Thursday, October 31, 2019

Hate Speech Hysteria

"John Spartan, you are fined five credits for repeated violations of the verbal morality statute."
--Moral Statute Machine (Demolition Man)

Peter Klein notes the absurdity of sophistry floated to justify laws proposed to protect people against purported 'hate speech.' The WaPo editorial proposes that the First Amendment was written under the assumption that, in a 'marketplace of ideas,' truth would always triumph. The argument then claims that in modern venues such as the on-line world, truth does not always win. When hate, or negative, speech does rule the day, violence may result. As such, we need hate speech laws to protect against the potential for violence.
The premise is simply wrong. Our founding ancestors wrote the First Amendment to keep government out of the way of discourse, however full throated and vulgar it might be. Hate speech violates no one's rights. The framers understood the 'sticks-and-stones' axiom--negative words do not equal physical aggression.

Violence can only result from negative speech if a choice is made to act on it. It is the act, if taken, that constitutes aggression and upon which good law is built to protect against.

The founders understood that inserting government as an arbiter of what constitutes offensive speech is certain to compromise freedom over time.

Wednesday, October 30, 2019

Going Global

"I have learned how to live--how to be in the world, and of the world."
--Sabrina Fairchild (Sabrina)

Liz Ann Sonders presents a series of charts suggesting that, in the most recent quarter, companies with more international exposure had worse earnings. Just one quarter worth of date, of course, but we expect that going global should increase returns?
One view suggests yes. Companies expand production to other countries because they sense higher returns on capital. But data such as the above demonstrates that may not be realistic.

Another view suggests that, instead of increasing returns, going global smooths them out. When returns are low in, say, Asia, they may be high in Europe or in the US. Diversification--in securities, in skills, or in markets--hedges risk of being too exposed to a single set of circumstances in an uncertain world.

Tuesday, October 29, 2019


Give me your answer, fill in a form
Mine for evermore
Will you still need me, will you still feed me
When I'm sixty four?
--The Beatles

Throughout much of the 20th century, an attractive employee benefit offered by corporations was the pension. In its most common form, pensions are monthly payments to employees after they retire. The payments kick in at a certain age (often age 65) and last until the employee dies.

Pensions are known as 'defined benefit' plans because employees know exactly how much they are supposed to get on a monthly basis. The amount of the payment, which in most cases remains constant through the life of the benefit, is calculated based on age, earnings, and years of service.

My first employer offered a generous pension benefit. Employees became 'vested' in the plan after 5 years of service. When I left the company after 12 years of service, I took with me the promise of a modest monthly pension that I could begin collecting at age 65. There is an option to take those payments earlier, beginning at age 55, but for a lower monthly amount.

Until recently my intent was to wait until age 65 before drawing the full pension amount. Since I'm still working, there is no acute need for a supplemental income stream. Moreover, the monthly payment appreciates 8-9% annually if I wait until age 65 before collecting it. Few fixed income investments that I know of currently possess that kind of return profile.

However, a couple weeks ago I received an offer from the pension plan for what is known as a 'lump sum buyout.' Instead of paying the monthly annuity until I die, the plan is offering me a single, relatively large payment today. If I accept the lump sum offer, then this legally relieves the pension of any future payment obligation to me.

Why would a pension plan do this? To fund pension plans, companies must set aside portions of their profits today to pay for obligations in the future. Determining just how much to set aside is tricky--just as it is tricky for each of us to figure out how much to set aside to fund our individual retirements. Many companies are realizing that they may not have reserved enough funds to pay their future pension obligations. To manage the risk of having chronically 'underfunded pensions,' many companies dangle one-time lump sum payouts in hopes of getting some of pension liabilities off the books.

Difficulties with managing defined benefit pension plans have driven many organizations to phase them out in favor of 'defined contribution' plans. Defined contribution plans, known to many as 401(k) plans, commonly involve the employer kicking a fixed amount of money into a tax-deferred retirement account for each employee on a monthly basis. The employee is then responsible for managing those funds for retirement. The employee loses the certainty of a fixed monthly retirement payment (defined benefit) in exchange for receiving a fixed amount of money today to save/invest (defined contribution).

Today, defined contribution plans far outnumber defined benefit plans. Those defined benefit pension plans still remaining are mostly legacies of the past that, like mine, are in the process of being wound down.

So, should I accept the lump sum buyout now, or wait six years to draw my scheduled monthly pension when I turn 65? Is, as they say, a 'bird in the hand' worth more than 'two in the bush' in this case? We'll discuss the pros and cons of each alternative in an upcoming post.

Monday, October 28, 2019

Off We Go

There used to be a greying tower alone on the sea
You became the light on the dark side of me

Just like that, gappy futures popped the SPX to all time highs out of the gate this am.

Need to hold those gains, of course. A reversal would quickly prune the bloom off the rose.

Sunday, October 27, 2019

Negative, Not Positive

"Why should I trade one tyrant three thousand miles away for 3,000 tyrants one mile away? An elected legislature can trample a man's rights as easily as a king can."
--Benjamin Martin (The Patriot)

The quote below comes from a large thought stream of that Prof Williams has dedicated to the subject of democracy and liberty. These pages have reflected on these thoughts from time to time.

His central proposition is that associating liberty with democracy, or claiming democratic processes as essential to free society, is sloppy thinking. As our founding ancestors well understood, democracy is more accurately associated with tyranny than with liberty.

A good case can be made that it has been statists who have tried to condition Americans to believe that democracy is rightly associated with freedom and liberty.

Don't fall for it. In the long run the relationship between democracy and liberty is negative, not positive.

Saturday, October 26, 2019

Knock Knock Knockin'

Mama, take this badge off of me
I can't use it anymore
--Bob Dylan

Yesterday the SPX printed north of its previous all-time high close marked back in July before closing slightly below the high water mark. The Dow and Nasdaq have been lagging slightly, but both are less than a percent from their all time highs as well.

Despite the negative news stream and environmental uncertainty, stocks are once again knocking on heaven's door.

Friday, October 25, 2019

Good Intel

"Me and the I-Team came up with some fascinating intel."
--Henry Wayne (Exit Wounds)

After a disappointing earnings call in the spring sent the stock lower, Intel (INTC) shares have been building momentum. Last night's positive earnings call popped the stock above resistance.

As it fills the gap from last spring, INTC looks to be eyeing its previous high.

From bad Intel to good...

position in INTC

Thursday, October 24, 2019

Theater of Violence

"Now, we don't make policy here, gentlemen. Elected officials, civilians, do that."
--Cmdr Mike 'Viper' Metcalf (Top Gun)

Politics is where hypocrisy thrives.  Another case study being written involves partisans who espouse to be anti-war turning their hats around when it is a foe, in this case President Trump, who wants to dial back the US war machine in the Middle East. Naturally, those who side with the president become targets of wrath as well.
No need to take it personally, though. Say a prayer for those people, and then stick to the issue--as does Rand Paul below. If it is war that you want, then follow the constitutional channel: debate the issue on the floor of Congress and obtain support legitimately.
Another approach is to become a mercenary yourself. Hire yourself out to the army of your choice and fight for their cause. Don't force others into your theater of violence.

Wednesday, October 23, 2019

Hedge Funds Hedge

Michael Burry: Lawrence, I found something really interesting.
Lawrence Fields: Great, Michael. Whenever you find something interesting, we all tend to make money. What stock are you valuing?
Michael Burry: No stocks. I want to short the housing market.
--The Big Short

Hedge funds have been under performing major stock indexes. Should this be a surprise? As we have noted before, no.

Hedge funds were built to 'hedge,' meaning that they manage risk by taking positions in assets that are not well correlated. This is why hedge funds themselves are considered alternative assets in the fund management world.
Note from the graph that hedge funds outperform when stocks go down. This is what you want from a good hedge.

If hedge funds did not under perform in strong stock bull markets, they would not be doing their job.

Tuesday, October 22, 2019

Loss Aversion

"I don't like losses, sport. Nothing ruins my day more than losses."
--Gordon Gekko (Wall Street)

Investors are subject to various biases that can cloud decision-making processes. One of these biases is 'loss aversion.' A concept developed by by behavioral psychologists Daniel Kahneman and Amos Tversky (1979) as part of their Nobel-winning research on 'prospect theory,' loss aversion means we tend to overweight losses compared to gains.

In customer service settings, it is well known that when customers are dissatisfied they tend to share their negative experiences with others at far greater rates than when they are pleasantly surprised by the quality of service that they receive.

When we invest, the effect is similar. when we buy a stock and the investment goes down by, say, $10, we tend to feel more 'psychic pain' than if the stock goes up by that same $10 amount.

Because 'losses loom larger than gains' in our minds, Kahneman and Tversky (1979) found that this bias may drive us toward ill-advised investment behavior. For example, when we realize losses on an investment, we may be more willing to stick with that losing position longer than we should. In fact, we may be anxious to buy more--to 'double down'--so that we might at least get back to even on our original position.

Stated differently, we may be willing to make a bad situation worse by taking even more risk in order to 'save face.'

On the other hand, when we realize gains, we are often prone to sell our winning positions too soon in order to 'lock in gains' before they might turn into losses.

Professional gamblers will tell you that this is precisely the opposite of what they do when putting money at risk in casinos. When you are ahead, that is the time to push your bets because you are 'playing with the house's money.' Conversely, when you are behind, that is the time to consider reducing your risky exposure in order to 'cut your losses.'

While casinos do not present quite the same environment as financial markets, hopefully you can see the implications that loss aversion brings to investing. How we manage winning and losing investment positions is likely to be influenced by a bias toward trying to turn losing positions around at the expense of gains.

Being aware of the negative effects that loss aversion presents is a good first step toward managing this bias in our decision-making processes.


Kahneman, D. & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47: 263-291.

Monday, October 21, 2019

Banking on Strength

"That's a strong move!"
--Terry Silver (Karate Kid 3)

Banks have been outperforming on this move higher. The BKX is challenging year long resistance in the 103 area.

Why so strong? Would think the Fed's helping hand is certainly playing a role.

As the saying goes: 'so go the piggies, so goes the tape.' A breakout of the BKX would certainly augur well for the tape.

Sunday, October 20, 2019

None of the Above

"Appeal to their emotions. Make them laugh. Make them cry. Make them mad--even if they get mad at you. But for heaven's sake, don't try to improve their minds."
--Jack Burden (All the President's Men)

Interesting idea. What if a 'None of the Above' (NOTA) option was required on all ballots? Selecting NOTA would permit voters to express lack of consent for any candidate up for election.

What if NOTA wins? Voter who select None of the Above are saying that no candidate is legitimate.

Many people do not vote because they see no legitimate choices on the ballot. NOTA supporters would not only be more likely to turn out, but they might actively campaign for NOTA. Groundswell support for NOTA would drive candidates toward more accountability.

Government size and scope would likely shrink as a result.

Saturday, October 19, 2019

Repo Madness

All our times have come
Here but now they're gone
--Blue Oyster Cult

As we've noted, the Fed has embarked on another monetization program. A primary focus of this intervention is the repo market, where short term financing rates have skyrocketed over the past few weeks, surpassing highs during last decade's credit market freeze.

We've written about repos before, and speculated that they could potentially lie at the epicenter of the next financial system meltdown (here, here, here).

The question, however, is why now? What is causing the repo market to crack at this moment?

The regulatory backdrop has been ripe for some time. Post-crises revisions to banking regulations have forced banks to set aside more than $1 trillion in reserves. Repo rates are rising in part not because of a scarcity of cash in the banking system, but because that cash cannot be used to fund repo loans. Regulations are also constraining the return creditors can realize on large lending positions in short term money markets.

The Fed's sell down of QE program assets has exacerbated the stress. Until the Fed (predictably) suspended its QE unwind a couple months back, it was draining tens of billion$ monthly from the system as it sold back the bonds that it had previously purchased during QE (with money created out of thin air, of course). Those sell backs took cash off the repo market, perhaps to a tipping point. Now, the Fed's recent monetization program is once again sending cash (created out of thin air) in exchange for bonds (as shown above).

Peter Schiff adds that ever more federal debt coupled with shorter maturities on that debt means that record levels of debt need to be financed daily. Banks have dutifully bought those bonds--as they in part are required to do by recapitalization laws put in place since 2008. Once again, this leaves less cash available to fund repos.

Perhaps it has just been the confluence of these factors that have cracked the repo market, although I can't help but think that something more acute is pushing this situation overboard. We'll likely know soon enough.

Also not hard to think back to the early days of the credit collapse. Early tremors (e.g., New Century Financial) before the dominos starting hitting each other in the mortgage markets. Is the repo market an early tremor this time around?

Friday, October 18, 2019

Which View is True?

"Gonna come a time when we all gonna have to ante up. Ante up and kick in like men. LIKE MEN! You watch who you call a nigger. If there's any niggers around here, it's YOU! Just a smart-mouthed, stupid ass, swamp runnin' nigger. And if you aren't careful, that's all you ever gonna be!"
--Sgt Major John Rawlins (Glory)

Two competing views on racism in the US. Which view is true?
Use your reasoning mind to get there.

Thursday, October 17, 2019

Monetization, Pure and Simple

The deception, with tact
Just what are you trying to say?
--The Fixx

When it wants to employ 'monetary policy' to stimulate economic activity, the Federal Reserve can choose from three primary approaches. All three involve the creation money out of thin air (i.e., 'money printing'). However, the dynamics differ depending on the approach employed.

The most popular approach to date has been to lower the interest rate charged to banks that want to borrow funds from the Fed. All else equal, the lower the cost of borrowing money, the more money that will be borrowed. Presumably, banks would then use those borrowed funds to engage in lending, investing, and other activities that would stimulate the economy. The funds that the Fed lends are sourced out of thin air. The catch, however, is that this form of money, sometimes referred to as 'credit money,' is not free and clear. It is not like receiving a $100 bill as a gift. Instead, it is like taking out a $100 loan. The loan is a liability. You can spend the $100, but you must pay it back in the future--with interest at the rate specified by the Fed. As such, credit money created is subsequently 'destroyed' when the loan is paid back. Credit money can therefore be seen as temporary in nature. When credit contracts, so does the supply of credit money.

A second approach is to simply send checks directly to the people. This is the 'helicopter money' idea famously elaborated by former Fed chair Ben Bernanke. To date, the Fed has rarely used this approach, although central banks elsewhere have engaged in goodly amounts of helicopter money--often to the visible detriment of the monetary system (e.g., Weimar Germany, Zimbabwe, Venezuela). A recent example on a small scale here in the US was the 'tax rebate' checks sent to people in attempts to stimulate the economy during the 2008 credit collapse (a collapse which, by definition, destroyed lots of credit money discussed above). Imagine this on a larger scale, e.g., $50,000 checks sent to every US citizen every month, to get a sense of big league helicopter money.

The third approach, one that has gained recent popularity, is monetization. Monetization is where the Fed creates money out of thin air to buy assets. The Fed's three 'quantitative easing' programs (QE1, QE2, QE3) programs were large-scale monetization schemes. From 2008-2015, the Fed bought nearly $4 trillion of Treasury, agency, and other debt from bond dealers. The Fed put those assets on its balance sheet. In exchange, bond dealers got $4 trillion of freshly minted cash. How might this stimulate economic activity? The thought was that, in addition to the direct effect of putting money in bond dealers' pockets (which could be used for investment or consumption purposes), interest rates would also be pulled down by the bond buying (when bond prices go up, bond yields come down). Lower rates, as noted above, should stimulate borrowing all else equal.

Other central banks followed the Fed's lead and established their own flavors of QE-style monetization. Currently, the Bank of Japan and European Central Bank operate QE programs that dwarf the $4 trillion Fed project.

Last week, the Fed announced that, after a four year respite, it will once again buy assets. This time the focus will be on shorter duration Treasuries. The central bank adamantly denies that this is QE, but this is a semantic smokescreen.

Bond buying, whatever the duration and for whatever reason, is monetization, pure and simple.

Wednesday, October 16, 2019

Inversion Before Recession

Charlotte Blackwood: If you were directly above him, how could you see him?
Lt Pete Mitchell: Because I was inverted.
--Top Gun

Interesting post by Liz Sonders showing yield curve inversions (defined here as 10 yr minus 3 month Treasury yield) and previous recessions back to 1970. Note that inversions precede recessions and often 'un-invert' before the recession begins.
Implication: if/when yield curve pulls out of its currently inverted phase, that does not mean that the coast is clear. Based on history, it is more likely to mean recession dead ahead.

Tuesday, October 15, 2019

Situational Awareness of Markets

I follow you around but you can't see
You're too wrapped up in yourself to notice

An important factor in making sound investment decisions is situational awareness about markets. Generally speaking, situational awareness is a state of knowledge and sensitivity about the environment that you're operating in. People with high situational awareness perceive critical forces at work around them, understand their meaning, and project what can happen to a system in the future.

Stated differently, the more you know about the surroundings that you're operating in, then the better you'll be able to operate.

Situational awareness starts with understanding important concepts and their relationships in a decision-making domain. In the investment domain, we've considered many core market concepts over the past few months.

Once you've grasped concepts, you have to put them to work. By this I mean observing what goes on routinely in the socio-economic reality of markets--the happenings that bring concepts to life. The more you immerse yourself in the flow of events, the more situational awareness you'll gain.

Here are some ideas for developing greater situational awareness of markets:

Start with a watchlist. Apps abound that enable you to create lists of stocks, bonds, commodities, indexes, et al. whose prices you want to track. Because prices are a central expression of market behavior, understanding price levels and trends is an effective way to elevate situational awareness of markets. Watchlist apps often include charting capabilities as well as relevant headlines. My favorite watchlist app came with my iPhone. I usually roll through my watchlist at least once/day.

Review the news flow. In the dark ages prior to the internet, staying apprised of business and market headlines took some doing. I would spend hours scouring daily newspapers like the Wall Street Journal and Investor's Business Daily plus weekly magazines like Business Week and Fortune to stay apprised of events. Cable TV stations that catered to investors, such as CNBC, Fox Business, and Bloomberg, subsequently added to the process of assimilating information. Today, these media outlets, alongside many others, operate websites that stream news flow 24/7 to the convenience of investors. My recommendation is to locate a source or two that you like, and then visit regularly. Over time, you'll be stunned at how much situational awareness you'll acquire by 'osmosis.'

Keep tabs of your personal financial situation. What is your current asset allocation? What stock positions are you holding? How much dividend income are you collecting on an annual basis? How much cash have you set aside to fund life's expenses? Good situational awareness of markets requires that you are aware of your own financial situation! Establish a routine where you review your financial situation regularly. You might start with account web pages or statements generated by your broker or bank. To make the process active rather than passive, consider setting up spreadsheets that require you to plug in up-to-date data regarding your accounts. You might also consider a spreadsheet that aggregates information across accounts so that you can estimate overall asset allocation.

As your situational awareness of markets improves, so will the quality of your investment decisions.

Monday, October 14, 2019

Less Troops, More Stability

"You shouldn't have come here."
--Atto (Black Hawk Down)

After President Trump's announcement that the US military would leave Syria ahead of a conflict with Turkey, the 'war caucus' has predictably been on the warpath. The caucus has crafted a message, mindlessly regurgitated by the mainstream media, that the withdrawal of the small number of US forces in Syria exposes Kurds, our 'allies,' to senseless slaughter by invading Turks.

As Ron Paul observes, this is merely another ploy of the military establishment to "keep the 'forever war' gravy train rolling through the Beltway." This time around, of course, a large number of anti-Trumpers, sensing political opportunity, are piling on for good measure as well.

What the media is not widely reporting is that yesterday the Kurds signed an agreement with the Syrian government to put aside their differences and fight the Turks side-by-side.

One of Paul's most important observations is this:

"Once again, the politicians, the mainstream media, and the Beltway 'experts' have been proven wrong. They never understand that sending US troops into another country without the proper authority is not a stabilizing factor, but a destabilizing factor [emphasis mine]. I have argued that were the US to leave Syria (and the rest of the Middle East) the countries of the region would find a way to solve their own problems."

The Kurd/Syrian joint agreement offers an example of how pulling US troops out of the Middle East motivates voluntary cooperation that should improve stability in the region over time.

Sunday, October 13, 2019

Semantic Smokescreen

They burned down the gambling house
It died with an awful sound
--Deep Purple

This past week Fed chair Jerome Powell announced that the Fed will begin buying short dated Treasuries at the rate of $60 billion/month until at least Q2 2020. This officially marks the end of the Fed's balance sheet unwind and plot a new course down the path of quantitative easing (QE).

Some argue that this new program does not constitute real QE since it is not focused on long dated paper nor on providing accommodating monetary policy. Instead, its stated purpose is to ease pressure in money markets that have been losing liquidity for a couple of years.

This is nothing but semantic smokescreen. The Fed 'accomodates' the monetary system using one of two approaches. Lowering lending rates on credit money created out of thin air, or by simply printing money out of thin air. When it does so in the name of buying securities outright, it has become known as QE.

That is what the Fed is doing here. Whether it is called QE or simply money printing, the Fed is engaging in inflation to goose the monetary system.

Saturday, October 12, 2019

ISM Exports and Stocks

"Looks like they're getting ready for some heavy duty action."
--Cowboy (Kelly's Heroes)

'New Export Orders' is one of the areas examined in the ISM's monthly survey of manufacturing purchasing managers. Given the trade war backdrop, it should be no surprise that exports (as well as imports) have been dropping.

However, the historical correlation of the export series with the SPX should give stock bulls cause for pause. ISM typically leads the SPX by a couple of months.

If past is indicative of future, then strap yourselves in and prepare for some heavy duty action.

Friday, October 11, 2019

Compassion or Resentment?

Feed the babies who don't have enough to eat
Shoe the children with no shoes on their feet
House the people living in the street
Oh, oh, there's a solution
--Steve Miller Band

Interesting empirical research helps answer questions that can't easily be resolved by theory-building alone. For example, it is straightforward to develop competing theories about why people support taxing the rich and redistributing wealth. One theory posits that people feel compassionate for the needy, and the rich have resources that can help them. Another theory is that people are envious of the rich, and this resentment motivates forcible confiscation of resources from the wealthy.

Which theory is reflected more in practice? This is an empirical question.

Emily Ekins offers an empirical answer. As part of a larger study on American perceptions of poverty, wealth, and work, she employs regression analysis that compares people's responses to measures of compassion for the poor and resentment of the rich to willingness to tax wealthy. She finds that resentment is more likely to motivate tax increases on the rich and redistribution of wealth than does compassion:

Similarly, she finds that concerns about inequality are related more to antagonism toward the rich than to compassion for the poor:

And finally, she finds that, while both compassion and resentment predict favorable views toward socialism, hostility toward capitalism is more likely to be motivated by resentment of the successful.

Nice demo of how empirical research sheds light on the validity of plausible rival hypotheses.

Thursday, October 10, 2019

Lame Frame

Louis Winthorpe III: Randolph, Mortimer, come in here quickly! I've finally caught him!
Billy Ray Valentine: Who are you?
Louis Winthorpe III: I've caught him red-handed!
Mortimer Duke: Winthorpe, is that you?
Louis Winthorpe III: I'm making a citizen's arrest! This man is a drug dealer! Look, his office drawer...he's got all the bad drugs here: marijuana joints, pills, quaaludes, valium, yellow ones, red ones, cocaine grinder, drug needles. He's the pusher, not me!
--Trading Places

In the classic film Trading Places, down-and-out commodities broker Louis Winthorpe III (played by Dan Aykroyd) tries to reclaim his prestige and position by planting drug paraphernalia in the office desk of his replacement at the firm of Duke & Duke, the up-and-comer Billy Ray Valentine (played by Eddie Murphy).

But his scheme gets nowhere. Billy Ray and the Duke brothers all recognize the lame frame attempt for what it is, and Winthorpe withdraws in disgrace.

Winthorpe's plot resembles the Democrats' plan to flush out Donald Trump. Manufacture situations and implicate the president, using a willing and complicit media to articulate the false narrative in hopes that the general populace will somehow buy it.

But, save for ideologues sympathetic to the left's cause, people can smell rat(s). Another manufactured Yuri.

Another hoax aimed to deceive and displace.

Wednesday, October 9, 2019

Out of Syria

Oh, war is an enemy to all mankind
The thought of war blows my mind
--Edwin Starr

Last weekend President Trump announced that remaining US troops in northern Syria would be withdrawn ahead of a pending military conflict between Syria and Turkey. The president rightly notes that the "USA should never have been in the Middle East."
He adds that "the stupid endless wars, for us, are ending!" Well said.

Not surprisingly, pushback is growing from the bi-partisan 'war caucus' in Washington. These people, as Rand Paul observes, "have never met a war they didn't like."

Let's hope and pray that the president is able to stand his ground against the pro-war establishment.

Tuesday, October 8, 2019

Central Banks

So glad we've almost made it
So sad they had to fade it
Everybody wants to rule the world
--Tears for Fears

Central banks are government-affiliated institutions that manage 'monetary policy' for single countries or groups of countries. Monetary policy involves the fixing or controlling of interest rates, money supply, exchange rates, and/or asset prices, among other things--ostensibly to achieve high-level goals related to economic activity, price stability, trade, or degree of employment.

All countries in the world operate their own central bank, or ride the coat tails of someone else's central bank authority, to enact their monetary policy. Some of the more influential central banks include the Federal Reserve (United States), Bank of Japan (BOJ), European Central Bank (ECB, European Union), and People's Bank of China (PBOC).

Because central banks manipulate key variables that influence economies and markets, such as prices, interest rates, and money supply, they exert tremendous influence on market behavior. Whether one agrees with the tenets of central banking or not, investors must respect the power of these institutions--lest they risk getting their heads handed to them.

In future posts we'll discuss issues related to central banking--particularly as they relate to our home-base central bank, the Federal Reserve.

Monday, October 7, 2019

Fool in the Rain

Now my body is starting to quiver
And the palms of my hands getting wet
I've got no reason to doubt you, baby
It's all a terrible mess
--Led Zeppelin

People who slurp down the 'debt doesn't matter' argument need more reasoning power. Or they need to remove their ideological blinders.
Unfortunately, when the people spouting this drivel are so-called 'experts,' then many people outsource their reasoning power to others thought to 'know better.'
Think for yourself. Don't be another fool in the rain.

Sunday, October 6, 2019

Unsafe Harbour

"Hong Kong. A borrowed place that lives on borrowed time. The British run it now. But in 17 years, the lease runs out, and the People's Republic is the landlord. But this is a city of survivors. And whatever happens, Hong Kong will be THE place."
--Josh Randall (Forced Vengeance)

Hong Kong's local government has declared what amounts to martial law in response to unrelenting public protests. The protests have been going on since June--primarily in response to a law that would permit fugitives to be extradited from territorial Hong Kong to mainland China for trial (or, given China's opaque legal and judicial system, outright punishment).

Kyle Bass observes that banks runs have commenced and ATMs are running out of cash. Not surprising, given that the martial law declaration grants Hong Kong government the authority to confiscate bank accounts.
This is not good. Banks runs and closed vault doors have a way of escalating tension.

So far, the Mainland has largely remained in the background during the entire uprising. Should the central Chinese government (and military) get involved and act to put this protest down, something that hardliners in Beijing are surely chomping at the bit to do, then the situation gets ugly right quick.

Then imagine the prospects of the US wanting to step in...

Saturday, October 5, 2019

Friday, October 4, 2019

Bad is Good

Upside down
Boy, you turn me inside out
And 'round and 'round
--Diana Ross

When financial markets are addicted to low interest rates, what matters is news that can drive policymakers to lower rates some more.
Perversely, then, this is why fewer jobs created can be hailed as good news as it suggests more drugs are coming for the addicts.

This is the upside down world of financial repression.

Thursday, October 3, 2019

Come Down

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

Didn't take long for the major indexes to pull back from their assaults on new highs. After its come down, the SPX now sits on a multi-month uptrend line. The pattern is also taking on a head-and-shoulder-ish look.

If things don't hold here, then the 50 day moving avg will quickly come into play.

Below that is, well, a lot of space...

Wednesday, October 2, 2019

Political Diversion

Tell me why
This is a land of confusion

As these pages have noted, politicians and their media lackeys understand the value of creating diversions. Political diversions aim at focusing public attention on something other than the truth.

Politically-oriented headlines and events are rarely as they seem. They are calculated to distract those who do not know better.

Know better.

Tuesday, October 1, 2019

Can't Leave, Never Leaving

Relax, said the night man
We are programmed to receive
You can check out any time you like
But you can never leave

Long term chart of Fed Funds rate. Beginning in 1960, the trend was higher--culminating in a peak above 20%(!) as then Fed chair Paul Volcker famously raised rates to 'break the back' of inflation that gripped the US economy during the 1970s.

Since then the trend has reversed. In each cycle, rates never return to the previous cycle highs. The culmination of this cycle has been a near 10 yr period with rates close to zero--followed by a feeble few raises that the Fed recently walked back.

The Fed is stuck in a roach motel of its own making. Easy credit policies have created so much leverage in the system that even the smallest uptick in rates threatens to blow up the world.

Unfortunately, by never leaving its Hotel California monetary policy, the Fed is likely to blow up the world as well.