Bazooka Time

Lieutenant Briggs: Suppose they panic and start shooting?
Harry Callahan: Nothing wrong with shooting if the right people get shot.
--Magnum Force

As noted in this morning's post, central banks got out the bazookas today in an attempt to blow away systemic deflationary forces that are driving Euro and US banks toward insolvency.

On the surface, the concerted central bank actions are clearly inflationary.

This post on zerohedge w/ Peter Schiff comments captures it well. The snippet at the end of the post REALLY captures it well:

"...this is merely the beginning as more and more inflationary actions have to be undertaken by central banks to save banks from being crushed by untenable debt loads. Whether they succeed in overturning the deflationary tsunami is unknown. What is certain is that they will bring fiat currencies to the [brink] of viability (and beyond) in trying."

As the snippet notes, the big question is whether this collective action will work. In late 2008, the Fed got out the fire hose of liquidity to stem the Lehman blowup. After a sharp relief rally on the news, however, markets resumed their downward path as the deflationary forces were not to be denied.

Hard not to wonder whether the same set up might not be in play here. Yes, the collective bazooka exceeds the power of the Fed's firehose. But the deflationary forces are more global in nature this time around.

Peter Schiff suggests that this is the time to load up on gold. That may turn out to be the case. Heck, gold popped 40 handles today.

But the other side of the trade is that the market forces pressing against the intervention are deflationary in nature.

And it's generally not nice to fool Mother Nature.

position in SPX, gold

Coordinated Action

"Extreme situations call for extreme measures."
--Terry Silver (Karate Kid 3)

This morning central banks around the world announced coordinated measures to enhance global financial system liquidity. Coordinated measures like this imply that central bankers see something severely wrong with the global financial system.

Their perceptions of systemic probs are correct, although as usual they are behind the curve.

Unfortunately, the planned approach--i.e., 'more liquidity'--does little to remedy the underlying problem, which is one of insolvency.

Nonetheless, the news jacked markets around the world. Domestic stock markets have opened about 2% higher. Gold jumped $30 on the money printing spectre.

My inclination is to 'fade' (read: sell) this news and will be looking for an opportunity to add to short side exposure.

position in SPX, gold

Examples of Distortion Theory

There's more to the picture than meets the eye
Hey, hey, my, my
--Neil Young

It is easy to find examples of the distortion theory of media bias in the everyday press. About a month ago outlets like the New York Times and LA Times ran pieces on drug shortages. The NYT and LAT articles both focus on what government is doing to stem shortages and suggests the cause of shortages relate to greedy health care providers. There is also innuendo that those providers require even more oversight.

Neither piece remotely considers the government's role in causing the shortage. When health care becomes socialized, consumption of health care goods becomes subsidized. A basic axiom in economics is that, when you subsidize behavior, you get more of it. Consumption of onco drugs et al therefore goes up. At the same time, government reimbursement policies place a ceiling on how much providers can charge for those drugs. Place a ceiling on price of a good and you'll get less of that good.

So, government policies have stimulated demand and curtailed supply. Shortages in such situations are not only predictable but inevitable. Yet, journalists in both the NYT and LAT pieces fail to touch this side of the story.

Then there is this recent CBS report on positive thinking and disease. The piece suggests that there is no valid scientific evidence between positive attitudes and outcomes for people with cancer. One immediate problem is that the report does not clearly define what is meant by 'positive thinking,' 'survival,' et al although there are surely many ways that these terms could be defined and measured. Thus you wind up with people discussing/debating different concepts as if they are equivalent.

The report cites a UPenn researcher who has found no relationship between positive thinking and survival (again, however defined). The researcher dismisses other studies contradicting his as 'bad science.' Yet, the CBS report does not investigate or clarify why other studies should be considered 'bad science' while the UPenn study should be considered valid.

Further, a variety of 'positive thinking/positive outcome' cases are cited in the report. Are these cases to be considered random events/flukes? Or might they suggest variables or special subgroupings that the UPenn study is missing. The Yale research cited near the end of the report suggests perhaps the latter, but the reporter does not make a connection.

Consistent with Groseclose's (2011) distortion theory, neither of these examples appear to report incorrect 'facts.' But both examples omit important facts and perspectives.

By omitting these facts and perspectives, both examples are slanted toward certain conclusions. In the first example, a reader is tempted to conclude that health care providers are the problem and government is necessary to make things better. In the second example, the reader is tempted to conclude that individual attitudes and initiative do little to alter acute illness.

Such conclusions are consistent with favorite protagonist/antagonist pairs of the Left: pro government/anti business; pro victim/anti individual initiative.
Because they may not know better, dull minds are liable to slurp the messages up. Thus, as Groseclose (2011) proposes, liberal media bias is likely to distort the American mind.

Skeptical Spectacle

If I'm losing control, will you turn me away
Or touch me deep inside?
And before this gets old, will it still feel the same?
There's no way this can die
--Pat Benatar

If we were to assign news-related causes to today' 2-3% stock market rally, it would probably be a blend of better than expected Black Friday sales plus the spectre of (another) Euro bailout. Of course, we learned today that a) the IMF had no Italian bailout program in motion, and b) last week's retail sales numbers may be greatly exaggerated.

So perhaps today's move is just one more rally to blow off some near term selling pressure.

Technically, an upside move 'works' to SPX 1220.

Other technical evidence, however, is not in synch with a sustained upside move. After an early move lower, Treasuries recovered most of the day's losses. Bank stocks gave up a big chunk of their early gains. The dollar also closed near even after early selling. Oil closed near its lows.

Hard not to view these 'divergences' with some skepticism about the prospects for big upside from here. Time will tell, of course.

Personally, I did a whole lot of nuttin' today. Will likely put back on some of the incremental short exposure ditched last week should prices continue higher toward 1220. Other than that, I continue to be active in the physical metals market, buying both gold and silver.

position in SPX, gold, silver

Cash Rich, Balance Sheet Poor

Reached out a hand to touch your face
You're slowly disappearing from my view
Appearing from my view
--A Flock of Seagulls

Interesting weekly comment by John Hussman, particularly the back half devoted to corporate balance sheets. Many bulls claim that corporations are 'flush with cash' and that corporate balance sheets 'have never been stronger.' As Dr J demonstrates, these claims have little merit.

When compared to the amount of debt on corporate balance sheets, cash has been coming off historical lows. Cash as a fraction of net worth and total assets is also small (in the 5-10% range).

As such, much of the 'cash' on corporate balance sheets comes from debt. Corporations have been building cash in this manner due to cheap financing terms.

Make no mistake, the dominant feature of today's corporation continues to be debt and leverage, not cash.

John also comments on another eye-opening trend: the decline in tangible assets in non-finance corporations. The fraction of tangible assets to total assets is now below half. The remaining assets are financial assets such as debt securities and stocks.

As John notes, "This is striking, in that we presently have a menu of prospective returns on financial assets that is among the most dismal in history."

This is another argument for tangible assets (e.g., commodities) over financial assets, and for companies that are weighted toward more tangible assets.

position in commodities

Loan Ranger

"I got the Holy Spirit. You should get on it. It's a good train."
--Lyle (The Italian Job)

The IMF is said to be preparing a $800 billion loan for Italy in case its debt crisis worsens. The amusing quote here is "[Italy Prime Minister Monti] could draw on the money if his planned austerity measures fail to stop speculation on Italian debt..."

It's only speculation, of course, when price is going in the 'wrong' direction.

We should note that the US is the largest contributor to the IMF. So, once again, we appear to be stepping over the Constitution to fund the problems of other countries on the backs US taxpayers.

Distortion Theory of Media Bias

Haven't you heard, it's a battle of words
The poster bearer cried
Listen son, said the man with the gun
There's room for you inside
--Pink Floyd

Groseclose (2011) builds on previous theoretical concepts to propose a 'distortion theory' of media bias. The gist is that the stories that journalists select and how those stories are presented are shaped by the biases that journalists possess. Because an overwhelming majority of journalists are biased Left, it follows that we should observe general Left-leaning bias in media content.

It is straightforward to view Groseclose's distortion theory as an application of confirmation bias or selective reasoning to journalistic processes. Simply, what journalists decide as worth reporting will colored by their views of the world.

On any given day, there may be dozens of issues that journalists might choose to cover. On a particular issue, there may be hundreds of facts that might be relevant. It is impossible for journalist to capture them all. Instead, journalists can only report a sample.

Because of their own ideological views, however, journalists do not report a representative sample of stories or facts. They give us a biased sample. A sample that is biased Left.

Groseclose states:

"While the job of a journalist is to shine a light on the facts, in the current state of the U.S. media, journalists do not shine their light straight. Instead it is as if they use a prism, bending the light and causing it to make a left turn. The end result is that we, the readers and viewers of the news, are more likely to see facts from the left side of the spectrum." (2011: 68)

Left unchecked, consumption of biased media is likely to cause general political views to take a Left turn as well.

References

Groseclose, T. 2011. Left turn: How liberal media bias distorts the American mind. New York: St Martin's Press.

The Forgotten Man

I'm gonna teach you
How to sing it out
Come-a, come-a, come-a
Let me show you what it's all about
--Jackson Five

William Graham Sumner was a professor of sociology at Yale in the late 1800s. Unlike many of his contemporaries, Sumner refused to be sucked into socialistic fads coloring academic work emanating from European universities.

Instead, Sumner focused on social theory surrounding the nature of liberty and contemporary society. At first glance one might think that space to be crowded. Sadly, however, the vacuum created by the rush of many academics toward emerging theories of socialism left Sumner in a somewhat solitary theoretical position.

A gain for us, though, as it served to highlight Sumner's thought processes for all to consider.

In 1883, Sumner wrote a series of essays for Harper's Weekly on the subject of worker relations. He expanded two of his favorite essays from the series in an address given to audiences in New York and Connecticut that same year. The address as well as the essays are often famously referred to as "The Forgotten Man."

This is a remarkable essay for the time, and it rings true today.
One of the more thought provoking features is how Sumner introduces the Forgotten Man using some 'social justice algebra:'

"As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C should do for X or, in the better case, what A, B, and C should do for X. As for A and B, who get a law to make themselves do for X what they are willing to do for him, we have nothing to say except that they might better have done it without any law, but what I want to do is to look up C...I call him the Forgotten Man...He is the victim of the reformer, social speculator and philanthropist..."

The Forgotten Man wears scars from the truncheon swung by the Welfare State.

Democracy, Compromise, and Progress

I got a Gibson
Without a case
But I can't get that even tanned look on my face
Ill fitting clothes
I blend in a crowd
Fingers so clumsy
Voice so loud
--The Who

This article makes a number of thoughtful points.

Variation is a basic axiom of nature. Innovation results from variation. In most if not all cases, progress must come out of an extreme minority of opinion, not out of majority opinion.

Democracy squelches innovation by imposing the will of the majority on the minority.

Compromise is also prone to stop progress. "Truth is not a thing that can be compromised. A thing is right or it is wrong. Principle cannot be compromised; it can only be abandoned. The route to the discovery of truth is to allow a person to be wholly right or wholly wrong. Compromise is bound to be wrong."

An essential feature of effective government is to protect the rights of minorities from plunder by the majority. The ultimate minority is one person. Thus, the goal of effective government is to protect each person against the plunder of one or more persons.

The protection must be general--i.e., it must protect all persons equally.

Doing so maximizes the chance of progress.

Sacrificial Lamb

Jumpin' up, fallin' down
Don't misunderstand me
You don't think that I know your plan
What you tryin' to hand me?
--James Gang

Tossed about 20% of my SPX short to the trading gods in respect of the move lower that we've seen. Technically, we're approaching what might be thought of as a 'minor' support level at 1160ish.

More substantial support rests at about 1120ish.

Will look to piece out more short exposure on extended weakness. Will also look to add to my metals exposure should they continue weak as well.

position in SPX