Lost and Found

"I know what it's like to lose precious things. And then, of course, to find them again."
--Laura Charles (The Last Dragon)

Today we are treated to Luke 15--the magnificent Lost and Found parables. The intellectuals of the day, the Pharisees and scribes, complained that Jesus was mingling with sinners who wanted to hear Him speak. Christ explained using a series of parables.

He first asked the crowd, including the intellectuals, who among them would not tirelessly search for the one sheep from a large flock that had been lost, and then happily let everyone know once it had been found. This is like the joy felt in heaven when one sinner repents.

Christ then asked who among them would not search their homes for the one silver coin that had been misplaced, and then rejoice when it was recovered. This too, is analogous to God's joy when a sinner repents.

Then Jesus launched the main story, the famous story of the Prodigal Son. A twist to this parable is the brother who has faithfully stood by his father's side thru thick and thin. He is bothered when his father celebrates the prodigal son's unexpected return. After all, the faithful son had done everything his father had asked while his brother had squandered a fortune. Now the father was willing to forgive and forget plus throw an extravagant party on the prodigal son's behalf--a party that the father had never before thrown for the faithful son.

There is much to reflect on in this parable. Recovery and its celebration. The holiness of penance. Heavenly views on equality and justice.

It also bids the question of who was truly lost and found in, and by, this parable.

Ignorance and Socialism

The parting on the left
Is now parting on the right
And the beards have all grown longer overnight
--The Who

In an exchange on the House floor this past week, several Democrats protested claims made by several Republicans that Nazis were socialists. A writer for the leftist outlet Politico rushed to defend the Democrats:

"Of course, this isn't true. The Nazi Party, officially National Socialist German Worker's Party, was fascist, not socialist - the opposite end of the political universe from socialists. But that hasn't stopped other Republicans from jumping in as well."

The Democrats and their media lackeys would benefit from a better understanding of economics and history.

As these pages have discussed, socialism is a form of economic organizing in which control of the means of production rests with the state. Socialism comes in different brands. One form is communism, credited to the ideas of Karl Marx, which seeks to distribute production equitably in the name of the 'common good.'

Enthusiasm for communism as a political means for socialistic organizing grew in the late 1800s. By the turn of the Twentieth Century, Germany had embraced social welfare programs patterned on the Marxist ideal. However, World War I and its after effects soured sentiment for communism among the German people--particularly the part about sharing the wealth with comrades worldwide.

Political activists including Adolph Hitler convinced the German people that a more inwardly focused brand of socialism--one that stopped at the country's borders--would benefit them. The idea was for government to concentrate resource control on important production verticals. Proceeds would be shared inside the German borders.

The national socialist (NAZI) movement was born and became the template for similar movements elsewhere. Roosevelt's New Deal even employed several features.

Hayek understood that 'Marxist socialism' and 'National socialism' were merely different expressions of the same idea. He warned policymakers that the increasingly interventionist policies of the US and UK up to and during World War II were paradoxically transforming the ‘allies’ into precisely those 'bad' countries that we were fighting a world war against.

Ignorance about socialism then, it seems, remains ignorance about socialism now.

No Yuri, Now What?

Balian: Take the horse, and be about your business.
Imad: This is your prize of battle! I am your prisoner--your slave--should you wish it!
Balian: I have been a slave, or very near to one. I will never keep one, nor suffer any to be kept. Go.
Imad: The man you killed was a very great cavalier among the Muslims. His name was Mummad al Fais. 
Balian: I will pray for him.
Imad: Your quality will be known among your enemies...before you ever meet them, my friend.
--Kingdom of Heaven

After the Mueller Report was released last weekend, which revealed no Yuri, many Republicans wish to turn the guns around (quite literally in the case of government) on political partisans, including both government officials and their media lackeys, who precipitated this bogus investigation. Such a turnabout seems fair and reasonable under the circumstances.

However, there is also an argument for letting it go. It is possible, for example, that many people who motivated the Mueller investigation suffer from a psychosis that they are having trouble shaking. Seeking retribution does not seem a constructive mechanism for helping those who may be struggling.

The Lenten season teaches mercy and forgiveness--even toward staunch enemies.

Imagine this. A group of political partisans who had the opposition party in their sights for an easy public take-down refuse to pull the trigger. Instead of re-engaging in another round of combat with its enemies, the group walked away and prayed for the opposition.

Heaven's Opener

Ray Kinsella: Is there a heaven?
John Kinsella: Oh yeah. It's the place where dreams come true.
Ray Kinsella: Maybe this is heaven.
--Field of Dreams

Opening Day in Cincinnati. If you haven't grown up here, then the vibe can be difficult to grasp. Winter done. New beginnings. Tradition. Celebration. Joy.

Even more meaningful this year, as a special version of Take Me Out to the Ball Game streams from heaven.

Play ball!

Exploiting Fear

"People should not be afraid of their governments. Governments should be afraid of their people.
 --V (V for Vendetta)

Good point by Ron Paul. The recently proposed Green New Deal linked to the progressive rallying cry of 'climate change' is analogous to various neocon proposals that stir the rallying cry of 'terrorism.' Both are ready-made excuses for expanding government and curtailing liberty.

Politicians learned long ago that the key to assimilating power is to instill fear in the citizenry. When people are fearful, they become more willing to surrender their freedom in exchange for safety. Consequently, they contract with strong armed government agents to protect them from their fears.

By exploiting fear, the government's protection racket flourishes. State power increases and social power decreases.

Capital Gains vs Dividends

I was halfway home
I was half insane
And every shop window I looked into
Just looked the same
--Style Council

Stocks are often called 'shares' because, when you buy them, you essentially purchase fractional ownership of a business. This opens the door to sharing in a company's success in two ways. One way is through capital appreciation of your shares. Your 'capital appreciates' when the share price of a stock that you own increases above your purchase price.

If you previously bought Apple (AAPL) at $160/share, then at this morning's opening quote of about $192 you currently have a $32/share capital gain on your investment. That profit is on paper only, however, until you 'ring the register' by selling your shares. It is quite possible that today's $32/share gain in AAPL could turn into a future loss if the share price declines significantly from here. After all, AAPL shares were selling at about $140/share in early January.

Materially profiting from capital appreciation, then, requires selling your shares at a higher price. This raises several hard-to-answer questions. When should I sell? What are the tax consequences of doing so? What should I do with the proceeds after I sell? What if prices decline below my original purchase price before I can sell? How do I invest for the long term if I'm constantly selling my stock positions in pursuit of capital gains? Buy-to-sell investment strategies can be difficult to consistently execute well--as I can attest from personal experience.

The other way to participate in the success of a company is through dividend payouts. Dividends are cash payments made by companies to their shareholders. Think of dividends as a form of profit sharing. Companies that pay dividends decide to take a portion of their earnings and distribute them to investors. Dividends are often paid on regular (e.g., quarterly) basis.

Dividends often come from companies that have been around a while. These firms commonly have mature, profitable businesses that no longer benefit from plowing all earnings back into internal growth projects. Instead, some profits are returned to investors in the form of cash.

Take Coca-Cola (KO) for example. The company was founded in 1892 but did not begin paying a dividend until 1920. As the company has matured, it has become a consistent dividend payer. In fact, KO has increased its annual dividend payout to shareholders in each of the past 55 years. Current KO pays a quarterly dividend of $0.40/share, or $1.60 share annually. With KO currently trading at about $46/share, that's a 'dividend yield' of $1.60/$46 = 3.5%

Unlike capital gains from share price appreciation--which remain unrealized until/unless you sell your shares--dividends constitute actual cash in hand from your investment. As such, dividends provide a source of real income. Dividends can supplement the income that you earn from your job. When you retire, a portfolio of dividend-paying stocks can be an important source of regular income. This situation reflects the classic idea behind investing: lay out investment capital today and, if you have chosen wisely, that investment throws off a stream of future cash in your direction.

Dividend paying stocks do carry risks. A company's business can deteriorate, causing a it to reduce or even eliminate dividend payouts. Moreover, declines in a company's share price can offset gains from dividends. For instance, a 3.5% decline in KO's share price can be seen as wiping out a year's worth of dividend payouts from the company.

While investment strategies grounded in capital gains certainly have a place in investment portfolios, circumstances over the past few months have re-introduced me to the value--perhaps the superior value--of investment strategies grounded in dividend-paying stocks. We'll discuss why in a future post.

position in KO

Unequal Incomes by Force

And I get so tired when I have to explain
When you're so far away from me
See you've been in the sun and I've been in the rain
And you're so far away from me
--Dire Straits

As these pages have observed, income inequality is not a bad thing when it occurs naturally. In fact, it is an essential feature of a thriving market economy. The specter of higher incomes motivates producers to become more productive. When producers are compensated (by consumers) for being more productive (either thru innovation or efficiency gains), then standard of living improves for all.

Problems arise, however, when income inequality is increased by force. "Huh?," you ask, "I thought income equality is what bureaucrats seek to achieve by force--using, for example, socialist tactics of re-distribution."

Yes, but while income equality can be forced, so can income inequality. The primary platform for increased income (and wealth) inequality is central bank policy. Whenever the Fed and other central banks ease monetary policy, which requires force to do so, then incomes become more unequal.

When rates are forced lower, financial assets like stocks and bonds are bid higher. Wealthy individuals, who tend to own more financial assets, benefit in an out-sized way compared to people of lesser means. Moreover, people of lesser means, who commonly climb the first few rungs of the economic prosperity ladder by saving more of their incomes in interest-bearing accounts, get paid less for doing so. With less incentive to save, many lower income people save far less than they otherwise would--and may even take on more debt since the cost of borrowing has been forced lower. Yet, more debt and less saving is precisely the opposite of what poorer people need to do to boost income and wealth over time.

Another group that benefits from easy monetary policy is the financial sector. Because banks, brokers, et al. get first dibs on newly created cash and credit money by central banks, they can buy things (financial securities in particular) while prices are still low and then profit handsomely as prices rise when those lower in the food chain subsequently get their hands on the money and bid things higher in an inflationary cycle.

With central bankers engaged in the most radical monetary policies that the world has ever seen, we can be confident that these policies have forced income distribution markedly wider in their wake.

Why the Fed Caves

"Well, we're now so levered up that once it gets outside these limits, it gets ugly in a hurry."
--Will Emerson (Margin Call)

Chart below shows the Fed Funds target since 1992. The low periods correspond to recessions (~1992, 2002, 2008). Note the lower lows and lower highs--the technical definition of a downtrend.

This helps portray the Fed's predicament. Each time we have a recession, the Fed lowers rates below market, prompting more borrowing than would otherwise occur. In natural market cycles not subject to central bank intervention, just the opposite should occur. Debt should fall during a recession as bad loans get extinguished, interest rates rise, and saving commences.

In unnatural market cycles, with Fed policies that force rates lower, we get more debt and leverage. And, by definition, less savings.

This leaves the system weaker coming out of downturns rather than stronger. Thanks to central bank policies, the system always exits a recession more levered up than before.

Thus, attempts by central banks to 'normalize' rates back to levels of previous expansions are destined to fail. Why? Because the greater the leverage in the system, the less tolerant the system is to rising interest rates and falling asset prices used as collateral against the debt.

Stated differently, the collective balance sheet, being more leveraged, is more susceptible to insolvency should rates rise and asset prices fall.

This is why the Fed always caves and turns dovish earlier in the present cycle compared to the previous cycle. With each passing cycle, the Fed paints itself (and the economy) farther into a corner that it cannot escape.

First Amendment Protection on Campus

A voice is waiting for me
To set it free
I got the key
I got the key
--Russ Ballard

This week President Trump signed an executive order aimed at protecting free speech on college campuses. The order threatens to pull federal funding from colleges that do not uphold those rights.

This order is directed at movements on college campuses to suppress speech deemed unpleasant by some students, administrators, or external resource providers. Those movements restrain communication of alternative viewpoints necessary for seeing various sides of an issue and for developing critical thought processes (perhaps the ultimate goal of higher ed).

Opponents of Trump's order claim that colleges are not free speech forums but learning institutions, and these institutions must set norms about how learning should take place. These norms may, at times, limit speech for the sake of learning.

Nice try, but few things challenge critical minds more so than views that run counter to orthodoxy and fall outside the comfort level of everyday norms. Free speech forums--not safe spaces--are vital for learning.

The First Amendment specifies that the federal government shall make no laws abridging the freedom of speech. When speech takes place in public places, such as on college campuses that have received public funding, then no laws, rules, regulations, et al. can rightfully prevent speech from freely occurring. In fact, government is obligated to ensure a speaker's right to speak and his/her audience's right to hear. President Trump is fulfilling that obligation.

However, the president has no standing to uphold free speech in private college contexts. Under principles of private property, owners of private schools can manage speech as they choose and have the right to physically remove those who violate the rules. 

The implication, of course, is that those schools not wishing to preserve the First Amendment can do so simply by removing their hands from public coffers.

Admission of Failure

Relax said the night man
We are programmed to receive
You can check out any time you like
But you can never leave
--Eagles

Following its bimonthly meeting on Wednesday, the FOMC announced that its overnight lending rate would remain unchanged in a range between 2.25-2.5%. At a news conference after the meeting and announcement, Fed Chairman Jerome Powell suggested that the central bank's previous campaign to tighten rates is over.

He also announced that the Fed's quantitative tightening (QT) program, originally anticipated to last years as the central bank unwound $trillions in securities purchased during the quantitative easing (QE) campaign, would end this fall with about $4 trillion of assets now to be kept on the Fed's balance sheet.

This all amounts to a gigantic admission of failure. Aggressive monetary policy did not create a self-sustaining recovery that could withstand a reversal of that policy.

Instead, all QE et al proved is that financial asset prices could be inflated significantly higher.

It also proved that these aggressive policies trap central banks. They can't leave these policies without willfully collapsing economies and markets.

Unfortunately, that suggests an 'unwillful' collapse when central banks can no longer suppress natural forces that seek to normalize market functioning.