Trump's Cover

When the shit hits the fan
I'll be sitting on the can
When the whip comes down
--The Rolling Stones

It must irritate dedicated statists to no end to hear Donald Trump constantly take credit for stock market performance since his election. Sure, many of Trump's first year actions such as regulatory cutbacks and the recently signed tax law are friendly to markets. But the past year's performance is merely an extension of a multi-year bull market of historic proportions that precedes Trump.

Smart statists realize that the seeds of this uptrend were sown during the depths of the credit collapse in 2008 when some of their own--central bankers and other policymakers--began implementing the most radical set of monetary and fiscal policies that the world has ever seen. Since then, markets around the world have been floating ever upwards on an ocean of liquidity.

Trump's pro-growth policies are being enacted at a time of peak central bank lunacy, thereby lending a parabolic shape to financial markets of all stripes.

Alas, statists can take comfort in the notion that Trump has given them an out. The president's policies and boastfulness serve to cover several years of radical interventionary actions by the State. Trump's actions create a diversion of sorts. And because the president has taken ownership of market performance, statists can offload blame to him when the whip inevitably comes down.

Government as God

"Aye, fight and you may die. Run and you'll live--at least for a while. And dying in your beds, many years from now, would you be willing to trade ALL the days, from this day to that, for one chance, just one chance, to come back here and tell our enemies that they may take our lives, but they'll never take OUR FREEDOM!"
--William Wallace (Braveheart)

In his Christmas column, Judge Nap asks several penetrating questions regarding the relationship between God and the State (what he calls 'government as god'). Let's list a few of them here.

What if many folks today have rejected the true God for government-as-god?

What if the government-as-god has set itself up as providing for all secular needs in return for fidelity to it?

What if this seductive offer has been accepted by millions of Americans?

What if the defiance inherent in the belief of government-as-god chills the exercise of personal freedoms for fear of the loss of government munificence?

What if Jesus came to set us free from the yoke of government oppression and the chains of personal sin?

What if freedom is our birthright, given to us by the true God, not by the government-as-god?

What if the most similar likeness between us mortals and the true God is freedom?

What if we have failed to preserve freedom and have permitted governments to take it from us?

What if we are not full people without full freedom?

If freedom is God's gift and Christ came to remove the yoke of government from our necks, then that means we possess the capacity, and the authority, to reclaim that freedom from the State.

New York Taxes

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

Since the passage of the tax cut bill, New York's Governor Andrew Cuomo has been complaining that the new law is unfair. For example, the new law caps federal deductions for state and local taxes to $10,000. Because NY is a high tax state, many high income residents will no longer be able to deduct the full amount of their state income taxes paid.

There is nothing unfair about this. After the 16th Amendment was added to the Constitution in 1913, both states and the feds can impose taxes on income. There is nothing that says that Congress can't impose a limit on deducting state income taxes paid from the federal tax bill. Congress is not forcing New York or other states to do anything. Moreover, the deduction cap is imposed equally across the 50 states.

What the new law does do is make high taxation states more apparent to its residents. Previously, state officials knew that the unlimited federal deduction of state taxes paid would soften the blow that residents would feel if state taxes were increased.

This is less likely to happen now. Higher income residents in particular will immediately feel the sting of high state taxes. They will be more likely to vote with their wallets (e.g., spend less on consumption or by move out of state) and/or at the ballot box to toss out high tax regimes.

This is why Cuomo is now reluctantly considering 'tax restructuring' within his state. He needs to cut taxes if he wants to remain in power.

Political and Personal Immorality

"To want power is corruption already."
--President Art Hockstader (The Best Man)

Ron Paul suggests that recent revelations about sexual misconduct among members of Congress should not be surprising. Because the welfare-warfare state is itself immoral, the system is likely to attract those who behave immorally in their personal lives.

The welfare-warfare state depends on a stream of resources confiscated from its citizens thru systematic taxation and monetary debasement. Laws prevent people from living their lives as they choose. Force is constantly threatened against those who choose not to obey.

The warfare side of the state is, of course, violence out in the open for all to see. Deaths, including deaths of innocents, are inevitable. As our founding ancestors understood, establishment of a permanent warfare state quickly leads to loss of liberty.

It stands to reason that the people most likely to want to handle the controls of the immoral state apparatus are those who are immoral themselves.

Delusion and Reason

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

At the beginning of his weekly letter, John Hussman proposes that delusions--such as those currently enveloping popular thought about financial markets, the economy at large, and Bitcoin--are not driven by failures in logic or reason. Instead, he suggests that delusional thinking results from 'distorted inputs' such as poor data gathering.

A different view is that the reasoning process includes front end activities that select and shape inputs for disposition by the human mind. If, for example, an individual exhibits a 'data gathering bias' that fosters collection of insufficient evidence that, when processed, leads the person to 'jump to conclusions,' then that person is not thinking rationally.

The reasoning mind understands the importance of information and evidence gathering prior to decision-making and will go to great lengths to ensure a sound basis for thought and judgment. The time and effort required to collect proper inputs is an important reason why humans tend to avoid reasoning process most of the time.

Claiming that delusional thinking does not reflect some deficiency in reasoning ability seems itself...delusional.

Jesus and the Police State

"I crossed this floor in spoken friendship, as I would speak to Arrius. But when I go up these stairs I become the hand of Caesar, ready to crush all those who challenge his authority. There are too many small men of envy and ambition who try to disrupt the government of Rome. You have become the victor and hero to these people. They look to you, their one true god as I called you. If you stay here, you will find yourself part of this tragedy."
--Pontius Pilate (Ben-Hur)

Author here observes that Jesus was born into a police state. His teachings subsequently undermined religious and political establishments to the point where He was crucified as a warning to not challenge the status quo.

The author then speculates about how government-imposed restrictions on liberty would have made the biblical acts of Christ more difficult to execute in the contemporary United States.

Perhaps He would have modified his actions. But there seems little doubt that the consequences would been similar. Death awaits those unwilling to compromise in the face of state-imposed threats of compliance.

The spectre of death awaiting those who challenge the modern day police state is a primary reason why it is so difficult to follow in Christ's footsteps today.

Immanuel

But when the time had fully come, God sent forth his Son, born of woman, born under the law, to redeem those who were under the law, so that we might receive adoption as sons.
--Galatians 4:4-5

God is with us once more.

Get Out of Jail Free

Jack Ryan: If I go down, you're going with me.
Robert Ritter: Wrong again. I have an autographed Get Out Of Jail Free card.
--Clear and Present Danger

A perk of being a bureaucrat, particularly a Washington bureaucrat, is the proverbial Get Out Of Jail Free card. More accurately labeled, it would be an Avoid Prison While Retaining Full Retirement Benefits card.

It works like this. Engage in wrongdoing. Get caught. Rather than be subject to prosecution, submit your 'early retirement' papers to your boss. The bureaucratic hierarchy signs off, and you subsequently walk out the door scot-free with full pension in-hand.

Reputations--institutional as well as your own--remain largely untarnished.

Optimism and Market Peaks

It's time for the good times
Forget about the bad times, oh yeah
--Madonna

Article suggests that the surge in optimism associated with signing of tax cut legislation could mark a stock market peak. It is certainly plausible. Measures of optimism haven't been this high since the dot.com era:

Cash levels in brokerage accounts are near all time lows:

Bears are too scared to be short. Indeed, the prospect of being short almost seems absurd.

All of this is bearish on the margin.

no positions

Headline Bias

I read the news today, oh boy
About a lucky man who made the grade
And though the news was rather sad
Well I just had to laugh
I saw the photograph
--The Beatles

One way to analyze media bias is to study how a particular outlet treats headline-worthy events of similar magnitude that are perceived to have been led by different political parties. Stories could be evaluated for both their placement and tone.

Consider, for example, how USA Today treated the Democrat-led passage of Obamacare:

Exclusive front page story, big fonts, pix with smiling faces, celebratory tone.

Contrast that to how the same outlet is treating the Republican-led passage of the tax-cut bill:

Shared front page story, smaller fonts, no pix, certainly no celebratory tone.

Not apples to apples events, some might say. Others contend that they are directly comparable. How to resolve such disagreement?

There are several ways to address such issues analytically. One would be to have a bipartisan expert panel that, using preset criteria, selects comparable headline-worthy events to be analyzed pairwise--as we imply doing above.

Another, probably better, way would be to pool, say, 100 events led by Democrats and 100 events led by Republicans that a bipartisan expert panel agrees meet a threshold for 'headline worthiness.' Then study the stories in each pool for their characteristics (placement, presentation, tone, etc.). Calculate the averages and compare the means.

Repeat for multiple outlets.

Finally, consider a measure of 'headline bias' to complement extant measures of media bias such as Groseclose's slant quotient.

Dow Closing Highs

'Cause she's so high
High above me
She's so lovely
--Tau Bachman

Thus far this year, the Dow has closed at all time highs on 70 days, surpassing the previous record of 69 set back in 1995. This is rare action indeed, as there have been only 4 years in the Dow's 122 yr existence where more than 60 new high closes were realized.

With still a week or so of trading left in the year, and with the Industrials up another 100+ today, additional excursion into record-setting territory seems imminent.

no positions

Hyperinflation Nightmare

Oh, see the fire's sweeping
Our very street today
Burns like a red coal carpet
Mad bull's lost its way
--Rolling Stones

Hyperinflation seems to be a distant thing on people's minds. Yet, gargantuan money supply increases over the past decade place us on the path.

History, famously in Weimar Germany and most recently in Venezuela suggests that hyperinflation lays dormant for a long time before it quickly kicks in. And once it does kick in, hyperinflation is virtually impossible to stop.

Pray that we will be spared this nightmare.

Trumping Hit-And-Run Smears

Senator Joseph Paine: He can raise public opinion against us. If any part of this sticks...
James Taylor: Ah, he'll never get started. I'll make public opinion out there within five hours. I've done it all my life. I'll blacken this punk so that he'll--you leave public opinion to me.
--Mr Smith Goes to Washington

In the old days a slanted media could smear targets by disseminating rumors and hearsay grounded in 'unnamed sources.' The key to effectiveness here was time lag. Before the target could post a denial in front of large numbers of media consumers, people had processed the false message thru their System 1's and stamped it as 'true.'

A story in the @washingtonpost that I was close to “rescinding” the nomination of Justice Gorsuch prior to confirmation is FAKE NEWS. I never even wavered and am very proud of him and the job he is doing as a Justice of the U.S. Supreme Court. The unnamed sources don’t exist!

— Donald J. Trump (@realDonaldTrump) December 19, 2017

Thru his entrepreneurial use of social media, Donald Trump is limiting the effectiveness of hit-and-run smear campaigns. His counters not only reach millions, but they do so quickly. Before large numbers of people can process libelous info, Trump neutralizes disparagement in a timely manner.

By doing so, Trump accomplishes more than an entire White House media relations staff.

Runaway Market

"I'm here for one reason and one reason alone. I'm here to guess what the music might do a week, a month, a year from now. That's it. Nothing more. And standing here tonight, I'm afraid that I - don't - hear - a thing. Just...silence."
--John Tuld (Margin Call)

We're witnessing a runaway market right now. Gapping higher. Up a percent each day. Parabolic shape.

During the run-up before the 2008 credit collapse, former Citigroup (C) CEO Chuck Prince famously remarked that investors have to dance while the music is playing--even if the long term prospects look dicey. This certainly holds true for many fund managers--particularly in the context of year end under-performance anxiety.

This time, however, I fear that, when the music stops this time, the silence will be deafening.

no positions

Doped Up

Your lights are on
But you're not home
Your mind
Is not your own
--Robert Palmer

Dopamine is a neurotransmitter that plays many roles in the human body. A primary role is as a chemical messenger that signals pleasure to brain for predicted rewards. The 'high' feeling associated with dopamine release is thought to be an important factor in addictive behavior.

I've long felt that people who can't put down their devices because they must stay plugged into their social networks exhibit signs of addiction.

Perhaps they're doped up on dopamine.

TINA is Turning

You don't think of them as human
You don't think of them at all
You keep your mind on the money
Keeping your eyes on the wall
--Tina Turner

Of the straws mounting on the market camel's back, a big one is rising short term fixed income yields. Yields on two yr Treasuries recently crossed S&P dividend yields for the first time in 10 yrs.

Perusing my broker's online CD inventory this morning found yields of 1.75% on one yr CDs and annualized yields of nearly 1.5% on 3 month CDs.

For investors seeking income, stocks have been considered the only game in town because of their 'hefty' dividend yields versus fixed income. That calculus is changing.

TINA is turning.

Becoming the Market

I've got your picture, I've got your picture
I'd like a million of them all around my cell
I asked the doctor to take your picture
So I can look at you from inside as well
--The Vapors

Nice picture of the relative position of all central banks (not just BOJ) in markets.

Not only are they increasingly involved, but CBs are quickly becoming THE market...

Always On

"The Army is a broadsword, not a scalpel. Trust me, senator, you do not want the Army in an American city."
--General William Devereaux (The Siege)

During the Civil War, President Abraham Lincoln dealt with those in Union states voicing opposition to the war by arresting dissenters under auspices of martial law. Thousands were jailed without writs of habeas corpus and tried before military commissions rather than civil courts.

One such dissenter, an Indiana lawyer name Lambdin Milligan, petitioned the federal circuit court in Indianapolis. His case, which became known as Ex parte Milligan, was passed to the Supreme Court. The primary question was whether Lincoln's military tribunals against dissenters were legal.

The Court unanimously rebuffed Lincoln's efforts to cut constitutional corners. The Court wrote:

"The Constitution of the United States is a law for rulers and people, equally in war and peace, and covers with the shield of its protection all classes of men, at all times, and in all circumstances. No doctrine, involving more pernicious circumstances, was ever invented by the wit of a man than that any of its provisions can be suspended during any of the great exigencies of government. Such a doctrine leads directly to anarchy or despotism."

Via its ruling in Milligan, the Court tells us that the Constitution is always on. No exceptions.

Distortion, Misallocation, and One Way Up

"You know, there's fortunes to be made--hundreds of millions of dollars--betting against this bubble. Just wish I had a million."
--Gordon Gekko (Wall Street: Money Never Sleeps)

ZeroHedge discusses a recent CNBC interview with Stan Druckenmiller. The legendary hedge fund manager, now retired but managing a multi-billion dollar family fund, became legendary for consistently putting up 30%+ annual returns.

This year has been different. "I would have to say it's probably the worst year I've had relative to the set of opportunities out there," he confessed. Although he's done well in stocks, "I've really, really mistraded macro," which, presumably refers to positions involving currencies, bonds, and other instruments that capture large-scale (macro) economic changes. "I'm not up anywhere near 30%," he laments, "I'm not up double digits."

While he may have mistraded his macro thesis from a timing standpoint, Druck seems confident in the endgame associated with his big picture view. "If you took the Taylor Rule a normal interest rate given our economic circumstances would be 4%. Interestingly, we're at 1%. In Europe, it would be 2%; they're at -0.4%. In Sweden, it would be 3.75%; they're at -0.5%. That doesn't even count the bond buying."

When asked about the consequences of keeping rates at such suppressed levels, Druckenmiller responded, "Well, the consequences are huge because we've distorted market signals and we're causing all sorts of what I would call misallocation of resources." [emphasis mine]

This distortion and misallocation goes far beyond the crypto-bubble. "Bitcoin, art, wine, equities, credit--you name it--everything is one way up. And there are huge distortions taking place...and when you get a misallocation of resources, it really hinders growth in the long run." [emphasis mine]

Understand the logic: distort market signals (i.e., suppress interest rates) --> misallocate resources --> create one way up asset classes --> vaporize resources when those bubbles pop --> less economic resources available for investment in the long run.

Traders like to say that when you get the timing of a trade wrong, then you're wrong. That's obviously how Druckenmiller sees it w.r.t. his investment performance. In the long wrong, however, Druck's macro thesis is likely to play out with near certainty.

Bucking Tribal Bias

King Henry VIII: It's my bounded duty to put away the Queen. And all the popes back to Peter shall not come between me and my duty. How is it that you cannot see? Everyone else does.
Sir Thomas More: Then why does your Grace need my poor support?
King Henry VIII: Because your honest. And what's more to the purpose, you're KNOWN to be honest.
--A Man for All Seasons

On the surface, attorney, law professor, and political analyst Alan Dershowitz would seem no friend of freedom. He is an avowed Democrat who endorsed Barack Obama and Hillary Clinton in recent presidential elections.

Over the years, however, I have found some value in Dershowitz's viewpoints. Because he is a constitutional scholar, Dershowitz's take on related issues can be interesting. Some of his arguments, such as those involving gun control and Israel, miss the mark. Many of his civil liberty opinions, on the other hand, are grounded in a libertarian-minded reading of the Constitution.

Dershowitz is also interesting because he has demonstrated that he has not afraid to break from the pack on controversial issues. As suggested by signaling theory, a message is often seen as more credible when it conflicts with the ideologies of the sender's home 'tribe.' Because the sender is not toeing the party line as expected, receivers reason, then the information may contain more truth and less 'tribal bias.'

This is what I’ve been arguing for months. Finally someone agrees @WSJopinion https://t.co/eiDgTlbKYn

— Alan Dershowitz (@AlanDersh) December 11, 2017

For some time now, Dershowitz has been arguing (as indicated in the Tweet above) against the legal investigations into Donald Trump's alleged Russian collusion and associated obstruction of justice charges. His basic argument is that no credible evidence of collusion has been brought forth, and that the Constitution grants presidents broad discretionary powers in staffing his agencies.

Pushback by his home tribe has been significant, as Dershowitz notes below.

.@AlanDersh: "I call it the Donald Trump Diet. I've lost 7 pounds because my liberal friends have stopped inviting me to dinner parties." pic.twitter.com/Bc8jkJhRlb

— Fox News (@FoxNews) December 8, 2017

Dershowitz likely knows from experience that when you buck tribal bias, you will incur the wrath of the tribe.

Litany of Retraction

"There isn't anything I can do to him that he hasn't already done to himself."
--Keith Nelson (Some Kind of Wonderful)

Last weekend Donald Trump called out a Washington Post reporter for photos that falsely reported an underwhelming crowd at a recent Trump rally down south. \The report was later retracted.

.@DaveWeigel @WashingtonPost put out a phony photo of an empty arena hours before I arrived @ the venue, w/ thousands of people outside, on their way in. Real photos now shown as I spoke. Packed house, many people unable to get in. Demand apology & retraction from FAKE NEWS WaPo! pic.twitter.com/XAblFGh1ob

— Donald J. Trump (@realDonaldTrump) December 9, 2017

Subsequent apology by the reporter adds to the list of nearly daily retractions (another weekend whopper here) by mainstream media outlets for negative press on the president that has been proven wrong. Fake news, quite literally.

This Twitter exchange captures the situation well:

I was a reporter in Washington during all of Watergate and I totally agree with this. https://t.co/48qCFlzdlN

— Brit Hume (@brithume) December 9, 2017

I remember Watergate pretty well, and I don't remember anything like this level of journalistic carelessness back then. The constant stream of 'bombshells' that turn into duds is doing much more to damage the media than anything Trump could manage. https://t.co/SA3Frx4KNE

— Walter Russell Mead (@wrmead) December 8, 2017

Through a litany of retraction caused by lowering journalistic standards in a quest to destroy someone they don't like, mainstream media outlets are destroying themselves.

Full Employment Fantasy

Here come the jesters
One, two, three
It's all part of my fantasy
--Bad Company

Graphic-rich piece comparing claims of 'full employment' to reality. One informative graph is this simple time series comparison of headline unemployment to the labor force participation rate.

The difference in labor force participation rate at this peak in 'full employment' vs previous peaks amounts to about 16 million fewer people working this time around.

Meanwhile, wages are nowhere near levels associate with previous 'full employment' peaks.

The obvious question is why isn't less supply/more demand for labor find wages rising here?

Household Stock Exposure

If you say that you are mine
I'll be here till end of time
--The Clash

Financial media frequently claim that households aren't into stocks any more and have therefore missed most of this bull market. In reality, most households never left stocks in a big way. While they may not be day trading brokerage and IRA accounts as in the heady .com days, households are likely to be significantly exposed to stocks via held 401(k) mutual funds, 'lifestyle' retirement funds, stock-laden pension and insurance pools, and other vehicles.

Currently, households hold more money in stocks than at any other time outside of the .com peak in 2000.

This is, of course, a key reason why policymakers can't afford for stocks to decline in meaningful way. Can their prop job endure?

If not, then people will still hold the shares, but they will be worth far less.

Reinforcing Moral Hazard

Jacob Moore: You know what moral hazard is, Ma? You know what that means?
Sylvia Moore: No.
Jacob Moore: It means that once you get bailed out, what's to stop you from taking another shot?
--Wall Street: Money Never Sleeps

The gist of this article, including the accompanying graph below, is that central banks no longer have to intervene in markets because investors have 'learned' from previous interventions that they will be bailed out by CBs should market actually decline.

Thus, we have investors buying all dips in competition to be early entrants into subsequent rises that would have been backstopped by the Fed et al. had those dips been deep enough. Follow that?

Due to CB-facilitated moral hazard, the reinforcing loop creates what appears to be a self-fulfilling prophecy of higher markets.

If one buys into this thesis, then the question becomes: what breaks this reinforcing cycle?

no positions

Plutocracy

"That stock's going to Pluto, man."
--Marv (Wall Street)

Make that 19,000...

Verticality

"He's going vertical, so am I."
--Maverick (Top Gun)

Bitcoin has creased 16,000 this morning. As recounted by ZeroHedge, the crypto has gone from 12,000 to 16,000 in about 36 hrs.

Bitcoin's market cap now exceeds $250 billion, ranking it as the 12th largest 'company' in the S&P 500.

Every bubble has its poster child. And you're looking at it.

no positions

Consecutive Low Closes

Will you look above me?
Look my way? Never love me?
Rain keeps falling, rain keeps falling
Down, down, down, down
--Simple Minds

An almost unbelievable note from Jason Goepfert stating that, yesterday, the SPX closed in the bottom 10% of its daily range on two consecutive days for the first time in about two years.

It's been almost 2 years (Dec 15, 2015) since $SPY closed in the bottom 10% of its daily range on back-to-back days.

— SentimenTrader (@sentimentrader) December 5, 2017

Cursory review of a candlestick chart over the past seven months is consistent with his statement.

Demonstrates just how one sided the market action has been. And how comotose we've become to the extreme conditions.

no positions

Reversal of Fortune

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

Market trends often culminate in a reversal day, where early strength is sold and another seemingly positive leg higher turns into a loss. Yesterday, the gap higher surrounding the weekend tax cut euphoria didn't stick and, by mid-day, major indexes began to leak.

After a rally attempt by the bulls, markets closed near session lows in classic 'sell the news' fashion.

Of course, this bull run has produced many false signals of its demise. This may be another one. Key will be whether we see downside follow-thru in the near term.

no positions

Sensitivity Analysis

"It's what the bean counters call a simple actuarial analysis."
--Dr Getchell (Class Action)

Dilbert discusses sensitivity analysis. How sensitive is your model to changes in your assumptions?

When small changes in assumptions cause big or unpredictable changes to projected outcomes, then a model is overly sensitive. When a model weathers such changes well, it is 'robust.'

Consumers of forecasts, particularly economic forecasts, would be wise to apply sensitivity analysis to the underlying models that generate the forecasts.

Those who do will likely find that, more often than not, noise greatly exceeds signal.

Drawdown Drought

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

Interesting graph showing amount of time before a 10% drawdown for a 'balanced' portfolio of 60% stocks and 40% bonds.

Only the 9.1 year run-up in portfolios in the late 1920s surpasses the current 8.7 year streak.

1920s run-up, of course, culminated in the great Crash of '29 and ushered in the Great Depression.

no positions

Market Highs and Margin Debt

Spent the last year
Rocky Mountain way
Couldn't get much higher
--Joe Walsh

'Dow 24K' was the major market headline this week. Needless to say, margin debt marking all time highs was not deemed headline worthy.

All speculative blow offs occur in environments of cheap debt and high leverage.

Without exception.

no positions

Pass...Anything

Oh, you're a hard one
I know you got your reasons
These things that are pleasin' you
Can hurt you somehow
--Eagles

Democrats were so desperate to pass healthcare legislation during President Obama's first year that they jammed the steaming pile of excrement that became known as Obamacare thru during the holiday season of 2009. Dems were so driven to deliver on a promise to their constituency in that first year that they were willing to pass...anything. They would find out what they passed, as House leader Nancy Pelosi so aptly put it, later.

Now it is the GOP's turn. Desperate to deliver on campaign promises to 'cut taxes,' Republicans are scrambling to push tax cut legislation thru the system before year's end. Whether this bill actually takes a big bite out of taxes for all Americans does not matter at this point.

What matters is passing...anything. And subsequent bragging rights that you have fulfilled a campaign promise during President Trump's first year.

Never mind that in your haste you passed legislation with so many ill effects that you get voted out of office next time around (see: Democrats post Obamacare).

So goes the perverse logic of Washington.

Coolidge's Error

Nick Carraway: You can't repeat the past
Jay Gatsby: Can't repeat the past? Why, of course you can.
--The Great Gatsby

These pages have argued that Calvin Coolidge may have been the best president of the Twentieth Century. He was not perfect, however. His gravest mistake involved presiding over a Federal Reserve that made credit too easy for too long while the Twenties roared.

At several points during the 1920s, the Fed eased credit conditions despite the booming economy. When they finally tried to tighten credit in 1928, stock and real estate markets did not respond. Instead they continued their upward spiral. In late 1929, of course, these markets finally came crashing down, ending one of the largest speculative benders in US history.

It is easy to draw parallels to today's situation. Despite information suggesting that the economy is on solid footing, the Fed maintains an ultra low interest rate policy. Stock markets are ringing all time highs almost daily. Speculators bid crypto constructs like Bitcoin to astronomical levels.

Stated differently, we are repeating Coolidge's error.

Animal Spirits

"Don't you see, dear. Some children wish for things they couldn't possibly use--like real locomotives or B-29s."
--Kris Kringle (Miracle on 34th Street)

Courtesy of the WSJ.

Nothing seems to awaken animal spirits like flat screen TVs on sale during the holiday season.

Tax Cuts, Deficits, and Debt

I have a mansion, forget the price
Ain't never been there, they tell me it's nice
I live in hotels, tear out the walls
I have accountants pay for it all
--Joe Walsh

Tax cuts do not cause deficits and debt. Deficits are caused by spending beyond one's means. Resources must be borrowed to make up the difference.

To reduce deficits and debt, get rid of the cause.

Cut spending.

Shopping on Margin

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

As the holiday shopping season begins, let's check in on consumer credit position. As a % of disposable income, credit-instilled leverage has never been higher.

Nothing like shopping on margin...

Inconsistent Time Horizons

It may seem to you that I'm acting confused
When you're close to me
If I tend to look dazed I've read it someplace
I've got cause to be
--Tina Turner

Buy-and-hold investors often argue that one has to be in it for the long haul. That you can't time the markets.

Many of these 'long term' investors chide bears who predict market declines but, because no decline has occurred recently, those bears must obviously wrong.

See the inconsistency?

Dilbert's Rules for Writing

Staring at the blank page before you
Open up the dirty window
Let the sun illuminate the words
That you could not find
--Natasha Bedingfield

Scott Adams, creator of the Dilbert comic strip series, claims that he became a better writer after taking a one day course in 'business writing.' To realize improvement, he suggests using the following tricks.

Simplicity rules (see?). Simple writing persuades. A good argument in a few sentences is better than a great argument delivered over many pages. Academics, even those from business disciplines, have yet to catch on here.

Writing can be simplified by pruning words. The example he uses, that of deleting 'very' from sentences, was a lesson from my first boss, He argued that words like 'very' and 'really' read like you are trying to sell the reader on an idea using emotional tags rather than on the merits of the idea itself. Take the 'sell words' out.

Grab the reader in the first sentence. Rewrite the beginning until you are satisfied that it will arouse curiosity.

Write short sentences. Multiple thoughts in one sentence confuse and fatigue readers.

Use active rather than passive voice. Focus on verbs. Action-oriented verbs convey more effectively. For example, "I wrote this sentence" engages human brains far more than "This sentence was written by me."

These practices apply to writing contexts beyond the business realm, of course.

On the Contrary

I have a picture
Pinned to my wall
An image of you and me
We're laughing and loving it all
--Thompson Twins

Last two time consumers expressed such a low level of concern about the US economy? 1999 and 2007.

This, my friends, is what is known as a contrarian indicator.

Grateful for Markets

Neal Page: Honey, I'd like you to meet a friend of mine.
Susan Page: Hello, Mr Griffith.
Del Griffith: Hello, Mrs Page.
--Planes, Trains & Automobiles

Richard Ebeling shares the story surrounding the first Thanksgiving--a story that these pages have recounted before.

Am grateful for our Creator's gifts of markets and spontaneous order that have led to this bountiful harvest.

Big Business and Government

Say that you'll never, never, never need it
One headline, why believe it?
Everybody wants to rule the world
--Tears for Fears

Ron Paul and Chris Rossini discuss several myths surrounding big business and government. These myths include:

Big business loves free markets and is shackled by regulation.

Republicans love free markets.

The fact is that big business loves hampered markets where regulatory barriers protect its franchise by keeping entrepreneurial competition out. Moreover, going back to Lincoln, the Republican Party was founded on hampered markets. In particular, the Party of Lincoln favored corporate welfare in the form of tariffs, central bank control of money and credit, and government sponsored 'internal improvement' projects.

If you believe official narrative that regulation of big business is good for the people, then you are being played.

Red Century, Red Blood

Take my arm, take my leg
Oh, baby don't you take my head
--The Rolling Stones

The 100th anniversary of the Bolshevik Revolution finds several mainstream media outlets including NYT waxing poetically about the 'Red Century.' Its association with the color red is more than a little ironic. No ideology has exacted a bloodier toll on human existence than communism.

As noted here, the killing capacity of the Marxist-Leninist movement, which commonly promoted itself as a champion of 'the people,' tests the bounds of human comprehension. The number of deaths associated with various threads of this ideology might surpass 100 million.

Recount after recount of life behind the iron curtain reinforces the extent of human cruelty in everyday terms.

None of this should be surprising. Even cursory examination of Marx and Engels and other early works that laid the conceptual foundation for communism suggests that an extreme amount of force is necessary to reshape the lives of individuals--who are naturally endowed with freedom--into the unnaturally collectivist communist ideal.

A Harvard undergrad, whose parents fled the chaos the communism wrought on Eastern Europe, captured the essence:

"Communism cannot be separated from oppression; in fact, it depends on it."

Here's hoping that the world's sentence to a century of communism is not extended.

Abundance and Scarcity

I'm not expecting to grow flowers in the desert
But I can live and breathe
And see the sun in winter time
--Big Country

Two quick lessons in economics from Prof Bylund. Abundance is a condition where a good is in plentiful enough supply where it has no price. Oxygen in the air is an abundant good.

In #economics, "abundant" means a good is so plentiful it has no price. Leftists seem to think it means "having more than I think you need."

— Per Bylund (@PerBylund) November 19, 2017

Abundance does not mean that abundant goods can be taken from owners because it is deemed that they have more than they need.

Scarcity is a condition where a good is in short enough supply where it commands a price (i.e., something must be given up, or traded, to acquire it).

In #economics scarcity means some kind of tradeoff is necessary w.r.t. that good. It doesn't mean "few" or "rare"; it means it has a price.

— Per Bylund (@PerBylund) November 20, 2017

Scarcity does not mean that it is rare or nearly impossible to obtain.

Where's the Leverage?

"And I hate to tell you this, but it's a bankrupt business model. It's systemic, it's malignant, and it's global...like cancer."
--Gordon Gekko (Wall Street: Money Never Sleeps)

In past bubbles, leverage was concentrated and easy to spot. In the late 1990s leverage clustered in dot.com. In the 2000s it accumulated in housing and mortgages.

This time around leverage is harder to recognize. Yet, derivative usage, corporate debt, duration, and sovereign debt are all at record levels.

It is tougher to see leverage when it is all around us.

Rather than being dormant and local, leverage and its associated risks have become malignant and systemic.

Debt and GDP

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

Uncited but simple list that ranks debt as a percentage of central government GDP.

Government debt as share of GDP.

Japan: 250%
Greece: 179%
Italy: 132%
US: 106%
Spain: 99%
France: 96%
Canada: 92%
UK: 89%
India: 69%
Brazil: 69%
Germany: 68%
Pakistan: 66%
Netherlands: 62%
Israel: 62%
China: 46%
S Korea: 38%
Turkey: 28%
Russia: 17%
Saudi Arabia: 13%

— The Spectator Index (@spectatorindex) November 15, 2017

US is number four. Federal debt now exceeds $20 trillion.

High Anxiety in High Yield

This city's mad in the head
And sick in the soul
All the stars flew away 
A long time ago
--Flesh For Lulu

Bears are eyeing the recent weakness in high yield (read: junk) bonds as a harbinger of what's to come in stocks. From a technical standpoint, it is true that junk has broken from a near term uptrend:

But pull back the time horizon a bit and the current weakness barely registers:

Because credit weakness often precedes equity weakness, the situation is worth watching. As of now, however, the action in high yield seems to be stirring little more than high anxiety among the bears.

no positions

Rates Never Lower

Maybe some day, saved by zero
I'll be more together
Stretched by fewer thoughts that leave me
Chasing after my dreams disown me
Loaded with danger
--The Fixx

Short rates have never been this low for this long in human history.

Rates are not where they are because of natural, peaceful factors. Instead, they have been forced lower.

Force builds distortion and instability into the system. At some point that potential energy will turn kinetic.

TINA Will Turn

Out from the ruins
Out from the wreckage
We can't make the same mistakes this time
--Tina Turner

I know several intelligent people with significant exposure to equities here under the primary thesis that, because they need income, they are willing to take the risk of using dividend paying stocks as their primary income avenue. Their rationale? Because fixed income yields are so suppressed, stocks are the only game in town.

In some circles, this rationale is known as TINA (There Is No Alternative).

There is an alternative, of course. It is called capital preservation. This alternative feels terrible when equity prices are flying high.

But its purpose is to protect against the inevitable crash.

Gross vs Net Standard of Living

I'm sick and tired of you setting me up yeah
Setting me up just to knock-a, knock-a, knock-a me down
--Bruce Springsteen

Assessing standard of living in a debt-laden society can be misleading. A portion of what is viewed as 'prosperity' has been borrowed from the future and must be paid back. This payback taxes, quite literally, future standard of living.

Where would US standard of living be today, for example, if the resources borrowed by current $20+ trillion in federal government debt could be factored out of the picture?

Suppose that you borrowed to the hilt. Jumbo mortgage, car loans, maxed out credit cards, student loans, et al. Of course, for many, this state is not merely supposition. On the surface, living standards would seem quite posh. But when debt is netted out, equity may be below zero.

When evaluating degree of prosperity among highly leveraged entities, gross standard of living provides one image while net standard of living paints an entirely different portrait.

Demand for Slant

You don't really need to find out
What's going on
You don't really want to know
Just how far it's gone
--Don Henley

Many fault the media for its slanted product. However, in a market where choices are available, then it must be concluded that biased media coverage is merely catering to demand for slant. Media outlets may have an agenda, but without customers willing to trade money for slant then their agenda would go unfunded and their operations would wither.

The only exception is for media outlets sponsored by the State. State funded media can operate whether consumers are willing to pay for slant or not.

Uncompetitive Advantage

Life is a mystery
Everyone must stand alone
I hear you call my name
And it feels like home
--Madonna

Competitive advantage is often the stated goal of strategic management. Innovation, productivity improvement, brand building, etc are among the activities that can give an organization an edge in a competitive industry.

The challenge, as Schumpeter observed many years ago, is that competitive advantage is always fleeting. Rivals are also busy trying to gain an edge.

In free markets, gaining, and maintaining competitive advantage is hard.

Because managers, like all humans, prefer to economize effort, they will be prone to look for ways to make their quest for strategic advantage easier. In particular they will be tempted to find ways to bend the rules in their favor so that they do not have to work so hard innovating et al. Patents, regulations, and other forms of political favor can give an organization an edge without having to endure competitive assault from rivals.

Advantage without competition.

Economic Charlatans

You better get back to your used-to-be
'Cause your kind of love ain't good for me
--Dave Edmunds

Hard to imagine an academic field populated by more charlatans than economics. So much drivel has been spoon fed to people by so-called experts in economics that it has clouded the public mind.

Don't succumb to the temptation of outsourcing your economic thought to these people. The fundamental truths of economics are accessible to all willing to engage their brains.

When the charlatans come knocking on the door to your mind, don't let them in.

Markets Compensate for Ignorance

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

Prof Williams reminds us that markets compensate for the ignorance built into the human condition. Despite the hubris of bureaucrats who believe that they could plan production and distribution for the masses, the fact is that the task of centrally planning an economy that works is impossible. The complexity is impossible for the human mind to grasp.

Markets are far more capable of doing the job. Why? Because no one single person needs to know all that's necessary to bring the products that consumers want to those consumers. Individuals focused on their local buying/selling situation chain together to get the job done far better than a brain trust ever could.

This, of course, does not stop the brain trusts from trying. And failing miserably.

Tulip Deja Vu

"It's just money. It's made up. Pieces of paper with pictures on it so we don't have to kill each other just to get something to eat. It's not wrong. And it's certainly no different today than it's ever been. 1637, 1797, 1819, '37, '57, '84, 1901, '07, '29, 1937, 1974, 1989--Jesus, didn't that one fuck me up good. 1992, '97, 2000, and whatever we want to call this. It's all just the same thing over and over. We can't help ourselves. And you and I can't control it, or stop it, or even slow it. Or even ever-so-slightly alter it. We just react. And we make a lot of money if we get it right. And we get left by the side of the road if we get it wrong."
--John Tuld (Margin Call)

In the 1600s, Dutch speculators bid tulip bulb futures to spectacular heights. As prices rose, the value of one tulip bulb equated to annual salaries and even scenic homes. Not surprisingly, demand for bulbs and prices subsequently collapsed, causing ruin among leveraged speculators. The event, often referred to as 'Tulipmania,' is held up as an early example of a speculative financial market bubble.

Obviously, a captivating aspect of Tulipmania is how people could have been stupid enough to sink life fortunes into something as mundane as garden flowers.

I suspect that we will be wondering about the Bitcoin phenomenon in a similar fashion. When crypto prices ultimately collapse, the question will be how people could have been idiotic enough to sink fortunes into a construct that only existed on a computer?

That question will occupy the post-bubble autopsy crew for some time.

Voter Acquisition Costs

Grace Marshall: Remember our first campaign?
James Marshall: In the House? Yeah. Driving downstate with...who was that kid, our volunteer?
Grace Marshall: Henry.
James Marshall: Henry, with the convertible.
Grace Marshall: With the broken top.
James Marshall: And the snow coming in.
Grace Marshall: We were the only three people who thought you could win.
--Air Force One

Just as companies face costs (e.g., channel development, marketing) to acquire customers, politicians involved in elections determined by democratic process face costs to acquire voters. Politicians must campaign to get their name and message out. They might also try to acquire votes by doing things for prospects such as giving them free cell phones or giving them rides to the polls on election day.

Voter acquisition costs grow with geographic scope of an election. Politicians in local races face relatively low voter acquisition costs because voters are close by. It costs less to reach voters because there are less of them to reach and messages do not have to be conveyed as far. Campaigns are likely to be conducted on a more intimate level, with politicians themselves personally contacting voters, perhaps even door-to-door.

As elections cover more territory, voter acquisition costs quickly escalate. If one imagines the ground politicians have to cover as radiating outwards from election headquarters in a circular fashion, then cost to influence voters increases with the square of distance. Campaigns take on a 'mass production' feel and become less personal in order to economize scarce acquisition resources.

Once geographic scope expands beyond a certain point, then it becomes cost prohibitive for politicians to reach all prospective voters. When this situation arises, campaigns must decide which prospects to pursue and which ones to ignore.

Purely from a voter acquisition cost perspective, then, it follows that the greater the geographic scope of an election, the more likely that politicians will ignore some fraction of the electorate out of economic necessity.

Old School

"People don't talk that way anymore."
--Benjamin Franklin Gates (National Treasure)

Reading lists and exam questions from a 1936-37 economics class taught by Joseph Schumpeter at Harvard provide a sense of the classic college teaching method. Require students to read original texts, not textbooks, on important topics. Discuss those topics and the readings in class lectures with students taking notes. Examine knowledge acquired with open ended questions--many of them with no single correct answer. Instead, knowledge gained is measured by the quality of thought in the exam question responses.

Some representative exam questions:

Define arc elasticity of demand and explain the usefulness or otherwise of the concept.

"The key to problems of imperfect competition lies in the conditions of demand. But it is precisely when we come to problems of imperfect competition that the ordinary demand curve apparatus ceases to have any clear meaning." Comment.

Saving, by increasing the quantity of capital, will tend to increase its absolute and relative share. At the same time saving will tend to reduce the rate of interest and thereby to increase capital's absolute and relative share. State the conditions on which the net effect of saving on the absolute and relative share will depend. What do you think the actual effect is in practice?

Which of the theories of interest which you have studied seems to you most acceptable and why?

Discuss the problem of inequality of incomes from the following points of view: (a) measurement, (b) economic effects, (c) relation to welfare.

This is what college used to be about. The acquisition of dense, deep thought capacity and demonstrable ability to express it.

Racial Justice Indoctrination

"His brain has not only been washed, as they say. It has been dry cleaned."
--Dr Yen Lo (The Manchurian Candidate)

Prof Tom DiLorenzo recounts his experiences while sitting thru 'racial justice' training mandated by his institution. As he notes, the approaches and language employed are reminiscent of communist mind control camps. In fact, efforts to cram drivel such as 'white privilege' and 'social justice' down the throats of feeble-minded individuals are central to cultural Marxism.

The problem facing the cultural Marxists is that all minds aren't feeble. As DiLorenzo notes, reasoning minds readily shoot holes thru the institutional racism narrative that can't be patched.

Fortunately, my institution has not established these indoctrination camps for faculty...yet.

Bitcoin and Real Money

Matt Farrell: Aww, great. There goes the cellphone.
John McClane: They knock the satellites out of the skies, now?
Matt Farrell: No, your battery ran out.
--Live Free or Die Hard

Real money determined by freedom rather than force would possess several characteristics necessary for a good money, including intrinsic value, scarcity, divisibility, recognizibility, portability, fungibility, and durability.

Cryptocurrencies are weak on several fronts. They have no intrinsic value because they are intangible constructs. More importantly, they are not scarce. Although developers claim that they can regulate their creation, the fact remains that their creation can be controlled by computer keystrokes executed fallible humans. When push comes to shove, humans are prone to print money in vain attempts to paper their way out of problems.

A good money should also be difficult to counterfeit. Hackers worldwide are no doubt laser-focused on cracking the cryptos.

Finally, a good money must always be available and not subject to being switched on and off by electrical power. Stated differently, what happens in a Bitcoin world if the grid goes down?

Election Rallies

"Kid, you're on a roll. Enjoy it while it lasts, 'cause it never does."
--Lou Mannheim (Wall Street)

As we close in on the one year anniversary of arguably the most incredible presidential election in US history, Donald Trump reminds us almost daily about how high the stock market has lifted since election night. The S&P 500 is up about 21% in the last year.

However, that twelve month performance places the Trump election rally only fourth on the list since 1936. Clinton 1996 (32%), JFK 1960 (29%), and George H.W. Bush 1988 (23%) all rank higher.

One thing we can be sure of. All of these administrations, and their supporters, were prone to tout what they saw as the executive office's positive influence on markets. And you can bet that many of Trump's detractors who see higher stock market prices as completely unrelated to Trump were chatting up Bill Clinton's market magic during the dot.com era.

Taking credit for stock market gains is extremely bad mojo. From the above graph, the JFK and Bush rallies both fizzled in subsequent months. Clinton was fortunate enough to jump ship before the dot.com bust really got going.

Rest assured that the wrath of the trading gods will rain down upon Donald Trump's swagger as well. When the storm hits, this president, like his predecessors, will quickly move from owning market increases to disowning market declines.

no positions

Cancer of Compromise

"And so, one by one, these compromises, these small corruptions, destroy character. To want power is corruption already."
--President Art Hockstader (The Best Man)

Former DNC chair Donna Brazile authored a piece yesterday claiming that the party's presidential primary was rigged in favor of Hillary Clinton. To informed observers, this is of little surprise. In fact, it was Brazile herself caught red-handed for passing cheat sheets to the Clinton campaign during the presidential debates.

And the timing of Brazile's release is no accident as it amounts to an excerpt from her upcoming book on the subject to be released in a few days. For a political hack turned author, an article like this is cheap advertising.

What I found most interesting in her expose was near the end where she says that after telling Bernie Sanders about the rigged arrangement, both he and she decided to keep their mouths shut and campaign for Clinton. She writes:

"I urged Bernie to work as hard as he could to bring his supporters into the fold with Hillary, and to campaign with all the heart and hope he could muster. He might find some of her positions too centrist, and her coziness with the financial elites distasteful, but he knew and I knew that the alternative was a person who would put the very future of the country in peril." [emphasis mine]

What she describes is not just a Democratic Party issue. Rather, it is a problem that all politically motivated people regularly face in elections determined by democratic (i.e., majority) vote. Set aside what is right and take one for the team. Don't break ranks, because if we can't band together to support our candidate, the option being put forth by the other side will win and it is far worse.

This is the cancer of compromise in democracies.

Cryptos as Gold Substitutes

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

We recently noted that gold bullion sales have been soft this year despite a sociopolitical environment often favorable for precious metals. One explanation is that cryptocurrencies such as Bitcoin are increasingly seen as a viable alternative currency to dollars, yen, euros, et al. And because they are perceived as having sound money properties, they are being purchased as a substitute for gold, thereby siphoning money away from bullion.

Yesterday, I heard a radio personality who has historically been bullish on gold recommending that his listeners should diversify their portfolios with some Bitcoin.

I have no doubt that this phenomenon has contributed to soft gold demand. I also have no doubt that the proposition that the cryptos are a sound money alternative to gold is wrong--something that we will discuss later.

Meanwhile, I personally welcome the current softness in gold prices as I am a net buyer. My constant fear is that gold prices will take off before I get done accumulating the metal in its various forms.

Of course, in this environment, I'm not sure my appetite for bullion can be sated. The rise of the cryptos has only intensified that feeling.

position in gold