Compulsion, Not Compassion

Standing in line marking time
Waiting for the welfare dime
'Cause they can't buy a job
--Bruce Hornsby & the Range

Have picked up on more people claiming that their fondness for welfarism, i.e., government sponsored welfare and relief programs, demonstrates their 'compassion' for others. Welfarists also claim that those people who do not share their support for welfarism are 'cold-hearted.'

Those who promote this perspective shower themselves with misguided praise.

Compassion is empathy for the suffering of others coupled with a desire to relieve that suffering. It drives acts of altruism or charity--behaving in a manner that is helpful to others with no expectation of material benefit in return. There is still a trade involved, however, as the compassionate actor is likely to realize psychic income from helping others.

Acts of compassion are therefore voluntary exchanges. They cannot be forced.

Yet, that is precisely what proponents of government sponsored welfare programs attempt to do. Instead of engaging in direct voluntary exchange with those who need help, welfarists prefer to employ government as strong armed agents to force others to part with life, liberty, or property in the name of 'helping' others.

Stated differently, welfarists expropriate then trade the property of others to gain psychic for themselves.

And by doing this, welfarists credit themselves with 'compassion?'

This is authoritarianism. Compulsion rather than compassion. By forcing others to do something that they do not want to do, welfarists engender the coldness that they fault in others.

Fade Trade

So glad we've almost made it
So sad they had to fade it
--Tears for Fears

Stocks have tacked on close to 5% off Friday's lows on the back of Fed chair Bernanke's Jackson Hole speech. We're now coming up on the SPX 1225 level that led the spill once breached nearly a month ago.

Will be interesting to see how things behave at these levels, as that 1225 now serves as resistance.

Personally, I've been fading (read: selling) this rally--unloading longs and adding to shorts. Have worked my net long stock exposure (longs minus shorts) down from about 22% to 13% of liquid assets.

Still sense that we have a date below w/ SPX 1025 in the not too distant future. As such, I want to use strength to reduce my net long position.

position in SPX

Valuation with Open Eyes

But did you know
That when it snows
My eyes become large
And the light that you shine can be seen
--Seal

Fine weekly note by John Hussman. Particularly noteworthy was the 'Valuation Review' section. I continue to view John's work on general market valuation as among the best.

Note the graph that plots projected 10 year projected annual return of the SPX versus current SPX price level. Today's level of about 1200 projects to about 5 1/2% annualized.

To achieve projected returns corresponding to the oft cited 10% historical returns of stocks would require the SPX to be at about 800.

As Dr J observes, those rare secular buying opportunities (e.g., circa 1982), those that correspond to single digit P/Es and 6-8% dividend yields correspond to an SPX of 400.

John notes that while this may seem 'utterly ridiculous,' historical evidence suggests otherwise.

position in SPX

Robber Barons

I'm at the car park, the airport, the baggage carousel
The people keep on grabbing, ain't wishing I was well
--Squeeze

A man walking down the street is stopped by five people. The five people tell the man to hand over his wallet or else they will forcibly take it from him.

-----

Five people vote in favor of acquiring wealth from a man who is better off than the rest. The five people tell the man to hand over his wealth or they will forcibly take it from him.

-----

Is this not robbery in both cases?

Correlation Station

Ain't got no regrets

And I ain't losing track

Of which way I'm going

Ain't gonna double back

--Lou Gramm

Have been running across claims that the correlation among stocks has been declining.

Data suggest otherwise...

position in SPX

Fed the Risk Addict

Nothing's so loud
As hearing when we lie
The truth is not kind
And you said neither am I
--Toad the Wet Sprocket

A year ago at Jackson Hole, Fed chair Bernanke signaled a major policy initiative aimed at stimulating the stock market, er, the economy, that became known as QE2. That policy lit a fire under the equity markets and they ripped higher--only to come tumbling down over the last month or so coincident with the end of QE2.

Markets were looking for some deja vu today as Bernanke took the podium this year's summer shrimpfest this morning. His speech did not detail a new stimulus program, although he did indicate that he has extended the length of the Sept FOMC meeting to two days so that the committee can amply discuss the various 'tools' at the Fed's disposal for stimulating growth.

That 'potential' for future Fed intervention was perhaps all markets needed today, as early market losses were quickly reversed as Bernanke spoke and the indexes sprinted higher for gains of 1% or so.

Hope springs eternal for the addict.

position in SPX

Gold and Blackball

"You just sit there in your office. A scholarship here, no scholarship there. He goes. He stays. Who in the hell gave you that power?"
--Stefen Djordjevic (All the Right Moves)

Previously we noted the media's general avoidance of Ron Paul's presidential campaign despite his success. Peter Schiff does similar here while pulling in this laughable article from Barron's profiling Ron Paul's home run investments in gold.

The article seems to want to discredit RP's investment success. At times the article's tone paints Paul as reckless (portfolio full of gold stocks that would be a 'financial planner's nightmare), negative or unpatriotic (portfolio constitutes a 'massive bearish bet on the economy'), or, and it's hard to write this without LOL, wrong (RP has been predicting 'disastrous inflation' since Nixon closed the gold window in '71--plus gold might still go down and hammer his portfolio).

Sheer child-like thought process...

The other implied message, as Schiff notes, is that Ron Paul's investment positions imply that he his using his political position to do things to tank the economy and push gold higher. We've actually discussed media claims like this before--that there is a conflict of interest between Paul's investments and his job as a Congressman.

An ounce of reasoning dismisses these claims as misguided (or worse). Investments in gold are bets on disorder (monetary, social, etc). Disorder has been increasing and gold prices have been rising in kind. Ron Paul's voting record demonstrates that he has consistently opposed the policy trends enacted as disorder has increased.

More suspicious would be politicians who happen to be long lots of gold while favoring the stimulus programs, bank bailouts, Federal Reserve easy money policy, et al that continue to be rolled out. It would be reasonable to conclude that such people were front running their own policies that are bringing the system down.

Instead, Ron Paul is fading (read: going against) his investment positions. He is trying to make the system better, while preparing for the worst.

position in gold  

Democratic Tyranny

With one foot in the past
Now just how long will it last
No, no, no, have you no ambition?
--Tears for Fears

Many people like to say that democracy is a necessary component of a free society. I'm not sure where the broad adherence to such a wrongful association originated.

Surely it could not have come from study of America's founding documents. While the Declaration and Constitution are chock full of references to liberty, there is not one mention of the word 'democracy.'

However, enough people espouse the freedom-democracy link to make me think it was brainwashed into their heads as part of schooling. Of course, mainstream media play a role as well.

Liberty is the freedom to pursue one's destiny without forceful interference from others. Democracy is a group decision-making rule whereby the alternative supported by the largest number of people is pursued.

The reasoning mind quickly concludes that democracy impairs, rather than supports, liberty. Unless the vote is unanimous, any decision made by democratic process discriminates against those in the minority as they are forced to succumb to the desires of those in the majority group.

Democracy's common label as the 'majority rule' could not be more accurate. The majority rules the minority.

The framers understood that tyranny by the majority was just as detrimental to liberty as tyranny by some small group. Which is why they designed a republic grounded in rule of law rather than discretionary rule by any person or group.

Democracy and freedom have little in common.

Capital Myths

In a couple years they have built a home sweet home
With a couple kids running in the yard
Of Desmond and Molly Jones
--The Beatles

Rare these days to find a market-grounded economist at Harvard. But Prof Jeff Miron goes against the grain here to falsify three myths about capitalism.

Pro capitalism is the same as pro big business. Capitalism is defined as ownership and control of productive assets in private hands. There is no government intervention. Consumers benefit and standard of living increases when producers compete to satisfy market needs. Large businesses often seek anti-capitalist remedies to reduce competition and protect profits. These remedies generally come from government e.g., trade barriers, subsidies, and, yes, regulation. Regulation raise barriers to entry, thereby squelching competition. Big business and big government are good friends.

Capitalism generates an 'unfair' distribution of wealth. Capitalism rewards productive effort. Those who successfully meet market needs of the market are rewarded by buyers via trade. Those who are less successful get less. Attempting to redistribute wealth more evenly reduces incentive to satisfy consumers, and general standard of living falls.

Capitalism was responsible for the recent financial crisis. Many times on these pages we've observed that current markets are not free but hampered. In fact, they have been trending toward the other end of the spectrum, socialism, for some time. As Dr Miron observes, no one who is being intellectually honest can truly think that we had capitalism anywhere close to its pure sense prior to the meltdown. Given the extent to which government was (and is) intervening across the board, it is more reasonable to conclude that interfering with capitalism generates crises and recessions.

The Folly of Income Equality

When the walls come tumblin' down
When the walls come crumblin' crumblin'
When the walls come tumblin' tumblin' down
--John Mellencamp

Keen insight, as always, from Mises on wealth and income inequality. The phenomenon of unequal distribution of wealth and income is as old as civilization itself, although formal study is often considered to have commenced with Pareto's work in the 1800s.

Mises sagely observes that inequality is an essential feature of a market economy. In a market economy, consumers, not producers, are supreme. Inequality empowers consumers to motivate those engaged in production to comply with their demands. Producers maintain possession of productive assets as long as they successfully satisfy consumers. If they are unsuccessful, then profits fall and producers cede control of productive assets to those more capable.

If there was no inequality of income permitted in society, then producers would not be driven to improve productivity and innovate to better satisfy buyer needs. Inequality of income drives higher standard of living for all, including those at the bottom of the social pyramid. This relationship is something that socialists fail or refuse to understand.

Were it possible to to evenly distribute income (a debateable thing, as we've never seen it on a large scale in the history of the world), then society is destined for squalor. There is no incentive for producers to innovate. Moreover, investment capital necessary for improving productivity would not exist it is typically accumulated by those with high incomes. Indeed, those who control production, which in a socialistic system are the central planners, reign supreme. Consumers are forced to take what the planners mandate. Productivity declines; standard of living falls.

Mises notes that contemporary socialists often claim that they don't to do away with inequality altogether. Instead, they espouse a 'lesser degree' of inequality. Of course, determining that lesser degree is an exercise in subjectivity that leads down the slippery slope. Mises correctly notes that once a society undertakes a policy of equalization, it is unlikely that there will be a future point where that policy can be checked. Quoting the master:

"Under the sway of the doctrines taught by contemporary pseudoeconomists, all but a few reasonable men believe that they are injured by the mere fact that their own income is smaller than that of other people and that it is not a bad policy to confiscate the difference." [emphasis mine]

So progressives clamor for ever more 'social justice' from their government agents of force...as the walls crumble around them.