Eve of Gratitude

Louis Winthorpe III: My god, the Dukes are going to corner the entire frozen orange juice market!
Ophelia: Unless somebody stops them.
Coleman: Or beats them to it...Eggnog?
--Trading Places

Much to be grateful for as we bring this year to a close.

"Winter in Cincinnati" (John Ellsworth Weis, 1920s)

Giving thanks for it all on New Year's Eve.

Over-Caution Bias and the Invisible Graveyard

"Well, Baby-O, it's not exactly Mai-Thais and Yahtzee out here, but let's do it!"
--Cameron Poe (Con Air)

Prof Williams discusses over-caution bias in the context of the FDA. Policymakers in general and FDA officials in particular can make two types of errors. In the context of the drug approval process, a type I error involves delaying approval of a medicine that is safe and effective (i.e., over-caution, or not acting when one should). A type II error is approving a medicine that subsequently exhibits unanticipated side effects (i.e., under-caution, or acting when one shouldn't).

In the case of FDA officials, incentives favor erring to the side of over-caution. If the FDA approved a drug that had unanticipated side effects, then the victims of the agency's mistake would be readily visible. Political uproar would ensue and heads would likely roll.

On the other hand, if the FDA delayed approval of a safe and effective drug, then the victims are all of those who suffered and died because they were denied access to medicine that would have otherwise been available on the market. Because these victims stem from 'errors of omission' and are not readily visible not connectable to the FDA process, the associated type II errors do not attract anywhere close to the political fallout that type I errors do.

To minimize political fallout, FDA officials will clearly prefer making type II mistakes.

Consequently, the over-caution bias embedded in the FDA's regulatory process sends victims to what Prof Williams calls 'the invisible graveyard' on a routine basis.

Intraday Volatility

Here comes the rain again
Falling on my head like a memory
Falling on my head like a new emotion
--Eurythmics

Bear markets are often associated with increased 'volatility.' In the context of markets, volatility refers to the degree of variation in prices measured over some period of time. On an intraday basis, this variation is usually captured by the range (i.e., high minus low) in price.

From the charts, the increase in intraday price ranges since the early October highs is unmistakable. Over the past several trading days the intraday range in the Dow has been 500 pts or more--punctuated by a 1000 point surge in the last two hours of Wednesday's session.

One explanation for increased intraday volatility in bear markets is that optimists constantly want to believe that the worst is over, thereby bidding prices higher off of intraday lows only to get their heads handed to them when more supply subsequently hits the tape. On the other side of the trade, bears get jittery over the prospect of snappers (snap-back rallies) meaning shorts are generally in weak hands and prone to cover positions quickly--thereby creating self-fulfilling short covering rallies like the one on Wed.

At the end of the day, intraday volatility in bear markets finds both bulls and bears carried out on stretchers in epic numbers.

Christmas Season Celebration

"That's what Christmas is all about, Charlie Brown."
--Linus Van Pelt (A Charlie Brown Christmas)

The Catholic Christmas season begins with the Christmas Eve vigil mass and ends with the feast of Christ's baptism. That's 20 days.

"The Midnight Mass" (Edward Timothy Hurley, Cincinnati, 1911)

As our priest observed at Christmas Eve mass, Catholics really know how to celebrate Christmas. I will endeavor to maintain a celebratory posture throughout this very special Christmas season.

End It

Too many shadows
Whispering voices
Faces on posters
Too many choices
--Pet Shop Boys

Thomas Massie has the appropriate solution for those wringing their hands over Fed policy.

end it! https://t.co/6FGm0JJsij

— Thomas Massie (@RepThomasMassie) December 24, 2018

Unfortunately, ending the Fed is not what the president nor any other politician displeased with the Fed has in mind. Instead, politicians want central bankers who will do their bidding--i.e., to intervene in markets to their liking.

Algo Rhythms

So if you see me acting strangely
Don't be surprised
I'm just a man who needed someone
And somewhere to hide
--Styx

Monday's 600+ pt down day in the Dow was the worst Christmas Eve showing since the Great Depression. The pre-market gap higher in the futes this am was probably not what the bulls really needed as it has been getting sold out of the gate.

WSJ article speculates that automated trading, which makes up over 80% of daily volume, is exacerbating downside movement. The thesis, something that these pages have discussed for some time, is that black box trading is largely grounded in trend-following algorithms.

Just as they amplified moves on the way up, the robots are likely to amplify moves on the way down.

In the near term, stochastics suggest an oversold condition ripe for a snapper (i.e., snap-back rally). Then again, in bear markets, oversold often becomes more oversold.

no positions

Hosanna in Excelsis

The people who walked in darkness have seen a great light, upon those who dwelt in the land of gloom a light has shone.

You have brought them abundant joy and great rejoicing; they rejoice before you as with joy at the harvest, as people exult when dividing spoils.

For the yoke that burdened them, and the bar across their shoulders, the rod of their oppressor, you have broken as on the day of Midian.

For every boot that tramped in battle, every cloak rolled in blood, shall be burned as fuel for for the fire.

For a child has been born for us, a son given to us; upon his shoulders dominion rests. They name him Wonderful Counselor, Mighty God, Everlasting Father, Prince of Peace.

His dominion is vast and forever peaceful for the throne of David and his kingdom. He will establish and uphold it with justice and with righteousness from this time onward and forevermore. The zeal of the Lord of hosts will do this.

Isaiah 9:1-6

Early Immanuel

"My soul magnifies the Lord
     My spirit rejoices in God
          my Savior"
--Luke 1:46-47

While we await His coming in two days, our family's Christmas arrived early this morning before dawn.

Immanuel. Truly.

Leaving Syria

"We walk, and Afghanistan reverts back to the Taliban. Only now the Taliban has metastasized into something infinitely more vicious and potent because they're now 2-0 versus superpowers. They butcher the people who helped us, who voted and were stupid enough to put their faith in our word. So call it not only the end of hope for tens to millions of Afghans, but the end of American credibility, the end of America as a force of righteousness in the world. And when we're forced to go back in a couple of years, and please quote me on this, we'll be squared of against a shattered Iraq, a hopeless Afghanistan, and a nuclear Iran. How many troops are we going to need then? I guarantee you'll be adding some zeros."
--Senator Jasper Irving (Lions for Lambs)

Earlier this week, President Trump announced that he is ordering the withdrawal of US troops from Syria. The uproar from the military/industrial complex predictably followed.

Defense Secretary James Mattis, a card-carrying member of the complex, subsequently resigned, citing irreconcilable differences with the president on foreign and military policy.

Joining the chorus, other war proponents claim that a delicate balance in the Middle East will be upset, implying that the only way the world can operate smoothly is if U.S. troops are deployed around the globe and put at risk while pounding the beat as world policemen.

I join Rand Paul in applauding this move. Trump is doing something that his predecessor could have done but never did.

Hopefully the president can withstand the criticism. And make this the first in a string of withdrawals.

Fatal Conceit Exemplified

There's a place where the lights won't find you
Holding hands while the walls come tumbling down
When they do
I'll be right behind you
--Tears for Fears

The fatal conceit of bureaucrats is well exemplified by yesterday's FOMC statement. The image that this statement attempts to convey--that a group of central planners is capable of effectively monitoring and controlling a complex economy is pure folly. Even more ludicrous is that many onlookers actually believe it.

Perhaps some are waking up, because at the moment it appears financial markets might be doubting the Fed's omnipotence. The Dow has dropped about 1000 points since the FOMC statement was released yesterday afternoon.

Gold is chiming in as well. Remember, gold is essentially a bet on disorder--including disorder caused by the Fed's fatal conceit.

Perhaps gold is telling us that confidence in the Fed's conceit may be fatal.

position in gold

Protectionism and Prices

"I hope you had a hell of a piss, Arnold!"
--Brad Hamilton (Fast Times at Ridgemont High)

One of the many consequences of protectionism, whether it be in the form of tariffs, minimum wage laws, etc, is higher prices.

Confused as to why? Using tariffs as an example, complete the following quiz. As trade barriers go up,

Specialization of work inside a country goes a) up b) down.

Diversification of work inside a country goes a) up b) down.

Potential to learn by doing goes a) up b) down.

Cost of switching between tasks goes a) up b) down

Consequently, productivity of work inside a country goes a) up b) down.

Competition goes a) up b) down.

It doesn't take a PhD to sum up the impact on prices and, consequently, standard of living.

Gold and Disorder

And so we turn on the TV one more time
And we see that everything is fine
--Flesh for Lulu

WSJ observes that, with gold up nearly over the past three months, the yellow metal is outperforming stocks on a quarterly basis for the first time in years.

When it really gets its groove on, financial analysis of gold is likely to look more like this:

And perhaps people will suddenly remember gold's historical position in the monetary hierarchy:

This 'golden rule' is grounded in the primary thesis for owning gold. Gold is a bet on disorder--whether that disorder is narrowly monetary or broadly social in nature.

Sadly, people tend to figure this out only after this disorder is well underway.

position in gold

Triple Bottom Breakdown

We chased our pleasures here
Dug our treasures there
But can't you still recall
The time we cried
Break on through to the other side
--The Doors

Took nearly a week, but today's nasty intra-day action suggests that the triple bottoms appear to be history on the major indexes. One could argue that there could be some right around here at SPX 2550.

Not much below that but tree branches  hanging from cliffs for a while. Next meaningful support from where I sit appears to be SPX 2100. This level was defined by the Trump election rally way back in November 2016.

Personally, and perhaps ironically, I suspect that is where the Fed gets cold feet if/when.

no positions

Upside Down Fed

Respectfully I say to thee
I'm aware that you're cheating
But no one makes me feel like you do
--Diana Ross

When the Fed was in the middle of expanding its balance sheet amid various 'quantitative easing' (QE) programs, we observed that prices of the fixed income securities on the Fed's highly leveraged balance sheet would not have to fall much to render the Fed technically insolvent.

It appears that has occurred. The latest quarter financial statements indicate that bonds purchased and held by the Fed have  unrealized losses of over $66 billion, which eclipses its tiny sliver of $39 billion in capital. Can you say upside down?

Most people view this as a technicality because the Fed can literally print money out of thin air to cover those losses. As the author concludes, however, it is difficult to imagine a consequence-free future in this money-printing regime.

Epic Media Bias

I've been trying oh so long to let you know
Let you know how I feel
--Phil Collins

Although 'never before' statements carry the risk of recency bias, President Trump's claim may be correct, at least with respect to the mainstream media.

Never in the history of our Country has the “press” been more dishonest than it is today. Stories that should be good, are bad. Stories that should be bad, are horrible. Many stories, like with the REAL story on Russia, Clinton & the DNC, seldom get reported. Too bad!

— Donald J. Trump (@realDonaldTrump) December 15, 2018

Seems ripe for academic research. It would be interesting, for example, if Groseclose's (2011) methodology were applied to panel data.

Suspect that a beta coefficent estimating the relationship between media bias and time would be positive and significant, which would position recent slant at top of trend.

Legal and Judicial Rot

It's time we stop, hey, what's that sound
Everybody look what's going down
--Buffalo Springfield

If one believes in divine providence, then one way to make sense of the improbable election of Donald Trump, a Washington outsider and renegade, to the office of President of the United States was that it was supposed to wake people up to the corruption of the federal government that has been robbing people of their liberty--a God-given gift--while they sleep.

The desperate pursuit of Trump by the deep state and its media lackeys via the 'Russian collusion' folly provides no better example of the rot that impairs our legal and judicial system. People are able to view tactics by government agents, lawyers, and even judges that, if you or I sought to do them, would land us in jail for a long time. Lies, blackmail, selective investigation, use of government deep pockets (read taxpayer funds) to threaten people with financial ruin. Freedom can be snatched with a blink of an eye.

This rot is being exposed before our eyes. We are being urged to open them and see.

Albatross Banks

Reached out a hand to touch your face
You're slowly disappearing from my view
Disappearing from my view
--A Flock of Seagulls

Hard not to notice the heavy action in the banks. The BKX continues to drift lower despite the heroic stand of the bulls still above the recent major index triple bottom.

Laggy banks constitute an albatross around the bulls' necks.

no positions

Freedom is not Free

"You think you're free? You're not."
--Nathan 'Diamond Dog' Jones (Con Air)

To maintain freedom, individuals must allocate personal resources (time, money, attention, etc.) to protect their freedom against threats. Those allocations build two groups of defensive skills.

One group of skills is focused on detecting threats. For example, being aware of surroundings, studying history, consuming news media help people stay vigilant and aware of potential intrusions on their freedom.

The other group of skills is geared toward developing capability to ward off threats. Learning how to defend oneself, obtaining public office, and persuasion skills are among the varied talents that can neutralize actual or potential threats.

Because allocating scarce resources toward protecting freedom necessarily subtracts from resources that could have been allocated toward higher priority among freedom lovers--i.e., unhampered pursuit of personal interests--individuals will be tempted to skimp on self-defense skills. Instead, they might roll the dice and go for the increased reward associated with specialization (focused pursuit of personal interests) at the expense of increased risk (not having self-defense skills ready if threats actually materialize).

It is also possible that people might choose to outsource self-defense to someone else. This, of course, is supposed to be the primary role of government. There is some logic to this choice. Retaining agents who specialize in defense are likely better than those who do defense alongside other tasks.

However, there are problems with this outsourcing arrangement as well. Principals who hire agents to do their bidding are subject to the 'agency problem,' whereby agent goals differ significantly from the goals of the principals. It could be extremely tempting, for example, for strong armed government agents to use their muscle to shake down, rather than to protect, their principals. After all, the agents are the specialists with the guns.

It should be noted that the efficiencies gained by outsourcing to specialists in this case may be consumed in costs to monitor the hired guns for prospective mischief.

In the case of modern government, another problem is that government agents no longer specialize in protection. Because the scope of government has broadened considerably, state employees engage in myriad activities which could in fact diversify (i.e., de-specialized) them more so than the principals that hired them.

Some of these problems can be reduced by outsourcing protection to private, rather than public, organizations.

Nevertheless, because freedom is not free, individuals must grapple with how best to allocate resources toward defending that freedom before it is forcibly taken away.

Blinded by Political Affinity

With this very unpleasing
Sneezing and weezing
The calliope crashed to the ground
--Manfred Mann

One sure sign of partisanship: accusing some people of biased behavior or judgment that you know they have political affinities different from yours, while not making similar accusations of people that you know have a political affinities similar to yours.

There is perhaps no better expression of the core tenets of social identity theory than politics.

Flag Recaptured

You got me running
Going out of my mind
You got me thinking
That I'm wasting time
--Electric Light Orchestra

Although the indexes broke thru their triple bottoms in a big way yesterday morning, the bulls had the bears backpedaling the rest of the day. By the day's end, the bulls had recaptured the flag and closed in the green.

Many traders are eyeing SPX 2600 as the near term Maginot. With yet another layer of demand stripped away on the most recent test, bulls are hoping to keep the battle well north of that weakend level of support.

no positions

Global Warming Premises

"There is a WALL of water headed toward New York City!"
--Radio announcer (The Day After Tomorrow)

As observed here, global warming is based on three premises: 1) the earth's atmosphere is warming, 2) humans are responsible for that warming, 3) warming is inherently bad.

Despite what some pundits have claimed, none of these premises have been decisively proven. Indeed, if global warming enthusiasts had to bring their case before a court of law they would surely lose for lack of conclusive evidence.

But suppose those premises were accepted. What would be some of the consequences of proposed policy responses such as heavy carbon taxes, outlawing cheap fossil fuels, and mandating expensive 'green' technologies, or one child policies?

Some of the economic trade-offs might include: surrendering consumer comforts such as air conditioning, outlawing personal automobiles, higher cost of living, less mobility, and, most certainly, slower economic growth in the world.

Less prosperity.

Stealing Prosperity

"No matter how bad it gets, we don't steal."
--Jim Braddock (Cinderella Man)

Smart answer to Bernie Sanders' question by Prof Reisman. Sanders, an avowed socialist, asks why people are comfortable giving tax breaks to corporate billionaires but don't think we can afford to pay for health care for everyone.

The answer is simple. When billions are added to the means of production, the supply of products we buy, and the demand for the labor we sell, are increased, resulting in our being better off. When we have to pay for the health care of others, we are worse off. https://t.co/XpZMqSwuDz

— George Reisman (@GGReisman) December 5, 2018

Reisman replies that those billions in tax breaks can be added to the means of production thru savings and investment.Those productivity gains fuel more goods and services, including those related to healthcare, at lower cost, thereby improving prosperity for all. Spending those savings today amounts to capital consumption, which amounts to cooking the goose that lays golden eggs.

Notice the words Sanders uses. 'Giving' tax breaks to billionaires. 'We' can afford to pay for healthcare. He implies that those billionaires don't rightfully own their $billions. 'We' do.

This is the rationale of a thief displaying a pathology of resentment with hopes of capturing supporters with songs of envy and covetousness.

Perspective

So I guess the fortune teller's right
I should have seen just what was there
And not some holy light
--Natalie Imbruglia

Lotta angst out there after Thursday's intraday comeback couldn't stick on Friday. It's near term triple bottom time in the SPX.

But let's put current levels of apprehension in perspective. When examining the entire bull run that began nearly 10 yrs ago with the March, 2009 lows, very little technical damage has been done. You almost have to squint to see the current volatility.

The uptrend defined by the early 2016 lows, although currently under assault, is still intact. The entire bull market uptrend from the 2009 lows is defined by support down at about SPX 2200. That's about 20% down from here.

That people are freaking out already by recent price action demonstrates just how conditioned psyches have become to ever higher prices. It also makes one wonder what happens to the collective investment mind if/when prices really get moving to the downside.

no positions

Yield Curve Flattening

"A brilliant man would find a way not to fight a war."
--Admiral Isoroku Yamamoto (Pearl Harbor)

With long bond rates collapsing over the past few days, and short rates steadily rising over the past year or so, the yield curve is flattening--and right quick. The difference between Twos...

...and Tens...

...stands at about 10 bips.

Because they reduce the attractiveness of carry trades, flattening yield curves are rarely construed as bullish in leveraged economies.

no positions

Triple Bottom Test

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

Gap and go lower out of the gate on major indexes. Recent lows being challenged in what resembles a triple bottom pattern.

Rule of thumb is that support gets weaker with each successive test. Bears wondering whether third time will be the charm.

Also worth noting that daily stochastics are nowhere close to indicating oversold, suggesting more potential energy behind a downside thrust.

no positions

Tariff Man

"You can't do this to me. I'm an AMERICAN!"
--Marion Ravenwood (Raiders of the Lost Ark)

Well, the $billions in tariffs may be enriching the federal government coffers, but it reduces prosperity among Americans. As Ron Paul deftly notes, voluntary trade is not a 'raid.' A raid occurs when one party uses violence to confiscate someone else's property. Tariffs are taxes paid by consumers.

Moreover, trade that no longer occurs because of the higher prices involved hurts both sides since they can no longer take full advantage of the productivity gains from specialization.

Taxes do not create wealth, but destroy it.

With tariffs, the U.S. federal government is "raiding" the American standard of living.

— Ron Paul (@RonPaul) December 4, 2018

Tariff-makers are the true raiders. Through taxes, higher prices, and reduced trade, tariff-makers raid standard of living.

Slay Ride

"And then...it hit!"
--Sam the Snowman (Rudolph the Red Nosed Reindeer)

After yesterday's 'Tariff Truce' lift inspired bulls to perhaps get long and ride the Santa Claus Rally sleigh into the new year, the longs had their heads handed to them today as markets took a 3% haircut and closed on their lows.

Some blame Trump tweets implying a tougher stance on Chinese tariff talk. Others continue to blame the Fed's interest rate increase program.

There does seem to be increasing concern (and pockets of evidence) about the economy slowing down--and right fast. It is consistent with the movement we're starting to see in various macro indicators.

Will be interesting to see whether Santa can get his reindeer team back in the air--or whether they will remain grounded.

no positions

Macro Movement

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

Big rally in long bonds. Ten year yields have broken below 3% and are flirting with the 200 day moving avg.

Might be a sign that investors think the Fed will indeed reverse interest rate policy sooner rather than later. Or perhaps it's a 'flight to quality' as investors seek to reduce risk and pile into Treasuries.

With gold showing signs of life as well, 'macro' indicators beyond stocks are beginning to stir. Precisely why remains to be seen.

position in gold

SPX Performance Around Recessions

I saw the world crashing all around your face
Never realizing it was always mesh and lace
--Modern English

ZeroHedge article includes analysis from Credit Suisse on behavior of the S&P 500 index (SPX) around recessions. The gist of it is this. On average, the SPX continues to make gains until about 6 months before the start of a recession.

In those final six months, the SPX tends to tread water. A downtrend commences just prior to recession onset which subsequently continues toward a 15-20% loss after 12 months.

Since 1968, declines in the SPX of 20% or more have been associated with recessions in all cases but one (1987).

Thus far from its October highs (which also marked an all-time high), the SPX has fallen about 12%.

no positions

Regime Politics

I must have dreamed a thousand dreams
Been haunted by a million screams
But I can hear the marching feet
They're moving into the street
--Genesis

Political scientists sometimes distinguish between normal politics and regime politics. Normal politics takes place within an existing political order. The ends are agreed upon but the means are debated and form the basis for political division.

Regime politics questions the nature of the existing political order itself. Who rules and for what purpose? What are rights? Who has them? What principles do we value?

The original vision of the United States was grounded in the natural rights idea of liberty captured by the Declaration of Independence and ratified in the Constitution. An alternative vision has been under development for about 100 years now. It is grounded in the doctrine of progressive politics and socialism and stresses submission to the state.

These two visions share no middle ground. Consequently, regime politics in America has been escalating.

History suggests regime politics rarely concludes peacefully.

Affiliation Plantation

Trim life shadows flicker and fall
But you still can't turn away
Get up and run before you stall
Before the edges fray
--Ric Ocasek

Affiliation makes it hard to think straight. Our group is better than yours. Wrongs in our group are the exception; in yours, they're the rule. We're smart; you're stupid.

Commitments to failing courses of action can't be broken. In fact, they are likely to escalate.

Individuals are sacrificed for the sake of the group. Mobs rule.

Escape the affiliation plantation and be free.