Charity and Slavery

In violent times
You shouldn't have to sell your soul
--Tears for Fears

Charity is voluntarily giving production (either self-produced or obtained thru trade) to help others. Charity is not a one-sided trade. The giver of production gains psychic or perhaps spiritual income from the transaction.

Slavery is involuntarily surrendering production to others on a routine basis. Slavery is a one-sided trade. Production is confiscated from producers who get nothing in return--although slavemasters may rationalize otherwise.

Welfare programs funded by tax dollars are not forms of charity. They are institutions of slavery. Taxpayers regularly surrender production at the point of a gun.

They are slaves of welfare program beneficiaries and their proponents.

Movement in Motion

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

Lew Rockwell argues that the libertarian movement is not a future event. It is well underway. Media can no longer ignore libertarian ideas, particularly as young people devour classics by Mises, Rothbard, Hayek, Hazlitt, et al.

Discussions are active that would have been dismissed not long ago. What is the proper role of government? Do bailouts do more harm than good? How can economic situations improve simply by printing more money? How can a people borrow their way out of debt? Why isn't the best foreign policy simply to trade freely with all?

These are not new questions. Our founding ancestors pondered them in depth. Over the past century or so, however, these issues have been pushed aside by claims that these questions are old-fashioned and out of date. People have been distracted by smokescreens of sophistry.

An attractive feature of libertarian philosophy is its simplicity. Libertarianism opposes aggression, period. This spawns another another intellectually attractive feature: consistency. Any policy or program grounded in taking property from some is undesirable and wrong. Unlike other political philosophies, offensive force is not rationalized. 

Libertarianism is a philosophy of peace and voluntary cooperation among people. It is consistent with the harmony of nature.

Libertarianism was the philosophy of our founding ancestors. And it is once again gaining traction.

Laissez-faire

And when the night is cloudy
There is still a light that shines on me
Shine until tomorrow
Let it be
--The Beatles

In French, laissez-faire means "let them do as they will" or "leave them alone." When applied to markets, this idea means that force should not intervene between people seeking to produce and trade with each other. People should be permitted to trade freely because they are acting out of their own volition.

Forceful intervention is only appropriate when property rights are violated. Otherwise, forceful intervention is a form of aggression--in conflict with natural law.

Let the people be.

Yield Curve Flattening

A good man pays his debt
But you ain't paid yours yet
--Heart

The yield curve is a plot of yields at various Treasury bond durations. When times are good, people generally like to see a 'steep' yield curve, meaning that there is a significant positive difference between short and long rates. This permits an attractive 'carry trade' where investors can borrow short duration and buy long duration.

In tough times, the yield curve 'flattens,' meaning that there is less difference between short and long rates. In an economy that depends on borrowing and leverage as ours does, this is an unwelcome event.

Presently, the yield curve is flattening. Much of this has been Fed induced as QE buys in long bonds, forcing their yields lower. Difference between 5 and 30 year Treasury yields is back to early 2009 levels and only 50 bips from 2008 lows.

Harbinger of coming problems? Not sure, but is seems likely that carry trades will come under increased stress.

Paper Wealth

An angel's smile is what you sell
You promise me heaven
Then put me through hell
--Bon Jovi

As the SPX marks new highs, many people are breathing a sigh of relief. Not only have they recovered losses associated with the credit market meltdown, but in many cases their account statements indicate that they are wealthier than ever.

However, the numbers on those statements reflect wealth only to the extent that financial securities can be converted into liquid assets that can buy real resources.

People tend to assume that such a conversion is straightforward. Simply sell stocks, bonds, et al to get liquid.

Maybe so. But if lots of people simultaneously decide to seek liquidity, then today's account statement numbers do not reflect wealth levels.

They reflect ignorance and overconfidence.

Affiliation, Groupthink, and Discrimination

Can you imagine no love, pride, deep fried chicken
Your best friend always sticking up for you
Even when I know you're wrong
--Train

Thomas Jefferson said that he sought kept his affiliations to a minimum in order to preserve independent thought. He understood that belonging to groups invites groupthink and clouds judgment.

Social identity theory posits that people join groups to enhance self-esteem. As they do so, individuals begin to assume characteristics thought to belong to the group.

To advance self-esteem, however, people must believe that they belong to the 'right' group. They will defend their group against perceived threats from outsiders. Group members will go also along with what the collective wants even if they personally believe it to be wrong. Failure to do so would constitute admission that their affiliation is a mistake.

A consequence of affiliation is inherent tendency to discriminate. Outsiders are apt to be seen as inferior in some way. Discrimination enhances self-esteem to be gained from joining groups.

Because he thought this was not a worthy route to self-esteem and sound judgment, Jefferson sought to be as group-free as possible.

Freedom of Choice

"A king may move a man. A father may claim a son. But remember that, even when those who move you be kings or men of great power, your soul is in your keeping alone. When you stand before God you cannot say 'but I was told by others to do thus' or that 'virtue was not convenient at the time.' This will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

One characteristic that separates us from the rest of the animal kingdom is freedom of choice. Unlike Pavlov's dog, we can decide how to respond to a stimulus. We can override limbic reflex and choose differently.

This means that no matter how bad or high pressure things get, we control our response. Others cannot move us unless we let them. When we stand accountable before the Creator we will not be able to claim temporary insanity, or that social pressure was too much, or that orders were merely being followed, or that we were ignorant, or that good ends justified evil means.

But I gave you capacity for reason and choice, He will say, to choose between right and wrong, between peace and aggression. Why did you not use it?

Little Joe

And when the night is cold and dark
You can see, you can see light
'Cause no one can take away your right
To fight and to never surrender
--Corey Hart

Thoroughly enjoyed listening to Joe Morgan the other night as he joined the Reds TV broadcast crew for a few innings. Morgan was my favorite player on the Big Red Machine. On a team loaded with superstars, Little Joe made the machine tick. He put it all together during the magical 1975 and 76 World Series years, earning back-to-back MVP awards.

Morgan was testimony to the truth that size was not a prerequisite for performance excellence. Despite his small stature, he hit for power as well as average. Watching countless BP sessions, I recall watching him stroke ball after ball against or over the right field fence at Riverfront. Long, smooth stroke, quick hands.

Morgan was also quick afoot, but not blazing fast. He learned how to channel his quickness into base stealing skill and Gold Glove defense.

Joe Morgan possessed superior attitude. He stepped on the field to play hard and to win.

In his on-air conversation the other night, Morgan demonstrated that he has not lost that attitude. When asked about what the Reds needed to do to break out of this bad losing streak, Morgan said that players have step up and do it. "You need to figure out a way. You need to will it. If what you're doing isn't working, you have to find another way. But you keep trying until you are successful."

You need to will it. That's the lesson of Joe Morgan.

Malignant Body Politic

"I hate to tell you this, but it's a bankrupt business model. It won't work. It's systemic, malignant...and it's global. Like cancer."
--Gordon Gekko (Wall Street: Money Never Sleeps)

Jacob Hornberger proposes three malignant tumors infecting the American body politic:

Regulated society. Slowest growing of the three tumors, regulations manipulate and control people's otherwise peaceful behavior. Because people can learn how to cope with its debilitating effects, regulation impoverishes and destroys over long periods of time.

Welfare state. Socialist programs such as Social Security and Medicare start out slowly but its aggressiveness accelerates over time to reach a size that can take society down quickly. As the tumor grows, resources required to feed it require borrowing and debt. When the debt becomes too large to pay back, money is debased to extend the tumor's life. A chaos endpoint is only a matter of time.

Warfare state. In JH's view, this is the worst tumor of all. This cancer generates forces that convince people that the warfare state is necessary to preserve life and liberty. Even though the tumor is destroying society, people feel that they have to embrace militarism in order to protect against external dangers that the tumor itself produces.

Like personal medical situations, when diagnosed with these cancers, society collectively goes into denial. People become angry and refuse to believe that they are sick, arguing that these three pathologies are actually healthy and life-nurturing attachments to society.

As every cancer patient learns, however, denial of reality does not change reality. The diagnosed are facing immenent death.

Unnatural

"I know the vibration was not normal."
--Jack Godell (The China Syndrome)

Jeff Cooper poses a question that I've been asking myself for some time: "Does this look and feel like a natural market to you?"

My answer: "No way."

Forced price action. Futures led. Declining volume. Automated. Agenda driven. The action feels manipulated. Manipulated by non-economic buyers.

A manipulation that can last only so long.

position in SPX

Busily Unaware

"Look at these people. Wandering around with absolutely no idea what's about to happen."
--Peter Sullivan (Margin Call)

As people become busier and more involved in minutae of life, awareness of trending danger drops. Threat builds unsensed. It is not until harm is imminent that people wake up.

Being busy, therefore, can be distracting. It lowers one's guard.

Aggressors can use this to their advantage.

Induction Errors

Right behind you, I see the millions
On you, I see the glory
From you, I get opinions
From you, I get the story
--The Who

Inductive reasoning is the process of reaching conclusions or generalizing from specific observations. For example, one might observe increasing temperature trends in the midst of industrial activity and conclude that industrial activity increases temperature.

Induction is particularly useful in the early stages of seeking truth. A phenomenon is observed, and induction initiates the sense-making process.

However, induction is prone to error. Spurious correlations can be confused with cause-and-effect. Small sample size of individual observations may lead to sweeping generalizations that do not hold across entire populations.

Cognitive biases can exacerbate induction errors. The availability heuristic favors data that are readily accessible. For example, we are prone to rely on recent experiences and observations when seeking inductive conclusions. Essentially, convenience samples form the basis for conclusions.

Confirmation bias, a.k.a. selective reasoning, also taints inductive processes. People are prone to seek out cases or evidence that confirm our points of view while discounting or completely dismissing conflicting evidence. Confirmation bias impairs critical thinking as it discourages search for informed alternatives.

To manage potential for error, induction seemingly needs to be complemented by deductive processes that spark minds to test inductive premises for validity. By doing so, perhaps fast and slow thinking can be coordinated and managed.

Central Bank Distortions

Look at the faces
Listen to the bells
It's hard to believe
We need a place called hell
--INXS

Good list (sourced from Fred Hickey) on the bottom of this post of problems/distortions created by the Fed and other central banks:

Fostered widespread moral hazard

Encouraged formation of asset bubbles that eventually pop

Skewed wealth inequality far beyond natural levels

Severely penalized retirees on fixed incomes via financial repression

Encouraged spending/discouraged saving

Funded massive government spending by monetizing debt

Lengthened recessions and reduced job creation

The Fed and other central banks have also sewn seeds for massive consumer price inflation in the future.

Falsifiability

So true
Funny how it seems
Always in time
But never in line for dreams
--Spandau Ballet

Falsifiability is the logical possibility that an assertion can be proven false by a particular observation or experiment. Falsifiability does not mean that a statement is false. It means that if the statement was false, that its falseness can be demonstrated.

For example, claiming that 'no two people are the same' (perhaps regarding a certain trait or behavior) is not falsifiable because it doesn't seem possible to prove wrong. Regardless of how many people are compared and found to be different, one might have to keep comparing all people forever in order to detect a false case.

On the other hand, claiming that 'all people are the same' is falsifiable because presenting one case of differences proves the statement wrong.

Karl Popper (1959, 1963) argued that falsifiability is an important concept in science. Although not sufficient, falsifiability is a necessary criterion for scientific ideas. However, he suggested that unfalsifiable statements such as meta-physical and religious propositions are not without relevance and may lead to testable theories down the road.

Popper also viewed that falsifiable theories that have withstood long periods of testing may be seen as corroborated by experience but not necessarily confirmed. Corroboration through experience does not guarantee that a theory is true. Thomans Kuhn's (1962) work is consistent with this view.

Popper held that falsifiability is a special case of the general notion of criticizability. Criticizability is the openness of an assertion to criticism--i.e., to the logical possibility of specifying what would show the assertion to be mistaken.

The idea is that without openness to criticism, it is difficult to approach truth.

References

Kuhn, T.S. (1962). The structure of scientific revolutions. Chicago: University of Chicago Press.

Popper, K. (1959). The logic of scientific discovery. New York: Basic Books.

Popper, K. (1963). Conjectures and refutations. London: Routledge.

Fed's Primary Motive

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

ZeroHedge argues that the primary motive behind the Fed's stock market friendly policies is not to line the pockets of the wealthy, although that is certainly occuring. Instead, it seeks to prop up the value of equity-laden pension funds.

As a fraction of total assets, US pension funds own more stocks than similar funds in other countries. In fact, pension funds in other countries have generally decreased their allocations to equities since the last market meltdown.

By trying to uphold the paper wealth gains of future retirees, the Fed thinks that it will avoid a general decline in confidence that keeps social fabric from ripping.

In other words, the Fed is trying to preserve the legitimacy of the welfare state.

position in SPX

Defensive Routines

"These walls were not meant to shut out problems. You have to face them."
--Mother Abbess (The Sound of Music)

Defensive routines are thoughts and actions employed by individuals, groups, and organizations to protect their usual ways of dealing with reality (Argyris, 1985: 5). Essentially, defensive routines are behaviors to prevent or avoid embarassment or threat.

Common defensive routines include blaming, stereotyping, advocating views without encouraging inquiry, acting to save face, making arguments personal, intellectualing, and creating diversions. Defensive routines can take the form of physical action as well as mental thought processes.

Defensive routines are components of fast thinking, and probably a consequence of our evolutionary past. While they might promote near term self-protection, defensive routines discourage learning over the longer run. Difficult situations are avoided rather than faced.

By helping us avoid our problems, defensive routines blind us to improvement possibilities.

Reference

Argyris, C. (1985). Strategy, change, and defensive routines. Boston: Pitman.

Volume and Non Economic Buyers

Tonight is fading fast
The sun is rising
I've been down so many times
Now I'm realizing
--March Violets

What should happen to volume if non-economic buyers (NEBs), such as central banks, were buying securities? Either directly or through agents, NEBs would accumulate increasingly larger fractions of shares outstanding. Less shares would be available for other entities to trade.

Over time, volume should decline.

While possibly due to less enthusiasm among traders, the present declining volume phenomenon can also be explained by increased buying by NEBs such as central banks.

Soros Put Position

I see a red door
And I want it painted black
No colors anymore
I want them to turn black
--Rolling Stones

Hard not to raise an eyebrow at George Soros' position in S&P 500 index puts. While it oscillates from quarter to quarter, Soros has been increasing his put position, particularly over the past year.

In the most recent reported quarter, the position was $2.2 billion large, which equates to about 17% of assets under management.

Why Soros has been increasing this bearish bet, which of course, can be construed as a downside hedge against other other positions, is unknown.

position in SPX

Central Banks and Government Spending

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

Interesting statement at the end of this screed: "Central banks exist to make it easier for insolvent governments to borrow money."

In ZIRP (zero interest rate policy) or NIRP (negative interest rate policy) regimes, financial repression prompts investors to reach for yield. This permits the US government, already $17 trillion in the hole, to sell even more Treasury debt with uber low coupons. In an unhampered interest rate environment, the cost of selling that debt would be much higher.

Of course, it also helps that the Fed, thru its QE programs, happens to the biggest buyer of US debt as well.

Much of this Ponzi-esque silliness would cease if investors took the view that buying sovereign debt is essentially sanctioning the use of force on others. Viewed thru this ethical lens, sovereign debt should not be bought, because those who do are contracting with government agents to force people into conditions of involuntary servitude.

Until more people decide not to play, central banks enable governments to borrow and spend much more than the could otherwise.

Lauren Bacall

Philip Marlowe: How'd you happen to pick out this place?
Vivian Rutledge: Maybe I wanted to hold your hand.
Philip Marlowe: Oh, that can be arranged.
--The Big Sleep

Lauren Bacall passed away yesterday at age 89. Sultry and cool, Bacall made memorable moments on film--many of them with husband Humphrey Bogart.

Fortunately for us, those performances live on. RIP Betty.

Another Buyout

"Your boy really did his homework on this one, Fox. And you'll have the shortest executive career since that pope that got poisoned."
--Investment banker (Wall Street)

The assets once owned by my former employer are once again in play. We've reviewed the timeline and the sage previously.

In the late 1990s, the company was purchased by a Scandinavian operator. When that merger didn't work, the assets were sold to an arm of a large private equity firm.

That didn't work either. After all, what did the private equity folks know about making paper? Also, like all PE firms, they were operating with big leverage. As markets continued to sag, Chapter 11 beckoned. After a year or so of that, the PE firm has basically transferred control to creditors.

The syndicate of creditors don't want the thing. So they've tentatively accepted an offer from another operator in the industry. This company is smaller and has a worse balance sheet than the target.

With both companies and end markets so weak, how can this deal get done? Well, the junk bond market has been on fire (although that may be changing), enabling high credit risks to obtain debt financing on the cheap. Also, the syndicate of creditors has apparently offered what amounts to 'vendor financing.'

Similar to the classic scene from Wall Street, where the lending syndicate for the Blue Star buyout gets assurance that its loans will be paid back by selling planes and hangars, it seems like this merger only gets done with the promise of more shutdowns, closures, and asset sales.

While visiting friends on their Central Wisconsin farm this past weekend, I spied the familiar candy-striped smoke stacks of the Biron Mill--where I began my career. Couldn't help but wonder if those stacks will soon go dormant for good.

If so, then this sad story of decline may approach closure.

Intuition and Flow

"A good martial artist becomes not tense, but ready. Not thinking, yet, not dreaming--ready for whatever may come. When the opponent expands, I contract. When he contracts, I expand. When there is an opportunity, I do not hit. It hits all by itself."
--Bruce Lee (Enter The Dragon)

When individuals are under pressure in complex situations, careful reasoning is often not a viable option because of the short time period that frames need for decision. Well developed intuition is necessary to guide decision-making under conditions of threat, confusion, and time constraints.

Essentially, intuition is knowing something without having to engage in large amounts of analysis.

Intuition is sometimes referred to as "gut feel," which implies an emotive, mystic sense that derives from psychic processes that defy explanation. But it is not mystical. Effective intuition is informed. Research shows that it is the product of pattern recognition. The mind scans thousands of past patterns for matches with present situations. If matches are found, then decisions reflect judgment of what is required to successfully navigate the present situation in accordance with what is perceived to have worked in previously similar patterns.

Developing effective intuition, then, requires exposure to thousands of patterns, cataloguing them into memory, then developing capacity for quick retrieval from the catalogue.

That last piece, quick retrieval, is key. Under tense situations our minds are apt to freeze, to block. We are unable to access past patterns for use.

The mind must flow, not block, under high pressure situations. No worries, no expectations, no past, no future.

Instead, clear, preaceful, flowing in the here and now so that intuition can quickly do its work.

Testing Mindset

"It ain't the six minutes...it's what happens in those six minutes."
--Elmo (VisionQuest)

The common mindset for a pending test is to be nervous and fearful. Fear of making mistakes, embarrassment, failure.

An alternative mindset is to welcome tests. After all, it is a rare moment to show what you know. Such opportunities do not come along every day.

Look forward to tests. Put your all into it. Do your best, and relish the moment.

My Place

In a big country dreams stay with you
Like a lover's voice fires the mountainside
--Big Country

Many people have a place--a special place where they find solitude and reflection. For many years my place was a park that wound along the Wisconsin River. I loved to walk the trail and watch the  tamarack-stained river peacefully flowing by.

There was one point in particular with a westward view of the river sloping toward the pineries. In the evenings, as the sun went down, I would reflect on the past, and hope and pray for the future.

Although I left Central Wisconsin long ago, I think of my place when I am in a reflective mood. Sometimes I look at pictures. Sometimes I imagine being there.

Now and then, I am fortunate to return to the area and visit old friends. I had hardly arrived last evening when I heard my place calling. Although it was getting dark, I dropped my things in my room and headed to the park.

Once again I am walking the path of dreams, giving thanks for all of my good fortune, and gazing at the horizon of hope.

Undone

Now we'll try to stay blind
To the hope and fear outside
Hey child, stay wilder than the wind
And blow me in to cry
--Duran Duran

Interesting thing about social systems. They often stay stuck in one mode for the longest time, impervious to any forces trying to counter or rebalance the system.

Then, the resistance lets go, and the in-place regime is toppled by the slightest breeze.

Resist, resist, resist. Then come undone in an instant.

Capital Controls

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

This missive posits that the greatest risk racing those who own financial assets is not the risk of a bad investment. Instead it is exposure to political risk--primarily in the form of capital controls.

Capital controls are legal restraints placed on moving and trading financial assets. They include outright confiscation.

Evidence is offered of growing interest in capital controls among public officials. Personally, it was the Cyprus situation early last year the heightenend my awareness of this risk.

While managing such risk is not easy, going thru the exercise is a prudent one. One day you could wake up and find some or all funds confiscated from your bank account.

Volume and Not Playing

"A strange game. The only winning move is not to play."
--Joshua (War Games)

We have noted the declining volume phenomenon in previous missives. This article offers interesting perspective on what is happening.

First, a couple of graphs.  Long term volume trend in SPX intact until official end of Great Recession. 

Declining volume is not just a stock thing, however. Bond volume also tapering off since official end of last recession.

The author posits that declining volume reflects public souring on capital markets. Professionals and retail investors are turning their backs. Why? Because they perceive them as increasingly manipulated by policymakers.

People are voting with their feet. They are disgusted with this state of affairs and deciding not to play.

position in SPX

Less Thinking is Fast Thinking

"You don't have time to think up there. If you think, you're dead."
--Pete "Maverick" Mitchell (Top Gun)

Thomas Sowell laments an increasing trend in the lack of thinking reflected in many current policies and their defense. To the extent that a trend does in fact exist, Kahneman might suggest that the trend does not reflect lack of thinking, but an increasingly dominant role of System 1 (fast) thinking over System 2 (slow) thinking.

What might explain a trend toward more fast thinking? A few possibilities:

People are more pressed for time. System 1 is fast and renders judgment quickly--even if it is subject to error and bias.

People feel more threatened today. System 1 is a product of our evolution, when fast thinking was necessary for survival.

Popularity and shock value. In today's interconnected world, people are anxious to self-brand. They are more likely to take biased positions and make wild statements to gain attention and collect followers. System 1 makes this happen.

Schools are less prone to help children develop their System 2 thinking skills. When kids become adults, they have underdeveloped reasoning capacities.

People feel that they have more to lose today. System 1 is inducing a classic endowment effect.

Feeling Heat

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

Right around this time three years ago Greece and the rest of Europe starting sliding. Global markets were sucked into their last significant decline.

Increasingly getting the feeling that we could be on the cusp of another big move. Could be a false alarm, of course. But am not the only one who feels the heat.

Be careful out there.

position in SPX

Sam the Bald Eagle

"Tower, this is Ghostrider requesting a fly-by."
--Pete "Maverick" Mitchell (Top Gun)

A few days ago Sam the Bald Eagle made is fifth and final landing of the season at Great American Ballpark.

F-16 flyovers can be pretty cool.

But they can't top Sam.

Diversions and Government

Take that look of worry
I'm an ordinary man
They don't tell me nothing
So I find out all I can
--Phil Collins

Going back to Sun Tsu and further, a fundamental tactic of warfare is to create diversions--to distract the enemy.

Because government is legitimized force that is often used aggressively, governmental actions can be seen as waging war on the citizenry--seeking to take property using methods of aggression.

As tacticians of the governmental apparatus, politicians are well versed in creating diversions. To distract the citizenry from an important issue that might damage the political machine, politicians create other events for the media to highlight instead.

Gullible citizens take the bait and get taken.

Don't permit yourself to be distracted. Stay focused. Separate signal from noise.

Doing so counters diversionary government tactics, rendering them less effective.

High Yield Spreads

'Cause when the feeling's right
I'm gonna run all night
I'm gonna run to you
--Bryan Adams

Related to the last post, where are junk credit spreads currently? Spreads are blowing out (note spread scale is inverted):

Six month wides. Long term, however, high yield credit spreads average 6 -10%.

The implication, as noted earlier, is possible trend change in risk appetite.

position in SPX

Junk Yard

Now Leroy's, he's a gambler
And he like his fancy clothes
And he like to wave his diamond rings
In front of everybody's nose
--Jim Croce

Continue to watch junk bonds as a harbinger for risk aversion. And junk continues weaken. Near term picture is ugly:

Longer term, weekly prices are just now peaking thru mult-year support:

If support decisively breaks, then there's alotta room lower without much support.