No Market Rhythm

At night when you turn off all the lights
There's no place that you can hide
--Miami Sound Machine

Among several interesting remarks made by Stan Druckenmiller in this interview snippet was this one concerning algos and price distortions:

"These algos have taken all the rhythm out of the market, and have become extremely confusing to me."



The commentator subsequently observes that the machines, which now manage a very large fraction of dollars currently in US stock markets, have been buying the uptrend for years. We really haven't seen them sell to any large degree...yet. He asks Druck how he is protecting himself against the downside when the indicators that help him tune into market rhythm are not working.

Druck replied that while he will trust his skills and instincts, "I will say, and I have proved it to my own detriment the last few years, the minute the risk/reward gets a little dodgy, I get a little more cautious than I would be without this [algos] in the background."

Add to this Fleck's comments in his Friday Rap:

"Based on conversations with friends of mine who have been successful at the investing business for 30-plus years, every one of them is frustrated and feels like they don't know anything anymore. In fact, I made a comment to one recently where I said, 'I feel like I knew more when I started out in the investment business in 1980, when I literally knew nothing, than I do about the market today, because it makes so little sense.'"

Massive distortions by central banks coupled with automated trading have destroyed sense-making, intuition, rhythm. It may take a crash before market rhythm returns.

Lynch Mobs

"Are we going to hang him, or beat him to death?"
--Jenkins (Hang 'Em High) 

A vivid symbol of discretionary rule is the lynch mob. A group of people seek to attack someone without a trial because the group believes that the person has committed a crime.

The target is tried in a court of public opinion rather than in a court of law. This is done because the groups senses a traditional legal process would either a) take too long, or b) result in a 'not guilty' verdict.

In the lynch mob process, the 'trial' is usually loud and emotional. The verdict, if the mob has its way, is always 'guilty' and the punishment is administered swiftly. In the aftermath, the lynch mob justifies its action in the name of 'righteousness.'

As recent events demonstrate, modern day lynch mobs continue to run roughshod over the rule of law.

Psychosis, Delusion, and Social Networks

In my head the voice is waiting
Waiting for me to set it free
--Russ Ballard

Psychosis is a mental condition where a person has difficulty determining what is real and what is not. A common symptom of psychosis is delusion. A delusion is a false belief--i.e., a belief that is held with strong conviction despite the presence of superior evidence to the contrary.

Events over the past few weeks have me wondering about the capability of social networks for amplifying psychotic tendencies in people who are prone to delusion. Immersion in social networks can lead to 'echo chamber' effects, where ideas and beliefs are reinforced through circulation and repetition without serious consideration of competing ideas or disconfirming evidence.

Such unchallenged reinforcement serves to fortify delusion. Consequently, individuals who are susceptible to psychosis emerge from social networking experiences more convinced than ever that their dream world is in fact reality.

Breaking Bad

The less we say about it the better
Make it up as we go along
Feet on the ground, head in the sky
It's ok, I know nothing's wrong
--Talking Heads

Yesterday the FOMC announced that it would raise its fed funds rate target another 25 basis points to 2.25%. It is the eighth increase since late 2015. The last time the fed funds rate was increased to 2.25% was January of 2005 on the way to a peak of 5.25% before the Fed began furiously cutting rates in response to the last credit crisis.

The Fed is behind the curve as always. Real rates remain at historic lows that historically correspond to deep recessions. This despite nearly all data suggesting economic strength and rising wages. Meanwhile, balance sheet assets accumulated during the various QE bond buying sprees have barely declined.

A couple of days back a frequent contributor on Fleck's Q&A observed that "rising rates eventually break credit bubbles."

Stated differently, central banks eventually break the bubbles that they themselves blow.

Disclosure for Journalists

"I can think of three reasons why you wouldn't want to do that, judge."
--Billy Ray Valentine (Trading Places)

In the financial services sector it is common practice to have pundits, analysts, et al disclose any positions they have in the securities they discuss. By doing so, consumers of financial information are made more aware of potential biases in the people generating such information. Those biases might slant the information to be consumed in some way.

Why aren't similar practices adopted by the media--particularly those reporting on political issues? Isn't it reasonable to have journalists disclose their political affiliations and contributions so that readers are more aware of potential for bias and slant in the information that they consume?

Perhaps, but I can think of at least three reasons why such disclosure is unlikely. One is that it would quickly reveal just how tilted the entire profession is to the left. Although this tilt has been recognized by many for some time, there are still those who want to believe that their sources of information are objective. Overt political disclosure by those generating the information would destroy this fantasy.

Another is that customers are likely to be lost if journalists subsequently attempt to compensate for their biases by actually producing more balanced content. A large market for bias exists, and followers will defect if their preference for bias is not satisfied.

A third reason is that journalists might realize, per core tenets of signaling theory, that the only time that consumers of information will view their information as credible is when they report a) negatively about friendly political entities (as suggested by their political disclosure) or b) positively about political opponents.

That thought is most unpalatable to an interested media.

Natural vs Planned Diversity

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

Diversity is variety. It is axiomatic in nature. A principle of natural diversity is that it flows freely. It is not created by force.

Another principle of diversity is heterogeneity of distribution. Variety is not spread evenly. It ebbs and flows in states of concentration and dilution. It can be patterned and territorial. In fact, as the area examined gets more localized, we should expect to find less diversity as a general rule.

Natural diversity is also dynamic, meaning that variety occupying a particular location is likely to change as things evolve and progress. Today's mixture is not necessarily tomorrow's. 

Those who seek to impose a preconceived pattern or blend onto an area violate these principles. Planned diversity is not diversity at all.

Means to an End

President Art Hockstader: Oh, there have been moments where I've questioned your methods.
Joe Cantwell: Well, you got to fight fire with fire, Mr President.
President Art Hockstader: And the end justifies the means, huh?
Joe Cantwell: Yes, I believe that.
President Art Hockstader: Well, son, I got news for you about both politics and life--and may I say that the two are exactly the same? There are no ends, Joe, only means.
--The Best Man

The circus that the left has made of Supreme Court nominee Brett Kavanaugh's confirmation hearings is not about the nominee himself. Although leftists make it appear that they don't like him, it is not personal. It is business.

As Prof Williams observes, this charade is about the Constitution. The left despises the Constitution. If confirmed, Kavanaugh threatens to tilt the balance of the high court in favor of more constitutionally grounded rulings.

This is unacceptable to the left, and they will do whatever it takes to prevent this from occurring. Oddly, though, even if leftists believe they must try to take down the person to achieve their goal, it is not about the person. Other nominees would be subject to similar smear tactics.

Instead, the left sees it as merely a means to an end.

Words vs Works

Why don't they
Do what they say
Say what they mean
One thing leads to another
--The Fixx

In last Sunday's second reading, James reminds us that claims of faith are worth little if we do not back them up with action.

"What good is it, my brothers and sisters, if you say you have faith but do not have works?...If a brother or sister is naked and lacks daily food, and one of you says to them, 'Go in peace; keep warm and eat your fill,' and yet you do not supply their bodily needs, what is the good of that?"

James is telling us that actions speak louder than words. Or, in his words:

"Faith by itself, if it has no works, is dead."

Kangaroo Court

"Son, this is a Washington DC kind of lie. It's when the other person knows you're lying, and also know you KNOW he knows. You follow?"
--Robert Leffingwell (Advise and Consent)

Over the past few years, colleges nationwide have established internal review processes for sexual misconduct and assault cases that essentially forego principles of jurisprudence in favor of expedience and political correctness. Several high-profile cases conducted in this manner have resulted in rulings against defendants based on accusations that were subsequently shown to be false.

Currently, progressives want to transfer a similar process to congressional proceedings. As stated here:

"What we're seeing is the importation of the famous kangaroo-court apparatus for adjudicating sexual-harassment and assault cases from college campuses--which often denies the accused basic protections of due process--to the U.S. Senate."

Some hope that our senators can keep the kangaroos from entering the building. However, it seems that kangaroos already occupy seats on the Senate floor.

Rates of Change

Look in the mirror
And you see that you've been taken
You won't surrender
But now your heart is breakin'
--John Waite

As attention centers on major U.S. equity indexes once again marking all time highs, Ten Year yields have quickly but quietly moved to the top of the multi-month channel. Currently they rest near the May highs of about 3.1%.

Do bonds smell a pick up in price inflation? Plenty of factors point in that direction (e.g., rising wages, tariffs/trade wars, $trillions on financial stimulus slowly leaking into consumer markets).

Whatever the reason, we can be confident that the higher rates go, the greater the headwinds for our leveraged economy and financial markets.

no positions

Stalling in Desperation

Dr Charles Nichols: You're getting pretty desperate, aren't you Mr Girard?
Samuel Gerard: Oh yeah.
--The Fugitive

Statists are in trouble on multiple fronts ranging from probes into FBI/DOJ misconduct to a Supreme Court nominee who could tilt the high court's balance away from statist preferences. Their hope is that the midterm election will save their playhouse from destruction.

As such, progressives, neocons, and deep state bureaucrats--along with a complicit media--are banding together in a thinly veiled stall tactic to slow down several threatening projects. The idea is to delay progress until the November elections when, they hope, Republicans lose control of at least the House which, it is presumed, would subsequently cause threats against the State to disappear.

This is what desperation looks like.

Accusations Are Not Evidence

Tell you straight
No intervention
To your face
No deception
--Eurythmics

There seems to be a growing belief that accusations are evidence and that burden of proof lies with the accused. Only a weak mind, or one that permits lying to itself, would admit that as true.

Securities Industry Tax Payments

Here comes the rain again
Raining on my head like a tragedy
Tearing me apart like a new emotion
--Eurythmics

Interesting series by Jason Goepfert showing historical tax payments by NYC securities firms.

Soaring tax payments from the securities industry in New York City, superimposed against the S&P 500.

Best-case: it's a jump to a new tier like 1999 or 2006
Worst-case: it's a blowoff like 2001, 2007-08, 2015 pic.twitter.com/j3a57ZK0fD

— SentimenTrader (@sentimentrader) September 17, 2018

Previous highs in tax payments have corresponded to market tops.

no positions

Channeling Banks

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

After these pages noted that they had been trading conspicuously heavy, the banks proceeded to rally off support right on cue. However, after a two month lift took the bank index to the top of the multi-month trading range, it appears that the rally has fizzled. 

The index has now retraced about half of its gain in the course of a couple weeks. If it cannot hold this middle ground, then the bank index appears destined to retest the early July lows.

Seems like an 'old school' thought anymore, but it is difficult to see how the tape continues to lift without participation by the banking sector.

no positions

Preemptive Bubble Blowing

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

Central planning hubris at its finest as former Fed chair Janet Yellen says that the Fed should inflate asset prices even more to make up for major busts. And she recommends that the central bank should signal that it will do so.

Naturally, the article does mention any potential downsides to a policy of preemptive bubble blowing, including ongoing economic distortions, massive inflation, and moral hazard.

Anonymous Sources

I staggered back to the underground
And the breeze blew back my hair
I remember throwin' punches around
And preachin' from my chair
--The Who

Perhaps Time's 2018 Person of the Year should be the anonymous source. Without anonymous sources, the mainstream media would have few other sources to cite, and claims of many political operatives would go from being weakly substantiated to completely unsubstantiated.

The greater the ____, the greater the use of anonymous sources.

Some fill-in-the-blank possibilities: political interest, desperation to smear, propensity to lie.

In-Kind Media Contributions

"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. Now, Joe, I think you'd better go back into the Senate and keep those senators lined up."
--James Taylor (Mr Smith Goes to Washington)

Many people on the left wring their hands over contributions to political campaigns made by corporations. They seem less concerned about those contributions when they are made by corporations sympathetic to leftist candidates--particularly when those contributions are of the nefarious, in-kind sort.

Corporate entities like the New York Times and Washington Post, for instance, routinely endorse candidates and slant their content toward leftist issues. Why aren't these actions considered in-kind contributions and subject to campaign finance restrictions?

Or take a company like Google that operates an internet services business with characteristics of a public utility. Google's management, which is clearly biased left (as demonstrated by top management behavior following the 2016 election), could easily tilt its search machinery in favor of stakeholder political interests. In fact, accusations are growing that Google, Twitter, and Facebook routinely slant their operations toward leftist interests.

Due to their potential influence and reach, such in-kind contributions made by media outlets could easily be worth far more than most checks written to political campaigns.

If fairness and equity political process is truly a concern, then isn't there a movement to regulate in-kind campaign contributions by media?

Gun Bans and Disparity of Force

Daniel LaRusso: You really think I can beat that guy?
Miyagi: No matter. Wacko teacher attitude rest in fist. Stupid, but fact of life. Win, lose, no matter. You make good fight...earn respect. Then nobody bother.
--The Karate Kid

When they are challenged, gun grabbers sometimes dial back their claims from "banning guns would eliminate shooting-related crime" to "banning guns would reduce the likelihood of crime." At first glance, the latter claim seems more reasoned and valid. But upon further scrutiny, is it really?

Suppose we have two people, A and B. Both of them carry guns. However, their motivations for carrying guns differ. A carries a gun to facilitate acts of aggression on others (e.g, theft, murder, etc.). B carries a gun to protect his interests from unwanted, violent intrusion by others.

As an aggressor or potential aggressor, A has a general preference for picking targets that allow him to exploit disparity of force. Disparity of force means that, in a violent altercation involving two of more parties, one party possesses capacity for bringing significantly more force to bear on the situation than the other(s). Greater force implies higher likelihood of victory in the altercation.

Like many criminals, A realizes that a gun gives him great disparity of force--assuming, of course, that his target does not carry a firearm as well. Therefore, A will tend to steer clear of people like B, preferring instead to prey on unarmed victims.

B's gun serves as a deterrent to crime. It decreases, rather than increases, the likelihood of crime--at least that of A on B.

Now, consider the situation where guns are banned by law. B, being a law-abiding citizen, surrenders his weapon to authorities. On the other hand, A, having little regard for the law, keeps his.

It doesn't take A long to realize that disparity of force has tilted more in his favor. Many people who were previously carrying weapons are now walking the streets unarmed. This emboldens B to commit more crime.

Moreover, this situation likely incentivizes more people to pursue criminal careers as it appears that likelihood of successful criminal acts has gone up. Black markets for guns will also surely intensify, along with their criminal potential.

Rather than decreasing the likelihood of crime, banning guns is likely to increase crime.

Indeed, this is precisely what empirical evidence suggests (e.g., here, here).

Confidence Means Caution

Things are going great
And they're only getting better
--Timbuk 3

These pages have recently observed the weak relationship between high consumer confidence and future economic growth. Instead, confidence appears to be a coincident or perhaps even lagging indicator. Stated differently, consumer confidence is more reflective of present or past economic growth rather than serving as a harbinger of future strength.

That linkage is shown pretty clearly in this article. Consumer confidence is at historical highs. In the past, such highs suggest that economic expansion is late in the cycle and that recessionary periods are approaching.

Sanity check. The annualized return in the Russell 2000 when small business optimism is above 107 has been -3.5%. pic.twitter.com/rsZt4Dn94k

— SentimenTrader (@sentimentrader) September 11, 2018

Jason Goepfert chimes in, noting the low historical returns in small cap stocks when small business optimism hits high marks like current levels.

Historically, then, high levels of confidence about the economy should not inspire euphoria...but caution.

Surprise and Preparedness

When my teeth bite down I can see the blood
Of a thousand men who have come and gone
Now we grieve 'cause now it's gone
Things were good when we were young
--Von Bondies

As I once again reflect on that day, the word that comes to mind this time is preparedness. Pearl Harbor, the 9/11 attack, last week's Fifth Third shooting. A common factor in nearly all massacres is the element of surprise. Perpetrators generally do not want to be expected. They prefer to take their victims by surprise.

I saw some tweets today claiming that threat of terrorism is all around us today. Others claim that we are far safer than 17 years ago today.

But neither claim is worth pondering much. Whether there is more or less risk now compared to then, there is risk. And if that risk is realized, then it is no longer a probability. It is a reality.

The best way to cope with that reality, whatever its chances, it to be prepared.

Stagflation Cometh?

Flying high above the sky
The battles down below look simplified
With no place to hide
--Karla DeVito

As people celebrate multi-year highs in many indicators of economic strength, guess what other measure is ringing the bell. The underlying inflation gauge is marking 13 year highs.

With labor demand and wages moving higher in a stagnant productivity world with trillion$ of stimulus in the system, it is only a matter of time before consumer prices take off.

The Fed will be behind the curve as usual (it already is). When they do take corrective action, they will need to raise rates--dramatically.

Higher rates, lower growth, higher prices...Can you say stagflation?

Defying Custom

"I put no stock in religion. By the word 'religion' I have seen the lunacy of fanatics of every denomination be called the will of God. Holiness is in right action and courage on behalf of those who cannot defend themselves, and goodness. What God desires is here [points to head], and here [points to heart], and what you decide to do every day...you will be a good man...or not."
--Hospitalier (Kingdom of Heaven)

In last Sunday's gospel reading (Mark 7:1-23), the Pharisees and scribes challenged Jesus about his disciples' habit of not washing their hands before eating. Washing hands and cooking utensils was a custom of the elders. Not cleaning one's hands before eating could be viewed as a sign of defiance.

Christ rebuked the Pharisees, calling them hypocrites. He quoted Isaiah:

This people honors me with their lips,
but their hearts are from from me;
in vain do they worship me,
teaching human precepts as doctrines.

He is telling us that any worldly custom or man-made rule that contradicts God's law is not worth following

He concludes by telling the crowd that it is not what comes into a person from the outside that makes a person unclean. Evil comes from within. And so does goodness.

Defying custom may make not make us worldly friends. But if those customs interfere with us following Him, then they are better left behind.

Four Minutes

Yeah there's a storm on the loose
Sirens in my head
Wrapped up in silence
All circuits are dead
--Golden Earring

The shooting at the Fifth Third building in downtown Cincinnati that left four dead (including the shooter) and two wounded share two characteristics common to rampage shooting events.

One is that it was perpetrated in a so called gun free zone. In fact, the Fifth Third building was so gun free that even the building's on site security guards carried no firearms. Gun free zones invite bad guys like the shooter who was, of course, was not gun free.

The other common characteristic is the time from first shot until police were on the scene. In this case it is estimated that it took about four minutes for CPD officers to arrive, engage the shooter, and put him down. While that might seem fast, response times measured in minutes for such shooting episodes are not unusual--particularly when they take place in urban areas dense with police.

Moreover, it is likely that those four minutes felt like an eternity to those who found themselves under fire and defenseless in the Fifth Third lobby. During that time, the shooter was able to get off 35 shots with a 9 mm handgun--meaning that he was able to reload once or perhaps twice using standard magazines. His gun then reportedly jammed which made him a bigger target for the four responding officers who nailed him with multiple rounds.

The problem facing all people in harm's way under similar circumstances is how to survive those four minutes. 

Coup Attempt

"I fear all we have done is awaken a sleeping giant, and fill him with a terrible resolve."
--Admiral Isoroku Yamamoto (Tora! Tora! Tora!)

Since Donald Trump's election, a coalition of statists from both left and right in tandem with a complicit media have been engaged in activities that can readily be seen as an attempt to undermine and overthrow a sitting US president. Regardless of whether this perception is accurate or not, I wonder if this coalition realizes that a growing group of US citizens sees what is going on as an attempted coup.

This is on my mind because it seems to me that the coalition is so desperate to get rid of Trump that it does not fully grasp the potential consequences of its actions.  The longer the perceived coup attempt endures, the greater the likelihood that any future president--particularly those who statists prefer--will face 'resistance' from the other side far greater than what we've seen in the Trump administration's case.

Stated differently, the coup attempt might poison the well of bipartisan cooperation for any future administration. Future calls for 'coming together' will almost certainly fall on deaf ears.

And should the coup attempt be successful in taking Trump out, well, I shudder to think what might occur.

There are those who believe that this is precisely the goal of this coup attempt--to tear down constitutional impediments to 'progress' so that new institutions can be erected for a greater good. But a strategy of disruption ignores the fact that it has been precisely the opposite strategy--one of gradualism facilitated by democratic process--that has lulled many to sleep while their liberty has been slowly expropriated in favor of the statists' agenda.

It also ignores the likelihood that a successful coup would awaken those sleepers to the reality that they have lost their liberty, and that they would be willing to engage in a revolution to reclaim it.

Were I a statist, I would not at all be confident that a coup that sparks a revolution against committed freedom fighters would be a winnable proposition.

Democracy and Propaganda

"Why don't you pass the time by playing a little solitaire?"
--Dr Yen Lo (The Manchurian Candidate)

Ron Paul observes that propaganda has conditioned Americans to believe that democracy is associated with freedom and liberty. It isn't, of course. In fact the opposite is true. Democracy, defined as a process for making political decisions by force based on the desires of the voting majority, compromises the freedom of some for the benefit of others.

A favorite tool of propagandists is to manipulate language to create 'positive substitute symbols.' Take a word that people value in a positive manner (liberty), and gradually connect it to a new word (democracy) initially associated with a concept that people are prone to dislike (democracy = system of decision-making by majority force). With enough repetition, the negative connotation linked to the new word is likely to decline in favor of a positive connotation (democracy is a component of liberty).

Presto, the new word becomes cherished and people are berated for treating it in a negative light.

Perversely, then, if you don't support democracy today, then you are viewed as an enemy of freedom.

Fiat Money and Wealth Distribution

Back to life
Back to the present time
Back from a fantasy
--Soul II Soul

Nice graphic here on the effect of fiat money on distribution of wealth as reflected by income growth.

"The best way to destroy the capitalist system is to debauch the currency." Sound money is the only friend of the people, not politicians. @mises pic.twitter.com/jZVtZ2vGN5

— K. Edward Goodreau (@kennethgoodreau) September 4, 2018

Sound money is the enemy of the state. It is the friend of the people.

position in gold

Pyramid of Ridicule

Slide your feet up the street, bend your back
Shift your arm, then you pull it back
Life's hard you know
So strike a pose on a Cadillac
--Bangles

Problems with the Cincinnati streetcar 'pyramid' continue. This article not only documents the continued decline in ridership as well as the reliability issues, but also the possibility that the streetcar's primary corporate sponsor, Cincinnati Bell (CBB), may pull its support.

In 2016, CBB signed a 10 year contract worth $3.4 million to put its name on the streetcar. The contract allows for CBB to terminate the deal if problems with the streetcar cause harm to the business interests of the company.

Having your name on the side of what has amounted to a pyramid of ridicule would seem to qualify.

Labor Plus Capital

Some days won't end ever
And some days pass on by
I'll be working here forever
At least until I die
--Huey Lewis and the News

Productivity is defined as how much output is generated per unit of input. Usually, the input of most interest is labor. As such, the most common expression of productivity is output per hour worked.

Suppose an individual produces 100 units of output in an hour of work. How to improve this productivity? One way is to improve the work process--a.k.a. 'work smarter.' Reduce wasted effort, combine steps, etc.

The other way is to develop tools that will help the worker do more. When digging holes in the ground, man first used his hands. Then he used a stick. Then a shovel. Then a back hoe.

Each one of these tools significantly improved how much earth he could move in an hour's worth of work.

The tools that combine with labor to produce output are known as capital. It is labor plus capital that jointly determine productivity and, consequently, standard of living.

Normalizing Crazy

"Crazy is on the bus."
 --Danny Roman (The Negotiator)

Interesting point raised last Friday by Fleck. He believes that the best analog to the current stock market situation is Japan in the 1980s prior to its epic bust. In particular he feels that there is a parallel in the extreme investor confidence that accumulates when huge and prolonged deviation from norms becomes status quo.

"When something crazy lasts longer than anyone would think possible--and that could be a few months or many years--the duration can somehow sanction in people's minds whatever is happening, as if the length of time somehow adjudicated the ultimate outcome of the policies or the environment."

Stated differently, the longer craziness persists, the less crazy and the more normal it seems.

Meanwhile, the Nikkei remains well below its all time high of nearly 30 years ago.

Tiger Hunting

Rising up
Back on the street
Did my time
Took my chances
--Survivor

The recent Tiger Woods interview reinforces the notion that the mainstream media plays the role of modern day pharisees seeking to trap people in their words.Snaps to Tiger for shutting them down.

Of course, some in the media couldn't handle the snub.

As this type of become all too common, the obvious question becomes why engage with the media at all?