Central Error

"A fool and his money are lucky enough to get together in the first place."
--Gordon Gekko (Wall Street)

Jim Grant, in recent testimony before the House financial services committee, cited the work of Henry Parker Willis. Willis was involved in the origin of the Federal Reserve back in the early 1900s.

As Grant observes, the Federal Reserve envisioned by Willis had gone of the rails almost as soon as it opened its doors in 1914. After watching the travesty that followed, Willis wrote his swan song The Theory and Practice of Central Banking to capture what he viewed as the proper role of central banking, and where the Fed had bastardized the concept.

To Willis, the proper role of a central bank was to function as a big commercial bank--particularly during times of systemic stress. Back then, commercial banks functioned to provide liquidity to industrial transactions. During times of stress back in the 1800s, commerical banks of the day would not step between short term transactions and fund them.

Willis thought that this should be the Fed's proper role. By providing short term credit, commerce would still be able to function and would be less prone to 'crash.'

While I'm not sure I agree with that logic, limiting a central bank's role to facilitating short term commercial credit is much more palatable than what is actually done today.

Today, the Fed's role is as central planner of the economy with a printing press to enforce policy. Willis was quick to point out the flaws of such a model--flaws that he witnessed first hand thru the unfolding of the 1920s and 30s.

Years back I undertook study of the founding years of the Federal Reserve. My main question was how could a country that valued free markets so highly approve such an institution of central planning?

Willis offers some insight as to why some may have been duped. Some may have believed, like Willis, that a US central bank could truly ease short term commercial credit crunches by providing liquidity to good money, self-liquidating commerical transactions. The Fed would accomodate the needs of the community, not determine what those needs would be.

Noble as that purpose might be, anyone in 1913 with a modicum of understanding about political economy should have clearly been able to grasp the naivety of such a scheme.

Asset Allocation Targets

Drivin' home this evening
I coulda sworn we had it all worked out
You had this boy believin'
Way beyond a shadow of a doubt
--Bryan Adams

I've been rethinking my asset allocation strategy over the past couple of months. Given the bold, persistent nature of monetary and fiscal policy blunders made be bureaucrats both in the US and worldwide, chances of bigtime inflation have materially increased from where I sit.

As such, I'm starting to migrate toward asset allocations that better reflect an inflationary posture. Here are current positions and targets.

Stocks (current 6%/target 20%). I have not 'owned' stocks in quite a while. But I'm feeling the need to build some core equity positions. My preference is for cash rich firms with dominant brands that pay a dividend. I've taken a position in select tech, e.g., Microsoft (MSFT), and healthcare, e.g., Johnson & Johnson (JNJ), that appear to offer decent, but not great, value at these levels. I'm pretty sure that I'll be able to use price to my advantage to build more meaningful positions at lower prices.

Commodities (current 8%/target 20%). My commodity exposure has been 'in and out' now for a couple of years. I'm now looking to put longer term exposure on my sheets. In a world experiencing a blizzard of fiat money printing, the gold SPDR (GLD) is the obvious centerpiece. I would like a smaller core position in general commodity ETFs such as RJI and DBC. The subsector ETFs (e.g., DBO, DBE, RJA, JJC) are good trading vehicles, but they are hard to hold due to roll yield related slippage.

Fixed income (current 6%/target 10%). Hard to hold fixed income in an inflationary world. I'm keeping my duration short. Primary vehicles are CDs, but will look closer at some individual govie/corp issues as well as some bond ETFs if prices come down.

Alternative assets (current 9%/target 10%). I'm including currencies, real estate, and short positions in this group. Currently, my exposure here is a short position in the SPX (SH). Over time, I'd like to add some forex and perhaps a REIT or two.

Cash (current 71%/target 40%). Why such a large cash fraction in an inflationary world? Because inflation is not a lock, cookie. There's still a good chance that we experience a major deflationary wave lower given the levered state of the world. So a decent cash stash provides a cushion against a general price decline in risky assets. It also serves as a pool of opportunistic capital to pick up bargains at lower prices.

As always, these targets are subject to change as the world turns...

positions in GLD, JNJ, MSFT, RJI, RJA, SH

Power Lineup

As you're leaving, please would you close the door?
--The Outfield

The past couple of weeks have reinforced the notion that Republicans and Democrats in Washington say one thing then do another so that, in the end, they look more alike than different.

Republicans have been banging the drum about the need to get debt and spending under control. Yet, with notable exceptions among the Tea Party minority, the GOP has been lining up behind proposals to increase the federal govt debt ceiling and to cut spending by trivial amounts.

Democrats have long claimed to be opposed to war. And Dems loudly voiced opposition to military actions taken under the Bush administration. However, when a president from their own party takes similarly unconstitutional military action, this time in Libya, Democrats largely line up and shut up.

Both parties wear the same uniform--the uniform of Big Government.

And they all hit for power.

Dollar Drama

"I've been working steady for the past twelve years, minus the last three."
--Johnny Drama (Entourage)

It's getting close to fish-or-cut-bait time for the US dollar index (USD). The USD has been in a decade long downtrend. (offline, compare the 10 yr USD chart to a chart of gold over the same time period)

On the back of QE2, the USD is once again probing the lows for the move. Near term support resides right around here at about 75ish. Below that rests the 2008 lows at 71-72.

If that support gives way, then it'll be a brave new world...

position in gold

Line Dance

It's not in the way you've been treating my friends
It's not in the way that you've stayed till the end
It's not in the way you look or the things that you say that you'll do
--Toto

Interesting battle shaping up here at SPX 1300. The S&P has rallied over 30 handles in three days.

It is now hitting its head against resistance at 1300, which also corresponds to the 50 day MA.

I added some short exposure in here given the tight defined risk parameters. Should the SPX decisively chew thru resistance here and motor higher, then I'll humbly stop this trade out.

position in SPX

Another War

Most of freedom and of pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

With our participation in the military intervention in Libya, we have once again violated the Constitutional requirement that only Congress can declare war. Since WWII, the United States has engaged in numerous violent conflicts, all of which have been done outside of Constitutional authority.

In doing so, we trample the freedom of US citizens.

Quite ironically, we also fail to recognize the sovereign right of other countries to govern themselves--as different as their choices might be relative to ours.

Land Grab

Morpheus: The Matrix is everywhere. It is all around us. Even now, in this very room. You can see it when you look out your window or when you turn on your television. You can feel it when you go to work, when you go to church, when you pay your taxes. It is the world that has been pulled over your eyes to blind you from the truth.
Neo: What truth?
Morpheus: That you are a slave, Neo. Like everyone else you were born into bondage. Into a prison that you cannot taste or see or touch. A prison of your mind.
--The Matrix

The federal government owns about 30% of the land area of the United States. This land constitutes a huge wasting asset because it is largely producing nothing.

At the same time, Congress has spent every penny that people have paid into Social Security--payments that has been made under force. Those now at retirement age who were forced to pay into Social Security are owed something. But who owes them? Politicians would like to take it out of the hides of those still in the workforce in the form of higher taxes. But that is unfair, as it has been those same politicians who have squandered the resources. The federal government that has not lived up to its end of the contract.

GMU professor Walter Williams says that he would be willing to make a deal w/ the feds whereby he would foresake all Social Security and Medicare benefits owed him in exchange for, say, 50 acres of land in Alaska (the federal govt owns about 70% of Alaska).

I would certainly jump at a similar offer--as long as I would not have to pay anything more into the system from this day forward.

But I wouldn't even need the land sweetener. I'd be willing to call it even right here. Government could keep all that that I've paid in the system. In exchange, I would take no future Social Security or Medicare benefits and I would no longer be subject to any related taxes.

Labor Pains

"Look, what does a capitalist do? Let me ask you that, Mike. Huh? Tell me. I mean, what does he make, besides money? I don't know what he makes. The workers do all the work, don't they? Well, what if they got organized?"
--John Reed (Reds)

Marx's (1867) framework of class conflict is motivated largely by his labor theory of value. Like nearly everything he wrote, this theory is refutable thru observation and reason. For example:

Marx: The value of a thing is determined by the amount of labor put into producting it.

Reality: Value is subjective and has no direct relationship to labor. Consumers place value on what is wanted. Toiling to create a product that no one will buy generates no value.

Marx: Capitalists appropriate all value that labor produces less subsistence-level wages to workers.

Reality: Wages come out of production. The more capital used in production, the greater the output of labor (i.e., the greater the productivity). Higher productivity improves standard of living. Wages to labor depends on consumer demand on what is being produced as well as the supply of workers who can do the work.

High worker supply suppresses wages even in strong product markets. Unless, of course, some group intervenes to prop wages above market rates.

Reference

Marx, K. 1867. Das kapital, Vol 1. Hamburg: O. Meissner.

No Confidence Vote

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

Opposition to the recent continuing budget resolution numbered over 50 in the House--topping the half dozen or so 'no' votes to the first CR a few weeks back.

Does this mean that Tea Party principles are gaining traction? Perhaps, but Ron Paul is not optimistic it will be enough soon enough to proactively curb our spending and debt addiction, stating the odds as 'one in a million.'

Sadly, he may be correct.

Make no mistake, though, our addiction will cease. Am hoping (praying) for proactive measures, since the reactive measures that will be imposed by market forces will be much less palatable.

Blind Addiction

Your lights are on, but you're not home
Your mind is not your own
--Robert Palmer

US public debt recently crossed $14.2 trillion which nearly matches annual GDP. This debt level amounts to nearly $46,000/citizen and over $128,000 per taxpayer.

State and local shortfalls amount to nearly $3 trillion more.

Total US debt exceeds $55 trillion, or more than $676,000 per family. This does not include unfunded entitlement liabilities of at least $30 trillion.

At the federal govt level, we are borrowing nearly $5 billion/day and face daily interest expense of over $500 million/day (expense that will surely rise when the Fed loses control of interest rates).

Federal govt outlays are about $3.5 trillion/yr, which creates a deficit of $1.5 trillion annually.

This is where we are.

And yet there are those who suggest that our current finanical position is not dire.

The Federal government just passed another temporary budget extension that included $6 billion in domestic spending cuts--less than a day's worth of Fed govt spending. Some in Congress are calling these cuts draconian and that no more can be done without crippling government.

Denial and escalation. Traits of the addict.

no positions