Rational Basis Judiciary

"The truth is what I say it is."
--Senator Charles F. Meachum (Shooter)

In this interesting discussion about the judicial branch's lack of adherence to the Constitution when making rulings, the concept of the 'rational basis test' is brought up. The rational basis test considers whether a government action can be reasonably related to a legitimate interest of government. What is 'reasonable' and 'legitimate,' of course, is up to the Court to decide.

The rational basis test became vogue as the Supreme Court was reassembled in the late 1930s to do FDR's bidding.

As observed by the interviewee, the rational basis test encourages judges to "collaborate with the government in coming up with hypothetical justifications for a law in order to bend over backwards and uphold whatever the government is doing."

Sophistry in place of substance.

Discretionary rule in place of rule of law.

Executive Lawlessness

Let me be your ruler
You can call me Queen Bee
And baby I'll rule, I'll rule, I'll rule, I'll rule
Let me live that fantasy
--Lorde

In his State of the Union message last week, President Obama promised that "wherever and whenever [he] can take steps without legislation to expand opportunity for more American families, that's what [he's] going to do."

As an American citizen, Mr Obama can act in many ways to expand opportunity for others. For example, he could donate part of his salary to needy families. He needs no legislative backing to do so.

However, what the president is signaling here is intent to act by issuing executive orders. Although the Constitution makes no explicit provision for the issuance of executive orders, the chief executive of the executive branch of the federal government has traditionally thought to be within his pervue to issue orders that enable him to execute laws developed by Congress. For example, the president might order the establishment or continuance of committees that advise the executive branch on technical issues associated with implementing particular laws.

Presidents have acted accordingly. FDR holds the record, issuing more than 3,500 executive orders during his administration.

However, executive orders that establish new laws or defy extant laws are not constitutionally valid. The presidency is not a lawmaking position. The president has no constitutional power to act unilaterally.

Yet, when President Obama overtly states that he intends to "take steps without legislation," it is difficult not to construe that this is precisely what he intends to do.

In fact, President Obama has already done so. Judge Nap offers the example of executive orders issued by the president related to immigration prior to the 2012 election that had no basis in congressional law. The president has also materially changed the law thru orders related to killing purported enemies of the United States by drones, and to changing requirements specified by the Affordable Care Act statute. Thorough documentation of this administration's attempts at expand executive power is being developed by a Congressional committee headed by Senator Ted Cruz (TX).

When presidents act without Congressional approval, they are practicing rule by fiat. Discretionary rule was clearly a situation that our American ancestors feared and endeavored to avoid.

Market Cap to GDP

First class and fancy free
She's high society
She's got the best of everything
--Tal Bachman

Over a decade ago, Warren Buffett offered the ratio of stock market capitalization to GDP as an effective measure of overall equity value. It is hard not to like the aggregate, macro feel of the numerator and denominator components. Moreover, the denominator is a bit harder to manipulate than some other valuation metrics such as the P/E ratio.

Doug Short provides an updated glimpse of the mkt cap:GDP metric in this missive.

His ratio of Wilshire 5000 market cap:GDP is shown above (FRED worksheet here).

By this metric, today's stock market valuations have surpassed the peak prior to the 2008 credit collapse. Current valuations are higher than any time since 1970 save for the late 1990s run-up prior to the dot.com bust.

Note also that the slopes of the declines following the two previous peaks are much steeper than the slopes of the advances that preceded the peaks.

position in SPX

Brute Fear

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

Nice multi-panel display that adds to our collection of market extreme graphics. Margin debt, valuation, macro, sentiment...

The set up has market sage Richard Russell fearing an epic wipe-out:

"Since infancy I've always been ultra-sensitive to danger. For this reason I've never been caught in a primary bear market--my sensitivity to impending danger (and Dow Theory) has always saved me and my subscribers. But this time my unconscious fear is unrelenting, and it won't leave me alone.

"Finally, I've admitted it to myself. I'm afraid we're in a primary bear market in the economy and the stock market. I believe it's going to be an absolute 'brute.' And I'm afraid of what might lie ahead."

position in SPX

Capitalism Requires Capital

I've been laid off from work, my rent is due
My kids all need brand new shoes
So I went to the bank to see what they could do
They said, sir, looks like bad luck's got a hold on you
--Simply Red

A point that seems to be lost on many: capitalism requires capital. The lifeblood of capitalism is savings, from which capital for investment springs.

Capitalism cannot and does not exist in an environment where savings rates are negative. In truly unhampered markets, declining savings would drive the price of borrowed money (i.e., interest rates) higher to better conserve and ration the savings supply that did exist. Higher interest rates would also signal opportunity associated with saving.

Stated differently, it is highly unlikely that savings could disappear--or fall to extremely low levels--in a capitalistic system.

Our present high debt, low savings environment is far removed from capitalism.

Lopsided Sentiment

Chuck Scarett: How are you feeling today?
Joe Scheffer: Confident!
--Joe Somebody

More evidence of lopsided sentiment. Investor's Intelligence % bulls and % bears:

CBOE put:call ratios:

Sentimental extremes are contrarian in nature. The more lopsided the market sentiment, the greater the likelihood of major trend reversal.

position in SPX

Drop Zone

And there's some chance we could fail
But the last time someone was always there for bail
When will we fall down
--Toad the Wet Sprocket

Recent support gave way in decisive fashion yesterday with the SPX down 40 handles. Big volume too.

Today's early bounce off the multi-month uptrend line seems intuitive. Not sure today's early green is in Hoofy's best interest, though. If the intraday action reverses, then things could get dicey as more bulls rush toward the exits.

The 200 day moving average is below at 1710ish. The SPX has not been below its 200 day since November 2012.

position in SPX

Cathedral Builders

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

People have two general choices for improving their economic conditions. They can choose aggression, where either they themselves or their strong-armed agents forcibly take resources from others.

Or they can choose non-aggression, where they produce economic resources and engage in trade with others. They also save--i.e., they restrain consumption today in order to fund better standard of living tomorrow.

Because programs of aggression can yield more per unit of effort, the way of force tempts many. As temptation grows, ethical problems associated with aggression are ignored or rationalized away.

People who choose non-aggressive approaches for improving their economic conditions take the high road. They are not interested in get-rich-quick schemes. They refuse to improve their standards of living by taking property from others.

Instead, the non-aggressors are 'cathedral builders.' They are engaged in great self-funded construction projects that may not be completed in their lifetimes.

Economic cathedral builders may be poor, scraping together initial resources for setting the underlying foundation. Or they may be rich, buttressing structure that stretches skywards. Poor and rich builders help each other as they engage in trade to obtain resources that advance project progress.

When they get old, the present generation of builders passes along their work-in-progress to the next generation who take up the work.

Absent the economic cathedral builders, society's long term prospects are grim.

Andre Reed HOF

And it won't matter now
Whatever happens to me
Though the air speaks of all we'll never be
It won't trouble me
--Toad the Wet Sprocket

Former Buffalo Bills great Andre Reed was elected to the Pro Football Hall of Fame this week. The wide receiver was finally elected after nine years of eligibility and eight years as a finalist in the voting.

Reed's numbers speak for themselves. Eleventh all-time in career receptions (951), 13th in receiving yardage (13,198), 13 seasons (including 9 consecutive) with 50 or more catches, seven straight Pro Bowls (1989-95).

The Buffalo Bills were one of the best teams of the era. They went to four straight Super Bowls (1990, 91, 92, 93) although they lost them all.

I admired Reed and his team because they never gave up. Their comeback playoff win against the Houston Oilers in 1993 was one of the most memorable highlights of that sports era for me.

Heartfelt congrats to AR on this Super Bowl Sunday.

Top Labels

"All is fair in love and war...and this is revolution!"
--Jerry Travers (Top Hat)

Prior to this post, here are all key words that have appeared at least 300 times in the labels list at the end of posts appearing on this blog:

intervention  619
debt  510
media  505
government  502
risk  456
socialism  402
technical analysis  385
inflation  382
reason  362
freedom  354
Fed  317
sentiment  316
liberty  312

Surprises: media, risk, reason. Didn't think those tags had been used that often.