there's a nasty comeuppance pending.

Either way, the technicals suggest that it's suddenly gut check time for bulls. The SPX is sitting on near term support after easily slicing thru the 50 day moving avg. Volume is picking up, while the oscillators suggest 'room' on the down side.

If the current level doesn't hold, then looks like near term support in the 1880-1900 area, followed by the 200 day moving avg at 1860ish.

Hoofy's heros have come through with stick saves time and again over the past few years. Let's see if they're up to the challenge once more.

position in SPX

Reds Run Production

Harry Doyle: That's all we got? Just one goddamn hit?
Assistant: You can't say goddamn on the air.
Harry Doyle: Don't worry. Nobody is listening anyway.
--Major League

Since the All Star break, the Reds have lost 10 of 12 games. While the team's starting pitching and defense have slipped a bit compared to the first half, the primary issue has been the Reds' anemic offense. Let's see how the recent 12 game string compares to the overall season thus far.

Here's a plot of Reds runs and hits for each game.

Post ASG begins with game 96. Correlation between runs and hits is .74. Runs/hit as a measure of efficiency or productivity:

Run scoring productivity in the period since the AS break certainly constitutes a season low compared to any other 12 game period. Still, at about 10% of total games played, the sample size isn't all that high.

Cyclicality is also evident in the overall series, meaning that slumps typically morph into streaks. Unfortunately for the Reds, there is no Votto or Phillips immediately available to help turn the tide.

Wednesday, July 30, 2014

Lerner Isn't The Problem

"You're the threat now, just like I was."
--Brill (Enemy of the State)

Very good point made here. The problem is not that former IRS official Lois Lerner has stong political opinions. Strong political preferences are likely to be held by most government officials.

The problem is not that Lerner expressed her political biases in emails that could have been read by others.

Because people are prone to act on their biases, the problem is that government officials can use the strong arm of government against those who oppose them politically. That Lerner and others acted in this fashion should not be surprising. Those on the other end of the political spectrum would surely be tempted to do the same.

The IRS and other government agencies constitute vehicles of aggression that can be employed by anyone who gets control of them.

Falling Fed Confidence

Welcome to the grand illusion
Come on in and see what's happening

Not a bad synopsis of what faces the Fed from a public confidence standpoint. After six years of unprecedented money printing, the Fed must withdraw the stimulus to maintain credibility. The longer the Fed waits to do so, the lower the public confidence that the Fed knows what it is doing and that Fed policies have improved things.

If the Fed does withdraw the stimulus, then financial markets will plummet. The Fed must either let that happen--at which point confidence in the Fed will decline. Or the Fed will have to reinject the stimulus--at which point public confidence that the Fed knows what it is doing will also decline.

Welcome to the corner that the Fed has painted itself into. When public confidence in the Fed declines, the charade is over.

Tuesday, July 29, 2014

Delinquent Debt

"I'm tapped out, Marv. American Express has got a hit man looking for me."
--Bud Fox (Wall Street)

New report indicates that about 77 million Americans have debt in collections. That's about 35% of poeple with credit files.

In the collection cycle for unsecured debt, the collections phase occurs when payment is more than 180 days past due.

At this stage, debt is charged off by the creditor. The creditor can subsequently sell the charged off accounts to debt buyers, attempt to collect via in-house or third party collectors, and/or warehouse the defaulted account.

Wondering about the extent to which moral hazard influences decisions by both creditors and debtors in this process.

Monday, July 28, 2014

Rebellion and Government Size

Young Soldier: Home! The English are too many.
William Wallace: Sons of Scotland. I am William Wallace... and I see a whole army of my countrymen, here in defiance of tyranny. You've come to fight as free men, and free men you are. What will you do with that freedom? Will you fight?
Veteran Soldier: Fight? Against that? We will run and we will live.
William Wallace: Aye, fight and you may die. Run, and you'll live--at least for a while. And dying in your beds, many years from now, would you be willing to trade all the days, from this day to that, for one chance, just one chance, to come back and tell our enemies that they may take our lives, but they'll never take our FREEDOM!

A commonly held belief is that the larger the size of government, the less likely it will be that the governed will rebel. As government grows so does its capacity for force. In the eyes of many, large government is too big to take on, leaving the citizenry compliant.

A plausible rival hypothesis is that larger government increases the likelihood of rebellion. In order for government to grow, it must take resources from the people. As people become relatively poor vis a vis government, the liberty preference of more individuals becomes engaged. They are more willing to resist state aggression and defend their property.

Government size is really a proxy for degree of government plunder. As plunder increases, citizens become more resolute, not discouraged, in acts of rebellion--acts of self-defense against state aggression.

Sunday, July 27, 2014

Hurt's So Good

When I was a young boy
Said put away those young boy ways
Now that I'm getting older, so much older
I long for those young boy days
--John Cougar Mellencamp

Celebrating the induction of Frank Thomas into the Hall of Fame today.

Hats off to The Big Hurt!

Saturday, July 26, 2014

Zero and Positive Sum Games

So maybe I'll win
Saved by zero
--The Fixx

A zero sum game is an exchange where one party wins while the other loses. For example, when government takes from some to give to others, some benefit from free economic resources while others lose their property.

A positive sum game is an exchange where both parties benefit. For example, when two people voluntarily engage in trade, both are typically better off than if they did not trade. The trade would not have occured had either thought that they would be worse off after the trade.

Some factors likely to influence the nature of the game at hand include availability of information and presence of aggression force. Zero sum games are more likely to be played by ignorant individuals. People who do not 'know better' might get 'taken.' The more information available, the more likely individuals are to engage in positive sum games.

Presence of aggressive force will coerce some into playing zero sum games. An individual might surrender money to a thief at the point of a gun. The lower the presence of aggression, the more likely that individuals will prefer positive sum games driven by mutual cooperation and volition.

Friday, July 25, 2014

Junk Weakness

"So, what you're telling me is the music is about to stop, and we're going to be left holding the biggest bag of odorous excrement ever assembled in the history of capitalism."
--John Tuld (Margin Call)

For the past couple of weeks, I've been thinking about high yield (a.k.a. 'junk') bonds. Junk bonds are bonds issued by companies with shaky prospects (e.g., weak balance sheets, low cash flows. They are able to sell debt only if they offer coupons at interest rates significantly higher than more credit worthy firms.

In today's 'reach-for'yield' environment, junk has been bid to the stratosphere with commensurate tightening in credit spreads, i.e., the difference between Treasury yields and junk yields. Over the past few months, junk spreads have been tightening to historic lows.

That Little Voice has been telling me that it is time to keep half an eye on junk spreads for signs of widening. Widening spreads would suggest declining appetite for extreme risk among market participants.

Today, ZeroHedge reports some weakening in high yield credit markets. Relative to stocks, high yield is trading heavy:

And we're starting to see some outflows from junk bond funds:

Nothing huge, but worth watching. The real test will be credit spreads. If junk spreads start blowing out then heads will turn and eyes will focus.

position in SPX

Real Campaign Finance Reform

I took it all for granted
But how was I to know
That you'd be letting go
--Bryan Adams

Jacob Hornberger nails the durable solution to campaign finance reform. It is not new laws or restrictions on political donations. As long as government has the power to redistribute wealth, then markets for political favor (whether they be legal or black markets) will operate.

Those markets no longer have incentive to operate if government no longer has the power to redistribute wealth. Cut off the resource stream, and politicians and special interest groups have nothing to trade.

Real campaign finance reform requires dismantling the warfare/welfare state.

Thursday, July 24, 2014


It's been such a long time
I think I should be going
And time doesn't wait for me
It keeps on rolling

Lags are time delays between cause and effect, between stimulus and response. Lags are a feature of nature. The time between planting a seed and germination. The time between sun hitting a rock and the rock getting hot. The time between force applied to a branch and the branch's failure.

Human behavior is influenced by various types of lags. Neuromuscular make-up creates a delay in muscular reflex. Cognition necessitates time to process information. Social pressures gradually nudge people to run with the herd.

When making sense of the world, lags must be accounted for. If we ignore the influence of lags, then reasoning and empirical analyses are apt to be flawed. Errors in understanding relationships (e.g., cause and effect) are likely.

Wednesday, July 23, 2014

Prices and Wages

We're talkin' 'bout the dollar bill
Now what are we all to do
When the money's got a hold on you?
--Simply Red

One way to assess severity of inflation is to compare prices to wages. If prices increase more than wages, then inflation is bound to be felt by wage earners.

Food prices, for example, have been increasing much more than wages. Even if the reported CPI seems low, wage growth has been even lower. That taxes purchasing power at the grocery store.

While government can fudge price data, it cannot fudge real production. Stagnant real production means stagnant wages. Stagnant wages in even a 'low inflation' environment means restrained purchasing capacity. Each item purchased costs relatively more in wages. Less purchasing power is a central condition of inflation.

Sooner or later people will get it, regardless of the fairy tales told by officials.

Tuesday, July 22, 2014

Major Blow to ACA

They make no mention
Of the beauty of decay
Blue, yellow, pink umbrella
Save it for a rainy day
--Tears For Fears

This morning the DC Circuit Court of Appeals ruled that the Affordable Care Act does not permit the federal government to issue insurance subsidies to enrollees in states that do not operate their own exchanges. The decision reverses a lower court ruling that the federal government did have such authority.

The ruling is grounded primarily in the ACA language itself, which in several instances limits subsidies and credits to any "Exchange established by the State." Thirty six states opted not to operate their own health insurance exchanges.

While it is destined to be appealed and likely headed for the Supreme Court, today's ruling vacates the IRS regulation allowing the federal exchange to give subsidies. More than 80% of enrollees on the federal exchange receive subsidies, and those subsidies cover over three quarters of the premium on average.

This is a major blow to Obamacare, perhaps a lethal one. Interestingly enough, it is a self-administered blow. The law is tripping over its own bureaucratic syntax.

Monday, July 21, 2014

AK-47 Sanctions

"Of all the weapons in the vast Soviet arsenal, none was more profitable than the Avtomat Kalashnikova model of 1947--more commonly known as the AK-47 or Kalashnikov. It's the world's most popular assault rifle. A weapon all fighters love. An elegantly simple nine pound amalgamation of forged steel and plywood. It doesn't break, jam, or overheat. It'll shoot whether it's covered in mud or filled with sand. It's so easy, even a child could use it--and they do. The Soviets put the gun on a coin. Mozambique put it on their flag. Since the end of the Cold War, the Kalashnikov has become the Russian people's greatest export. After that comes vodka, caviar, and suicidal novelists. One thing is for sure, no one was lining up to buy their cars."
--Yuri Orlov (Lord of War)

As part of a recent round of sanctions against Russia, the Obama Administration has banned US business contacts with Russian arms makers including those making AK-47s.

The AK-47 is the most popular assault rifle ever made. No one knows precisely how many have been made since volume production began in 1949, although the count is probably in the hundreds of millions.

The recent ban has sparked a run on AK-47s in the US. CNN's exclamation of 'surprise' is either disingenuous or na├»ve. Restrict supply below market and shortages will result. So will black markets.

Every time this administration restricts gun markets, the gun industry reaps a windfall.

Sunday, July 20, 2014

The Captain

I've been lost now days uncounted
And it's months since I've seen home
Can you hear me, can you hear me
Or am I all alone?
--Grand Funk Railroad

Newfound respect this week for Derek Jeter. The Captain is retiring after this season, closing a stellar 20 year career as shortstop for the New York Yankees.

Jeter's numbers speak for themselves. Over 3400 hits (9th all time), .311 career batting average, eight seasons with over 200 hits, 5 time Gold Glove winner, 14 time all star. In the field, he has played no where but SS.

One would think that, with these results, you're looking at a natural--someone with off-the-earth talent. However, Jeter's raw athletic ability is often middle-of-the-pack with others on the field. Not the quickest bat--I am constantly amazed at how many opposite field dink shots he hits. Nor does he possess the best speed or the best arm.

What Derek Jeter does possess is superior mindset. He notes that one of his greatest traits is confidence. In difficult situations, he thinks back to times when he was successful and pictures success in his mind. Minimize negatives. He also says that he's not big on reflection, preferring instead to focus on the moment.

He works hard, rarely taking time off in the off season. "There may be people with more talent than you, but there's no excuse for anyone to work harder than you do," he likes to say.

Off the field, he has kept his nose clean despite 20 yrs in the Big Applie media spotlight. He is active in the community, particularly thru his Turn 2 Foundation for kids.

Last week's All Star Game was consummate Jeter. Modest response to booming ovations. Diving stop off the bat of The Cutch on first play of the game. Leadoff double in first inning and scored the first AL run. Two for two (both to right field). Stayed on top step in dugout, where he did a long candid interview with the game announcers upstairs, after leaving the game.

Strange thing is that it is only now that I am coming to realize how special this person is. But certainly glad I did.

Catching up to millions of others this week, a tip of the cap to The Captain.

Saturday, July 19, 2014

Are We Better Decision Makers Today?

The pressure's on the screen
To sell you things that you don't need
It's too much information for me
--Duran Duran

The current environment offers more information than any previous period. Because decision-making is generally thought to be better when it is 'informed,' one would think that we are presently making the best decisions in the history of mankind.

Yet, it can be argued that decision-making quality has not improved in proportion to the increase in information. Some might even argue the opposite--that the general quality of decisions made today is worse than those of our predecessors.

What might explain such a phenomenon--that today's decisions are generally not improving at the rate of information increase? Here are a few propositions:

Information overload. The quantity of information available exceeds our cognitive capacity for processing it.

Not enough relevant information. Although more information is available today, it is mostly trivial and largely not useful for making the decisions we face.

Competitive negation. To the extent that decisions help us compete for resources, the gains possible from better information are competed away by rivals employing similar technology. This might be particularly true in organizational environments.

Misinformation. Channels convey misleading information that, when utilized, reduces decision-making quality.

False premise. The proposed relationship between information and decision-making is invalid. Rather than drawing on rich information pools for decisions, individuals prefer decision-making processes that employ little information.

Friday, July 18, 2014

Greater Good Accounting

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

Statists often use rationalize government programs using some variation of this mental accounting:

number of people helped by the program - number of people hurt by the program = net people helped

If the net is positive, then the program is judged to be a winner. If the net is negative, then the accounting rationale migrates toward the following:

gross number of people helped

If the gross is deemed > 0, then the program is deemed worthwhile. Never mind those who are hurt by the program.

Thursday, July 17, 2014

Less Copyright

"Now, do what I do. And say what I say."
--John Winger (Stripes)

Discussion suggests that we'd be better off with less copyright law. The popular 'wisdom' behind copyright law it to promote creativity and innovation. Yet, these laws clearly do the opposite.

Copyright laws grant monopolistic privileges that restrict use of ideas and limit expression.

The solution proposed by the discussants is to merely emphasize ordinary property and contract law. Such laws provide plenty of incentive to create and innovate.

It is ironic that many people who oppose monopolistic practices by Big Business have no problem with monopolistic privileges granted to them by copyright law.

Wednesday, July 16, 2014

Price Equity Ratios?

In violent times
You shouldn't have to sell your soul
In black and white
They really, really ought to know
--Tears for Fears

New Fed chair Janet Yellen opines that "price equity ratios and other measures are not outside of historical norms." Price equity ratios?

Zero Hedge relates this comment to one made by President Obama years back about attractive "profit and earning ratios."

As ZH concludes, government officials, Fed and otherwise, have no idea what they are talking about when it comes to economics and financial markets.

The real bubble is a bubble in public confidence in these institutions. The real question is how long before this bubble pops.

Blinded to Wealth Transfer

It's poetry in motion
She turned her tender eyes to me
As deep as any ocean
As sweet as any harmony
--Thomas Dolby

The folly of it all. Washington bickers over billion dollar spending bills while the Federal Reserve prints that much in a couple of days and gives it to the banks and other special interests.

A dollar is a claim on production. When the Fed prints those claims, those who get their hands on them first take production from others.

People continue to be blind to the largest wealth transfer in the history of the world.

Tuesday, July 15, 2014

Few Shorts

I don't know when to start or when to stop
My luck's like a button
I can't stop pushing it
--General Public

Toddo notes that he knows some people who are cautious here but few who are actually short. This is true at all tops. Some bears turn their hats around as prices march ever higher. Other cautious types can't stomach the pain of short positions moving against them.

What is important is how people are actually positioned, not what they say or feel.

And currently bulls are fully entrenched while bears exhibit no commitment.

position in SPX

Monday, July 14, 2014


All my dreams came true last night
All my hopes and fears
All my dreams came true last night
In tears, in tears

A sinister looking person is walking toward you. You fear for your life. Is it within your right to self-defense to act on that person to eliminate the perceived threat?


A person who has indicated dislike for you buys a gun and trains with it. Is it within your right to self-defense to hire strong-armed agents to take the gun away from the person?


A person who has indicated dislike for you is walking down the street toward you with a holstered gun. Is it within your right to self-defense to act to disarm that person?


Preemption is rarely a legitimate reason for applying force against another person. Only when a threat is acutely imminent (e.g., a person within a few feet of you draws a gun and says he is going to kill you) is preemptive action potentially valid.

Otherwise, preemption is aggression.

Sunday, July 13, 2014

Will It Be Repos?

In my dream of laughter
You came creeping with your fears
Telling me your sorrow
In the trace ends of your tears

Am increasingly wondering whether repos might be central to the Next Time Down. Repos have become a primary source of leverage, as traders swap liquid collateral such as Treasuries for borrowed funds. Repos have also been a means for the Fed to control market liquidity.

Through its QE programs, however, the Fed has essentially been buying Treasuries and other liquid assets off the market. Collateral shortages are developing as well as repo 'fails.' As participants are withdrawing from the repo market.

What this sets up is a deleveraging event. Deleveraging means that traders sell risky assets to take projects funded with debt off their books.

As dominos hit each other, prices broadly decline.

position in SPX

Saturday, July 12, 2014

No US in WWI

"You've been given a great gift, George--a chance to see what the world would be like without you."
--Clarence Oddbody (It's a Wonderful Life)

David Stockman suggests many unpleasantries that would not have occurred had the US stayed out of WWI. German hyperinflation (Weimar) and Hitler's subsequent rise to power. The US boom/bust of the 1920s/1930s. WWII. The Holocaust. Atomic bombs dropped on Japan. The Cold War. US empire-building.

I would add domestic policies birthed during the period including Great Depression. Social Security. Oppressive government regulation. Fannie Mae. Various Federal Reserve actions.

In the classic film It's a Wonderful Life, George Bailey is allowed to see how different life would be had he not been born. We have been given a similar gift, reason, that we can apply to historical events and gain insight into the negative consequences of past acts of aggression.

Our challenge is to use this gift, and to apply what we learn.

Friday, July 11, 2014

Obama's Censorship

Here I am in silence
It's a game I have to play
You and I in silence
With nothing else to say
--Information Society

Letter from the Society of Professional Journalists requesting that the Obama administration remove various forms of censorship of public information.

In particular, SPJ cites restrictions placed on communications between journalists and federal agencies. Whereas journalists could once freely walk agency halls and communicate with agency staff, such free communication is no longer allowed. Instead, media representative must go through public affairs offices or political appointees. Incomplete information and spin, results.

Unlike privately owned and operated organizations, where reasonable control of communication is a valid property right, government agencies are owned by and work for the public. Transparency should be total. Media restrictions lifted.

What makes the present state of censorship particularly ironic is that it comes from an administration that had promised high transparency. In reality, it operates with growing opacity and deceit.

The SPJ letter suggests that information suppression at the federal level has been growing for decades, and has significantly increased with the past two administrations.

Why more censorship now? Because technology has collapsed barriers to entry and opened the field of journalism. Prior to the increased competition, media outlets were fewer and easier to control--particularly where biased journalists were partial to particular political causes. Even if journalists with a political preference intend to report news impartially, it is difficult to do so (see 'Distortion Theory' thread).

Now, it is more difficult for government institutions to control the media. Journalists and their outlets can no longer be trusted to toe party lines. Information markets that are more free are more capable of exposing political malfeasance.

The institutional response, and quite predictable, really, has been to cut information flows and more tightly manage its content.

Thursday, July 10, 2014

Portuguese Unease

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

Soft equity markets this am as Portugal's largest bank defaults on bond payments. Perhaps the weak EU banking system is coming back into focus. May be another crack.

Dip buyers will not give up easily. Will be interesting to see if they can lift 'em once again. If they can't lift 'em, then the angst level ticks higher.

position in SPX

Wednesday, July 9, 2014

Secessionist Tradition

Lay down the law
Shout out for more
Break out and shout
Day in, day out
--Swing Out Sister

Tom DiLorenzo highlights people and events in the US secessionist tradition developed during the first half of the country's existence. It began with the Declaration of Independence which was itself a declaration of secession from England.

The Declaration's author, Thomas Jefferson, was a vocal proponent of secession. In his inaugural address in 1801, Jefferson spoke, "If there be any among us who wish to dissolve this Union or to change its republican form, let them stand undisturbed as monuments of the safety with which error of opinion may be tolerated where reason is left to combat it."

Subsequently, when two New England states threatened secession after the Louisiana Purchase, Jefferson wrote to a friend, if there was a "separation," then "God bless them both and keep them in the union if it be for their good, but separate them, if it be better."

The idea was voluntary union and the right to secede.

DiLorenzo quotes various individuals who subsequently reiterated this concept. He also includes a few examples from the long history of newspaper endorsements of the right to secede.

The Lincoln regime sought to rewrite history, declaring that a) the states were never sovereign, b) the union was not voluntary, c) the federal government was justified in waging total war on states that wished to secede from the union.

Despite those efforts, which killed and maimed millions, the natural right to secession remains undisturbed. As Jefferson wrote, this right is inalienable.

Tuesday, July 8, 2014

Industry Concentration and Interest Rates

What's the long face
What's all the crying for
Didn't you expect it
When you opened the door
--Bruce Hornsby & The Range

Concentrated industries are dominated by a few key players. More precisely, concentrated industries are those where most of the market share is controlled by a few operators.

Measures such as the CR4, which reports the market shares of the largest four operators as a percentage of the overall industry, estimate industry concentration. A general rule of thumb is that when CR4s surpass 60%, then industries are sufficiently concentrated to foster anti-competitive behaviors such as price collusion and regulatory capture. Such behaviors serve to shield large incumbent franchises from competitive pressures applied by smaller, more nimble rivals. Such behaviors also discourage entrepreneurial entry.

Although I do not have CR4s in front of me to verify this, there is little doubt from where I sit that industries have been growing more concentrated over the past few decades.

There also can be little doubt that a key driver of higher industry concentrations has been the lower interest rate regime of the last thirty years fostered by the Federal Reserve. Since 1980, yields on 10 year Treasury notes have fallen from above 15% to under 2%. That's a near 90% decline in borrowing costs facilitated by central bank policy.

It takes no genius to grasp the effect of secular interest rate decline on industry concentration. Cheap money makes it easier to borrow and build. Large operators that already enjoy economies of scale can leverage size advantages even more by adding additional capacity.

More importantly, cheap money makes it easier to borrow and buy. Large operators can buy capacity and market share by purchasing competitors. Merger and acquisition booms are fueled by cheap credit.

Sadly, many people who rail against 'Big Business' also support, or are at least neutral to, low interest rate policies of the federal government. These people turn blind eyes to the linkage between Big Business and the state.

Monday, July 7, 2014

Moral Rot

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

Professor Williams suggests that we don't have a spending problem. Rather, government spending is symptomatic of deep moral rot.

If I decide to give part of my production to help someone else then it is called charity. If I employ a group of strong armed agents to take production from some for the benefit of others then it is theft. If I do it routinely then it is slavery.

We are succumbing to the urge to economize (which is natural) by the use of aggression (which is wrong). Although we can help others by giving of ourselves, we figure that can get much more bang for the buck by contracting with others to forcibly take from some for the benefit of others.

But by using force to leverage our good intentions, we are doing evil, not good.

Sunday, July 6, 2014

Rahn Curve

It happened one summer
It happened one time
It happened forever
For a short time
--The Motels

Economist Richard Rahn developed what has become known as the 'Rahn Curve' that sketches a small but optimum size of government that maximizes economic prosperity.

This merely portrays the general minarchist view that a small amount of formal government is necessary for effective social functioning.

The question is whether such a theoretical state, that of a limited government that stays limited, is realistically possible. Our founding ancestors were optimistic.

Unfortunately, a growing body of empirical evidence suggests that their optimism may have been misplaced.

Saturday, July 5, 2014

Unfree and Dissatisfied

Benjamin Martin: May I sit with you?
Charlotte Selton: It's a free country. Or at least it will be.
--The Patriot

Gallup poll indicates increasingly more Americans feel dissatisfied with their freedom to choose what to do with their lives. The survey average has increased from 9% in 2006 to 21%.

This should be wholly expected. As state power grows, more and more people will engage their preference for liberty.

How low does a survey estimate like this have to fall before it reflects a critical mass of people acting to reclaim liberty lost? The 50% level reflects a democratic, majority rule mindset.

About 240 years ago, the road to American independence was paved with a critical mass much lower than 50%.

Friday, July 4, 2014

Liberty's Patriots

"So, here's to the men who did what was considered wrong, in order to do what they knew was right...what they KNEW was right."
--Benjamin Franklin Gates (National Treasure)

Ron Paul reminds us that Independence Day is a celebration of opposition to tyranny--not a celebration of government.

As Jacob Hornberger observes, individuals labeled as patriots in 1776 were British citizens who took up arms against their own government. In the eyes of the standing government, these people were traitors. Legally, they could be hanged for treason.

These people were patriots because they took a stand against wrongdoing and tyranny. Their stated justification for doing so was that all people are endowed with certain inalienable rights granted to them by God or by nature. Government does not grant these rights; government exists at the pleasure of the people and can be thrown off if ineffective in helping individuals defend their rights.

These ideas are as radical today as they were then.

The patriotism of our founding ancestors was grounded in their revolutionary stand for liberty--the belief that people's rights come from God and nature, not from government.

Thursday, July 3, 2014

Interest Rates and Balance

Miyagi: You remember lesson about balance?
Daniel Larusso: Yeah.
Miyagi: Lesson not just karate only. Lesson for whole life. Whole life have balance. Everything be better. Understand?
--The Karate Kid

Interest rates reflect the price of borrowing money. In unhampered markets, interest rates are determined by the supply of savings and the demand for funding.

Low levels of savings pressure interest rates higher in free markets. Higher interest rates reflect low supply of savings and encourage more people to save more. As savings build, supply grows, causing interest rates to fall.

Over time, the system comes back into balance. Shortage of savings is alleviated. Capital is replenished for productivity improvement projects.

Today's markets are hampered, however. Rather than being permitted to float freely, interest rates are being held low at gunpoint. In a system that is extremely short on savings and extremely long on consumption, hostaged interest rates impair the rebalancing process. People continue to borrow and consume. Debt continues to grow. Savings continues to decline. Capital continues to dwindle.

A person must either believe that a system that is forced to remain out of balance thru interest rate repression is not a concern, or that there will be consequences to pay for this forcible restraint.

Wednesday, July 2, 2014

Munis Feeling Heat

The shadows are
On the darker side
Behind those doors
It's a wilder ride
--Glenn Frey

After reading this post from Minyanville's resident bond guru Michael Sedacca, called up some muni bond fund charts.

While most of the fixed income space is under pressure today, the heat is on in munis.

Maybe something or maybe nothing. But these are what cracks in the dike might look like.

no position


"A repo man spends his life getting into tense situations."
--Bud (Repo Man)

Repurchase agreements, or 'repos,' are contracts where party A (the seller) sells securities to party B (the buyer) with the promise to buy those securities back at some future date. The time frame for this agreement is short term and often overnight. B, who buys then sells, is said to be engaging in a 'reverse repo' agreement.

What is going on here? A wants or needs cash for a project. B essentially lends A the money, and accepts the securities, usually liquid short term instruments like US T-bills, as collateral. When A buys back the securities, it is usually at a higher price. The difference between the initial sale price and the buyback price constitutes what is often called the 'repo rate.' Essentially, B is being paid interest for a short term loan.

Although repos resemble secured loans, they are legally different. Unlike loans, A legally repurchases the securities at the end of the term. This has regulatory and tax consequences that differ from loans.

Collateral reduces but does not eliminate risk with repos. A may fail to repurchase the securities at the maturity date, resulting in a default. B can sell the securities to recover the lost cash, but the securities may have lost value due to market movement. B may also fail to sell back the securities if their value increases during the term of the agreement.

An important thing to remember is that repos put more leverage into the system. If prices move in the wrong direction for leveraged parties, then repos can drive big increases in market volatility as investors move to unwind risk.

Tuesday, July 1, 2014

Corporations and People

People are people so why should it be
You and I should get along so awfully?
--Depeche Mode

Yesterday the Supreme Court ruled on the 'Hobby Lobby' case, saying the Obamacare's contraception mandate does not apply to 'closely held' corporations. Hobby Lobby and other corporate entities claim that it is against religious beliefs of people who own their enterprises to pay for services that support abortion. Thus, the ACA's contraception mandate violates the owners' First Amendment rights.

That the Supreme Court upheld these rights is a positive outcome, insofar as it goes, and is worthy of separate discussion.

Here, though, I wanted to discuss part of the rationale appearing in the ruling opinion written by Justice Alito.

A popular response by people who disagreed with the Citizens United ruling (2010), which held that certain parameters of statutory campaign contribution limits on corporations violated First Amendment rights of free speech, has been that 'corporations aren't people.' Because the Bill of Rights elaborate individual, not corporate, rights, the argument goes, corporations are not subject to those constitutional protections.

Those arguments are misguided. Corporations are owned by individuals. Individuals do not surrender constitutional protections when they own shares of corporations. While a corporation is not a person, it is owned by persons. Individuals who own shares of corporations possess the same inalienable rights as other people. Just as an owner's corporate share cannot be legally stolen, an owner's First Amendment rights cannot be forcibly compromised.

Alito's thoughts in his 'Holly Lobby' opinion reflect similar reasoning:

"A corporation is simply a form of organization used by people to achieve desired ends...When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people."

The federal government argued the 'corporations are not people' position. Hobby Lobby, as a for-profit corporation, is "separate and apart from" its individual owners. Because the corporation is not a person, they are ineligible for Bill of Rights protections designed to protect a person's "free exercise" of religion.

Nonsense, said Alito. "Corporations, 'separate and apart from' the human beings who own, run, and are employed by them, cannot do anything at all."

While there are many issues with opinion and backdrop of this case, this portion of Alito's argument was well reasoned.