Tuesday, October 31, 2017

Vertical Inflation

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

Suppose there are only two categories of goods. Consumer goods are products what you and I consume in our everyday lives. Food, clothing, cars, appliances, computers, etc. Financial goods are vehicles for investment. Stock, bonds, and other securities, for example.

Suppose also that there are two ways to create and distribute money. One way is to print dollars and send them directly to people in boxes. The other way is to reduce the price of credit (a.k.a. interest rates) and offer cheap loans to primary lenders, such as banks.

Now, match up the category of good most likely to be the initial recipient of the newly created money. Correct, if people received newly printed cash in boxes, most of it would likely be spent on consumer goods, thereby rising prices in that category. If banks were the initial recipients of newly created credit money, then most of that money would be spend buying financial goods, thereby bidding up the prices of stocks, bonds, etc.

This is a consequence of the Cantillon Effect. Prices rise first in the vertical that is the initial recipient of newly created money.

Practically all of the trillion$ in money created by central banks over the past 30 years has been of the credit money variety. This is why the price of goods has remained relatively tame, while prices of financial assets have been going vertical.

Monday, October 30, 2017

Zen and Keynes

"Don't think. Feel. It's like a finger pointing the way to the moon. Do not concentrate on the finger or you will miss all the heavenly glory."
--Lee (Enter the Dragon)

Thought project for the day. Ponder how this picture describes the Keynesian idea of government intervention and economic stimulus.

Very good, Grasshopper.

Sunday, October 29, 2017

Home Prices and Affordability

"Someone reminded me the other evening that I once said, 'Greed is good.' Now it seems it's legal. But, folks, it's greed that makes my bartender buy three houses he can't afford with no money down. And it's greed that makes your parents refinance their two hundred thousand dollar house for two fifty. And then they take that extra fifty and they go down to the mall. And they buy a plasma TV, cell phones, computers, an SUV, and, hey, why not a second home while we're at it because, gee whiz, we all know that prices of houses in America always go up, right?"
--Gordon Gekko (Wall Street: Money Never Sleeps)

Nearly a year ago, US home price passed thru their previous highs set before the mortgage-backed credit collapse. In fact, over the past few years, home prices have been increasing at a breathtaking pace. The below graph indicates that since summer of 2012, the median price of a new home has increased about 38%.

This is a good example of the Cantillon Effect. First users of cheap mortgage credit have bid up the housing category in a classic compartmentalized inflation.

So what's a little housing inflation matter? Well, for one, home prices are rising faster than incomes, making housing less affordable.

For another, people are more leveraged as they borrow more against less equity. Another economic downturn will once again stress cash flows and mortgage payments, leading to the familiar sound of jingle mail.

Stated differently, rising housing prices are a mirage. Like a decade ago, they are an artifact of cheap credit money bidding up assets ahead of an inevitable tumble.

Saturday, October 28, 2017

Name Calling

David Sloan: The most dangerous weapon in the universe is a focused mind. Your mind should be like a still, calm pool. Tranquil. Relaxed. One violent emotion is like taking a rock and dropping it into that smooth pond. Everything is chaos. Concentration is lost. Now, Brian here is going to show us how to lose with dignity and grace. You ready?
Brian Wagner: Any time, old man.
David Sloan: See? He's trying to throw a rock into my pond.
--Kickboxer 2

Verbal altercations on the playground often find kids running to their teachers or parents with the complaint that "s(he) called me a name!"

There are two ways to approach this situation. One is to sanction the name caller and perhaps even the name caller's parents.

Another is to strengthen the minds of children so that they are immune to name calling. Because not taking it personally is associated with maturity, name calling episodes are an opportunity to help children advance their emotional stability.

We know, of course, that society has leaned toward the first approach, given the hypersensitive nature of many who are offended by and seek to sanction all who say things deemed by the recipient as unpleasant.

Many adults have not yet graduated from the playground.

Friday, October 27, 2017

Dot Com Deja Vu

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

The name of the day is Amazon (AMZN), up more than $100/share on what is perceived as positive Q3 earnings report. AMZN's share price now clocks in at about $1100.

Dot com deja vu.

no positions

Thursday, October 26, 2017

Reluctance to Prosecute

"Listen, I'm a politician, which means I'm a cheat and a liar. And when I'm not kissing babies, I'm stealing their lollipops. But it also means I keep my options open."
--Jeffrey Pelt (The Hunt for Red October)

We see this scenario repeat itself in Washington. Evidence mounts that a political figure has broken the law. Officials from the opposing political party bang the drums for an investigation. Then, after a period of hand wringing...nothing. Despite evidence suggesting formal scrutiny, no serious investigation is ever undertaken.

People scratch their heads. Shouldn't politicians be all over opportunities to vanquish their opponents who have appears to have engaged in illegal behavior?

In a word, no.

The straightforward explanation is that most politicians are dirty. They fear that if they undertake legal proceedings against someone on the other side, then the other side is likely to retaliate against them in tit for tat fashion.

A strategy that appears to be deemed 'safer' is to leak leak information about the opponent to the people via the press and hope that voters subsequently damn the behavior as criminal at the ballot box.

This helps explain why politicians are generally quick to grandstand against the opposition but reluctant to legally prosecute them.

Wednesday, October 25, 2017

Looking Away

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

If the mainstream media were anywhere close to 'fair and balanced,' then the story that should be making front page headlines is the report that the Clinton campaign in conjunction with the DNC funded the research that produced the infamous dossier that dubiously linked Trump to Russian-sponsored collusion in the presidential election.

Dot connectors now have more data to work with. Clinton and the DNC paid 'deep' sources in UK spy apparatus and in Russia, to dig up dirt on Trump. After the election, the FBI, via James Comey and possibly others, was instrumental in subsequently leaking the dossier to the media.

Reporters at Politico and the NYT are now claiming that Clinton/DNC officials lied about the sources of this funding for over a year.

This story continues to merge with the thread involving Clinton's possible involvement with Russia over US nuclear assets. The central story line here is that in 2010 Russia was able to obtain purchase U.S. uranium operations, with the approval of Hillary Clinton's State Department, in exchange for donations to the Clinton Foundation and possibly a $500,000 speaking engagement in Moscow by Bill Clinton.

This deliciousness of the irony not only places the Clinton front and center in 'Russian collusion,' but it also implicates the FBI's role in facilitating it.

As discussed in the WSJ, the FBI had uncovered bribery and kickback schemes associated with Russia/US nuclear business, but did not disclose this criminal activity to agencies vetting the 2010 uranium transfer until years later. The head of the FBI during that time? Robert Mueller, now the special investigator of the Trump collusion case.

One doesn't need a PhD to conclude that Mueller has the motivation and means to deflect investigation away from himself and his agency while pleasing a large portion of the political spectrum.

Yet, headlines continue to look away from the role of the Clintons and the FBI apparatus in sponsoring 'Russian collusion.'

Tuesday, October 24, 2017

Outside Day

Out in the distance
I could hear some people laughing
I felt my heart beat back
A weekend's worth of sadness
--Til Tuesday

In the old days, when technical patterns seemed to matter, an outside day to the downside in the major indexes like we had yesterday would be viewed with some significance An outside down day occurs when the range of a day that closes on the lows exceeds the previous day's range that closed on its highs.

Outside days are often deemed particularly significant when they occur in breakouts after extended rallies similar to what we've recently experienced. In such cases, they are sometimes referred to as 'island reversals.'

The interpretation is that optimism is out of gas, as a desperate push higher has failed, leaving traders who went long in the last couple of days upside down and prone to question their motives.

Whether any of this 'comes true' this time is anyone's guess.

no positions

Monday, October 23, 2017

Capture the Flag

I used to think maybe you loved me
Now baby I'm sure
And I just can't wait for the day
That you knock on my door
--Katrina & The Waves

Pulling back the time horizon on PAAS indicates that the stock is completing a 'flag' or 'pennant' pattern. The technical, almost obvious, implication of this pattern is that it is likely to resolve one way or the other.

The rule of thumb is that direction of resolution favors the current trend, which for the past year and a half, has been up.

position in PAAS

Sunday, October 22, 2017

In Control

Trust in the Lord with all your heart
And lean not on your understanding
Acknowledge Him in all your ways
And He will direct your paths
--Proverbs 3:5-6

In times of strife and chaos, it is easy to conclude that God has left us, that he is no longer in control of the situation.

This is mistaken.

God is always and everywhere with us. He is always in control.

Because He is always in control, it follows that, even in the worst of times, we are precisely where God wants us to be at that moment.

That is both comforting and mind-numbing at the same time.

Saturday, October 21, 2017

For the Children?

Richard Vernon: Now this is the thought that wakes me up in the middle of the night. That, when I get older, these kids are going to take care of me.
Carl the Janitor: I wouldn't count on it.
--The Breakfast Club

Government spending is often justified 'for the sake of the children.' If you buy this, then you have been emotionally captured. Spending today is largely debt-financed. Government debt burdens future generations.

Stated differently, we are increasingly consuming what amounts to our children's future production. And, as the chart below suggests, the burden that we are saddling onto our children is increasingly back-breaking.

Imagine showing children this graph and explaining it in terms of "we are doing this for you."

This is generational theft at its worst.

Friday, October 20, 2017

Monetizing Debt

All my instincts
They return
The grand facade
So soon will burn
--Peter Gabriel

Comparison of the extent to which various central banks are buying their country's sovereign bonds (a.k.a. 'monetizing debt' thru their quantitative easing (QE) programs. At its peak, Fed bond buying never exceeded net issuance.

Other central banks have been much more profligate. BOJ has been buying bonds at the rate of 3x net issuance.

ECB has been going at it at the rate of 7x net issuance.

The Fed looks like a tightwad in this era of CB profligacy.

Thursday, October 19, 2017

Presidential Healthcare Subsidies

We thought just for an instant
We could see the future
We thought for once we knew
What really was important
--Til Tuesday

Another important part of President Trump's healthcare-related executive orders signed last week is that they direct the treasury and health and human services secretaries to cease making payments to heath insurance companies that subsidize policies for people that qualify for subsidies under Obamacare.

Judge Nap explains why those payments were unconstitutional.

Under the Constitution, it is Congress's responsibility to direct federal funds for expenditure. The congressional process requires two steps. First, Congress must create the program using its legislative process. Then, it must pass a second bill that appropriates money from the federal treasury and makes it available to the president for the purpose stated in the first law.

Although the Affordable Care Act become law in 2010, its provisions required several years to roll out. By the time the subsidy provisions of Obamacare took effect, Republicans had regained control of Congress. When President Obama asked Congress to appropriate the funds necessary to subsidize the system, Congress declined to do so.

This is completely within Congress's legal scope. The framers anticipated the very situation confronting Obama and Congress: an increasingly unpopular law no longer supported by Congress that costs money to enforce, with a president eager to enforce it. In such a situation, the framers clearly put the power of the purse in the hands of Congress. "No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law."

When Obama was denied the means to enforce the subsidy portion of his signature legislation, he spent the money anyway. He directed his treasury and HHS secretaries to take fund appropriated for other programs and make subsidy payments to the seven largest health insurance carriers in the United States.

This was illegal.

Trump, after making the same unlawful payments for the first nine months of his presidency, decided to cease the practice last week. Although he should have done so his first day in office, Trump did the constitutionally correct thing.

Wednesday, October 18, 2017

Revenue Neutral

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

If a requirement of a tax cut plan is that it must be 'revenue neutral' to the federal government, then it is not a tax cut plan at all. Rather, it is a tax shifting plan. Some people may realize lower taxes, but only at the expense of others who must pay more to the federal government to make up for lost tax revenue.

Revenue neutral tax plans always find special interest groups maneuvering to be among those who don't get the shaft, er, shift.

Tuesday, October 17, 2017

Cash on Hand

I went to my brother
To see what he could do
He said, brother like to help you
But I'm unable to
--Simply Red

One personal finance decision is how much physical cash to keep on hand--i.e., under the pillow, in a coffee can in the backyard, between pages on the bookshelf--for 'just in case' situations. If one focuses on the central bank money printing situation, then the answer is not much. As we move closer to Big Inflation, then the value of paper dollars kept at the house goes to dust quickly.

However, the recent hurricanes offer a reason why it still makes sense to keep some cash around. Power could go off, thereby reducing electronic access to money. Those with cash in hand can make vital purchases that others cannot.

Bank runs, like those in Greece and Cyprus, are another reason. Cash withdrawals could be limited, once again granting only those with physical cash on hand with financial flexibility.

Bottom line: Despite the inflationary environment that destroys the purchasing power of currency, keeping some cash on the premises seems prudent to manage risk associated with extreme events.

Monday, October 16, 2017

Obamacare's Ugly Truth

You're begging me to go
Then making me stay
Why do you hurt me so bad?
--Pat Benatar

Jeff Tucker observes that last week's executive order that allows choice in seeking healthcare coverage defeats the core feature of Obamacare: coercion. The ACA forces risk pools to exist that free people would otherwise never had chosen.

Tucker cites a litany of mainstream media critics who believe that that Trump's executive order is some sort of despotic act. But clearly the opposite is true. The order removes one source of coercion from the system.

Per Tucker, "Once you break this all down, the ugly truth about Obamacare is laid bare: Obamacare didn't create a market. It destroyed a market. Even the slightest bit of freedom wrecks the whole point."

Obamacare is about force, not freedom. It forcibly redistributes wealth from the healthy to the sick. Through its forcible creation of non-market risk pools, Obamacare counters the entire logic of insurance, which is "supposed to calibrate premiums, risks, and payouts toward mutual profitability."

By introducing a modicum of freedom into the system, last week's executive order exposes Obamacare as the true despotic act.

Sunday, October 15, 2017


It's not in the way that you hold me
It's not in the way you say you care

Gold recaptured the flag last week as it moved back above 1300. In addition to being a psychologically important round number, 1300 is an important technical level currently as depicted below.

Let's see if the comeback holds.

position in gold

Saturday, October 14, 2017

Marginal Credit

Will Emerson: These here are the historical volatility limits which, of course, our trading model relies on pretty fucking heavily. Well, we're now so levered up that once it gets outside of these limits, it gets ugly in a hurry.
Sam Rogers: And how close to these limits have we gotten?
Will Emerson: Sam, we're beyond close. We broke through these limits five or six days in the last two weeks.
--Margin Call

Not sure what the corporate universe was for the analysis, but picture reflects the decline in corporate credit quality over the past decade.

Very few AAA companies left--probably even fewer than indicated as credit rating agency scales have relaxed.

Couple that with a burgeoning stable of junk and, once again, the stage is set for credit events.

Friday, October 13, 2017

Bait and Nominate

We can do the innuendo
We can dance and sing
When it's all said and done
We haven't told you a thing
We all know that crap is king
Give us dirty laundry
--Don Henley

Donald Trump's outrageous claims on Twitter and elsewhere constantly keep his adversaries in motion. Many absorb themselves in the president's rhetoric and spend much of their days crafting clever replies and put downs. They rationalize that Trump is unstable and maybe even downright crazy.

Crazy like a fox, maybe? What if Trump's social media remarks are meant, in many cases, to distract? Perhaps many of his off-the-wall comments are designed to bait enemies into looking one way while he acts elsewhere.

Case in point offered here in the WSJ editorial. The author argues that, while the media remains caught up in Trump's tweets, his administration is restocking the federal courts with dozens of constitutional textualists that bear little resemblance to their predecessors. Trump has nominated more that 60 judges and has already filled more vacancies than Barack Obama did in his first year.

The author suggests that, while Trump keeps "baiting the media with shiny objects," he is remaking the judiciary with an extraordinary class of nominees that appear to be, as the editorial title reads, "Scalias All the Way Down."

Thursday, October 12, 2017

Associated Health Plans

The mist across the windows hides the lines
But nothing hides the colors of the lights that shine
Electricity so fine
Look and dry your eyes
--Joe Jackson

Earlier today, President Trump signed an executive order that permits people to purchase health insurance across state lines. The blueprint for this order came from Rand Paul, who posits that this will allow small buyers to band together and form 'association health plans.' The prospective bargaining power of these AHPs promises to push down premiums for many Americans.

Paul discusses the executive order here.

The increased competition and buyer bargaining power facilitated by the order makes it potentially one of the best health care market 'reforms' in many years.

And the beauty of it, as RP has noted, is that this plan "costs zero dollars" and sidesteps the dysfunction on Capitol Hill. Instead, it frees the market to do what it does best via its 'invisible hand.'

Wednesday, October 11, 2017

What Hyperinflation Looks Like

Better get yourself together
And hold on to what you've got
Once the music hits your system
There's no way you're gonna stop
--Miami Sound Machiine

Venezuela provides an example of what hyperinflation looks like. Prices rising at double, triple, and even quadruple digits rates.

Hyperbolic currency exchange rates.

Empty grocery store shelves and associated consequences.

Good thing the Venezuelan situation could never happen.here.

Tuesday, October 10, 2017

How Would Criminals Vote?

"The liquor business is gonna grow big and it's gonna grow fast. So get in line, buster."
--Panama Smith (The Roaring Twenties)

Following up on yesterday's post. If prohibition comes up for vote, what would be the preference of criminals and wannabes?

The answer is obvious. Prohibition is good for business, particularly the violent kind.

Monday, October 9, 2017


"They pull a knife; you pull a gun. He sends one of yours to the hospital; you send one of his to the morgue."
--Jim Malone (The Untouchables)

Prohibitionists never seem to learn. Seeking to restrict voluntary trade between buyers and sellers inevitably fails. People who want to trade will trade. Black markets inevitably arise to satisfy latent demand. And because prohibited trade is by definition criminal, black markets tend to attract...criminals.

Crime becomes more organized over time and frequency of criminal activity increases. Law enforcement in turn develops harsher measures to deal with illegal activity. Criminals respond in kind. And violence escalates.

The irony, of course, is that prohibitionists generally seek to reduce violence rather than to increase it. But they are the ones initiating violence against people who wish to peacefully trade.

Sunday, October 8, 2017

Global Market Cap

She's so high
Like Cleopatra, Joan of Arc
Or Aphrodite
--Tal Bachman

Global stock market cap is quickly approaching $90 trillion. World GDP currently resides at about $75 trillion.

What does this variant of the 'Buffett ratio' suggest about global stock market valuation and risk?

Saturday, October 7, 2017

Enabling Snipers

"How do you like it when someone's shooting back at you?"
--Rafe McCawley (Pearl Harbor)

It has been said that gun-free zones are essentially hunting preserves for mass shooters and other criminals. Gun-free zones attract law breakers because perpetrators can accost law-abiding citizens who have no capacity for shooting back.

Stated differently, because gun-free zones offer grounds for aggression without meaningful pushback, they are magnets for bad guys.

Last weekend's mass shooting in Las Vegas demonstrates that gun free zones can also provide long range assailants with safe havens from which to shoot. The Mandalay Bay resort is a gun-free zone--so much so that not even hotel security guards are often not permitted to carry. High rise buildings that prohibit possession of firearms can be seen by criminals as inviting sniper stands from which shooters can rain death on people below without challenge for a significant period of time.

The current official story line in the Vegas incident indicates that the shooter enjoyed at least 10 minutes of private shooting time from his perch before being interrupted by authorities.

Had Mandalay Bay guests been permitted to carry, then perhaps some would have taken initiative to home in on the shooter's room and, at the very least, distracted the perpetrator sooner, thereby reducing the carnage outside.

Lesson for me: be aware not only of gun free zones that you enter, but also of gun free zones within your range--particularly if they occupy high ground.

Friday, October 6, 2017

Losing Luster?

"I'm going after that gold, Joe."
--Kelly (Kelly's Heroes)

Bloomberg reports US Mint gold coin sales at lowest levels since 2007. That previous low, of course, marked a launching point for gold. Over the next few years, bullion prices tripled and Mint ounces sold went thru the roof.

The article suggests that investors are dissing gold in favor of stocks. With stock prices marking all time highs and gold well below its highs, well, the relative value play seems obvious.

Particularly in this environment...

position in gold

Thursday, October 5, 2017

Shrinking Spreads

Out along the edges
Always where I burn to be
The further on the edge
The hotter the intensity
--Kenny Loggins

Corporate bond spreads have narrowed back to 2007 levels.

At the same time, corporate leverage continues to climb. This is painfully obvious when combing thru corporate balance sheets--debt has risen significantly for nearly all large corporations.

The culprits. Stretching for yield under conditions of financial repression. Borrowing 'cheap' to buy back stock. And don't forget to add a dollop of moral hazard.

Wednesday, October 4, 2017

Protecting Liberty

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

It is the natural right of all human beings to pursue their interests--as long as they do not forcibly interfere with the pursuits of others. This is the essence of liberty.

Because some will be tempted to live off the backs of others thru use of forcible interference, it is also the natural right of individuals to protect their liberty from such invasion.

As such, individuals must acquire capabilities for defending their interests. Home security systems, self-defense skills, and weaponry exemplify such capabilities for defending against direct assault. People might also combine their capabilities with those of others to build strength in numbers. For instance, walking down a poorly lit street with someone else rather than by oneself reduces threat of invasion and increases self-defense capacity.

However, many perpetrators may not seek to invade a person's liberties directly. Instead, they may find it more efficient to hire a strong armed agent to do their bidding. Because government tends to be an attractive agent-for-hire in this regard, individuals must also invest in capabilities for keeping an eye on this potential threat, and acting in manners that curtail government invasion of liberty.

An implication is that, as distasteful as it is for many, individuals must invest some of their attention in the political sphere. They need to become knowledgeable about political systems, monitor political trends, and be ready to act when their liberty is threatened by politically motivated principles and their strong-armed agents.

If people do not develop political awareness, then their interests are more likely to be compromised over time.

Tuesday, October 3, 2017

Drawdown Dream

I felt so good
Like anything was possible
I hit cruise control
And rubbed my eyes
--Tom Petty

The below graph shows the maximum percentage drawdown in the SPX since 1914. The average appears to be about 10%.

So far in 2017, we've experienced the smallest max drawdown on record.

Low volatility emboldens the bulls...

no positions

Monday, October 2, 2017

Bravo Votto

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

Special shout out to Reds first baseman Joey Votto on the completion of a spectacular season--particularly considering the team's dismal endpoint.

Of all the eye popping achievements Votto booked this year, starting all 162 games--the first Red to do so since Pete Rose in 1975--stands out most. A couple years ago, knee issues caused Votto to miss parts of two seasons, casting doubt about his durability.

No doubts now about the smartest and hardest working player in the game today.

Sunday, October 1, 2017

Coping With Anthem Protests

Col Robert Gould Shaw: It stinks, I suppose.
Trip: Yeah, it stinks bad. And we all covered up in it too. Ain't nobody clean. Be nice to get clean, though.
Col Robert Gould Shaw: How do we do that?
Trip: We ante up and kick in, sir. But I still don't want to carry your flag.

Favorability ratings are declining for the NFL in response to player protests during the national anthem. How can owners stem the tide? Similar to the NBA, the league could create a rule that requires players to stand for the national anthem. Such a work rule is fully within the owner's rights. Those who argue that the First Amendment generally protects workplace speech need a Civics 101 refresher.

Owners could also cease playing the national anthem before games. Playing the Star-Spangled banner before sporting events is a relatively recent institution. As recounted by Tara Ross, baseball appears to be the first professional sport where the national anthem was played before (or during) games, but it did not become a routine occurrence until WWII.

Because national anthems can be viewed as political statements, they invite push back from those with different political preferences. Why create such a forum for trouble?

While some people would immediately be upset with the removal of the national anthem before games, the long run effect would be to depoliticize an environment that nearly all consumers of sports, in truth, would like to see depoliticized.