Sunday, December 31, 2017

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.

Saturday, December 30, 2017

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.

Friday, December 29, 2017

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.

Thursday, December 28, 2017

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.

Wednesday, December 27, 2017

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.

Tuesday, December 26, 2017

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.

Monday, December 25, 2017


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.

Sunday, December 24, 2017

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.

Saturday, December 23, 2017

Optimism and Market Peaks

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

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 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

Friday, December 22, 2017

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.

Thursday, December 21, 2017

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

Wednesday, December 20, 2017

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.

Tuesday, December 19, 2017

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.'
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.

Monday, December 18, 2017

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

Sunday, December 17, 2017

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.

Saturday, December 16, 2017

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.

Friday, December 15, 2017

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...

Thursday, December 14, 2017

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.

Wednesday, December 13, 2017

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.

Tuesday, December 12, 2017

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

Monday, December 11, 2017

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.
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:

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.

Sunday, December 10, 2017

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?

Saturday, December 9, 2017

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.

Friday, December 8, 2017

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

Thursday, December 7, 2017


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

Make that 19,000...


"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

Wednesday, December 6, 2017

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.
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

Tuesday, December 5, 2017

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

Monday, December 4, 2017

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.

Sunday, December 3, 2017

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

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

Saturday, December 2, 2017

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

Friday, December 1, 2017


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

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.