Narrow Margin

Here come the world
With the look in its eye
Future uncertain but certainly slight
--INXS

James Kostohryz downplays America's debt problem, citing a McKinsey study showing that US debt levels are not out of line with the rest of the developed world.

Dismissing the severity US debt issue based on this type of analysis seems imprudent for a number of reasons. How meaningful are relative debt comparisons, for example? If all developed countries are carrying on average 200%+ debt levels relative to GDP, it seems unwise to conclude that because the US falls somewhere in the middle of the pack that we don't have a problem. On an absolute basis, there's an argument to be made that the entire developed world is essentially broke due to chronically borrowing from the future to live better in the present.

During the ~20 yr period of the McKinsey report, debt levels of all developed countries have been increasing substantially--in some cases 2x or 3x. As we've observed in sector markets over the past couple of years, accumulating debt eventually leads to levels that can no longer be serviced or funded. Exactly what that level is, no one knows. But if creditors get risk averse and no longer fund chronically increasing borrowing habits, then the world has a problem.

Moreover, the McKinsey analysis ignores future liabilities. In the US and elsewhere, this would easily double or even triple country debt levels. Moreover, leverage baked into debt-related derivatives, the notional values of which run in the hundreds of $trillions, are not considered. Given the world's leveraged, interconnected state, a seemingly 'small' problem eminating from an isolated part of the world could knock dominos onto the US and elsewhere. We've seen hints of this over the past two years. Ignoring this scenario given what we've already witnessed just doesn't make sense to me.

Leverage is a measure of debt to the value of underlying assets. If the underlying assets are valued at inflated levels, then leverage will appear lower than actual. There is a good case to be made that asset levels are being propped up by interventionary policies. If market forces re-exert their influence and take prices lower, then measured leverage will increase accordingly. And then selling begets selling as folks seek to delever...

In short, grounding a risk assessment of US debt levels in a report such the McKinsey analysis seems a myopic approach to the problem.

Politics and Fiscal Disaster

"When I asked for your advice, I didn't mean that you should actually speak."
--Bill Cabot (Sum of All Fears)

I thought this was a well written piece from an author who has been positioned for excellent perspective. Non-partisan (as in he blasts both sides of the aisle) in analysis as well.

Particularly liked his refute use common sense, back-of-the-envelope accounting of the popular argument that government intervention was necessary to save the system from collapse.

His primary thesis is primarily this: thru government's interventions, all discpline for fiscal oversight has gone out the window. And likely cannot be reversed.

Serf's Up

"I caught my first tube today, sir."
--Johnny Utah (Point Break)

Some nice quotes from Hayek (1944) Chapter 5 'Planning and Democracy.' Boldface emphasis mine.

"The common features of all collectivist systems may be described, in a phrase ever dear to socialists of all schools, as the deliberate organization of the labors of society for a definite social goal."

"...the individualist concludes that the individuals should be allowed, within defined limits, to follow their own values and preferences rather than somebody else's; that within these spheres the individual's system of ends should be supreme and not subject to any dictation by others. It is this recognition of the individual as the ultimate judge of his ends, the belief that as far as possible his own views ought to govern his actions, that forms the essence of the individualist position."

"When individuals combine in a joint effort to realize ends they have in common, the organizations, like the state, that they form for this purpose are given their own system of ends and their own means. But any organization thus formed remains one 'person' among others, in the case of the state much more powerful than any of the others, it is true, yet still with its separate and limited sphere in which alone its ends are supreme. The limits of this sphere are determined by the extent to which the individuals agree on particular ends, and the probability that they will agree on a particular course of action necessarily decreases as the scope of such action extends."

"We can rely on voluntary agreement to guide the action of the state only so long as it is confined to spheres where agreement exists. But not only where the state undertakes direct control in fields where there is no such agreement is it bound to suppress individual freedom."

"It is often said that democracy will not tolerate capitalism. If 'capitalism' means here a competitive system based on free disposal over private property, it is far more important to realize that only within this system is democracy possible. When it becomes dominated by a collectivist creed, democracy will inevitably destroy itself."

Reference

Hayek, F. 1944. The road to serfdom. Chicago: The University of Chicago.

Boo's Clues

I've been looking so long at these pictures of you
That I almost believe that they're real
I've been living so long with my pictures of you
That I almost believe that the pictures are all I can feel
--The Cure

Over the past year, sustained downside market action has been rare. Thus the recent heavy action has stood out.

Chartgazing, however, suggests nothing for the bulls to get too concerned about yet, as we've had a couple other episodes like this (7-10% pullbacks) off the March lows.

Lotsa traders are watching SPX 1080 as near term support. We bounced off 1080 today. The old technical adage is that support gets weaker with each visit, as additional demand is stripped away at this level that could offer future support.

My eyes gravitate to the 200 day MA at about 1025, and I wonder whether Boo might get his groove on down to this area which constitutes another discernable zone of support.

Personally, I kicked out all longs a coupla wks back as this uptrend seemed to be running on vapor, and many trend exhaustion signals were sounding. It remains to be seen, of course, whether that was the right thing to do.

Currently, I do have some short exposure, and may use further lifts to add some more, as my sense is that the tape's tenor may be changing in Boo's favor.

position in SPX

Back and Forth

"All the same, Mr Fitzsimmons, if you aren't confused, you don't know what's going on."
--Frankie McGuire (The Devil's Own)

After the 2004 presidential election, I offered to my disappointed sister that she might take solace in the likelihood that the Bush administration would be unable to keep the wheels on the economic wagon for another four yrs, and that in 2008 it would be a bad time to be running for president as a Republican.

Such a prognostication didn't require sophisticated foresight. One merely had to observe the extreme actions being taken by the majority party to paint the surface pretty while underneath these same actions were making a bad situation worse.

The same thing is now happening in the new large and in charge party. The Democratic majority is engaging in pretty much the same types of unproductive economic interventions--they're just taking things to new levels of extreme.

The chances that this will end badly for them are very high. Early election and poll numbers are beginning to reflect this.

One has to wonder if/when the voting public throws of the curse of 'expecting different results from the same process' and regains sanity.

Hands Over Eyes

World serves its own needs
Listen to your heart bleed
Tell me with the rapture
And the reverent in the right, right
--REM

A couple nights back I was watching a Conservative talking head bash the current administration for spending money we don't have which is putting our future at risk.

When the subject turned to Ben Bernanke's reappointment, however, the pundit staunchly defended the Fed chair, claiming that Mr Bernanke's actions have been vital to market lifts worldwide and that not reappointing him might precipitate a severe market pullback.

Just one example of the ignorance, or hypocrisy, displayed by politically-minded people who treat fiscal and monetary policy as mutually exclusive. In reality, they are joined at the hip.

And together they're breaking us.

Kiss of the Dragon

Forty seven deadbeats living in the back streets
North east west south all in the same house
Sitting in a back room waiting for the big boom
I'm in a bedroom waiting for my baby
--Escape Club

My friend Vitaliy skillfully sketches structural problems growing in China. What I particularly like about his analysis is that it comes from someone who grew up in a similar authoritarian regime. He has first hand experience of big-time capital misallocation by central planners.

What I wish Vitaliy would have done was sketch the consequences, not just for China but for the world, if (when) this bubble pops.

Nonetheless, his missive heightens my sense that China is a train wreck in the making. The impact of such a crash will certainly resonate globally.

No Chainsaw Here

"Our job is to cut costs. Cut them to the bone."
--Art Thomas (The Secret of My Success)

John's annual living expenses currently amount to ~$30K. For daily lunch during the workweek, he buys a $5 footlong at Subway. This habit costs him $1000-1500 annually, or about 3-5% of annual expenses.

Economic uncertainty has John thinking about cutting his spending over the next year. Here's what he decides:

-->Let's freeze spending on those lunchtime subs. No cuts, just no increases.

-->All other expenses, the other 95-97%, are exempt from the budget plan. Based on previous year's trends, expenses in the exempt categories have been increasing anywhere from 10 to 200% annually.

Based on his plan, how successful will John be at curbing expenses?

About as successful as President Obama's proposed spending freeze. As Mike Shedlock notes, given its tiny scope and hefty exemptions, proposing such a plan should be downright embarrasing for this administration.

Al Dunlap doesn't have to worry about surrendering his nickname anytime soon.

Title of Justice

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

Lots of good points here by Murray Rothbard on the subject of justice and property rights. He begins with a point that is often overlooked. Whenever an economic exchange takes place, what is really being exchanged is title of ownership.

It is therefore inconsistent to condone free economic exchange between two parties while proposing that individuals do not have full rights to this property.

Viewed in this manner, denying such an exchange or such rights would be unjust.

Yet folks who frequently engage in free economic exchange also want to confiscate the property of others in the name of 'justice.' The rationale often offered is that the property was not the confiscatee's to begin with. Rather, the property is jointly owned by the community, and therefore can be rightly redistributed to others in the community.

As Rothbard points out, in denying the property rights of an individual, only two alternatives are possible. a) A certain class of people has the right to appropriate another class's property without the appropriatee's consent, or b) Everyone in the community has an equal share in the property of everyone else.

While the injustice of a) should be apparent, we witness such action routinely via taxation, eminent domain, et al. The 'communal' solution expressed in b) is grounded in the absurdity that individuals are entitled to own a part of everyone else but not entitled to own themselves.

As Rothbard notes, b) leads to a world where no one would be free to take any productive action without prior approval or command by all others in society. Because it would be physically impossible for everyone to keep tabs of everyone else to ensure that communal goals were being upheld, supervision (and ultimately control and ownership) would devolve into a specialized group of people who would become the ruling class.

Confiscation in the name of others would therefore practically devolve into an oligarchy of confiscators.

The oligarchs confiscate in the name of communal 'justice.'

Sadly, this twisted state of affairs is not a hypothetical. It is becoming reality.

Inquiring Minds

"Scientific criticism has no nobler task than to shatter false beliefs."
--Ludwig von Mises

Have started in once more on Mises's (1951) analysis of socialism. I now have three projects along these lines pushed away from shore. The others include Hayek (1944) and Schumpeter (1942).

Mises's approach is to study socialism using a scientific, logical approach which, as he notes early on, is something that Marx and other developers despised.

When a particular mindset seek to barracade itself from scientific thought and critical thinking, you're likely looking at something with a low degree of validity.

References

Hayek, F. 1944. The road to serfdom. Chicago: The University of Chicago.

Mises, L. 1951. Socialism: An economic and sociological analysis. New Haven: Yale University Press.

Schumpeter, J.A. 1942. Capitalism, socialism, and democracy. New York: Harper & Brothers.