Offsides

Everybody wants you to be special
And everybody wants you to be high
They throw you down a rope when you're in trouble, baby
Screamin' "Save me"
Then they charge you with the rescue blues
--Ryan Adams

With battle lines drawn at SPX 2000, Hoofy' Heroes once again appeared snatch victory out of the mouth of defeat with a Thursday route of Boo's Crew.

Unfortunately, this may have been a fleeting flurry of short covering and window dressing because, when the dust settled after Friday's heavy close, the bulls find themselves south of the SPX 2000 maginot.

Bears will be looking for follow thru next week--something that they have not been able to do for a long time.

One thing is certain: intraday volatility is picking up. Suggests that the tape is trying to throw off demons at the current level in order to charge deeper into either bull or bear territory.

position in SPX

Yields and Leverage

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

Ten year Treasury yields are once again breaking lower. Now under 1.7%, T-note yields seem intent on testing all time lows of about 1.4% reached in summer of 2012.

Treasuries aren't the only ones. Sovereign bond yields in countries deemed as safe havens, such as Germany, are all marking lows.

This is occurring to the dismay of many. "How can people pour into bonds here?" "How can bonds be bid in a world where printing presses spit money like confetti?" "Don't people realize that they are buying yield-free risk here?"

All valid points, but they reflect an oversimplified, linear in a world wrought with lags and complex non-linearities.

In NIRP and ZIRP worlds, for example, people will buy low yields to squeeze out return. They will be particularly prone to reach for yield as long as they believe policymakers have their backs. Thus, yield-suppression actions of policymakers along should make the low bond yield phenomenon unsurprising.

One also needs to be aware of what is likely to happen when markets transition from high to low risk appetites--particularly when those markets are leveraged. When risk appetite is high, borrowers will invest more of their borrowed proceeds into risky asset classes like stocks. They will also buy bonds to the extent that the investors perceive that they can make money on the spread between borrowing cost and coupon yield on purchased bonds.

Investors will be even more enamored to buy bonds at low spreads if they a) can borrow lots of funds to put to work on those spreads, and b) have confidence that policymakers won't suddenly raise borrowing rates--which would effectively call in their loans at a potential loss.

This, of course, is precisely what we've seen: leveraged trades in stock AND bonds, which has pushed prices of both higher. As long as a) and b) remain in effect, then risk preference seems the key variable. As long as carry traders maintain high risk appetite, then we should see bonds continue to be bid, and yields continue to fall.

However, bond are likely to be bid and yields are likely to continue to fall EVEN when risk appetites begin to decline. This is because carry traders probably won't immediately take all risk off the table when they begin to lose their risk appetite. Stated differently, traders are unlikely to deleverage right away. Instead, they WILL ROTATE OUT OF HIGH RISK INTO LOW RISK. Out of stocks and into bonds. Out of corporates and into Treasuries.

All the while, bonds get bid and yield falls.

This continues until risk appetite is so low (or a) and b) leave the room) that investors no longer want to carry any leverage. When that occurs, traders sell their bonds and deleverage, which causes yields to increase--perhaps quickly.

Note that when that deleveraging occurs, then we have deflation (money and credit supply contracting as loans are extinguished thru payback or default).

Note also the effect that seems opposed to conventional wisdom: bond yields INCREASE during deflation--not during inflation--.

This would all be different if the backdrop was not one of debt and unnatural leverage. However, as long as the world is unnaturally leveraged, the lower sovereign yield phenomenon is not a sign that investors have confidence in particular economies or economic policies or even low inflation. It is a sign of changing risk preferences and high inflation.  Historically low yields signal that risk appetites are closer to the point where carry traders are ready to jump ship and deleverage.

Given the huge amount of leverage in the system currently, this should give the thinking person cause for pause.

position in SPX

Put Off

If you leave, don't leave now
Please don't take my heart away
--OMD

In yesterday's FOMC statement, the Fed endorsed the view that the economy is getting stronger. Market participants appear to assume that to mean that ultra easy monetary policy is on borrowed time. Stocks sank post news.

Technically, bulls and bears are once again squaring off on the SPX 2000 maginot. This battle also includes a head and shoulders wind blowing in the face of Hoofy's Heroes.

Fear that the Fed put may be leaving drives this conflict.

position in SPX

Dollar Strength

We're talkin' 'bout the dollar bill
And that old man that's over the hill
--Simply Red

The US dollar has been increasing against most currencies over the past year. On a board index basis, it is up more than 15% year over year.

Why should that be, you might ask, if the Fed has been printing $trillions? Should all that extra supply cause the value of the dollar to tank?

Perceptive thought, grasshopper, but one has to remember that currency cross rates are nothing but one piece of paper ratio-ed to another. And central banks around the world are all trying to print their way out of debt (e.g., here). That coupled with the perception that the US economy is likely the best house in a neighborhood of growing global village of economic weakness finds the USD strongly bid at the moment.

One consequence of a strong currency in a beggar-thy-neighbor world is that exporters have a harder time of it. Foreign customers can buy less export goods and services when the exporters currency is strong. As such, it was only a matter of time until US multinationals began to take on water from reduced exports.

It appears that time was this week. Various multinational operators have reported either weak earning or forward guidance as a function of lower business abroad. Today Microsoft (MSFT) took early a 10% haircut on the back of its weak report. Caterpillar (CAT) was pounded for over 7%. Against this backdrop, the Dow moved lower to the tune of over 1.5%.

Cries about dollar strength are likely to get loud from here--as will howls from policymakers for monetary protectionism to protect their corporate pals.

position in SPX

More

Jacob Moore: So what's your number, Bretton?
Bretton James: More.
--Wall Street: Money Never Sleeps

Among the many salient points Prof Williams makes here relates to greed. If greed is defined as people wanting more than they have, then all people are greedy. What differs among people are their preferences, meaning that what "more" means to each individual is unique.

"More" is multidimensional in nature. Immaterial as well as material. Many people forsake material income in favor of psychic and spiritual income. Food, money, love, peace, cares, knowledge, belonging, domination, disease- and hunger-free world, enlightenment, etc. "More" encompasses a mishmash of wants.

Some believe that while others are greedy, they are not. That is delusional. All people act in search of more.

Wanting more is axiomatic.

Third Party Payers

"Moral hazard is when someone takes your money, and is not responsible with it."
--Gordon Gekko (Wall Street: Money Never Sleeps)

In the early 1990s I was involved in a corporate quality improvement project tasked with reducing annual increases in company health care costs. We were self-insured and paid 100% (!) of employee health expenses. We had few preventive programs or group deals. Employees submitted claims and the company simply paid them with few questions asked. Not surprisingly, company health care costs were increasing 15%+ annually.

This was also the era of Hillarycare, when the Clinton administration was making noise about more government intervention in healthcare markets. Laughable, of course, because Medicare, Medicaid, and other government-centric health care programs were already busting federal budgets to the tune of double digit annual percentage increases.

An early focus of our quality improvement team was getting more control over drug costs. In one initiative, we worked out a deal with a local grocery chain to get discounts on drugs mixed in their in-store pharmacies. Employees would show their ID card and drug costs would be billed directly to the company at the discounted rate. I do not recall a co-pay requirement. Incentive to participate was that employees would be required to pay the difference for drugs purchased outside the special network.

The  team issued a report that explained the pharma proposal, and it circulated among senior management. After reading the report, a disappointed senior VP sat me down in his office and told me that the plan wouldn't work. Although there was a penalty for employees who went outside the network, there was little direct incentive for them to shop for value. As long as there was someone else picking up the majority of the tab, said the VP, then cost will not be substantially curbed.

Today, the arrangement where someone else picks up the healthcare tab is called the third party payer system. Although it has been exacerbated by Obamacare, third party payment has been around much longer. One could argue that it had roots in 1930s health insurance plans that garnered government favor, and then escalated with the advent of Medicare in the 1960s.

Stated differently, hampered healthcare markets that shift costs to others have been with us for a long time.

Until costs are shifted back to those who consume the goods and services, then health care markets are destined to remain inefficient. Third party payment systems enable conditions of moral hazard. Moral hazard is the separation of risk from consequence. People will do less due diligence as consumers because they know someone else will pay.

Higher cost, lower quality, overuse, shortages are certain.

Why Hoard a Barbarous Relic?

"Sell it all. Today."
--Jared Cohen (Margin Call)

This editorial raises a good point. Central banks around the world constantly smash gold as a 'barbarous relic.' Why, then, don't they just sell their gold?

If European central banks currently hold more than 10,000 tons of gold, they could sell their hoard and fund more than half of the bond purchases proposed by the ECB over the next 18 months. Why print money out of thin air with all those nasty consequences when you have a worthless rock with no utility sitting around that someone is willing to purchase from you for $1300/oz?

Because like you and I, central bankers know better than to part with their gold.

position in gold

Ernie Banks

Here come bad news talking this and that
Yeah, give me all you got, don't hold back
Yeah, well I should probably warn you I'll be just fine
Yeah, no offense to you don't waste your time
--Pharrell Williams

Ernie Banks passed away yesterday at the age of 83.

By the time I saw him play, Mr Cub was wrapping up his Hall of Fame career (first ballot) at first base. I remember watching the Wrigley Field highlights of the 39 year old Banks circling the bases after hitting his 500th home run in 1970.

 In his earlier days, however, he was a superb shortstop. In fact, Banks won back-to-back MVP awards in 1958 and 59 as a SS.

Beyond his superb on-field credentials, Banks was one the the all time great ambassadors for the game. He was famous for his smile and for his expression "Let's play two."

Consummate positivity.

Bubbleheads

I'll move myself and my family aside
If we happen to be left half alive
I'll get all my papers and smile at the sky
Though I know that the hypnotized never lie
--The Who

Policymakers + learning disability

= bubble deja vu

ECB QE

Jason Bourne: You're acting like I'm trying to burn you here. I'm just trying to do the right thing.
Marie Kreutz: Nobody does the right thing.
--The Bourne Identity

The European Central Bank has announced their brand of Quantitative Easing. Essentially it amounts to the ECB buying 60 billion euros worth of bonds per month from EU countries. Those bonds will be purchsed with euros created out of thin air.

How the ECB will decide on which country's bonds to buy is unclear from the statement.

ECB QE will last until at least Fall 2016.

Strong State?

Someday soon we'll stop to ponder
What on earth's this spell we're under
--Styx

One question that should nag even the most partisan of supporters of this administration. If the state of the union is strong, then why are so many monetary and fiscal policies here and throughout the world pegged at epic disaster control levels? NIRP, monetization of debt (a.k.a. QE), massive borrowing and deficit spending, et al are policies previously articulated as appropriate only for extremely negative contexts.

Why is the pedal to the metal? Why are we employing tools designed for extremely negative contexts if things are not extremely negative?

PTSD or Guilt?

"A king may move a man. A father may claim a son. But even if the men 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 to do thus' or that 'Virtue was not convenient at the time.' That will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

In his review of the recently released film American Sniper, Jacob Hornberger wonders whether soldiers returning from armed combat truly suffer from post traumatic stress syndrome (PTSD) as commonly diagnosed. Or is it simply guilt?

God's law against wrongful killing is clear.  There are no exceptions for "following orders."

Individuals who kill others in wars of aggression must forever battle their consciences that they have done the supreme wrong. They have applied offensive, not defensive, force in lethal measures.

Despite the volumes of propaganda or rationalization that might stream through it, consciences are difficult to fool.

Sykes-Picot

Prince Feisal: Well, General, I will leave you. Major Lawrence doubtless has reports to make upon my people and their weakness, and the need to keep them weak in the British interest. And the French interest, of course. We must not forget the French now.
General Allenby: I've told you, sir, no such treaty exists.
Prince Feisal: Yes, General, you have lied most bravely, but not convincingly. I know this treaty does exist.
T.E. Lawrence: Treaty, sir?
Prince Feisal: He does it better than you, General. But then, of course, he is almost an Arab.
--Lawrence of Arabia

The Sykes-Picot Agreement of 1916 was a secret arrangement between Great Britain, France, and Russia about how to divide 'Asia Minor' and portions of the Middle East. The area at the time was controlled by the Ottoman Empire. Part of the thinking of the agreement was that the Ottoman Empire had to be neutralized, lest key resources for trade (shipping routes, oil, etc) would be jeopardized.

Great Britain et al then spent decades trying to make it happen via regime support and other forms of 'nation building,' instigating war (e.g., Ottomans vs Arabs), biased trade policy, and other nefarious action. The US, never shy about meddling in the affairs of others as the 20th century progressed, gradually became involved as well.

Of course, this constitutes more than just awkward intervention. It is outsiders with an interest instigating violence in someone else's territory. A form of war.

It is easy to understand the resentment that native inhabitants have toward outsiders meddling in their affairs. Today's upheaval in the Middle East, and spillover violence elsewhere, can be attributed to arrangements put in motion nearly 100 years ago.

Homeward Gold

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

Based on recent NY Fed data, ZeroHedge reports that gold once again appears to by flying out of Fed vaults toward its rightful owners in Europe. In addition to the Netherlands, it appears that Germany wants more of its gold back.

Seems a natural action given Germany's position in pending QE actions by the ECB (summarized nicely by John Hussman here).

Am beginning to wonder whether this massive bond buying program sanctioned by the ECB will be the straw the breaks the flawed EU's back.

If I were Germany, I'd want my gold back too ahead of such prospective craziness.

position in gold

Master of Persistence

No one can take away your right
To fight and to never surrender
--Corey Hart

Derek Jeter has spoken about it: "There may be people with more talent than you, but there's no excuse for anyone to work harder than you do."

Stuart Scott showed us how to live it.

Indomitable spirit. Never giving in. Don't worry about the other guy. Stay focused on your process and how to improve.

Become a master of persistence.

Regime Uncertainty

There's too many men, too many people
Making too many problems
And not much love to go 'round
Can't you see, this is the land of confusion?
--Genesis

Regime uncertainty (Higgs, 1997) is the inability to accurately forecast the influence of government policies on property rights. When regime uncertainty is high, decision-makers will be more reluctant to invest in projects out of concern that their property might be appropriated. They are less confident about the outcomes of their projects. They put productivity improvements on hold.

Malinvestment is also possible as decision makers engage in projects meant to circumvent or cope with regime uncertainty. For example, general purpose, mobile assets might be substituted for more promising specific, immobile assets in order to increase flexibility in uncertain times (Williamson, 1991).

Elections, pending legislation, executive overreach, and doubts about future monetary policy are some factors that can influence degree of regime uncertainty.

References

Higgs, R, (1997). Regime uncertainty - Why the Great Depression lasted lasted so long and why prosperity resumed after the war. The Independent Review, 1(4): 561-590.

Williamson, O.E. (1991). Comparative economic organization: The analysis of discrete structural alternatives. Administrative Science Quarterly, 36: 269-296.

Gold Breaking Out

The time has come to make your break
Breakout
--Swing Out Sister

This week's lift in gold finds it breaking thru multi-year downtrend resistance.

The price action appears to be changing. Gold going up with the dollar. There's a surprise for the black boxes...

position in gold

Why Switzerland Matters

It seems such a waste of time
If that's what it's all about
If that's moving up
Then I'm moving out
--Billy Joel

Why did Switzerland do what it did yesterday and why does it matter moving ahead? For generations, Swiss banks and the Swiss franc were fewed as the ultimate safe money havens. Conservative banking and monetary policies that attracted worldwide capital seeking safety.

However, in the era of modern central bank extremism, even the Swiss became addicted to the money printing drug. Since 2008, the SNB balance expanded nearly 5x and currently nearly equal to GDP--making it larger in relative terms to the Bank of Japan money printers.

In short, the Swiss were printing their way to oblivion. Last summer, the money printing addiction reached a crescendo with the SNB's announcement of NIRP and a promise to keep the Swissie from breaking thru a ceiling of 1.20 per euro.

With the European Central Bank considering a massive quantitative easing program sure to crush the already pounded down euro, it appears to have dawned on the SNB that, to maintain the peg to the euro, so many Swissies would need to be created as to destroy the currency's value.

So, yesterday the SNB reneged on its promises to markets. It confessed that it was lying or in poor command of its monetary faculties when it made those previous promises.

This is significant because if market participants come to distrust promises made by central banks--promises that have funded $trillions in risk in the name of moral hazard--then we are headed toward a brave new world. And a pleasant one at that.

The journey, however, will not be for the faint of heart.

35 Sigma

"My first thought is: a lot."
--Cameron Poe (Con Air)

Minyanville estimates that today's Swiss franc 16% move higher against the Euro was a 35 sigma event. A 25 sigma event should be witnessed only once every 100,000 years. That is, of course, assuming that the frequency distribution underlying the model is correct.

It probably isn't.

That's because we already saw a similar magnitude move in the Russian ruble earlier this month.

How many traders were carried out on stretchers today is unknown, but it is likely "a lot" because shorting the Swissie was a popular trade (carry traders borrowing zero cost CHF to fund their projects). Popular because, before today, traders thought they had the word of the Swiss National Bank that they would keep the CHF from breaking thru the 1.20 ceiling vs the Euro.

Fleck made a nice observation tonite, saying that if markets begin to distrust the word of central banks, then this game is over as moral hazard flees the markets.

Quants better fatten the tails of their risk models.

Swiss Cheese

"I felt a great disturbance in the Force. As if millions of voice suddenly cried out in terror and were suddenly silenced."
--Ben Kenobi (Star Wars)

One day the Swiss National Bank confirms commitment to pin the Swiss franc to the Euro. A couple days later the SNB unpegs it and extends its NIRP to -.75%. The Swissy has subsequently soared (those short CHF have been slaughtered) and Swiss stocks were pounded for an eight spot.

Reports now surfacing that Swiss ATMs are refusing to spit Euros.

Chatter is growing that this means that the ECB is preparing for massive QE.

Gold is up $35 on the news and rising.

position in gold

Goals vs Incentives

"Not everything is as seems."
--Miyagi (The Karate Kid)

One of several nice points made by Prof Williams in his review of Thomas Sowell's new textbook edition is that the path to understanding economic outcomes involves examining the consequences of decisions in terms of incentives they create rather than of the goals pursued. He observes that doing the opposite--paying attention to goals rather than incentives has resulted in disastrous public policy.

For example, the goal of minimum wage laws is to provide 'living wages.' However, minimum wage laws create incentives for employers to reduce labor and to seek labor substitutes. Unemployment goes up--particularly for the marginal workers that minimum wage laws purport to help. The ECON 101 axiom: put a floor on price (of labor) and demand (for labor) will leave the market.

Another example is rent control laws that are enacted to provide people with 'affordable housing.' They create incentives for landlords to reduce housing stock available to marginal tenants that rent controls purport to help. The ECON 101 axiom: put a ceiling on price (of rent) and supply (of housing) will leave the market.

As these two examples demonstrate, incentives often result in outcomes directly opposite of the goals of particular policies.

Willful Blindness

So put in your earplugs
Put on your eyeshades
You know where to put the cork
--The Who

You will often hear people say "I'm no expert but..." They then proceed to weigh in on discussions with air of authority. If the discussant's argument's fail, then hey, no problem, because "I wasn't an expert anyway."

Why not develop expertise? An advanced degree is not required. Only appetite for truth and willingness to engage one's brain.

The risk for many people is that their quest for truth will reveal that their previously uninformed views were mistaken.

People hate to be wrong, so they remain willfully blind.

Buffett Indicator Update

She's so high
High above me
She's so lovely
--Tal Bachman

Nearly a year ago we discussed Doug Short's analysis of market cap to GDP--a valuation indicator made famous by Warren Buffett in a Fortune article near the top of the dot com bubble. Here's an update.

Market valuations have only moved further into nosebleed territory, eclipsed only by the dotcom zenith since 1950. To the extent that GDP may be over-reported, then current overvaluation estimates are conservative.

Doesn't mean that markets can't go higher or that things crash tomorrow. It does signify a significant wind in the face of further price advances.

position in SPX

Molly Manages Minnesota

Tell them I'm through, "for love of the game"
--Billy Chapel (For Love of the Game)

Belated congrats to Paul Molitor on being named manager of the Minnesota Twins. Extra sweet for him certainly as Molly is from the Twin Cities area.

Molitor was a staple on the Milwaukee Brewer teams I enjoyed at County Stadium during my time in Wisconsin. He was the leadoff hitter and played third base. I liked his style. Good contact hitter. Compact swing with some pop. Athletic and fast.

In the early 1990s Molitor signed with Toronto, where he led the Blue Jays to the World Series in 1993 and was Series MVP. Molly finished his career by returning to his hometown. With the Twins, he logged his 3000th hit and had a 200 hit season at the age of 40 while batting .340.

Storybook style.

A first ballot Hall of Famer (he chose to enter as a Brewer), Molitor is one of only four major league players with at least 3000 hits, a .300 career average, and 500 stolen bases.

My top memory of Molly was his hitting steak of 39 games in 1987. I was in the midst of what would turn out to be my final season as a player, and Brewer games on the radio were the backdrop while traveling around the state for games. I remember one weekday night in particular playing in the small town of Elroy. Molitor's hitting streak was into the thirties by then and excitement was high. We were out on the field for pregame warmups. The sun was setting and the ballpark lights were waking up. The weather was warm for a summer Wisconsin evening. Grandstand radios cackled with Molitor drama. After gunning a rather strong practice throw to third, I remember standing in centerfield, gazing around, and relishing in what a great game it was.

Thanks for the memories, Molly.

Downtown Seen and Unseen

"I don't want realism. I want magic. Yes, yes, magic. I try to give that to people. I do misrepresent things. I don't tell truths. I tell what ought to be truth."
--Blanche DuBois (A Streetcar Named Desire)

In the eyes of some, downtown Cincinnati has been experiencing a renaissance. Whether it is the Banks project down by the river, the streetcar in progress, or Over the Rhine rehab, people marvel at the 'progress.'

This is a classic example of the seen and unseen principle.

What is seen is all of the new building. What is unseen is how resources for the new building have been obtained. Much have come by force--through taxes, evicting tenants and owners of real estate properties, and the issuance of debt that must be paid by taxes.

What is seen is growing residential and commercial activity. What is not seen is that many of the residents and storekeepers have been recipients of special privileges. Tax abatements, special grants and loans, the good fortune of having government sponsored projects built by their doorstep. Residents and storekeepers living away from downtown have not received the same privileges.

What is seen is activity today. What is unseen are the consequences of today's activity on tomorrow. Rising debt, central plans that do not work in the long run, the opportunity cost of resources squandered on public works projects funded by force rather than on project funded by voluntary investment.

Evaluating the effect of policy decisions on all people in the long run is a more intelligent way of assessing projects such as those unfolding in downtown Cincinnati.

The Slave of Liberty (1878)

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

The first federal income tax was passed under the Lincoln administration to help fund the Civil War. It was abolished in 1872. Economic interests feeling the effect of subsequent revenue-generating tariffs sought to broaden the tax burden by reintroducing the income tax in the late 1870s.

Thomas Nast drew the above cartoon to convey his opposition to the income tax. It first appeared in Harper's Weekly on February 9, 1878. Titled "Peace With a War Measure," it depicted the Statue of Liberty turned Slave of Liberty, with tattered clothes and the weight of the income tax around her neck. Her hands are shackled behind her with additional weights of Ideal Money, Laws, and Taxes.

Nast and income tax opponents were able to defeat the income tax bill in 1878. It was later re-enacted in 1894 before being struck down as unconstitutional by the Supreme Court. Unfortunately, the pro-income tax forces prevailed in 1913 with the ratification of the Sixteenth Amendment.

Liberty has been enslaved since.

Emergency Fund

Here comes the rain again
Raining in my head like a tragedy
Tearing me apart like a new emotion
--Eurythmics

An emergency fund is simply savings put away 'just in case.' An unforeseen expense such as a car repair or an emergency room visit could trigger these savings.

The WSJ reports that less than 40% of Americans have personally saved funds to cover such an expected expense.

Financial advisers often suggest that individuals build at least six months of living expenses in their emergency fund. Given that the great majority cannot even afford an unexpected $1000 expense, it appears that the number of Americans that could fund six months with no income is miniscule.

Ides of Gross

Oh, a storm is threatnin'
My very life today
If I don't get some shelter
Oh yeah I'm gonna fade away
--Rolling Stones

One of Bill Gross's better market letters in some time. He argues that the debt supercycle, coddled by easy central bank policies over the last 30 years, is nearing its end. "

"Central banks with their historical models do not yet comprehend the impotence of credit creation on the real economy at the zero bound."

Stated differently, ZIRP and NIRP don't work.

Gross goes on to observe that "as yields move closer and closer to zero, credit increasingly behaves like cash and loses its multiplicative power of monetary expansion for which the fractional reserve system was designed."

True enough, but credit with cash characteristics is still a liability and source of leverage, and ZIRP/NIRP sourced funds invested in projects are still funds on margin.

As such, Gross's recommendations for high quality bonds and dividend-paying stocks seems off target in lieu of a pending selling cascade that takes all risk classes with it.

position in SPX

Weak Start

Under a blood red sky
A crowd has gathered in black and white
--U2

Weak markets to start the year as US equity markets complete their first three trading days off 3-4%. Crude continues to get hammered and traded at a 47 handle today:

Beyond the energy sectors, the banks trade heavy and are already down a quick finski:

In retrospect, the Trannies may have been an important tell as they never confirmed new stock market highs in late December. Currently they're trading much like the banks:

The other noteworthy chart is Ten Year yields, which marked new lows for the move and are back under 2%:

SPX is now off five days in a row, something which hasn't happened in a couple of years.

Negative effects of money printing finally coming home to roost? Too early to tell although balls careening around the table like this is what we would likely see in the beginning.

position in SPX

Politics as Violence

And the men who spurred us on
Sit in judgment of all wrong
They decide and
The shotgun sings the song
--The Who

In a 1918 speech, German sociologist Max Weber observed "a state is a human community that (successfully) claims the monopoly of the legitimate use of physical force within a given territory." Of course, that government is legitimized force was understood long before Weber took the podium.

He goes on to note that the right to use force by individuals or institutions in state-governed territory exists only to the extent that the state permits it. Personally, I would have used 'privilege' rather than 'right' to describe this situation. But it does follow that a state that claims a monopoly on force will seek to limit its use by others...lest state authority be threatened and revolution be at hand.

"The modern state is a compulsory organization," Weber observes, "that organizes domination."

As such, those wanting to engage in politics let themselves "in for the diabolic forces lurking in all violence." Weber states that the kingdom of heaven does not operate under auspices of violence, and that those seeking salvation of their souls "should not seek it along the avenue of politics, for the quite different tasks of politics can only be solved by violence."

"Everything that is striven for through political action operating with violent means and following an ethic of responsibility endangers the 'salvation of the soul.'"

Stuart Scott

Emperor Meiji: Tell me how he died.
Nathan Algren: I will tell you how he lived.
--The Last Samurai

Twenty years ago, I liked to kick back after a long week's work by tuning into ESPN2 on Fri nights. I liked the evening sports show co-anchored by a young sportcaster named Stuart Scott. Like others on the network, he delivered sports news with an 'edge.' It was easy to see that he would be successful.

Yesterday, Stu Scott died of stomach cancer at the age of 49.

Rather than mourning the loss of an exceptional media talent, I am celebrating the life of someone who demonstrated what it means to live. Particularly since his initial diagnosis in 2007, Scott showed that he was a fighter. He would not let disease dictate his life, often heading to the gym directly after treatments to exercise his indomitable spirit.

He remained devoted to his family and work throughout. While in the hospital, Scott once had a friend send live video feed of his daughter's soccer game, and wildly cheered as his daughter kicked multiple goals. Professionally, many in his network were unaware that he was ill. He was on location at several NFL games this season.

He told people, "You beat cancer by how you live, why you live, and in the manner in which you live."

Stuart Scott showed us what it means to do one's best when struggling against adversity of the worst kind. He showed us that when we fight that good fight, we win.

Decline in Young Entrepreneurs

They're seeing through the promises
And all the lies they dare to tell
Is it heaven or hell?
They know very well
--Journey

ZeroHedge summarizes a WSJ article on downtrends in young entrepreneurship. The marquee metric offered as evidence is the % of households headed by someone under 30 with an ownership stake in a privately held business. Although the metric isn't perfect, it suggests that young entrpreneurs have fallen by more than half since the late 1980s.

The article offers psychological reasons as primary culprits. Young adults today are said to have low appetite for risk, low confidence, and high fear of failure--although the article provides little compelling rationale for why this is so.

The article could have focused on more intuitive explanations. One is the voluminous research that shows entrepreneurs typically do not start new businesses straight out of school. Rather, entrepreneurs first go to work for established firms where they come to identify entrepreneurial opportunities that motivate them to subsequently strike out on their own. The problem is that young people have been bearing the brunt of fewer employment opportunities for years, meaning that they are less likely to gain initial industrial experience that facilitates entrepreneurial opportunity recognition.

Higher entry barriers are also to blame. Large businesses have been partnering with government to protect their franchises against competitive assault, resulting in more concentrated industry structure. Moreover, increased regulatory burdens impose high start-up costs that discourage entrepreneurial entry.

Finally, lower savings rates have reduced propensity for young entrepreneurship. Less savings means less capital to fund entrepeurial ideas. Business startups decline as a result.

Borrowing more and saving less is perhaps the stiffest wind blowing in the face of young would-be entrepreneurs.

Oakley Mill Closing

But the restlessness was handed down
And it's getting very hard to stay
--Billy Joel

My first 'real' job was working at a Mead paperboard mill in Oakley during the summer between my junior and senior years of college. I worked various jobs around the facility--primarily filling in for vacationing union workers. Although I was not required to join the union, I learned a lot that summer about the management-labor perspective. It was a great experience that helped shape my career.

The facility itself was a classic small urban mill in what was at one time a significant production district. Across the street was the campus of machining giant Cincinnati Milacron--since shut, demoed, and converted into condos and mixed retail (part of the Milacron campus is visible in the upper half of the image below). Up the street was ILSCO (originally Incandescent Light & Stove Company) and other smaller manufacturers. Like many urban production settings that sprouted spontaneously many years ago, manufacturers were woven into the fabric of the community and integrated with residential neighborhoods.

The mill itself made paperboard products from all recycled paper. Spread across nearly five acres, the site sported two paper machines--already very 'vintage' by the time I arrived in the early 1980s, a converting plant, a warehouse, a recycled bale storage yard, and a coal-fired power plant (which I had the 'privilege' of cleaning during my tenure).

Viewed from the outside thirty plus years later, the facility does not appear to have received any major upgrades since my time there. Same faint but noticeable familiar odor of repulped board. The smell of production.

As has been common in the paper industry, the mill has since changed hands a few times--most recently winding up with a firm called RockTenn. After closing the plant in late November, RockTenn has posted it for sale.

Rather than once again trading into the hands of another operating manager, the site is being marketed for demolition and 'redevelopment.'

The tone is upbeat about the prospects of more offices, retail, and condos. The vision seems to seems one of throwing an old rusty boat anchor off the ship of prosperity.

It is hard not to wonder whether this enthusiasm is misplaced to some degree. At the very least, more production capacity is leaving the local area.

Is it wise to view urban production facilities as foregone liabilities? Or as undervalued assets?

Administrative Law

"Gentleman, whenever you have a group of individuals who are beyond any investigation, who can manipulate the press, judges, members of our Congress, you are always going to have in our government those who are above the law."
--Nico Toscani (Above the Law)

Columbia law professor Philip Hamburger discusses administrative law. Administrative law is binding edict that comes from administrative acts rather than legislative process. In the United States, the primary source of administrative law is the executive branch. The president, through executive orders or agencies, circumvents the two avenues of binding power established by the Constitution: acts of Congress and acts of the courts.

With the stench of despotic oppression still palpable, our founding ancestors steered away from empowering the executive branch with capacity for discretionary rule.

While conventionary history generally claims that administrative power was a product of post-constitutional US federal government development and is a modern necessity, Hamburger argues that administrative law as practiced today is merely the reemergence of absolute power practiced by pre-modern kings. Rather than a modern necessity, administrative law constitutes a threat inherent in human nature and the temptations of power.

The past one thousand years records ebb and flow between absolute power and legislative power. Time and again, kings were expected to govern through the acts of legislative and judicial bodies. Time and again, kings grew discontent with these legally binding constraints and began acting on their own. Hamburger calls their discretion "prerogative power."

Through prerogative power, kings had the authority to exercise force on legislative and judicial branches, enabling the enactment of personal decrees. Through their issuance of their discretionary proclamations, kings operated above the law.

Our founding ancestors were quite familiar with prerogative power and discretionary rule. They crafted the Constitution to bar capacity for administrative law.

At the same time, however, prerogative power was evolving. Particularly in Germany, what had once been the discretionary rule of kings was becoming the bureaucratic power of states. By the 19th century, Germany had become the mecca theories of administrative power, including those of the Marxian socialist variety. After thousands of intellectuals made pilgrimages to the Continent to study them, German theories of administration became standard fare in American universities.

By the early 20th century, the Progressive movement had embraced administrative law in America as a pragmatic and necessary instrument of modernity. A president unshackled by constitutional restraints was able to govern more effectively in changing and modern times, Progressive doctrine claimed. FDRs tenure became the ultimate expression of this doctrine in America, although it was well represented elsewhere through the likes of Stalin, Hitler, Mussolini, and others.

Today, it is often argued that Congress validly uses statutes to delegate lawmaking power to the executive branch. Hamburger observes that such a process is not new. Delegation of lawmaking has often been a feature of absolute power. Against this background, the Constitution expressly bars delegation of legislative power. The first words of Article 1 read:

All legislative Powers herein granted shall be vested in a Congress of the United States

"All" was not placed there by accident, as the framers understood the delegation problem in English constitutional history.

Rather than being a novel consequence of modern progression, today's administrative law reflects another round of pathological regression.

Grateful for Now

Right here, right now
There is no other place that I want to be
--Jesus Jones

Turning the page to a new year, I hope to focus on being grateful for God's blessings today. Draw from the past for what can be applied in a positive manner today. Look to the future to the extent that it positively frames actions today.

But focus on the here and now.