Thursday, November 30, 2017

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.

Wednesday, November 29, 2017

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.

Tuesday, November 28, 2017

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.

Monday, November 27, 2017

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...

Sunday, November 26, 2017

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?

Saturday, November 25, 2017

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.

Friday, November 24, 2017

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.

Thursday, November 23, 2017

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.

Wednesday, November 22, 2017

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.

Tuesday, November 21, 2017

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.

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.

Monday, November 20, 2017

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

Sunday, November 19, 2017

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 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 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.

Saturday, November 18, 2017

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

Friday, November 17, 2017

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

Thursday, November 16, 2017

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.

Wednesday, November 15, 2017

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.

Tuesday, November 14, 2017

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.

Monday, November 13, 2017

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.

Sunday, November 12, 2017

Uncompetitive Advantage

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

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.

Saturday, November 11, 2017

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.

Friday, November 10, 2017

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.

Thursday, November 9, 2017

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.

Wednesday, November 8, 2017

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.

Tuesday, November 7, 2017

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.

Monday, November 6, 2017

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.

Sunday, November 5, 2017

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?

Saturday, November 4, 2017

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 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 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

Friday, November 3, 2017

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.

Thursday, November 2, 2017

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

Wednesday, November 1, 2017

Deep State Retaliation

"People should not be afraid of their governments. Governments should be afraid of their people."
--V (V for Vendetta)

David Stockman suggests that the recent indictment of a young Trump campaign foreign policy official by special prosecutor Robert Mueller is part of a retaliatory effort by the Deep State. Deep State bureaucrats resent Trump's efforts to pursue foreign policy without them.

It is becoming obvious to all how the Deep State seeks to use legal machinery to get Trump. Dig up any dirt that you can find on low-level personnel and then, using the plea bargaining mechanism, which is akin to blackmail, make your way as far up the chain of command as possible toward the ultimate target.

One of the many grand follies of this entire charade, as Stockman notes, is that it pretends that interference in elections is frowned upon in Washington. This is the height of hypocrisy because "meddling in the political life, elections and governance of virtually every nation on planet earth--enemy, foe, rival, neutral, and friend, alike--is what Imperial Washington does."

Here's hoping that the Deep State's blatant attempt to sanction those who seek to defy its institution continues to open eyes.