Friday, July 31, 2015

Unhappy Birthday

So we turn on the TV one more time
And see that everything is fine
--Flesh For Lulu

Fifty years ago yesterday, Medicare was enacted. At the time, one of the easiest prognostications in American history was forecasting the negative influence that socialized medicine would have on healthcare markets.

The trend over the past 50 years has been more government control over healthcare markets. Costs have been increasing ever since, with negative spillovers in quality, innovation, and access.

Statists, of course, look the other way and rationalize that Medicare and its associates have enhanced rather than restrained prosperity.

Birthday wish? That this program will be eliminated so that there is no need to observe its birthday in the future.

Thursday, July 30, 2015

Low Rate Disease

"You're the disease, and I'm the cure."
--Lt Marion 'Cobra' Cobretti (Cobra)

As Bill Gross observes, low interest rates (when they have been forced lower) are not the cure. They are part of the problem.

Perhaps THE problem.

Lower saving, capital misallocation, market distortions, wealth transfer, widening divide between rich and poor, heightened moral hazard.

Most people will be unable to grasp just how badly market landscapes have been damaged until unnatural forces exit the system.

Wednesday, July 29, 2015

Back to Barter

So I went to the bank
To see what they could do
They said, son, look like bad luck
Got a hold on you
--Simply Red

One of the larger problems facing people in Greece is lack of money in the face of capital controls that restrict borrowing and discourage lending. Less cash is available to fund transactions.

Consequently, Greek citizens are resorting to barter, a practice perfected by their ancestors when dealing with Mediterranean trading partners.

An interesting development is the rise of website that facilitate barter such as tradenow (Greek version here). Modern technology enables more liquid barter exchange.

Hard not to wonder whether this practice might catch on as people get used to cashless exchange. It reduces reliance on modern currencies caught in the vise grip of government. It also is harder for government to track and, ultimately, tax.

It would also likely renew interest in gold as a more reliable and effective medium of exchange.

position in gold

Tuesday, July 28, 2015

Unbigoted Irony

Too many shadows
Whispering voices
Faces on posters
Too many choices
--Pet Shop Boys

Strange thing about many people who view themselves as unbigoted while frequently labeling others as racists. They are unable to evaluate opinions and behavior of others unless they know the others' skin color.

Suppose an on-line editorial about a controversial social issue is written by an individual for whom a name but no bio is given. It is likely that most of the self-proclaimed unbigots who are interested in the editorial will search the internet et al for background info on the author. In particular, the unbigots will want to know what this person looks like.

If the unbigots desire to weigh in on the issue in, say, the comment section underneath the editorial, then it is also likely that their responses will differ depending on the editorialist's appearance (i.e., gender, skin color, etc).

Monday, July 27, 2015

All the King's Men

Are young but getting old before our time
We'll leave the TV and the radio behind
Don't you wonder what we'll find
Steppin' out tonight
--Joe Jackson

Approximately eight years ago to the day, I was in NYC visiting my good friends at Minyanville. Early tremors were shaking markets as subprime derivatives were beginning to fall apart.

I remember thinking two things. One was that few people in The City seemed aware of the danger ahead. Real estate was flying. $1000 dinner tabs were common. Limos filled the streets.

The other was that the Bush administration and Republicans were going to have their hands full trying to keep the markets together ahead of the 2008 election. They couldn't, of course, as the SPX sank by about 50% over the next year.

Here we are eight years later and the shoe is now on the other foot. Early tremors are once again shaking markets--although with less effect so far as the markets have been heavily medicated. The Obama administration and Democrats are surely thinking about what they can do to prop prices up for the next year.

One problem that they face is that they have already moved heaven and earth to jam markets higher for the past few years. As bad as they were, the Bush people applied nowhere near the preemptive interventionary force currently being administered by the Obama group.

The question is whether this administration has any interventionary capacity remaining. What tricks the Obama administration might still be able to pull to keep those limos cruising the NYC streets in the months ahead?

position in SPX

Sunday, July 26, 2015

Individuals Act

"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)

Axiomatically, only individuals act. Groups, races, classes, nations etc exist but they can only act through individuals.

For example, Japan attacked Pearl Harbor on December 7, 1941, but only because certain individuals flew airplanes and dropped bombs on US ships. The US declared war on Japan on December 8, 1941, but only because certain individuals in Congress voted to declare war.

Yes, social pressure can persuade action. And herding tendencies can drive like-minded behavior.

But this does not alter the truth that when analyzing human action, the core unit of analysis is the individual.

Saturday, July 25, 2015

Operation Ajax

"There may be honor among thieves, but there's none in politicians."
--T.E. Lawrence (Lawrence of Arabia)

Operation Ajax was a CIA operation to overthrow the government of Iran in 1953. Two years prior, the democratically elected Mohammad Mossadeq had pushed for nationalization of Iran's oil industry, thereby removing it from the clutches of England who had been enjoying a sweetheart oil deal rooted in Sykes-Picot decades earlier.

Reluctant to lose its cheap oil supply, Britain convinced the US that the Iran regime had communist inclinations. The Americans, gripped in Cold War mania, were drawn in.

The CIA op, led by Theodore Roosevelt's grandson Kermit, used classic methods of subterfuge. The CIA hired Iranian goons to pose as communists to instigate riots and vandalize property. The majority of Iranian citizens demanded that the Iranian military intervene. By that time, the CIA had turned many Iranian military leaders into CIA operatives. When the moment came, the military operatives deposed the Mossadeq regime in the name of saving the country from communism.

The corrupted military leadership returned power to the Mohammad Reza Shah Pahlavi, who had previously been king. In exchange for the throne, the Shah was at the service of the US and UK. His dictatorship reigned for the next 25 years.

Although many Iranians suspected US involvement, the coup was kept secret from the American people for many years. The CIA, of course, considered the coup a resounding success.

In 1979 a revolt overthrew the Shah and Islamist forces headed by Ayatollah Khomeini prevailed. Takeover of the US Embassy in Iran and the ensuing 'hostage crisis' punctuated the period. The Islamist Republic of Iran was born, alongside anti-American animosity that has endured for decades.

The lineage of this creation traces straight to Ajax.

Friday, July 24, 2015


"One minute you're up half a million in soybeans and in the next, boom, your kids don't go to college and they've repossessed your Bentley."
--Louis Winthorpe III

Many commodities, including crude, gold, and silver, have been getting jack hammered. Many are now trading at or below their 2008 credit market meltdown lows.

Just sector rotation? Perhaps but I don't think so.

This action jibes with all sorts of incoming data points that global growth is slowing quickly. Falling raw material prices reflect producer weakness.

Accordingly, leveraged speculators in this area are now facing margin calls...

position in gold, silver

Thursday, July 23, 2015

Control Points

"The government's been in bed with the entire telecommunications industry since the forties. They've infected everything. They get into your bank statements, computer files, email, listen to your phone calls. Every wire, every airwave. The more technology used, the easier it is for them to keep tabs of you."
--Brill (Enemy of the State)

A tenet of social control and institution theory involves reducing the number of points or entities to monitor and adjust. This often leads to increased size and concentration of control points.

Thus, one roadblock such as Checkpoint Charlie that all traffic passes through for inspection. One spokesperson to represent a negotiating group. Boycott or seek sanctions against a few large producers rather than many small buyers.

Socialism, particularly fascism, is built on the few large control point notion. How better to influence production than through state endorsed verticals comprised of a few large producers? These verticals are the control points, the transmission mechanisms of state policy.

Contrary to popular belief, large corporations are not inevitable outcomes of capitalism. Under competitive conditions, size threatens adaptation as bureaucratic burdens hamper change. The natural state of affairs is one of fragmentation and diversity. The variation within, as observed by Darwin, provides the basis for adaptation.

Size and concentration are friends of the State. They strengthen capacity for control.

Wednesday, July 22, 2015

Lincoln's War Money

"Secesh has to be cleared away by the hand of God like the Jews of old. Now I will have to burn this town."
--Col James Montgomery (Glory)

Prof Williams asks the question that few ask: If Abraham Lincoln was frequently on record as supporting slavery and state's rights to secede, then why did he lead the US into civil war?

The answer: Follow the money.

Tariffs amounted to 90% of federal revenue. And Southern ports paid about three quarters of all tariffs collected. The federal government could hardly let that revenue stream go.

Add to that Southern plans to build an economic system around free markets--a plan that promised to crush Northern manufacturing concerns as captive Southern customers found cheaper resources on the market.

The straightforward conclusion is that the Civil War was fought to preserve the American System for crony beneficiaries.

Tuesday, July 21, 2015

Bad Breadth

Through the hour glass I saw you
In time you slipped away

Breadth assesses the degree to which all stocks are participating in an advance. If all 500 issues advance as the S&P 500 index climbs higher, then breadth is strong. This is considered bullish.

Shouldn't market advances always be associated with strong breadth? In a word, no.

Because equity indexes are usually market cap weighted, it is possible that price increases in just a few mega cap stocks can pull indexes higher even when most stocks are declining in value.

John Hussman notes that we're seeing just this phenomenon currently in US equity markets. For example, the NASDAQ composite has been recently marking new highs, but these increases have been due to just a few large issues such as GOOG climbing higher. When the index value is recalculated so that the price movements of each of the 1000 stocks in the index are weighted equally, then the NASDAQ has been falling sharply.

As Dr J observes, index increases on narrowing breadth are considered bearish, as optimistic investors pile into fewer and fewer stocks that are 'working' in order to keep their successful trend following winning streaks alive.

Advances on narrowing breadth are associated with most major stock market tops.

position in SPX

Monday, July 20, 2015

Textbook Dandruff

When it gets too much
I need to feel your touch
--Bryan Adams

You'll struggle to find a more textbook-looking head and shoulders set up than the current Intel (INTC) chart. Pattern matches a fundamental story of over-investment, earnings manipulation, and channel stuffing. After popping after hours last week after the company's earnings report, the stock has since given back those gains.

If the neckline of the pattern at 29ish breaks, then the breakdown intuitively 'works' to 26ish (which corresponds to both intermediate term support and the 200 day moving avg).

Actually have my first put project on in quite some time...

position in INTC

Sunday, July 19, 2015

Defense Free Crime Zones

Computerized information booth: Gun. Noun. Portable firearm. This device was widely used in the urban wars of the late twentieth century. Referred to as a pistol, a piece.
Simon Phoenix: Look, I don't need a history lesson. C'mon Hal, where are the god damned guns?
Moral Statute Machine: You are fined one credit for violation of the Verbal Morality Statute.
Simon Phoenix: What? Fuck you!
Moral Statute Machine: Your repeated violation of the Verbal Morality Statute has caused me to notify the San Angeles Police Department. Please remain where you are for your reprimand.
Simon Phoenix: Yeah, right.
--Demolition Man

This past week, we were once again reminded of defense free crime zone nature of no carry zones when 5 military personnel were shot and killed in Chattanooga. Bullet holes riddled the glass surrounding the gun free zone sign pasted to the entry door of Marine recruiting center where some of the murders occurred.

Gun violence researcher John Lott notes that, coincidently, the Batman shooter who killed dozens in a Colorado theater three years ago was convicted this week. The perp's diary indicated that he passed on other potential sites because of their 'substantial security' and settled on the Aurora theater because it banned self-defense.

Gun free zones attract mass shooters like magnets because of the conditions of weakness that are created. 

Although the straightforward logic continues to escape the gun grabbers, aggressors generally target unarmed victims.

Saturday, July 18, 2015

Iran and Peace

A cloud appears above your head
A beam of light comes shining down on you
Shining down on you
--A Flock of Seagulls

Little that President Obama has done has been peaceful. Like most modern presidents, Mr Obama believes in expanding government reach. And as government grows, more aggression is applied to social systems.

Welfare and warfare states are both states of violence.

However, there have been two areas were this president's actions have actually removed offensive force from the system: Cuba and, more significantly, Iran.

Primarily, these actions have served to reduce sanctions with these two countries. Sanctions usually restrict trade. Trade between countries improves well being on both sides and reduces incentive for war. To reciprocate a classic truism: "When goods cross borders, armies won't."

There are the usual complaints that Obama's agreement with Iran is too one sided, e.g., Iran can still build nukes, the president hates Israel, these actions threaten national security, etc. None of this matters. In fact, purely unilateral actions to lift all sanctions without demanding anything in return would have been the most peaceful action to take.

Good work, Mr President. If you want to continue to build a legacy of peace rather than of aggression, then there is much more you can do.

Friday, July 17, 2015

Emotional Comfort

I will be your knight in shining armor
Coming to your emotional rescue
--The Rolling Stones

It seems that actions are on the rise aimed at preventing speech or actions construed by some as unpleasant or offensive. In higher ed environments, for example, universities such as Cal Berkeley are seeking to curb so called 'microaggressions'--faculty practices that might be construed as offensive to students.

This is, of course, assault on free speech and is particularly alarming in institutions purportedly designed to encourage critical thought and free expression.

Just as people have no natural right to physical comfort at the expense of others, they have no right to emotional comfort at the expense of others either.

Thursday, July 16, 2015

Medical Bureaucrats

Sweet dreams are made of this
Who am I to disagree
I travel the world and the seven seas
Everybody's looking for something

Great chart showing the rise in medical bureaucracy. Growth in administrators outstrips growth of physicians by a greater than 10 to 1 margin.

Medcrat growth really took off in the early 1990s. What changed during this period? Simple, cookie: The onset of 'managed care' and growth in socialized medicine.

A patient's nightmare. A bureaucrat's sweet dream.

Wednesday, July 15, 2015

Traveling Show

I was born in the wagon of a traveling show
Mama used to dance for the money they'd throw

As socialism is implemented, consequential violations of natural law build potential energy in socio-economic systems that, when that potential energy turns kinetic, serves to rebalance natural forces warped by socialist policies. As the spring coils, glimpses of what the future holds are evident in vignettes that make the rounds in traveling road shows.

Greece currently provides the stage.

As Ron Paul observes, Greece's welfare and warfare state has put the country in its current predicament. The US, of course, is following a similar path.

The traveling show currently playing in the Greek theater is headed our way.

Tuesday, July 14, 2015

General Electric

Pure energy
--Information Society

If you love baseball and happen to be a Cincinnati Reds fan, then you will remember last night for a long time. The All Star Game is in Cincy this year and last night was the Home Run Derby. Reds third baseman Todd Frazier made the Derby slate, which for the first time was determined by taking the top 4 HR leaders in each league and bracketing them in AL vs NL pairs where winners of each one-on-one duel advanced toward the championship round.

The format was also changed this year. Essentially, each player was under a time constraint to take as many swings as possible in a 4 minute period with an option for a 45 second timeout and a bonus 30 seconds added if at least two bombs were estimated at 425 ft+. The rule changes plus dicey weather forecasts (a big storm had already blown thru during the afternoon) had some people wondering whether this event might lay an egg.

Those doubts were sorely misplaced as high drama unfolded on the banks of the Ohio River.

Frazier, who had been talking for months about competing in the HR Derby in his home team's park, picked his brother Charlie to pitch to him. He and his brother walked out of the dugout after some extra BP under the stands to see a 13 spot put up by his first round opponent, two time Derby champ Prince Fielder. He started slow, popping up and grounding a few. But when his first drive left the yard, the home town fans went wild. Frazier fed on the frenzy. With each subsequent shot, the crowd got louder. Adding to it, Charlie started cheering after serving up each blast.

After tying the score with a flurry of HRs as the clock ran down in regulation, Frazier went deep in the 30 second bonus period to dispatch a visibly dumbfounded Fielder.

The fans were going berserk, and if felt like the electricity being generated a few miles down river was flowing right thru my television set at home.

Frankly, I figured that would be the pinnacle of the excitement as that performance seemed hard to top.

In the semifinal round, Frazier's opponent was the Blue Jays' Josh Donaldson, who led with 9 HRs. Once again, Frazier got out of the box slowly but fed on the crescendo of cheers that built with each long ball. There was still some time left in regulation when Frazier took one deep to left and secured a place in the finals. Once more, the crowd went wild.

The finals pitted Frazier against rookie Joc Pederson of the Dodgers. Pederson led off. As he had done in previous rounds, the left handed rookie raised eyebrows with seemingly effortless swings that produced towering blasts to all fields. He left the batter's box after putting up 14 dingers which seemed at the time almost insurmountable.

Frazier strode to the plate backed by the cheering fans and then proceeded, again, to start slow. With 2:35 left and down 14-5, Frazier took his time out. After returning from the TO, he continued to come up empty in his next few swings, prompting commentator John Kruk to assert, "he's gotta get on a big roll right here or Joc Pederson's our champion."

Frazier hit an upper decker at 2:00 and then another HR, but at about 1:30 he was still down 14-7.

Then the magic started. Watch the video and feel the energy as Frazier got his groove on. After knotting the score at 14, he left a fly ball at the base of the wall to end regulation. The interlude for his 30 second bonus round was one solid standing ovation. Everyone felt the vibe as Frazier wiped his brow and strode to the plate.

It only took one pitch.

FANtastic. Not only the Best Home Run Derby Ever, but one of the finer expressions of collective energy that I have witnessed.

Monday, July 13, 2015

Financial Engineering

There's a crazy mirror showing us in 5-D
I'm laughing at you, you're laughing at me
There's a room of shadows that gets so dark brother
It's easy for two people to lose each other
--Bruce Springsteen

Periods of easy money invite financial engineering. Financial engineering seeks to increase the value of financial securities without commensurate improvement in productive assets backing the securities.

Examples of financial engineering include issuing debt to fund stock buybacks, leveraged buyouts, off balance sheet debt structures, various swaps and derivative contracts, syndicated loans and buyouts, and borrowing to magnify security returns.

All financial engineering projects have one thing in common: use of debt and leverage to manipulate the relationship between productivity and financial outcomes.

We can confidently propose that the easier the monetary policy, the greater the propensity for financial engineering.

Currently, monetary policy is easier than at any previous point in history. What does this suggest about the extant level of financial engineering?

Sunday, July 12, 2015

Last Defense for Liberty

"Why should I trade one tyrant 3000 miles away for three thousand tyrants one mile away? An elected legislature can trample a man's rights as easily as a king can."
--Benjamin Martin (The Patriot)

Although the Constitution is grounded in natural law, it is not a perfect reflection of it. As demonstrated by the Three Fifths Compromise, even slavery can be rationalized by a people claiming that liberty is an unalienable right.

Is there any hope that a governance system can properly reflect natural law? If the system takes a wrong turn, as it surely will given human tendencies to secure the strong arm of government for political benefit, who provides the last defense against violations of natural rights?

It is unlikely to come from the executive branch. Our founding ancestors well understood that presidents are more likely to usurp power for purposes of discretionary rule. But those limitations haven't worked. Lincoln, for example, was on the record as supporting slavery and signed off on the Corwin Amendment designed to perpetuate it.

It is unlikely to come from the legislative branch. Our founding ancestors also realized that legislators can easily trample individual rights and therefore shackled Congress with expressed limitations. But, again, those limitations haven't worked. Congress, for example, passed the Corwin Amendment designed to perpetuate slavery by supermajority vote.

What about the judicial branch? Ah, yes, the courts. Judges should be the ones. If individual rights are being trampled by tyranny, whether those tyrants are few or many, then the bench, well-versed in natural law, would rescue liberty. But that hasn't worked either. History has demonstrated that the basis for rulings, even those of the high court, is not natural law. Instead court rulings generally reflect positivism. In the Dred Scott decision, for example, the Supreme Court ignored the rights of man and upheld the institution of slavery, claiming that it was law and required a constitutional amendment to overturn. Of course, Jefferson and the antifederalists foresaw the problems with judicial review.

What is the last line of defense for liberty when no branches of government act on the basis of natural law?

Saturday, July 11, 2015

Original Thirteenth Amendment

Relax said the night man
We are programmed to receive
You can check out anytime you like
But you can never leave
--The Eagles

Many people know that the Thirteenth Amendment, passed in late 1865, formally outlawed slavery in the United States. Far fewer people realize that a previous Thirteenth Amendment had been approved by Congress four years earlier and was making the rounds to the states for ratification. This amendment would have perpetuated slavery among the slavery and was endorsed by Abraham Lincoln. The amendment had been ratified by three states before the process was interrupted by the Civil War.

It is sometimes claimed that the amendment was originally proposed by previous President James Buchanan, although there is also evidence that the proposal came from President Lincoln himself and conveyed by soon-to-be Secretary of State William Seward. The amendment was drafted by a committee ultimately headed by Ohio representative Thomas Corwin (hence, the Corwin Amendment). Its purpose was to keep Southern states from seceding out of fears that the federal government would interfere with slavery in places where it already existed. It stated:

"No amendment shall be made to the Constitution which will authorize or give to Congress the power to abolish or interfere, within any State, with the domestic institutions thereof, including that of persons held to labor or service by the laws of said State."

The Corwin Amendment received the requisite 2/3 Congressional approval necessary for a constitutional amendment, having been approved by the House on February 28, 1861 and by the Senate on March 2, 1861. The amendment was subsequently signed by Lincoln. It was then onto the states for 3/4 ratification. Ohio, Maryland, and Illinois had ratified it before the process was overtaken by the Civil War.

The original Thirteenth Amendment is another inconvenient truth for those who like to perpetuate Lincoln as the Great Emancipator and the friend of slaves. There is overwhelming evidence to the contrary.

It also demonstrates once more that the political focus of the time, at least at the federal government level, involved secession and how to prevent it. Why? For one thing, secession promised to be unprofitable to many.

Like the ill-fated compromise that preceded it, the Corwin Amendment demonstrates the desperate measures that some people will support to keep an untenable union together by force. The Corwin Amendment proposed to maintain forcible bonds on some people for the benefit of others.

Subsequently, of course, the Civil War was fought to forcibly bond some people to a union that they preferred to leave.

Friday, July 10, 2015

Greek Oxi-dent

Forty seven deadbeats
Living on the backstreets
North, east, west, south
All in the same house
Sitting in a back room
Waiting for the big boom
--Escape Club

The latest act of Greek theater finds Prime Minister Alexis Tsipras submitting an 'austerity' proposal similar to one that Greek people voted against last Sunday at the PM's urging. Hard to imagine this will sit well with the citizenry as it looks pretty much like a blatant sell out of revered democratic process.

Of course, as with past proposals that would bail out EU risk, world markets are greeting the news with open arms.

Are market participants factoring in prospects of wholesale riots in Athens?

Thursday, July 9, 2015

Memorializing Racists

You're lighting a scene
That's faded to black
I threw it away
'Cause I don't want it back
--Alan Parsons Project

Tom DiLorenzo points out one of the many hypocrisies of Progressives. On one hand, they obsess over a Confederate flag flying above a state house, claiming that it is a symbol of racism that must come down. On the other hand, they ignore the monument in Washington DC dedicated to a president whose public utterances include a collection of perhaps the most blatantly racist comments on presidential record.

Why shouldn't the Lincoln Memorial come down alongside the Confederate flag?

If the response is that Lincoln symbolized other things besides racism, then the argument is similar to many of those with affinity for the Confederate flag.

If the response is that the majority does not see Lincoln primarily as a racist while most view the Confederate flag as a symbol of racism, then the question is why should majority opinion overrule the First Amendment?

If the response is that government has no business endorsing opinions, then why is it doing either--i.e., flying flags construed by some as racist or memorializing individuals construed by some as racist?

Wednesday, July 8, 2015

Vulnerable Market

"I feel it."
--Jack Goddel (The China Syndrome)

Domestic markets took off their brave face from yesterday and sank about 1.6%. SPX close was noteworthy in that it marked the first time the index has closed below its 200 day moving average since last fall.

Not a lot of support between here and the November lows. SPX 2000 amounts to about a 50% fibo retracement and would be an intuitive battleground. Next support level below that is 120 handles down.

For perspective, retracing the entire fibo range above would amount to a 17% decline. Chinese stock markets have fallen more than twice that in the last few weeks.

Market feels increasingly vulnerable. Fire might only need spark here.

position in SPX

Deleveraging the Dragon

"The mother of all evils is speculation--leveraged debt."
--Gordon Gekko (Wall Street: Money Never Sleeps)

The China meltdown is attracting more attention after its stock markets were hammered again yesterday for a 6% loss. In an attempt to stem the selling, more than half the issues trading on China's mainland exchanges have been halted.

How this action, or any other intervention by policymakers, stems rather than exacerbates downside pressure remains to be seen.

The problem here is the problem everywhere when markets melt down: leverage. Borrowing to buy more stock magnifies returns on the way up, but it also magnifies losses on the way down.

It's been easy to borrow money to buy stocks in China. Structures such as so-called 'umbrella trusts' have made it easy for even rural peasants to get into the game on margin.

Mix in propensity for governments to bail out risk-seeking gone awry and you have a toxic combination.

Of course, the Chinese case, like the Greek case, should be a wake-up call for US investors. After all, US margin debt rests at all time highs.

Alas, the psychology of denial is an interesting thing. We can be certain that people won't recognize the problem until the margin calls arrive.

position in SPX

Tuesday, July 7, 2015

Chinese Checkers

"Always with the negative waves, Moriarity."
--Oddball (Kelly's Heroes)

The Euro Drama has been distracting attention from the carnage taking place in Chinese equity markets, which are down about 30% in less than a month. Of course, that followed a rise of more than 100% since the beginning of the year.

Because they have been loathe to let prices sink, government officials have been implemented a plethora of interventionist polices to try to keep the wheels on the wagon. Rate cuts, margin loan expansion, direct equity purchases. Hey, they've been learning from the champs (us).

Now media sources claim that the Chinese government is banning talk construed as unfriendly toward markets. Check your negative waves at the door, Moriarity, or get arrested.

Psychology of Denial

And I get on my knees and pray
We won't get fooled again
--The Who

With Greek citizens clamoring for cash after capital controls have restricted access to bank accounts, the obvious question to ask is: Why didn't these people act sooner? Because the Greek problem has been miles wide and easily recognizable for years, any rational person would have emptied their bank accounts a long time ago.

One factor at play here is the psychology of denial. Funded by impediments of cognitive dissonance, people maintain a failing course of action in the face of evidence suggesting that change is necessary.

How many people in the US are acting to protect themselves against a dollar collapse in the face of the most profligate central banking policies in history?

The socialistic problems of Greece are headed to a shore near you. And you know what? Odds are people once again won't be prepared despite copious signals signals.

Monday, July 6, 2015

Euro Dominos

There's no need for argument
There's no argument at all
--Van Morrison

As ZeroHedge reports, EU exposure to Greece is complex--amounting to both direct exposure assumed by banks and indirect exposure that has been laid off to various EU members via ECB programs. Estimated country exposure as a % of GDP looks like this:

Appropriately portrayed as the Greek domino tipping a progressively larger cascade.


Relax said the night man
We are programmed to receive
You can check out any time you like
But you can never leave
--The Eagles

This weekend Greek people overwhelmingly voted 'no' on a referendum requiring Greece to accept EU policy demands oriented toward fiscal 'austerity' in exchange for a restructuring of Greek sovereign debt which is now technically in default.

EU policymakers faces two primary choices. Agree to sit down once again with Greece in yet another round of Groundhog Day-like negotiations. This option makes Greece look like a winner in this battle. Plus it emboldens other EU countries teetering on default (e.g., Italy, Spain) to ignore future EU demands for fiscal policy reform.

The other choice is to boot Greece from the EU. Absent some sort of ECB bailout (which of course is possible), this option will eviscerate holders of Greek bonds.

Greece, on the other hand, in the throes of capital controls, is pondering the prospects of outright printing of euros to pay obligations. This, of course, would eviscerate the Euro and spark Big Inflation.

After futures markets sold hard over the weekend, investors have been putting on their brave faces once again this am, erasing nearly all red ink since the 'oxi' vote came in yesterday. Conditioned by previous bailouts, market participants obviously believe that policymakers will once again ride to their rescue.

Sunday, July 5, 2015

What Would It Take?

"Am I angry about taxation without representation? Well, yes I am. Should the American colonies govern themselves independently? I believe that they can, and they should. But if you are asking me, am I willing to go to war with England? Well, then the answer is most definitely no!" 
--Benjamin Martin (The Patriot)

An appropriate question to reflect on this weekend: What would it take for you to fight for your liberty?

Each person's answer will depend on their preference for liberty. Those with high liberty preference are more sensitive to violations of their liberty, making them more prone to push back over what to others seem like inconsequential infringements on liberty.

Those with low liberty preference are less willing to push back. If their valuation of liberty is low enough, no infringement on liberty will seem worth fighting for.

Some 240 years ago, enough people people felt their liberties infringed to the point where they were willing to muster an organized revolt that threw off the most powerful regime in the world.

To the tyrants of the time, that call to arms surely seemed as unlikely then as it does now.

Saturday, July 4, 2015

Radical Declaration

"A toast? Yeah, to high treason. That's what these men were committing when they signed the Declaration. Had we lost the war, they would have been hanged, beheaded, drawn and quartered, and, oh, my personal favorite, had their entrails cut out and burned.'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)

Jacob Hornberger observes that the primary significance of the Fourth of July rests not in remembering our founding ancestors who pushed back against tyranny--although their actions are certainly admirable.

Instead, it rests in our First Law--an expression of the most revolutionary declaration in political history.

Age old popular belief was that rights came from government, that rights were privileges bestowed by the state. As such, it was within government's scope to alter or revoke those privileges at its discretion.

The Declaration of Independence upended that belief. Rights such as life, liberty, and property are not bestowed by government. People are born with them as a function of their humanity. These rights are unalienable, meaning that they cannot be validly altered or revoked by government.

Rather than being the originator of rights, government is a construct of the people with the expressed purpose to protect those rights. If an extant government is failing in that regard, then it is within the people's legitimate power to throw off that design in favor of a better one.

239 years after this declaration was made, it can hard for us to appreciate just how radical this declaration was.

And largely still is.

Friday, July 3, 2015

High Court of Interest

All for freedom and for pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

Captures the current situation well.

In our government framework, the last bastion against arbitrary rule under the principle of judicial review is the Supreme Court. Even if the executive and legislative branches fail to uphold their constitutional oaths, a high court that adheres to the rule of law protects liberty.

Of course, that is not what we have. As demonstrated by the SCOTUScare decision last week, we have an interested court willing to facilitate, rather than check, discretionary rule.

The last paragraph of Justice Scalia's dissenting opinion summarizes the predicament (p. 21):

"Perhaps the Patient Protection and Affordable Care Act will attain the enduring status of the Social Security Act or the Taft-Hartley Act; perhaps not. But this Court's two decisions on the Act will surely be remembered through the years. The somersaults of statutory interpretation that they have performed ("penalty" means tax, "further [Medicaid] payments to the State" means only incremental Medicaid payments to the State, "established by the State" means not established by the State) will be cited by litigants endlessly, to the confusion of honest jurisprudence. And the cases will publish forever the discouraging truth that the Supreme Court of the United States favors some laws over others, and is prepared to do whatever it takes to uphold and assist its favorites."

175 years ago, Abel Parker Upshur wrote that an interested court would be the icing on the cake in destroying the system of checks and balances that protect liberty. He and the AntiFeds were spot on.

Thursday, July 2, 2015


Standing in line, marking time
Waiting for the welfare dime
'Cause they can't buy a job
--Bruce Hornsby & The Range

Today's headline employment numbers once again betray the true state of the job market. Driven in part by the mandates of Obamacare, full time positions continue to leave the system in favor of part time work.

Number of people not in the work force hit a record 93.6 million. The labor force participation rate is estimated at 62.6%, a level not seen since 1977.

Civilian employment to population ratio now stands at 59.3%.

Less people working. Those who are working are engaged in less productive activity. Less production to support a burgeoning welfare state.

This the Grecian Formula. It is also a predictable outcome of all socialistic designs.

Wednesday, July 1, 2015

New Deal Settlement

Crapgame: Then make a deal.
Big Joe: What kind of a deal?
Crapgame: A DEAL deal!
--Kelly's Heroes

In a previous post, we observed that rate of decline in protection of liberty by the judicial branch has been increasing since FDR was able to pack the Supreme Court to his liking. This period marks what is sometimes called the New Deal Settlement.

Prior to the New Deal Settlement, the high court frequently limited Congressional authority related to, for example, the Commerce clause or the Necessary and Proper clause, on constitutional grounds. Primary tools for doing so included the Fifth and Fourteenth Amendments. For instance, the Due Process and Equal Protection clauses were employed to prohibit arbitrary restrictions on liberty and equality under the law.

Under the New Deal Settlement, the high court stopped enforcing these limits. New tools of judicial sophistry, such as the rational basis test, were developed to justify nearly all infringements on liberty that other branches saw fit to bring.

Based on recent rulings such as the gay marriage case, some observers wonder whether terms of the New Deal Settlement may be weakening.

Proponents of liberty certainly hope so.