May

15

As the cost of a college education soars and the middle class finds itself struggling with paying for public university tuition, MOOCs (Massive Open Online Courses) offer one possible way to lower the costs of a college degree. Lots of promise–and the potential for disrupting the American college, a bastion of the middle ages for the past two centuries–is meeting with lots of resistance, particularly from those with the most to lose from them.

Stefan Jovanovich writes: 

If David includes the Reformation and its Counter within the Middle Ages, then he is right. As Rocky can remind us, until very recently the avowed purpose of Yale was still for man to find God, preferably of the Congregationalist version. The land-grant schools were to be trade schools as Governor Perry's alma mater still is — as a proud "Ag" school. The modern university owes its corrupt origins entirely to WW II and the G.I. bill — as do our healthcare pricing and payment systems. If schools were truly medieval, it would be a good thing. Teachers were paid directly by the customers — the students; and there were no required prerequisite courses. You find echoes of that system as late as the mid-1950s when "name" professors still competed with one another to teach the introductory survey courses; without those butts in the seats the esteemed scholar had little chance of being the next big hit on the textbook circuit.

May

14

I have seen more and more of this story reiterated over the last few months… That hi-tech and robotic innovation are leading to greater displacement of the middle class in the United States and around the world.

"Think Your Job is Robot Proof? Think Again"

A Stanford professor recently commented that technology and scale are greater drivers of job displacement than previously expected. They are also the strongest drivers of significant wealth. The Forbes 400 is now dominated by innovation and those who have perfected scale.

I am surprised that so many economists have been commenting on this so often so recently, as if it's new news.

Ricardo noted this trend in technological unemployment long long ago, but it completely seemed to have disappeared as a story for 190 years.

Even Krugman admitted that if technology is such a significant driver of the divide between the rich and the poor, then surely it makes a mockery of any attempt to balance wealth in this nation since you cannot tear down innovation in the pursuit of balanced distribution.

How did economists ignore this? For fear of being labeled Marxist?

This reminds me of my first three minutes at Hopkins. I asked a professor who had worked at the DOE what would happen if a radical green innovation displaced oil…

He replied… "You don't want to go down that road…" Innovation has its downside, and to him, it was millions of angry young men in the middle east without a source of income from oil.

Stefan Jovanovich comments:

The principal argument of the intellectuals who supported slavery was that economics itself was an inherently "dismal science". Carlyle genuinely believed that a system of accounts based on money prices was far more vicious than any lash. His spoken corollary was that black people needed slavery because they could not otherwise compete. The unspoken corollary of his intellectual successors was that many other groups of people needed protections from the market because they, too, could not compete. That unspoken corollary became spoken when Progressives discovered Marx.

No believer in liberty in 19th century (the people who called themselves "liberals") had any doubt that machines could do it better, faster and cheaper. That was the point of inventing them in the first place. Those liberals also had no doubt that, in a world of scarcity, "better, faster and cheaper" was a good thing because savings and costs were more important than incomes. That is the same reason why they wanted Money to be made only out of the 16K tons of the one metal that was indestructible and, in milled coinage, impossible to fake. If prices had their unit of account determined by the supply of something that could only be produced with great ingenuity and industry, then the implicit fraud of government (we take money from you as an individual at the point of a gun so people you do not choose can receive benefits) would be limited;and thrift would be rewarded.

The liberals' faith was the presumption that, over time, thrift and family virtue would outrun the machines because accumulated capital would profit from the ever-lower costs that machines always produced. The Progressive/Marxist answer was that we could all speed up economic evolution if we just let the government keep the capital and define the costs. What is truly dismal about much of current academic economics is that the basic argument that produced the science itself is now considered to be a fully-settled question. Meanwhile, the economists on the street are filing for disability with the help of the friendly lawyers they found on TV, highly-penalized work (the stuff classified as "wage and hour" employment remains scarce, and yet per capita discretionary retail sales (what people buy after they pay for food, energy, communications and shelter) are once again rising.

As the Lackey would say, "Hah!"

The principal argument of the intellectuals who supported slavery was that economics itself was an inherently "dismal science". Carlyle genuinely believed that a system of accounts based on money prices was far more vicious than any lash. His spoken corollary was that black people needed slavery because they could not otherwise compete. The unspoken corollary of his intellectual successors was that many other groups of people needed protections from the market because they, too, could not compete. That unspoken corollary became spoken when Progressives discovered Marx.

No believer in liberty in 19th century (the people who called themselves "liberals") had any doubt that machines could do it better, faster and cheaper. That was the point of inventing them in the first place. Those liberals also had no doubt that, in a world of scarcity, "better, faster and cheaper" was a good thing because savings and costs were more important than incomes. That is the same reason why they wanted Money to be made only out of the 16K tons of the one metal that was indestructible and, in milled coinage, impossible to fake. If prices had their unit of account determined by the supply of something that could only be produced with great ingenuity and industry, then the implicit fraud of government (we take money from you as an individual at the point of a gun so people you do not choose can receive benefits) would be limited;and thrift would be rewarded.

The liberals' faith was the presumption that, over time, thrift and family virtue would outrun the machines because accumulated capital would profit from the ever-lower costs that machines always produced. The Progressive/Marxist answer was that we could all speed up economic evolution if we just let the government keep the capital and define the costs. What is truly dismal about much of current academic economics is that the basic argument that produced the science itself is now considered to be a fully-settled question. Meanwhile, the economists on the street are filing for disability with the help of the friendly lawyers they found on TV, highly-penalized work (the stuff classified as "wage and hour" employment remains scarce, and yet per capita discretionary retail sales (what people buy after they pay for food, energy, communications and shelter) are once again rising.

As the Lackey would say, "Hah!".

Jim Lackey responds:

Correction! It is Mr. Vic that says HA! Lackeys say, "get the joke", which is a joke as it takes me 3 times to get it… or the "get the joke is "we are the last to know" when it comes to the "news".

May

7

This article echoes a nice perspective on the American Revolution with a Harvard Princeton twist.

"When Austerity Pushed American Colonists to Revolution"

Stefan Jovanovich retorts: 

This is bad history. The Stamp Act was repealed in 1766, and the Royalists were completely in control. The few attempts at rebellion that happened after repeal were horribly unsuccessful; Sam Adams even lost his position as party boss of the Southies. When Ethan Allen arrived in Philadelphia to ask for supplies to reinforce the Green Mountain Boys' control of the New Hampshire Grants (what became Vermont), the Congress told him to do a full inventory of the cannon and powder that Allen and Arnold had captured at Ft. Ticonderoga. Why? Because Congress was offering to give it all back. The Revolution was anything but inevitable. But for the Battle at Breed's Hill, it would not have happened; even Concord and Lexington would have been papered over (warning - Stamp Act pun) if Gage had not decided to try to capture the colonists' two useless cannon that "threatened" (sic) his ships in Boston harbor. But, after Bunkers Hill, it was on. The 2,000 British soldiers suffered 55% casualties (the colonists' first volley was sot at a distance of 15 yards), Gage wrote to London asking for reinforcements of 30,000 men, the Congress decided that they had to get in front of the mob so it could be a parade by sending Washington to Boston, and the arrival of the cannon from Ticonderoga forced the British to abandon Boston. London did send the 30,000 and more but not to Boston but to New York.

How any of this applies to Cyprus is beyond me, especially since it is doubtful that the EU countries combined could currently mount an amphibious invasion of 3,000 men, let alone 10 times that number.

Apr

29

I really enjoyed this article "The History of Creating Value". It has a great timeline showing how people made money through the ages.

Stefan Jovanovich writes: 

Warrior — "We can plunder grower's food for the King". Actually, not. Food is grown and taxed under the King's authority so that the King can afford a standing army that picks fights with other standing armies.

Craftsman — "If we make things and found cities, warriors won't get us." Kings need palaces and priests need temples and they are sure as hell not going to be stuck out in the boonies.

Skipping forward…

Oil Driller — "since industrialists need to feed cars, oil" . Oil was used first for illumination, then for furnaces (both for direct heat and for steam), and only then for gasoline, which begins its history because the Russian oil production has created a kerosene glut.

Corporate Executive — "cars made large factories into corporations" - So this is why the East India Company and the Pennsylvania Railroad are really outliers.

Ms. Vital is the new winner of the Historicity Prize and is entitled to a full case of scuppernog.

Gibbons Burke writes: 

The underlying thrust of this timeline is to argue that being a startup founder is the route to wealth and value creation today. Which is a great idea, and in line with Distributist economic organization, which holds that the main problem with capitalism is not when you have too many capitalists, but too few. The more owners there are in the society, the better.

But while the idea is a good one, the reality is that the road to wealth proposed by these startup evangelists is not to found and create a company which will provide a way to generate value for the owner over his lifetime, but to come up with a novel idea, develop it to the point where it has a proprietary advantage, and sell it to some corporate behemoth who has decided it it easier and much less risky to outsource its research and development to masses of proles living the startup dream. When one emerges with a good idea, simply snap it up and bring it into the corporate umbrella, and either monetize it and develop it further, or kill it because of the disruptive threat it poses to the existing herd of corporate cash cows.

Apr

29

I heard someone the other day say the "wrong route be easy" whereas the "right path will be hard." I challenged them to defend this principle!!! This is an annoying empty platitude. Both in markets and in life.

If you want to be a poet, please recite the rhyme of the ancient mariner instead. If you want to be an ascetic, please get your philosophy correct. If you want to be a trader, recognize that pain means you were WRONG.

On what basis do you argue that "on the wrong road, you find success and happiness initially but in the end you lose; whereas on the right path, you suffer but eventually win."

By this standard, if you allow me to hold your head underwater for the next 2 hours, it's a winning "position".

PLEASE!!!

Perhaps I should go back into my brain hibernation — from which you awakened me 50 hours ago!!!

Leo Jia writes:

Thanks for the wonderful argument, Rocky.

On a single trade, I am totally with you in that one should quickly recognize and correct mistakes. But on an entire trading career, this is generally not the case. I don't know how you learned to trade, but along my experience, which I believe is also quite similar for many successful traders, there have been a lot of difficulties. Should I or those many others have better quit early along the way? One simple example that perhaps best reflects this in life is on choosing careers. The easy (and likely the wrong) route is to get employed. The hard (and likely the right) route is to start one's own venture.

Stefan Jovanovich adds: 

I am the 3rd generation of Jovanovich to subscribe to the belief that "good business happens quickly". Depending on how you would include joint ventures/partnerships in the count, Eddy's Mom and I have started between 8 and 12 businesses and run them until they were either sold, shut down or the Peter principle applied to our management skills. In every one the test was the same: you made money within a matter of a few months or you never made it at all. These rules do not apply to venture capital or any other start-up where the loss of the money invested would make no difference to the lives of the investors. They apply absolutely to the opening of noodle stands ("broth runs deep in our veins, son") and other enterprises that start from scratch without any scratch.

The other rule is that sick businesses cannot be cured or "turned around"; they can be liquidated, as Secretary Mellon advised; but they cannot be saved as enterprises once the rot has set in.

Apr

22

This is a very interesting documentary about gold: "The Secret World of Gold". It just aired on CBC. The premise is that central banks have leased out gold, bullion banks have sold it multiple times over, and there is a big gap in physical gold that is supposed to be in vaults vs the claims that counterparties/customers have on it. But before that there is some really interesting historical stuff about gold at the front end. This was a really good watch.

So if the bullion banks and western central banks have this big shortfall of gold and it is starting to come to light, my theory is that what is going on right now in the gold market is a bear raid to get the prices of gold and silver down as far as possible so the mega-short bullion guys can buy in as much physical that they can (at lower prices) to avoid getting caught in the short-squeeze that has to be the outcome of this.

A couple of points that seem to be adding up.

1. Germany asked for its gold back and was told - 7 years. They were not allowed to see the gold that was supposedly there, supposedly for security reasons.

2. Texas wants its gold back from New York! They don't trust fed government sanctioned counter-parties in their own country!

3. J.P. Morgan was successfully sued (settled) for storage charges on physical gold that was supposed to be in their vaults, but was not.

4. ABN-Amro recently settled gold claims in cash at prevailing market prices. Investors came to get their gold - turns out there was none.

5. China and Russia probably smell what's coming and have been buying large quantities of gold, and encouraging their citizens to do so - setting up the short squeeze?

6. Forcing Cyprus to sell its gold? So who's buying it?

7. What's behind Utah, Arizona and other states legislating gold as legal tender?

If this is what is happening, best way to play it is in physical bullion, certificates in bullion trusts that actually hold the physical gold like Sprott, and gold/silver miners I would think (even if its in the ground, they still have gold). Not sure about futures and options, ETFs that use futures as underlying, nor precious metal ETFs that don't publish the serial numbers of their inventory.

Even if banks settle in cash, it will validate/underscore the shortage of the physical product. And if a manipulation comes to light, people will realize there was nothing wrong with gold as such, and will scramble to buy it back themselves for the reason they had it in the first place - insurance. There may also have to be more government assistance if the squeeze turns out really badly for the bullion banks, exacerbating the money-printing.

Anyway its an interesting scenario. Could be a good trading opportunity, I think the move could be explosive depending on how the news comes out - days of limit-up stuff in the futures markets (unless the banks and government call "uncle"). For disclosure purposes - I'm in a battered long precious metals trade right now, holding what I still have (I took partial stops) and starting to slowly rebuild the position.

Anatoly Veltman writes:

Outside Canada, the documentary can be watched here.

I think it's been known for a while that:

1. There is no upside limit for the price of gold in fiat currencies

2. That government confiscation is unavoidable, to limit item 1

Thus, the balance of the two is likely to be found within the historical $255-$1921 range…

Remember the logic for $250-500 oil calls, as $147 was being approached? All scenarios are always based on unrealistic "all else staying the same". Well, it never does. So it was on approach of $150/barrel, that Vitol got the news that it was "not a hedger" and thus is deemed in violation of NYMEX position limits, i.e. must liquidate…So what news will be new on gold's new wave up? That private ownership of it, outside jewelery and numesmatics is prohibited. First to liquidate will be funds, then individuals desiring to stay out of jail. In George's words, the move could be explosive depending on how the news comes out – days of limit-down stuff in the futures markets…

Stefan Jovanovich writes:

When gold was "confiscated" in 1932 holders were paid for their specie in F.R. bank notes at the Constitutional "price" - $20.67. People had to turn in bullion, coin and the outstanding gold certificates - the U. S. Treasury notes that had remained outstanding after 1912. When 2 years later the value for international exchanges was raised to $35 an ounce, the "profits" went to the U.S. Treasury which also took title to all gold and gold certificates held by the Fed. It is hard to see what the Fed/Treasury would gain from a repeat performance. They are no longer obligated to settle foreign exchanges in anything but the currency of their own digital creation.

Let me try to understand what is being suggested about the current state of the world regarding gold, prices and credit: (1) the amount of physical bullion actually available in the world is far, far less than advertised, (2) to preserve their legal tender oligopolies the central banks are not only lying about how much gold they have on hand but actively short-selling against their reserves, and (3) when interest rates rise in the U.S., social chaos will result and the government will impose Martial Law.

The premise seems to be that the U.S. and Europe have unsustainable government debts, and an inflation is inevitable. To avoid this, the Fed/Treasury/IMF/ECB and other institutional villains are doing everything they can to destroy speculators betting that the currency prices of gold will go up.

I don't get it. All of the past examples of government default that the Roganistas point to occurred during periods when foreign exchange markets cleared in gold. No country, not Britain, not the United States even in their days of greatest authority, could settle its foreign debts in its own fiat currency. When Roosevelt issued his Executive Order making the ownership of gold (and govenment promises to pay gold) treasonous, the worry was that the U.S. would literally run out of gold because our European trading partners' currencies were no longer fixed by a specie weight and measure. When, 2 years later, the U.S. devalued by 40%, it was to create a "stabilization reserve" that would keep the country from running out of gold. Even after WW II, with the rest of the world in ruins, the U.S. still had an explicit obligation to redeem its foreign exchange deficits in specie valued at $35 an ounce.

Our present world only began when President Nixon and Treasury Secretary Connolly adopted the Henry Ford approach to currencies - the U.S. trade partners would have their accounts settled in any colors they wanted as long as they were green and black ink on rag paper. Since that time, prices for the same scarce objects - fine art and Bel Air real estate, for example - have literally soared. But what has driven them is not an explosion of legal tender - what was quaintly described by Friedman as "the money supply" - but an explosion of private and public borrowing. When credit has become "tight", prices have fallen; once banks and other lenders, including the government itself, have been able to write checks once again, prices have resumed their increases. It is hardly surprising that gold - itself a scarce object - that has shared that increase in price. What is surprising is that we are somehow supposed to learn the "lessons" of those times in history when foreign exchange was measured in gold ounces and apply them to a period when current annual borrowings, including rollovers of existing debt exceed the sum of all borrowing by the species from its origin until gold's full legalization in the U.S. in 1975.

Apr

15

 To the extent that the central bank is driven to accumulate government securities at artificially inflated prices(and repressed yields), either such purchases must be i) held to maturity (implies that the central bank will not have the freedom to contract its balance sheet in a timely manner in order to tighten quantitative monetary policy) or ii) the government must be prepared to underwrite the capital losses realized from the sales of such securities in a normalized yield environment.

from "The Complete Chartpack Of The Top Global Themes For The Next Five Years"

One wonders when the U.S. has had a "normalized yield environment" and if that phrase means "one without the Treasury/Fed's collective thumbs on the scale". Sometimes they push down and sometimes they push up; but that unicorn of economic theory - the natural rate of interest - has not been seen in America's natural history. since Hamilton told everyone how wonderful it was that the Feds were going to redeem the states and Confederation's crap paper at par.

I love the author's gloomy conclusion - "A central bank that is beholden to government in this way has lost its independence. Its objective has been subtly realigned to the preservation to the creditworthiness of the sovereign". Duh!@# The illusion of the creditworthiness of the sovereign (governments remain the only serial defaulters in hisotyr) has alwasy been and always will be the objective of a central bank. That is why they were created in the first place.

We have already seen the Federal Reserve choose door (i). They also did so between 1938 and the end of the Korean War. For that entire period interest rates remained "moderate" even as the Federal debt increased parabolically. The question that even Jeffrey Gundlach seems to shy away from answering is how far along we all are in the process of climbing to the new much higher plateau of sovereign IOUs.

Apr

12

Poor Say (of Say's Law): he wrote that if someone goes to the trouble of spending time and money to produce something, that activity will add to other people's incomes and, therefore, aggregate demand. The reason the man is ridiculed is that his common sense observation contradicts the now standard religious belief that money savings = investment and the economist's creed that bank balances automatically add to the sum of human enterprise.

Mar

28

When gold was money, its price was measured not in currency but in what it could buy. From the adoption of the Constitution to WWI, except during the Civil War and Reconstruction, the price of gold as currency remained the same — 1 ounce was $20; measured by what it could buy during crashes and depressions, gold's "price" went up. That was equally true during the periods when the dollar was not redeemable in gold at the Constitutional standard — 1873, after 1932; in all these panics what gold could buy in the world's markets has increased. That is to be expected; it is a tautology that, during panics, the prices of things other than money go down and the price of money goes up, and gold has been the world near-money even when it has not been legal tender in the U.S.

George Parkanyi writes: 

I think that gold is difficult to read. It's not a slam-dunk by any stretch. In a rapid deflationary scenario where credit markets seize up and no-one trusts counterparties it could get hammered with everything else - people having to liquidate to cover margin calls, just needing cash to meet other obligations and so-on. Also you wouldn't be able to finance it. There would be a complex interplay between flight to "quality" and scrambling to raise cash. And inflation seems to be mixed bag; specific pockets of it - there seems to be plenty in food and energy, but little wage inflation in a globalized economy with a lot of cheap labour still around. Consumer electronics still seem to be trending down.

On the other hand you do have seemingly unstoppable currency debasement underway (the main gold bug meme), and interest rates practically at zero. And bank runs could be good for gold since the issue will be about parking cash somewhere other than in a bank - gold would sop up some of that. Equities at the moment I believe are benefiting from a shift in the perception away from the "safety" of fixed income. Sovereign debt everywhere really does look like crap because of the unsustainable amount of it - why would you tie up your wealth in it? You see it with companies starting and/or increasing dividends because of investor demand for income they're not getting from debt. Debt markets dwarf equity markets, so if this is a real trend, equities, and commodities in the mix somewhere, could go a lot higher. But at some point all this selling of debt will increase interest rates, which will then work against the economy, equities, and commodities - including gold.

Then there are other dynamics. They say central banks are buying gold right now. Bullish or bearish? That's taking production off the market (bullish), but then they have all that more to turn around and dump on the market if the agenda changes again (bearish).

Gold itself hasn't been hit that hard recently - 16 or 17% perhaps from its high - but the miners have been massively hammered, mainly - and I find this ironic - because of high operating cost inflation. I'm thinking its overdone and a fairly old story, setting the stage for at least a bear market rally (the rationale for my current trade), but the market's not agreeing with me so far.

Larry Williams writes: 

You make some nice points. I see a strong 4 year cycle operating in gold that called the top real well 2 years ago and suggests a low yet to come.

Mar

25

Some wisdom from the great Voltaire:

History is a pack of lies we play on the dead.

I have never made but one prayer to God, a very short one: 'O Lord, make my enemies ridiculous.' And God granted it.

Indolence is sweet, and its consequences bitter.

It is dangerous to be right when the government is wrong.

Love truth, and pardon error.

Marriage is the only adventure open to the cowardly.

Men are equal; it is not birth but virtue that makes the difference.

The art of medicine consists in amusing the patient while nature cures the disease.

The multitude of books is making us ignorant.

Those who can make you believe absurdities can make you commit atrocities.

Mar

22

I thought the group might enjoy reading the 1879 classic of Political Economy: "Progress and Poverty" by Henry George. 

Stefan Jovanovich writes: 

Scott and I seem to be in permanent disagreement. Henry George got all the publicity, but Terence Powderly is the important figure. He was the "mainstream" figure whose doctrine of producerism, now completely forgotten — was the essence of American political thinking in the years before WW I. Unlike George and the other neo-Socialists Powderly had equal scorn for government-protected financial capital, large, politically connected institutions and the underclass, including illegal immigrants. It is no surprise that the Ohio Republicans - Grant, Sherman, McKinley - were in complete agreement with such a "radical".

As a labor union organizer Powderly was wise enough to understand that strikes were stupid and that there had to be 1 Big Union. He knew that, as soon as labor organizing became a matter of craft guilds, the unions would spend their time fighting with each other over the already organized workers rather than trying to organize new ones. (The historiy of the AFL-CIO more than confirms this.) Powderly also opposed the doctrine of last hired first fired; he knew that such seniority rules would destroy enterprise and, therefore, destroy the unions themselves. Worst of all, from the point of view of modern enlightened opinion - both liberal and libertarian — Powderly had the common sense to know that tariffs (but not quotas) and immigration limitations were the only certain ways that workers could use politics to raise everyone's wages. 

Scott Brooks writes:

Actually, Stefan and I are not in disagreement. I was not advocating for or against the work of Henry George. I was merely sharing with the list something that I thought would interesting and spur debate. 

Mar

22

Wasn't there a round of prognostications 35 years ago that America was already in major decline and within 50 years would no longer be an economic superpower–Japan would displace the US as it merrily purchased every US asset in sight and ran roughshod over the US auto industry. I recall the reports of how great Japanese steel mills were–"they keep those mills so clean you can eat off of the floor." Then we had Carter's "American malaise" speech. America was supposed to be–or shortly be–done. Then the 1980s happened. With apologies to Mark Twain, reports of the decline of the US are greatly exaggerated.

Stefan, you know this history better than I do. Thoughts?

ART CASHIN: "If America Is Anything Like History's Great Civilizations, Then This Is The Beginning Of The End"

Stefan Jovanovich replies: 

The Art Cashin piece reminded me of Macpherson. The 18th century in Anglo-American culture was, like our present time, a great age for fraud.

As David wisely notes, predictions of the Decline and Fall of the West are usually very timely indicators for putting all of one's chips on Equities. Carter made his speech in 1980; Spengler's masterwork of petulance was published in English in late 1919, with the second volume appearing in 1922.

Mar

18

I found this article someone sent me ("The Forgotten Tyrant: Franklin D. Roosevelt") terribly sad. There are many, many things to criticize Roosevelt for, both as Commander-in-Chief and as leader of the one-party state that was the United States during the 1930s. But, the internment of Japanese-Americans is not one of them. The California delegation, led by its Attorney-General Earl Warren (a Republican!!!!), lobbied Roosevelt to intern the Japanese-Americans; Roosevelt gave in to their demands in the name of bi-partisanship. Warren was appropriately contrite after the fact; but that is typical "great man" B.S. He — and the majority of Californian Republicans — thought it was a grand idea. It is the reason, even now, that people of Japanese ancestry will never vote for Republican candidates in California, unless they are themselves Japanese-American.

Mar

6

In his "Essay on the Funding System" (1820) Ricardo concluded that raising money from taxes did nothing to "save" the government the cost of borrowing. Whether the Crown borrowed the money and paid it back with interest or raised the excise immediately, the effect on the public would be the same. With consols yielding 5% (and having, as they did, an infinite maturity but the usual amortization of 45 years) "there is no real difference in either of the modes, for 20 millions in one payment, 1 million per annum for ever, or £1,200,000 for forty-five years are precisely of the same value. To raise the money immediately the excise would have to be increased; and nothing in human experience suggested that the government would the reduce taxes once it had collected the 20 millions. As a result people would be saving more and spending less in anticipation of permanently higher taxes, and the higher excise rates would produce less revenues than the exchequer (or our current CBO) would predict.

If, instead, the government borrowed the money, more taxes would have to be collected to pay off the interest. But, people's wealth would be undiminished and their expectations about taxes would remain unchanged. As a result the excise would be able to collect, from growth, enough additional revenue to amortize the debt. Ricardo was himself somewhat puzzled by this result; it was confirmed by the facts he had gathered from the experiences of the Napoleonic Wars, but he wondered if the "equivalence" that he had found should be relied on as an economic law. Ever since then economists have emphasized Ricardo's doubts and done their best to ignore the inconvenient evidence.

Reagan had the advantage of understanding Ricardo without ever having read him. As President he had the temerity to reduce the level of growth in government spending in his first budget (1983). His compromise with Speaker O'Neill required the government to commit the sin of continuing to borrow more money to pay the bills already due. Still worse, it resisted the call to virtue by "conservatives" (sic) who wanted to balance the budget by taking more from the people who already paid the taxes taxes. For the next 5 years Federal spending grew but at less than half the percentage growth in private sector wages, incomes and output. This is now entirely attributed to Reagan's dumb luck.

In he year of the Clinton-Bush election, President Bush had already displayed his family's inimitable political tone-deafness by raising tax rates; and candidate Clinton did his best to follow suit by arguing that the rich had not been taxed enough. (One can hear echoes of the Hoover - Roosevelt contest over who would be less profligate.) Yet, in the next 6 years, largely because of the 1994 Congressional revolt, outlays by the Federal government increased at only 20% of the rate at which the economy grew.

We seem to have come to the same place once again. The prospect of ever increasing deficits has made people look for places to squirrel their money away, in bonds, stocks and now - possibly - in real estate. And now, for the first time in 15 years, there is a hint that the government might reduce the rate of growth in its spending. It will be a miracle, of course, if that happens. Given the current intellectual certainty that Keynes had the final explanation for how the earth and the other planets move (never mind Mercury, er, the record of the United States from 1869-1899), it will be even more surprising if economic growth revives. What can be guaranteed is that future textbooks will explain such growth, like that in the 1990s, as attributable solely to the tax increases courageously fought for by a Democrat President.

Here is Ricardo's essay.

The reference to Mercury is a crude shout out to Einstein and Arthur Stanley Eddington. The BBC movie about them is definitely worth seeing. Caution: in typical fashion the BBC offers a postscript which consigns Eddington to obscurity for having, like Darwin, managed to strengthen his faith in God through his scientific discoveries. For us fans of cosmology that brought a laugh. It is precisely Einstein's determinism, which gave strength to his Socialist convictions, that now seems quaintly dated. Eddington's speculations about the universe being "mind-stuff" are, on the other hand, precisely where physics seems to be going.

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Feb

21

I found this article about DIY weapons of the Syrian rebels.

There is tremendous ingenuity there despite difficult odds especially as the EU and US yawn.

Were the pics only slightly different during the American Revolution?

Stefan Jovanovich writes:

Nothing happening in Syria matches the scale of the American revolution or its duration. It was not, in any sense, an uprising; it was a civil war comparable to the one that began in Britain in 1640 and it was fought between organized armies, both of which have current serving units that can trace their ancestry back to 1776.

Army National Guard and Active Regular Army Units

The American Revolution began with the New England militias and the Regular Army literally kicking the British out of Boston using artillery taken from Fort Ticonderoga and muskets that they already owned. What Washington struggled with for the rest of the war was the fact that the British were not going to stay gone but were going to use their Navy to come back. The fleet that arrived offshore in New York harbor was the largest amphibious invasion in human history - more men and more ship tonnage than the Mongols' attempted invasion of Japan, Alexander's siege of Tyre, Anthony and Augustus' triremes at Actium. It was also, by far, the longest voyage. That effort wasn't matched again in size and distance until the Allies landed in North Africa during WW II.

The financial scale is also one that we have difficulty understanding. The war lasted for over 6 years and took Britain to the edge of bankruptcy. For what became the United States the result was total insolvency.

Feb

19

Do We Live Inside a Mathematical Equation?

BOSTON—From the arc of a baseball to the orbits of the planets, mathematical patterns are everywhere. But according to physicist Max Tegmark of the Massachusetts Institute of Technology in Cambridge, it's not enough to say that math governs our universe. Rather, he believes that reality itself is a mathematical structure. What the heck does that mean? We caught up with Tegmark after his presentation at yesterday's symposium "Is Beauty Truth?" at the annual meeting of AAAS (which publishes ScienceNOW).

Gary Rogan writes: 

I have long believed that the most puzzling thing about the universe is that fundamental mathematical laws and constants seem to hold reliably over vast stretches of the universe. Until we understand how a photon "knows" that it needs to travels through vacuum at exactly the same speed everywhere in the universe, or why any two objects anywhere attract each other gravitationally with exactly the same exponent attached to the distance between them and exactly the same constant attached to that equation, and any number of such things, we are just observing the symptoms of something on a deeper and deeper level without understanding how the whole thing is constructed. Sooner or later this has to come down to some fantastic explanation, like a single basic particle "painting" the universe on its own timescale, or every fundamental particle simultaneously communicating with every other fundamental particle to maintain consistency, or the universe being constructed on some level via a very small number of types of discreet building blocks that are completely invariant.

David Lillienfeld writes: 

That's the one issue I have with the Big Bang–where did all that energy come from?

Gary Rogan writes: 

Well, that's just one issue of several with the Big Bang, like

-What caused it to occur?
-What was there before it?
-How did all the physical constants settle on particular values (regardless of consistency)?

The Big Bang is just another descriptive theory of the form "the universe behaves according to these laws", but provides no explanation for the "why?" on the fundamental mathematical level. And no, religion doesn't help. The "global computer simulation" theory is highly attractive: constant laws and constants across time and space and a definitive beginning out of nothing with a lot of energy are just so easy to explain!

Gibbons Burke adds: 

Further, why are all the physical constants so precisely dialed in that if any one of the 30 or so parameters which define the immutable characteristics of the universe so tightly dependent that a variation in any one of those parameters, to one part in a million, would make life, or indeed the universe, impossible?

Feb

18

Last Friday, February 15th, should be at least one of the minor memorial days for the Law is Fairness doctrine. Ronald Dworkin's obituary made the Telegraph, and John Burt's book on Lincoln was reviewed by the WSJ. For those of you who are not besotted by the Constitution, this may not mean anything; but for us few remaining Neanderthals it is another reminder of how how pernicious modern legal scholarship has become. Dworkin believed with all his heart that the U.S. Constitution existed to "benefit society not just by providing predictability and procedural fairness, or in some instrumental way, but by securing a kind of equality among citizens that make their community more genuine and improves its moral justification for exercising the political power it does". Professor Burt remains convinced that freedom is really just a "code word" for "racism" (whatever that means) and that markets function only as a form of "Darwinist brutality."

The belief that the Constitutions of our Union were, as written, the "law of the land" is probably the only religion that Abraham Lincoln had. He used the vocabulary that Washington and Grant did and spoke and wrote regularly about Almighty Providence; but he did not have the soldier's acceptance of fate. What he did believe was that the Constitutions were sacred documents because they represented, in tangible form, the will of the People. However, for those of us who remain anarchist enough to think that the only foundation of "the law" in this country is the United States Constitution and the Constitutions of the various states, as written. The resonance of the words in Gettysburg Address is real because it is Lincoln's own catechism as an American: "that this nation, under God, shall have a new birth of freedom—and that government of the people, by the people, for the people, shall not perish from the earth." "Fairness" - in the communitarian sense of let's all share the rich guys' stuff so dear to academics and intellectuals everywhere - was not even mentioned.

Feb

14

One sees that he has called for an increase in the minimum wage. It will be interesting to see the annual economic report that usually accompanies The State of the Union and see how economists can show that raising a cost like this will not lead to decreased employment and layoffs for the unskilled. Economists are no better than the aforementioned counselors who tortured and ruined the Biker's whistleblowers it would seem. Indeed, as Rabelais would say, almost all of our professions are as laughable and flawed but wonderful as well as the economists and counselors.

anonymous writes: 

I only listened to a part of the speech but from what I understand he, and the rebuttals that will/did follow will all try to outbid each other about calling the illegals "immigrants" who are welcome like the high achievers that they are. As Milton Friedman said, you can you can have open borders or you can have the welfare state, but you cannot have both. When 10-20 million are legalized and are finished bringing in the 50 million with family reunification and 30 million of the total will go on welfare with five kids per couple this will dwarf all the other nonsense. This is clearly not sustainable.

Stefan Jovanovich replies: 

Apologies to anonymous for this mini-rant. The United States never had "open borders" any more than it had "free trade". What it did have in the 19th and early 20th centuries were very straigntforward rules about what people and goods had to do to cross the border. People had to pass physical health inspections (1 out of 5 did not), and goods had to pay a tariff. If you did not have tuberculosis or syphilis, you got in; if your importer paid the duties, your goods could be sold here. There was no presumption that having the right to live in the United States entitled someone to vote; that required the same citizenship examination that people now have to pass and a period of residency without being found guilty of a criminal offense (the definition included the non-payment of taxes). To be eligible for what the Constitution calls "Naturalization" a person also had to have no criminal record and avoid being placed on the attorney general's blacklist. Neither of my paternal grandparents ever became a citizen. My grandfather did not because he had been on the blacklist for being an anarchist. He was one; like Bakunin he thought that nothing could justify oppression, whether it was in the name of country (vide the Russians keeping down the Poles) or in the name of the revolution (Nechayev and Marx's authoritarian socialism). Grandmother's explanation was simpler; she never learned to read English or Polish, for that matter. (She suffered from severe dyslexia.)

My grandfather never thought he had been oppressed by the government for their failure to allow him to vote. He never considered the United States his homeland; but it was his children's, and he thought that he had an obligation to defend their country so, in December 1941, after they were all grown adults, he tried to join the Marine Corps. They turned him down (he was 52); but the Navy Department did accept the enlistments of all 3 of his children. He would have laughed at the notion that the United States had an obligation to allow people who broke the law - both by coming to the United States illegally and by committing crimes after they were here - to become citizens. If the country decided that these people could stay, that was up to the decision of the citizens; but he would have considered it a grave insult if other people had been allowed to become citizens after breaking the law or being illiterate in English. As a peaceful revolutionary (the very kind all the Marxists love to despise), he believed that "if you won't do the time, you don't have the character for crime". Surely, the same rule should apply to all current illegals.
 

Feb

5

Have any of you been following this bone of contention for the anthropologists.

'In a lengthy and angry rebuttal on Saturday, Diamond confirmed his finding that "tribal warfare tends to be chronic, because there are not strong central governments that can enforce peace". He accused Survival of falling into the thinking that views tribal people either as "primitive brutish barbarians" or as "noble savages, peaceful paragons of virtue living in harmony with their environment, and admirable compared to us, who are the real brutes".

He added: "An occupational hazard facing authors like me, who try to steer a middle course between these two extremes, is the likelihood of being criticised from either direction."'

(Link from Marginalrevolution.com)

Stefan Jovanovich replies:

Only Professor Diamond could see himself as "steering a middle course". When a snarky questioner at one of his UCLA appearances suggested that tribal warfare was chronic precisely because no individual member of the tribe had any property that was truly private, his first reaction was bewilderment. His second was less than polite academic rage when the questioner noted that Jean Jaures' sad comment that the poor had been so patriotic at the beginning of World War I because "their country was the only thing they owned". Central governments only exist because of war; that unfortunate fact is why the founders of this country were so adamant about having ours be strongly limited in scope and scale.

Feb

4

It has been a while since the dailyspec discussed the potential for mayhem in the Straits of Hormuz. So far, the greatest threat to American interests has come from our own Navy. It has been nearly 4 years since the USS Hartford collided with the USS New Orleans. The "accident" injured 15 sailors; the repairs to both ships cost over $100M.

The folks at StrategyPage just reported some of the details of the accident report:

1. There was no one supervising the sonar operator when the collision occurred

2. The sonar operator was not, in fact, looking at his screen at the time but talking to a fellow crew member

3. The ship's navigator was not plotting the ship's course but "doing something else, while listening to his iPod"

4. The officer in charge failed to raise the ship's periscope to scan the horizon before the ship breached the surface

In total there were 30 errors in procedure.

Chris Tucker writes:

Complacency and sloppy work are very difficult to control after they have taken hold of a work group. The proper place to kill them is in early training. People who are responsible for large numbers of other peoples lives and/or for highly valuable property need to be trained in active vigilance early in their careers. Unfortunately, safety is a boring topic to most — it lacks the intrigue of the higher mission, it lacks the luster of fancy technical gadgetry, and because it is something that has to be practiced with diligence day in and day out, at all times, it is difficult to keep at it.

But safety and its execution is absolutely essential to any complex operation. Organizations and systems that require precautions have to inculcate a culture of safety and then impress it into their people regularly. It can never be treated as a one off training item and then checked off as completed, it has to be pressed, again and again and drilled into the subconscious so that it comes automatically. Active surveillance, much like active listening, is a skill that requires practice to master.

I suspect that in the crossing of an active shipping lane like the Straits of Hormuz, that submarines use active sonar, but I have no idea how frequently they ping. Probably on the order of once every two or three seconds, much more than that and there is insufficient time to capture reflected signals without interfering with them. The point is that an operator, especially at a time that requires extra vigilance — like surfacing, needs to actively direct his attention to his equipment and scan for threats at least once every three seconds.

While this sounds easy enough, it requires a great deal of will and energy. Distractions constantly compete for attention and need to be reduced. Again, training is the only way to control this and create an environment that rewards attentive execution of duty and punishes the creation of distractions and sloppy behavior. I suspect that if the navy chose to drill procedures in vigilance and active surveillance as often as they train for emergencies or attack maneuvers, the frequency of these incidents would be dramatically reduced.

P.G writes: 

Excellent stuff on complacency, but "culture of safety" might be too strong a goal for any place in the military. It's true that the Navy is the service where war most closely resembles peace. Most naval ships in WWII saw only a few hours of combat over the years' duration. Day-to-day operations were quite similar to peacetime ops, with the environment (including friendly ships) being the principal enemy. But the few hours of combat were the whole point, and it seems to me that safety must not be so deeply ingrained that it cannot be easily discarded when the necessity arises.

Paolo Pezzutti writes: 

Western navies nowadays are dealing with decreasing budgets, changing operational scenarios and threats, issues in recruiting and retaining the professionals they need. All these factors are tightly linked. The level of ambition of naval forces is questioned in terms of requirements and capabilities needed. The threats is different from what it was at least two decades ago and attention is growing mainly for maritime security tasks. Hard to justify expensive investments to develop complex and futuristic weapon systems. For sure maintaining the fleet efficient and effective is tough at times when navies are struggling not to reduce numerically their fleets below critical thresholds. Recruiting highly skilled professionals and most of all retaining them is also critical. They need to find a motivating environment that meets their expectations. Innovation and technology are allowing the reduction of manning on board ships and submarines in order to achieve the compression of operating costs. This is also introducing risks because each member of the crew has more tasks than in the past to perform and no redundancy. On the job training and management of emergencies are issues to deal with. More focus over the past years is on modelling & simulation to train crews ashore although any sailor knows that these solutions cannot fully replace experience gained at sea. Some have questioned the extent of manning reduction that was envisioned as acceptable only a few years ago based on lessons learned developed on new constructions. The quality of training is key as days at sea spent each year tend to decrease. Incidents are the expression of this situation. Training concepts and processes have to change and adapt rapidly to this environment. As budget and personnel decrease, this is the challenge of this decade. 

An interesting sidenote about, "Stick close close to your desks and never go to sea, And you all may be rulers of the Queen's Navee!":

The object of Gilbert's satire is not so much the person of publisher and politician W. H. Smith as the system that in essence de-professionalized command positions in the British armed forces, and promoted those with wealth and political connections rather than military ability. Thus, Gilbert was in effect attacking the long-standing aristocratic tradition of purchasing commissions. Instead of "serving a term" as a midshipman (which was the conventional route leading to officer status and ship's command), Sir Joseph has taken a strictly political route to the Admiralty.

Russ Herrold writes:

A former officer (here: identified as JG) from the US Navy who served in submarines inter-lineates replies to the article you linked to:

Sub commanders are under a lot of pressure to keep their sailors from leaving the navy (JG agrees). But the long periods submarine sailors spend away from their families creates pressure to get out and take a civilian job close to home. (JG agrees) The submarine sailors are very capable, and highly trained, people. Getting a better paying civilian job is not a problem. So sub captains try to keep the crews happy. That often leads (JG: Bull Shit!) to lax discipline. (JG continues: just lax discipline with this command)

Interestingly the article's remarks about generally available better substitutions employment were not addressed in the initial comments back to me; in following up privately, JG thinks the author is over-stating the substitution opportunities …

But then that makes for a more urgent article, then, doesn't it?

Chris Tucker adds: 

My whole point is that these people are professionals and should be behaving like professionals. They are in positions of responsibility and need to act as such. There is a tremendous amount of self validation that comes with knowing that you know your business and that you act accordingly. People that understand this arrive at work with their heads held high and don't just talk the talk but actually walk the walk. They don't feel entitled to anything unless they've earned it themselves. This is the kind of behavior and path to self esteem that needs to be engendered. It is not about safety, per se, probably a bad choice of words on my part. It's about being a professional, about being an expert. And about wanting to be those things. It's about knowing what needs to be done and doing it properly, correctly and without fail.

Feb

4

As near as I can discover, my first "American" ancestor was one of the Hessian soldiers rented to the British for use in fighting against the colonists during the Revolution. He was captured at Trenton and paroled and, instead of returning to his command, hired himself out as one of those "Pennsylvania Dutch" farm laborers whom Benjamin Franklin detested. Within 50 years his descendants were no longer Roman Catholics but Methodists living in Georgia; by the Civil War they were in Alabama and Mississippi — still on the losing side. One was with Evander Law's Brigade.  The other, who was a rich man, somehow managed to spend 4 years in Barksdale's Brigade without even making it to the rank of corporal.

The Hessians were all "pressed men" — conscripts who were literally forced into service by the same recruiting techniques that the British Navy used (the very ones that were among the primary grievances that provoked the Southies in Boston to become Sam Adams' loyal followers). Even though most of the Southern branches of my family still prefer to start the genealogy with the Hessian's respectable children (which still qualifies everyone to be a Son or Daughter of the Confederacy), as an unreconstructed Yankee, I prefer the Hessian. I like to think that disgust for the draft is one of my better genetic inheritances. If I am fortunate enough to have grandchildren, I pray that neither the grandsons nor the granddaughters will have to break the law by refusing to participate in the charade now known as "Selective Service". If they take after their ancestors, they will be willing to volunteer: but they will not let the government tell them where their duties of service lie.

Jim Lackey adds: 

The lack's first recorded Military was the civil war. He survived, so his dated service was near the end of the war. I wasn't an officer so I didn't attend war college or any true military history classes. I defer to Pete or the other officers and historians on this august site.

Yet one can still tell you a map and a compass can and will take you anywhere. With my manchild (17 year old) on a Bama trip he made fun of my in the van nav technique at 6am. I retorted kid we will be cold and tired and driving out of here at midnight. The phones did not work in the valley and I refuse to use GPS on carz.

One of the things about Chicago childhood was it was too easy to navigate by map or memory. For years I traveled by dirtbike on RR tracks or powerline dirt cuts. At Ft. Knox I had no struggle adapting to on foot map and compass…Yet in Germany on a fast moving tank one can out run his map in 5 mikes.

Point? In Nashville or anywhere S or East, one can visit any civil war battle field, take a history book and do the stage to battle advance and or retreat on foot. One can imagine an all day forced march into and out of a fire fight with bad food no sleep and my gauche, I have only explored these fields in good weather.

I admit to never reading one word of Civil word history until two years ago. I find the entire war too much to bear. However a few of the battles S Nashville, and the surrounding areas to be quite interesting on a topographic map reading exercise. I can imagine marching up from Bama, sending my cav due east then attacking on foot with a battalion. There was quite a few balzy moves by the South in the awful war. I find the short swift battles and counter attacks most educational. The huge mass of troops is in all of history, to me is boring. The outcome was decided before day break. The after the fact of what went wrong is almost a bad joke. Some of the recounts on 91 are so silly I laugh. I do wait to read the 2003 recaps in good books if there ever is one.

Yeah the battle of Cowpens in the revolution or the battles of the 1860's around these parts N Ga the Cav counter attacks or attacks on the egregious Union supply lies are very exciting to walk through. Only a history book can describe Grants Forging and engineering work on the rivers to attack mass in force are a bit interesting. WW2 I was forced to learn all about the Battle of the Bulge or Ardens as that was my units history. Patton is far less interesting as a commander when you see his route or axis of attack and know the situation of the German. One day I'd like to visit the Ukrane and or Russia to look at the actual lay of the land. Those were some wicked battles. Yet the history often blames the German command. I am sure there are some reasons on the Map that many have failed to mention.

When you actually walk that last mile and top the crest and imagine an entire Battalion (or Army) when your at Brigade strength after marching all night all day and then go strait into attack at supper time.One can only imagine… as after a full nights rest, then driving 20 miles and walking just 5 up the trail to the hill. Then thinking we will be here all night and all day tomorrow under fire. Good lord, war is hell..

Jan

31

StrategyPage reports these numbers this morning:


Accident Rates for Combat Aircraft per 100,000 Flying Hours

1943: >200

1963: 30

2003: <10

2013: <5

"Flying combat aircraft has never been safer, or more boring."

Jan

30

There is a zero sum part to trading where what one flexion makes, another high frequency or day trader or poor gambler ruined or lack of margined or viged player uses. The win win aspect is that if you hold for a reas period as almost everyone in market is forced to do, you get the drift of 10000 fold a century, except if you lived in the Iron and played a game with kings moving backwards.

Anatoly Veltman writes:

Ok, I'll say it. Drift prevails over a century. And I had no problem with drift as recently as 4 years ago, when the only true drifter I know, a prince of certain oil, was adding to his C holdings by bidding pennies.

I'm having a problem with over-relying on drift now; because now, four years later, you can only bid pennies for C if you add $42 in front of it. All the while the real economic indicators, as Chair pointed out just today, have not and will not improve much any time soon. Now tell me: why assume that there will be much of a drift effect in the near five, or maybe the near ten years? Do you expect policy improvements, or pray for a budget spiral miracle, or Europe culture unity miracle, or what other miracle?

Jeff Watson writes:

Back in 1932, the DJIA made a new all time low that wiped out 36 years of gain. Likewise, the market didn't totally recover from 1969's highs until 1982, and the market has done a 15 bagger since then. I'll stick with the drift, which is a steady wind. 

Rocky Humbert writes:

There seem to be two sorts of smart-sounding stock market pundits: (1) those who get bearish because prices have risen. (2) those who get bearish because prices have fallen. I am neither smart nor a pundit but my views of the 3-5 year upside from here (small) and current positions (long inexpensive s&p calls) are known to all.

In the face of the current seemingly relentless rise (which has used up a year's drift in 3 weeks)… I confess that I am looking at my new, over 50% combined tax rate, and positing that higher marginal rates disincentive not only my risk-taking, but also my selling (as the taxes discourage my speculative urge to sell now and buy stuff back at hopefully lower prices.)

With this in mind, an academic study might consider whether changes in capital gains tax rates result in more serial correlation (i.e. trending — as I look around three times) SHORTLY AFTER the higher taxes are imposed. And the effect diminishes over time as people become accustomed to the new regime. Obviously I would guess the answer is yes.

Kim Zussman writes:

 Increasing tax regime could be bullish:

1. additional vig against frequent trading (as if there weren't enough already) > 1a. "drift" of holding period toward longer timeframe
2. disincentive to sell = incentive to hold and/or buy (including insiders)
3. restructuring away from dividends toward stock buy-backs

Rocky Humbert writes:

Dr Z may be onto something. Does this mean if Obama raises capital gains taxes to 99%, the stock market will triple over night? 

Anatoly Veltman writes: 

1. I have no problem with counting to include the last few years
2. I have a problem with counting to include anything pre-2007, let alone pre-2001, and even more so pre-1987.

The reason I have a problem with it: historical price analysis, no matter which way analysis is performed, relies on the notion that participants have not largely changed, and that "their" psychology has not changed. This is not the case - if one goes too far back - because financial market mechanism and participant make-up has changed ever increasingly over the past decade.

One of the victims of methamorphosis was "trend-following". I believe that most previosly successful trend-following rules have died in application to regulated electronically executed markets, because most clients are now automatically prevented from over-leveraging. Thus, "surprise follows trend" rule, for example, lost potency. Nowadays, you get preponderance of surprise "against trend". That's a very significant switcharoo, which has put most of famed trendfollowers of yester-year out of biz.

Also, Palindrome was not much off, predicting the other day hedge fund outflows due to old as age "2&20 fee structure". This structure just can't survive the years of ZER environment. Huge chunk of very cerebral participation has been replaced by bank punk punters, gambling public's money for bonuses.

Gary Rogan writes:

The drift seems to be a long-range phenomenon that has existed in different stock markets for a very long time. It is therefore difficult to make predictions of its demise based on any specific factors. One thing is clear: calamities like revolutions end the existence of the market and obviously the drift. Benito Mussolini was very good for the Italian stock market for a long time, and even way into the war it kept up with inflation, but eventually it succumbed to the realities of war (in real, not nominal terms). Granted, Mussolini initially had much better economic policies than Obama, but who would really expect that faschism could coexist with a great stock market? The question still remains: will there be a total wipeout? Short of that the drift is likely to continue.

Il Duce wasn't chosen completely at random, and the question was (just a little bit) tongue-in-cheek.

I could easily make the contention, and a great case, that fascism co-exists with a great stock market right here in the USA.

Ralph Vince writes:

I think we make a huge mistake when we assume that policy affects long term stock prices. Sure, you might have seen events, like a lot of stocks seeing big ex-dates last year, before big tax theft years — but the long term upward drift is a function of evolution. Like our progress has always been — starts and fits.

Sometimes the fits have lasted 950 years! But it always comes around. I like to get up in the morning, put my shoes on, by a few shares of some random something or other. If it goes against me, buy a little more. When it comes around to satisfy my Pythagorean criterion, out she goes.

As I've gotten older, I like to do it with wasting assets, long options.

It makes it more sporting.

Stefan Jovanovich writes:

I wish that we all could agree that prices only count if you can use the money . Zimbabwe's stock market does not have prices for anyone who wants use the money except in Zimbadwe. The Italian stock market was not quite that bad but close enough to make its "performance" entirely fictional from the point of view of anyone wanting to do what people now take for granted - use their dollars to buy/sell "foreign" stocks, close the trades and then take home their winnings - in dollars. That was not possible in Italy after 1922 or in Germany after 1932, for that matter.

As for Mussolini's economic policies, they were far more destructive than the President and Congress' inability to stop writing checks that the Treasury has not collected the money for. In his Battle for the Lira (1926), Mussolini decided that the currency would be fixed at 90 to the pound, even though the price in the foreign exchange market was 55% of that figure. The result was to create an instant bankruptcy for all exporters and those few remaining financial institutions that dealt in international trade. As a result Italy got a head start on the rest of the world; its Depression began in the fall of 1926. But Quota 90 did create a windfall for the Italian industrialists who were Mussolini's supporters; their costs on their imported raw materials were immediately halved. Like the German industrialists after Hitler took power, they saw their order books boom with all the government spending for guns and butter. And look how well that all turned out.

Baldi writes:

Ralph, you write: "As I've gotten older, I like to do it with wasting assets, long options."

Older? You wrote about doing just that in 1992:

"Finally, you must consider this next axiom. If you play a game with unlimited liability, you will go broke with a probability that approaches certainty as the length of the game approaches infinity. Not a very pleasant prospect. The situation can be better understood by saying that if you can only die by being struck by lightning, eventually you will die by being struck by lightning. Simple. If you trade a vehicle with unlimited liability (such as futures), you will eventually experience a loss of such magnitude as to lose everything you have. […]

"There are three possible courses of action you can take. One is to trade only vehicles where the liability is limited (such as long options.) The second is not to trade for an infinitely long period of time. Most traders will die before they see the cataclysmic loss manifest itself (or before they get hit by lightning.) The probability of an enormous winning trade exists, too, and one of the nice things about winning in trading is that you don't have to have the gigantic winning trade. Many smaller wins will suffice. Therefore, if you aren't going to trade in limited liability vehicles and you aren't going to die, make up your mind that you are going to quit trading unlimited liability vehicles altogether if and when your account equity reaches some pre-specified goal. If and when you achieve that goal, get out and don't' ever come back."

Jan

25

The ease with which Lance was able to maintain his hoax, and the difficulty that others had in breaking it, and the penalties they had to bear, and the great emoluments that were made from it by Lance and his crew should be generalized. What other hoaxes and conspiracies are there in the world? What is the dead weight and direct cost? I have been the victim of several such frauds and conspiracies but was smart enough in the last ones not to take legal action as I knew that my legal and opportunity costs would be many times greater than the possible recovery. I believe several on the list have also been so victimized. How prevalent is it? And how can they be defeated and fought against?

Anatoly Veltman writes:

Not a direct answer by any means, but the first time I heard Carl Lewis respond to a question on how good Ben Johnson was (question was posed way before Ben Johnson got publicly "discovered") — I was quite stunned by Carl's stern reaction. It was like you asked him if he could outrun a Martian in his prime. One might either conclude sour grapes from hints like that, or suspect that there is no smoke without fire. In any case, maybe one of the best ideas is to ask a competitor?

The question raised here, by the way, may be the most important question of the couple of decades. Every single one of you places your livelihood on the line daily in the system which is totally rigged against you in the worst way.

Jim Lackey writes:

I'll guess the opportunity cost of the lengthy background, due diligence to N^th, and flat out distrust of people, most of whom are benevolent and kind, would be something like the a 1,000,000% drift stocks give us per century. I'll flat out call it that being a skeptical, safe person is costly.

If it is too good to be true, it is, and we are not idiots. We all have some street smarts here. A well oiled con? I'll fall for it every time and I usually get the joke. To hell with them. To catch a thief one must be one or a good officer of the law.

David Hillman writes:

Some of the answers we know.

1] always get it in writing, 2] pigs get fat, hogs get slaughtered, 3] know thyself and resist your weaknesses, 4] invest in what you KNOW, 5] there's some business we just don't write, 6] most of us will make more money investing one's self than in someone else, 7] in the Shakespearian spirit…."neither a borrower or lender be", gifts are OK, but don't expect a return, 8] give at the office, 9] don't invest what you aren't willing to lose, 10] don't buy meat off the back of a truck, and 11] never buy anything with "Magic" in the name.

I have almost always found it best to be the "initiator" of an investment, an idea, etc. than to be "initiated upon". Also, when one is in the mud, it's usually better to hint at legal action, then settle rather than sue (The con often has the same legal and opportunity cost as you, at least the same amount of risk of losing and possibly more dire consequences.)

Even if one is optimistic and has faith in humanity, something I share with Lack and the chair, one of the best ways to avoid cons, scams, etc. is just to say "No, thank you" and go on about one's business. Except, of course, when the high school girls soccer team shows up at your door step in short uniform shorts and t-shirts, smiles all around, selling $1 candy bars to raise money. You say, "Sorry, ladies, I don't eat candy, but here…..", then you give them $20 and go on about your business.

Jim Lackey replies: 

David,

First never let little ones have a coke out of kitchen or touch your computer. One of mine must have spilled soda in my key board.

Next I must differentiate a scam from a good con. A scam, as in Fla scams or any mumbo we see on buy it now sites, well, burn me once and the 2nd time I am a fool and we get that joke.

A well oiled Con, do not even try. Do not worry about it. These are men of genius and spend their lives dedicated to stealing. Cops are so silly. It takes the after the fact to catch most cons. Only a genius officer of the law with 100 years experience will catch these guys in the act.

If you ever read or see some of the cons these men come up with… yeah, I guess it's easy to see after the fact, yet I am amazed at the work, the genius the art and science, James Bond movie types.

They seem to prey on our weakness of love and benevolence. Give that up and ………….. well just don't.

I can see why a Mr or others are concerned. We try to warm family for their future. I guess that is what lawyers and trusts are for, to protect the pot.

Trying to prevent the next con is to me like attempting to predict the next tech innovation. We all saw the music deal and the Ipod, but we dissed or didn't get the Iphone's change of the world and laughed at a zillion Ipads later. Now my friends are trying to buy aapl on a pullback at 500. Umm it was 15 or 30 or 50 many baggers ago. Move along.

Anatoly Veltman writes: 

Jim, yours is very good advice on relationships. My grandpa taught me exactly that. But when it comes to today's electronic financial markets, there are a number of caveats. And since you brought up drift again, let me try this: what if today's world heads have no interest in perpetuating the traditional drift? What if we're moving toward a reset, after which today's investors will not regain purchasing power in a generation or so? What statistics can you rely on, if the US has not conducted ZERP in many preceding decades? Nor has it ever experienced the current rate of deficit growth.

Gary Rogan writes: 

To know about a large financial conspiracy for sure you either have to be present during its planning or see overwhelming and pervasive accounting irregularities. How can one ever be confident that some group has conspired for some wide-spread reset? Whose evidence can you trust? If any particular highly-placed person is saying "yes" or "no", or if someone is writing that it should be clear based on this or that, how can you be sure that any of this is a result of a conspiracy and not otherwise-originated processes or actions? 

Anatoly Veltman clarifies: 

 I'm not saying there is conspiracy already in place as defined. There are certainly unusual goings-on:

1. The Fed has never entered the long-term market to this extent before.
2. The banks have never had access to zero-cost funds for this long before.
3. The employment data has never been groomed in particular fashion for this long before.
4. The US deficit has never been in this shape before.
5. The European experiment has not been really tested yet.

There will come a point, when only unprecedented last-moment multi-national "co-operation" will save the humanity. Figure out in which way, and you are golden.

Richard Owen adds: 

I was recently thinking about just this topic and was considering penning something along the lines of "Conspiracy and the Scientific Method" — even if just to try and settle what I think.

My sequence of thoughts about the helicrash in London had made me think of the essays by actuaries about 9/11. How your correct statistical assumption for 9/11 upon first impact was a terror event. One of Goldman prop's guys in London protected his book with Eurodollar to good profit.

Like all complex topics, it is complex. On the one hand, conspiracy or, more often, functionally equivalent structures, are very important in business. On the other hand, I think for the most part "there is no they".

To precis one thought: I think Lance is a good case study: it wasn't an 'illuminati conspiracy': he was widely known to be doping in the right circles. A public charade was maintained by many parties involved. The message was packaged and diluted appropriately for the media. That sort of "widening circles" structure is what differentiates it from the nutty "illuminati" type conspiracy concept.

For a very interesting case study, see Richard Heckmann and China Water. If Heckmann can be taken for a fraud, after huge ground work to avoid so being, so can all of us lesser mortals.

Gary Rogan comments: 

To quote Victor, "Market is pricing in inflation of 1 or 2% a year for the next 10 or 30 years. Yet every repub and every free market person predicts a catastrophic rise in inflation and interest rates. Who knows better?"

I can't agree that all will end well, but my theory of the market is that it doesn't really price what it has no idea about, so they just haven't figured it out. Under such circumstances, for anyone in particular, other than the guys planning it (paging Dr. Palindrome) plus some Free Masons and the Illuminati, it seems like figuring out how and if the unprecedented last-moment multi-national "co-operation" will save the humanity is too computationally intensive.

Jim Lackey writes:

Perhaps Mr. Stefan can overrule me as to when, but one doubts there was ever a time when the elite class wanted to perpetuate anything but the certainty of their own. Unless the rules in the USA go above and beynd the restictions of the EU, China and all, I can't see how anything but good can come out of our future. Less good or not as good as ones past or beliefs is relative. Yet I grew up in the 80s and saw the worst of it all for the good working men. Now we see the recession and depression of finance and perhaps the medical. Let's get the joke no way can the govie medical and finance command such a slice of the economy. It will be shared fairly by free market forces in new buisiness and growth. Construction is back and even oil refineries are being expanded again and never ending job at BP in Whiting IN.

I'll note the huge growth and investment now In Tulsa OK out to Nashville and building plants and things right here in US of A as even the advantage of current energy costs is enough to over come the rise in tax or any other threat. If you do not believe it, the Nordic EU venture boys are in deep buying all they can in Tulsa and kids are running Hass Machines out of their garage as start ups. The innovation is not in Silicon valley and instagram or new social…it's building real for the fracking that may or may not go global.

Tommy Ryan shot me an email back and once I figure out how deep this fracking can go global we shall have better answers to your questions. The DC boys are so far behind the kids. They are busy trying to regulate the white show firms that are already old line banks. From what I can tell, the kids already left for Singapore or some island to trade. I'll never leave the US, but if my kids were not in grade school I'd be Larry's neighbor.

Stefan Jovanovich writes:

There is only one reason to be optimistic about the future of the United States. It is that the country keeps redefining who the 'elites" are. It infuriated Henry Adams that a man with only a technical education could become the 19th century's most popular President. What was even worse was that a jumped up railroad lawyer's son could become the voice of all that Republican hard money. The Zinnistas, who never bother to do any counting, love the idea of the ruling class because that crude parody of Darwin's theory is as wonderfully tautological as the notion that a species' fitness determines its survival. The present Mandarin rule by believers in the pump theory of money spending is truly awful, but it hardly qualifies as a uniquely disastrous deficit ZIRP episode. One can argue that the country's entire history from the 1830s through the Civil War was comparably awful. We are not taught to see it that way because the extravagance, waste and fraud occurred not at the Federal level but among the states, not on Wall Street but among the country banks and state treasuries; but the country's government and official lenders were just as skint as they are now. All of this is now safely forgotten because of the explosion of wealth creation that occurred even in the defeated South in the last third of the 19th century; but no one visiting the U.S. in 1840 or 1850 or 1860 was writing home to tell everyone how marvelous it was. Dicken's sour descriptions were accurate, and Tocqueville's rosy forecasts were already an anachronism by the time they were published. No one was predicting that the Democrats' spoils system would do anything but continue. Yet within 2 decades the dollar had become an international currency and the marvels on display at Philadelphia were putting the Crystal Palace show to shame. We shall simply have to wait and see; the only certainty is that the Times (assuming they can get Mr. Slim to give them the money to survive) will be against whatever the future brings.

Gary Rogan adds:

This is an interesting case of a hoax that refused to die even when exposed, it's illustrative of how no amount of denial will destroy a hoax that is sufficiently implanted prior to the denial.

The Indian rope trick is stage magic said to have been performed in and around India during the 19th century. Sometimes described as "the world’s greatest illusion", it reputedly involved a magician, a length of rope, and one or more boy assistants.

The trick, considered by western magicians as a hoax, was perpetrated in 1890 by John Elbert Wilkie of the Chicago Tribune newspaper. There are no known references to the trick predating 1890, and later stage magic performances of the trick were inspired by Wilkie's account.

 

Jan

24

If cheapskating is going to increase, we might consider whether individual stocks that cater to cheap skates might have inordinate returns. This is the kind of things that my kids might make money with in terms of the category of stock, rather than its financial characteristics. Perhaps. On another front, I believe it is important to be especially cheap after having a good year. I think of Rimm every day with grave loathsomeness.

Art Cooper writes:

It's been a market theme for quite some time to buy stocks like Family Dollar Stores, Dollar General, etc. instead of retail stocks which cater to the middle class. The high-end retail market is a different market, as it responds to different forces. 

Jeff Watson writes:

I'm always accused of being a cheap person and try to not be penny wise and pound foolish. I never pay retail for anything and try to buy only stuff that will hold value. Herb Cohen is a person I look up to. He might look a little seedy, but he makes great sense and teaches sound methods of bargaining. His first $19.95 book I ever bought was probably the best investment I ever made, saving at least a million bucks, by bargaining with some of his techniques over a 30 year period. That's a hell of a return and his techniques work…

Pitt T. Maner III writes: 

Cheapskating is likely to be an increasingly popular topic as hidden inflation and taxes go up. Perhaps there is an opportunity for a "Global Skinflint"!

"Jeff Yeager, dubbed "The Ultimate Cheapskate" by Matt Lauer on NBC's Today show, is a very cheap guy. He re-cants, as opposed to decants, the wine he proudly serves his dinner guests, funneling cheap box wine into premium-label bottles. He believes you should never spend more than USD 1 per pound on food items. And to save time and energy costs, he soft-boils his morning eggs along with the dirty dishes in the dishwasher."

And then there is the TLC show :

"Be aware of what you're using. Victoria Hunt, who retired from her accounting career at 48 has been tracking her expenses and her income on a spreadsheet since 1989. "Every minute of every day has something to do with how I can make a better decisions financially," she points out."

Rocky Humbert writes: 

Mr. Yeager is either wasting money on his super-heated dishwasher or he's stretching the truth about his eggs. Dishwashers (generally) do not heat the water about 140 degrees. See this article on naturalhandyman. To get the egg white solid, it requires about 180 degrees. Even my Miele doesn't get the water to 180 degrees! This does not compute! (That is, he's making his money selling books. Not cooking eggs.) I would suggest that he should instead put his Pop Tarts and morning sausage on his car engine's manifold. By the time he gets to work, he'll have a well-cooked breakfast. (And he can similarly roast hot dogs on his drive home.)

Dr. Johnson writes: 

Ballyhoo? Like any good Spec, one must test, and test I did, the claim that an egg can be cooked in a dishwasher during a normal wash/dry cycle.

Equipment- Miele G5775.

Note: Perhaps not the ideal brand for testing a cheapskate's assertion.

Eggs= Phil's Fresh Farms Free Range Large 42F wrapped in plastic film.

Max Water Temperature Wash5F Max Air Temperature Dry= 185F

Time to complete cycles= 54 min wash & rinse, Dry 22 min.

Results: Egg removed immediately at end of the cycles= Yolk 134F thick and slightly flowing, settles to 1/4 height, white 151F at shell boundary with firm consistency.

Egg removed after 10 Min.= Yolk 141F thick and settles to 1/2 height, white 141F at shell boundary with firm consistency.

Conclusion: Not Ballyhoo! One important consideration for those cheapskates who want to try this method is that egg shells are semipermeable, therefore unless the taste of detergent combined with a menagerie of old food waste is to your liking, sealing the egg in plastic wrap is advisable (also which at +140 F will transmit unwanted substances).

David Hillman writes: 

Yes, let us commend Dr. Johnson both on his testing and on his using Phil's Farm Fresh Free Range eggs, the chicken egg of preference at Casa DGH…..cage-free, no chemicals, natural whole grain feed, laid in nests, and certified humane!

That said, even though my Bosch heats water to 160F and air dries at what seems to be 1200K if one opens the door during the 'sanitize' cycle and is met by a blast of superheated air, this whole business of cooking eggs in a dishwasher seems a bit impractical.

One, it seems like using a sledgehammer to place a pushpin in a cork board. Two, while the dishwasher here is run every 2-3 days, typically in the evening, eggs are a daily breakfast staple. What to do on 'accumulation' days? Three, counting time to heat water or a pan, it takes about 10 minutes to fry, poach, baste, scramble or soft boil eggs on the range. Why wait 76 minutes? Four, dishwasher cooking uses a heck of a lot of water and electricity v. range top cooking, multitasking notwithstanding.

For those who feel the need to multitask in the kitchen, there are what seem to be more practical alternatives to cooking one's breakfast eggs in the dishwasher, though at $90, this might not be thought of as 'cheapskating' …..

Pitt T. Maner III adds:

A few older links, but possibly of interest to those seeking to find ways to ride the money-saving trend and as a possible example of a company that finds quickly (identifying trends) and uses new inventions from private inventors. Khubani the CEO started with ad in National Enquirer.:

1) From 2010: 'A.J. Khubani, the man behind many “As Seen on TV” gadgets such as the PedEgg foot scraper, is making cheapskate gimmicks a priority at his company Telebrands, one of the nation’s top direct-response TV marketing companies.

More than half of Telebrands’ gadgets, sold online and at 90,000 stores, are now focused on helping shoppers be cheap. Khubani, who has been traveling around the country to meet inventors, is speeding up the number of new products he’s launching to every 30 days from every 60 days. “The mood of the country has changed,” said Khubani. “We’ve had tremendous opportunity with this recession.”'

Since 2007, Telebrands’ revenue has doubled to several hundred million dollars, he said.

Read more.

2) The current lineup of brands.

3) From 2012: "For the first time in our company's 29 year history, TeleBrands had 15 products ranked in a single year including our most recent hits like, Slice-O-Matic, Plaque Blast, Slim Away, OrGreenic and Bake Pops," said TeleBrands' CEO/Founder, AJ Khubani. "Each year, we continue to solidify our spot as the largest and most successful marketer of DRTV products aimed at solving everyday problems and reaching mass audiences at affordable prices. In 2011 alone, we rolled-out 12 products — the most in a single year in our company's history."

Read more.

4) On Khubani from 2011:

"The son of Indian immigrants, Khubani started out at 23, spending a few thousand dollars on an ad inNational Enquirer — a move that led to his first big hit. Since then, he's sold hundreds of millions of "As Seen on TV" products, including AmberVision sunglasses, the PedEgg and Doggy Steps. He has bolstered the careers of ubiquitous TV pitchmen, including the late Billy Mays, who enthusiastically hawked products now found on the shelves of more than 100,000 retailers. Today, Khubani is the leader in the $20 billion direct consumer marketing industry, turning out more "low-tech" products than ever before."

read more.

5) Not all have been appreciative of Khubani's methods:

"But will anyone care about dust mites? Khubani wasn’t achieving much traction among his Telebrands staff with his bed-spray idea, when along came a proposal for an anti-dust-mite pillow, from a colleague Khubani mysteriously describes only as “a business associate.” It’s hardly a new concept—there are several such pillows already marketed to allergy sufferers and asthmatics. But so far, nobody has had the brilliance to incite a national panic around flesh-eating creatures that feast on human remains—and lurk in the pillow of every man, woman, and child. “The hum you sometimes hear at night?” Khubani asks eerily. “That’s the sound of 2 million dust mites eating your dead skin.” Or perhaps it’s the sound of one man in Fairfield, New Jersey, homing in on your next anxiety. "

Read more. 

Victor Niederhoffer adds: 

Of course the main virtue about cheapskating is that it prepares you for such activities in your business. As the oil magnate said, "I am not smart enough to act one way in my personal life and another in my business. My margin is 8%, and if I gave away 8% on everything my 200,000 employees would be out of a job. So I make them pay for their telephone calls." Regrettably, the oil magnate was victimized by old man's disease (the same disease as the sage), and he was locked up in England for 20 years, with his retinue preventing him from going back to us for fear that he might change his will, and he was soporifisized by many nubile girls and other attractive women he would meet at museums. 

Funny. More important even then the fine posts with examples and tests of cheapskating is the query I have received from many of the younger hearted on the list. "Where are those museums that the oil magnate frequented?".

Gary Rogan suggests:

I suspect the Getty museum is a good place to start.

Stefan Jovanovich writes:

I hope Gary means the original one in Malibu, the villa whose design Getty himself supervised but never saw. The monstrosity built on top of the landfill by the 405 is absolutely the worst place in LA for the amusements Getty had in mind. If he were alive today and living in SoCal, he would be going to OCMA to appraise the latest generation of lovelies.

Jim Sogi adds:

Eggs can be cooked sous vide at 144 -155 for 20 plus minutes for a wonderfully cooked smooth soft boiled egg with a consistent texture throughout.

Food grade hydrogen peroxide diluted to a 3% solution is an excellent way to sanitize kitchen and utensils and not toxic like chlorine. 

Jan

21

The Rolling Stones tour reminds me that the decline and fall of America is now at least half a century old:

"There isn't any reason in the world why we can't do as well in this farewell business as any other country on the face of the globe. We have the farewellers and the people to say farewell to. If I can only keep it up I will be even with my competitors by the Spring of 1922, and by the Winter of 1937 I will be well in the lead."

William Gillette had it right. He was making the comment about the ability of European performers (the Divine Sarah being the most notorious) to do endless retirement tours; but it could have been said about our country as well. Gillette fits H.C.G. Mathew's description of Lord Palmerston (the greatest of Britain's first ministers): "an aristocrat, a reformer, a free-trader, an internationalist, and a chauvinist".

Jan

10

Uncle Tom's Cabin really did help start the Civil War; but it was not by arousing the North to embark on some moral crusade. The book's most important effect was to promote wildly exaggerated notions in the minds of plantation owners in the deep South (Mississippi, Alabama, Georgia, South Carolina and the delta parts of Tennessee) about how many slaves were were escaping to the North. The estimate of how many slaves escaped in the 40 years from 1820 to 1860 that I trust is James McPherson's — somewhere between 4,000 and 8,000 — only "several hundred per year". The politically correct numbers being offered by the National Park Service ("one thousand a year" and the National Underground Railroad Freedom Center in Cincinnati (2,500 a year) are as exaggerated as Ms. Stowe's narrative. What everyone agrees on is that almost all the escaped slaves — like Frederick Douglas –came from the border states - Maryland, Kentucky and Virginia.

I find myself wondering how long it will be before the current plantation owners — the School Teacher Unions — become hysterical about runaway children. 3 decades ago a majority of states in the Union made home schooling a crime (30, to be precise). According to Joseph Murphy, who teaches at Vanderbilt, in 1975 there were only 10,000-15,000 children being taught at home in the entire United States. There are now, according to Professor Murphy, two million. "Home Schooling in America” may be as exaggerated as Harriet Beecher Stowe's book was in terms of its numbers; I doubt it will have anything close to the same popularity. But, it may be "the smoking gun" (appropriately awful metaphor for our current politics) for the official education lobby. One can only hope.

Dec

30

This working paper published by the Dallas Fed Bank is helping in articulating the questionable assumptions underlying the Fed's ultra-easy monetary policies, and the potentially harmful consequences of that policy.

Stefan Jovanovich writes: 

Peter Temin has a wonderful paragraph in the introduction to his book Did Monetary Forces Cause the Great Depression:

"it is not surprising that the policies we now recommend for similar conditions were not tried. For if they had been tried and found wanting - if the Depression had occurred despite the imposition of expansionary monetary or fiscal policies - we would not longer count them as effective. Given the existence of the Depression, only policies that were not tried could escape with untarnished reputations".

Temin's book only addresses the U.S. — the one country where the Depression was truly "Great". As Hugh Hendry recently reminded people at his Buttonwood interview, the "depression" in the early 1930s in Europe saw real output fall by less than 5% from the 1920s peak; in the U.S. the decline was a THIRD! FWVLIW my assessment of what happened in the U.S. agrees neither with Rothbard nor Keynes nor Friedman. Art Cooper and I have been discussing this question recently. Art will, I hope, forgive me for making him guilty by association in presenting the Stefan theory:

In the decades that straddle the First World War, the U.S. became - for the first time in its history - a country with customers who were overseas. If you look at the histories of the giant enterprises - Standard Oil, Ford, Firestone and the other rubber companies, General Electric, DuPont to name only the ones that immediately come to mind - all of them developed large overseas operations and exported products abroad. American and Canadian farmers enjoyed a shorter but more dramatic boom because of the war. I have to quarrel a bit with your facts about the 1920s. They were not a "boom" for the U.S. any more than the period from 1945-1955 were; they were relatively good times only because the rest of the world was flat broke. Rothbard is right about the government's extending credit but he has the wrong recipients; domestic credit in the U.S. remained strict (it is the reason the farmers found it impossible to roll over the loans they had taken out during the boom of the war years) and the beginnings of consumer credit (people buying radios and cars on credit) came not from the banks but from new "finance" companies. The easy money was the stuff being sent overseas under the Dawes Plan, etc. It began back in 1914 when the U.S. Treasury unilaterally abandoned the gold standard for the British and French Treasuries and central banks; those countries were allowed to run chronic trade deficits without ever having to settle their accounts in gold. The Depression (as opposed to the stock market crash) came from the final collapse of the European borrowers who were the defeated nations (German, Austria-Hungary). U.S. policies were not helpful; and Roosevelt prolonged the Depression by taking the U.S. off the gold standard at the very time the Europeans were restoring it (the Japanese followed the American example - which meant that military socialism became their solution just as the revival of the Wilson economy became ours). But the ultimate cause was the bill for WW I finally coming due. You cannot have your major overseas customer go broke and somehow expect that everything will be OK by paying them to continue to buy your stuff. If you then decide that you can avoid the foreign exchange pressures from your now recapitalized, lower cost customers who are now competitors (by destroying the mechanism for trade itself i.e. the gold standard) and then confiscate the nation's bank reserves, you are going to have a collapse in your employment and production that will last for a decade or more.
 

Dec

14

This obituary of Nguyen Chi Thien is fascinating. A poet and a hero. 

Nguyen Chi Thien, who has died aged 73, spent nearly 30 years in prisons and
“re-education” camps in Vietnam because he had the temerity to insist on
historical truth and to write poems which attacked communist repression.

Richard Owen writes:

I have often thought that if in the unlikely circumstance someone forced me to invent one test to spell high future potential trading macro, it would be poetry comprehension.

Dec

11

The City of London merchants had been complaining for years that the colonies wanted to have their cake and eat it, too, when it came to money and credit. They wanted the City and the Crown's colonial governors to expand the ability of the colonial merchants and landowners to issue their own bills, to allow the colonies' own courts to decide all commercial disputes and to allow Gresham's law to always work in their favor - i.e. to get prices in sterling but pay debts in script.

By 1751 New England's practices had become so egregious that the Crown abolished their rights to issue paper that the law would recognize as legal tender. But throughout the 1750s the political majority in Virginia under John Robinson, who served as both Treasurer and Speaker of the House had been practicing modern finance at its very best. Virginia had been issuing notes to pay its bills that were secured by that year's anticipated tax receipts. The notes themselves could be tendered in payment of taxes. The notes themselves were supposed to be cancelled when collected; but Speaker Robinson was alleged to have reissued the notes to his friends and cronies.

The "radicals" (sic) in the Virginia House led by Richard Henry Lee demanded that the accounts be audited. Robinson refused, the appointed his own auditors who declared that everything was fine, just fine. Since these notes were also legal tender as far as payment of private debts were concerned, the members of the Board of Trade and other English creditors became incensed. They demanded that all Virginia's legal tender currency be abolished. The Act of 1764 was the compromise; it did not touch Robinson's outstanding notes, but it did stop the printing presses.

Any suggestion that these events have a current parallel is as dumb as the notion that a private association with monopoly authority over the country's legal tender should be subject to regular and full disclosure of its accounts.

Dec

10

Robert Buxton, the last of the Vavasseurs, which was a huge dried coconut company, died this week.

Coconut, as an ingredient in the production of confectionery items was first utilized in the United Kingdom in the late 1870's. At that time, whole nuts were being shipped into that country from its colony in Ceylon (now Sri Lanka), where coconuts grew in great abundance. However, because of difficulties in the handling and distribution of the raw material, coupled with long shipping times, product spoilage became a major problem. In 1888, a firm headed by a British entrepreneur, Henry Vavasseur, conducted experiments on a tea leaf dryer, successfully developing a process for preserving the material through drying (or desiccating) of the coconut meat. Vavasseur subsequently introduced the very first desiccated coconut brand in England called the Black V and commenced commercial production in Ceylon. The brand became an instant success and the company quickly expanded distribution throughout the rest of Europe. Before the end of the century, the brand was introduced into the United States. In 1909, the USA imposed a heavy tariff on imports of the product into the country. It, however, exempted the Philippines, which was a part of its territories in Asia at that time, seeking to help in the development of its coconut industry. Taking advantage of the duty exemption, the Vavasseurs established production facilities in the Philippines in 1923.

The Vavasseur brands (Red and Black V) are still sold; but the original company is long gone.

Nov

29

Rome: an Empire's Story By Greg Woolf gives and excellent review of the reasons and history of the rise and decline of Rome's empire which was kept relatively intact for 1500 years. The rise he attributes to efficiency, trade, and military success. The fall he attributes to weak alliances with neighboring countries to rule the provinces, and lack of incentives to produce from the provinces. I find many parallels to the present. The good news is that it took 1500 years to disintegrate.

Steve Ellison writes: 

I am partway through volume 1 of Gibbon's The Decline and Fall of the Roman Empire. There was little incentive for the emperor to rule for the benefit of his subjects rather than for his own pleasure. Rome became a military kleptocracy after the murder of Commodus in 192. The armies knew they were the source of power and demanded an exorbitant price for their support, beginning with the Praetorian guard's murder of Pertinax and subsequent auction of the throne to the highest bidder. Frequently contending for rival generals to seize the throne, Roman armies put more energy into fighting one another than fighting the enemies on the frontiers.

Stefan Jovanovich writes: 

Details, details:

"Romans imagined [the empire] as a collective effort: Senate and people, Rome and her allies, the men and the gods of the city working together." This continued as Rome passed from the Republic to the Caesars, who were kings "even if [Romans] could never bring themselves to call them by that name." It is "a history of remarkable stability. If it was largely true that (as one historian has put it) 'Emperors don't die in bed,' it was also true that the murders of many individual emperors seem to have done little to shake the system itself."

Since "decline and fall" is the current meme, one should hardly be surprised that publishers and their authors want to cash in on the latest craze. (That is all publishers ever do; and authors, poor things, are usually desperate to oblige.) Professor Woolf should have resisted the impulse. He certainly knows better. The "collective effort" he describes is a complete fairy tale. The Empire never even developed a common language; our "classical" education notions are based entirely on the fact that rich people had too know Greek because that was the commercial language of the eastern provinces — which was where the money was. Latin was for the inscriptions on the public buildings and for the official orations and the school examinations but the "common" people continued to speak their own tongues. Even the Army relied on whistles, drums. and flags for its "commands" when it took to the field. This explains why Latin itself became almost instantly obsolete even south of the Rubicon. No one writing about the Hapsburgs, who did manage to keep their own Empire running for a good long while, would ever have offered up such fictions about "court and people, Vienna and her allies, the men and gods of Vienna working together". But, we have enough information to know that the court spoke French in that Holy Roman empire. The beauty of Roman history is that there are so few actual facts that survive that one can make the story whatever one wants it to be.

Jim Sogi writes:

The key is "1500 years". It's not going to fall apart in the next 100, that's for sure.

Gary Rogan writes:

The difference is that they couldn't do state borrowing in anywhere near the same proportion to their GNP as the US can. It also took less than 100 years from the peak, however defined to really difficult times. And as "mr. grain's" article demonstrates in less than 200 years from the peak free people were volunteering for slavery to avoid taxes, an inflation rate of 15,000% was experienced, free employees were essentially made into slaves at their places of work, and women, children, and parents were physically hauled off and abused to get to the tax evaders. All due to overspending and overtaxation.

Also for whatever reason they limited the free grains to a relatively fixed number of people, and the amount was small for quite a long time. Their modern equivalents today with a much more advance education in economics talk about redistribution with such excitement and such lack of concern for where this is all going that would make Nero proud (I mean the part about fiddling while the Rome burned, except they are not fiddling but setting the fires).

Vince Fulco writes:

I am still trying to understand how a society flourishes with reported median family incomes stagnant or below that of a decade ago? And there is no sign the worker is gaining any bargaining power. Sure the govt can artificially tinker with rates reducing the carrying costs but someday existing debt must be paid; at least at the consumer level. It is debt assumption for non-producing overpriced (after debt service costs are added in) consumer goods which will kill this country.

Tim Melvin writes: 

I agree with that to a large degree…..crony capitalism at the expense of everyone else is a cancer in any society….the problem is not capitalism exploiting the workers. it is the complex and intertwined relationship of business and government that does us the most harm. Eisenhower was right.

Anonymous adds:

Tim,

I think the malignancy has metastasized much deeper than that, and now sits in a kind of acid bath (the pending "fiscal crisis') where all else is peeled away and we see it clearly (in fact, the fact that people seem to NOT see this clearly is evidence of its metastastization) and it is this: Our society — at every level — is characterized by a desire for more rules, and an exception of those rules for ourselves.

Talking different tax rates is a carve out. The argument that the elderly should get a carve out. The birth control carve out. The government worker's salaries untouchability as a carve out.

How about when the White House issues exemptions to Obamacare?

Affirmative action is a carve out. All corporate socialism is a carve out. Every bill passed by Congress does not apply to them. I call that a carve out!

The white lady's sinus-snort lament, "This is RIDICULOUS!" always pertains to her being denied her attempted exception carve-out to the rules.

That's the cancer. The cure would take a lot more than Mitt Romney, and likely cannot be cured by a single individual.

History doesn't exactly repeat, usually, an incident is followed by another incident of similar cause but differing results and often differing in duration. I don't think we're going into a 1,000 year long dark ages. I think we're racing headlong now to something far more sudden and shocking, and bigger than any one man or political party can purge from our psyches.

Jim Sogi writes: 

I used to think the revolution was just around the corner, society was fragile and was about to come apart. Not now. Look at NYC and Sandy: that was an amazing comeback. The recession was bad, but the economy is slowly coming back. Things are not bad now. In the 1940's there was nuclear world war. Japan, Germany, Europe came back. Russia fell apart, but now is back. China killed 10s of millions, but came back strong. People are resilient and social systems are strong. The apocalypse is Hollywood and journalistic bogus hokum ballyhoo.

David Lilienfeld writes: 

The same is true of the US post-Civil War. Nothing before or since has had the social and economic impact that that war had. The US is more adaptable than Rome was. As Peter Drucker often observed, the US genius is political.

One of the signposts that Rome was done was when it was no longer able to rely on client states for security. That isn't the case now with the US.

A better paradigm for guidance might be the Persian Empire.

Gary Rogan writes: 

I keep coming back to the debt issue, the current size, and the ability and desire by "the powers that be" to accumulate more at an astonishing clip. Four years ago I predicted a debt-driven collapse that Rocky chided me for so much, and while the timeframe now seems indeterminate, what IS the way out without a currency collapse and all that follows in those types of situations? The bond vigilantes are not too concerned, and they know all, but what is it that they see? Can they see far into the future or are they playing musical chairs? 

David Lilienfeld adds: 

I'm reminded of the comment by Jim Carville, Bill Clinton's political advisor. In a re-incarnated life, he said, he wanted to come back as the bond market. "It can intimidate anyone it wants to."

Nov

21

Have you heard about "The Untold History of the US" on Showtime, directed by Oliver Stone. With a touch of Jantelagen.

'So, why take the time to watch this documentary and read the book? In Stone's words, "We're going to go in the junk heap of history like everyone else at the end of time, and they're going to talk about the US Empire the same way that they talk about the Ottoman Empire, the Austro-Hungarian Empire, the British Empire, the Roman Empire. Six of them bit the dust in the 20th century. What makes us think that we are exceptional to history?"'

Stefan Jovanovich comments: 

Details, details.


The Ottomans, at their height, controlled everything in Europe east from Vienna to the Black Sea beyond the Crimea, the entire Arabian peninsula, the southern coast of the Mediterranean as far west as Algeria, and what are now Turkey, Syria, Iraq, Azebaijan and Georgia.

Mr. Stone and his pet historian may wish to think that this all fell apart at the end of World War I just as the Austro-Hungarian, Russian and German Empires did; but the truth is that the decline and fall of the Ottoman Empire occurred over two and a half centuries. If one wants to look for lessons from history, it is that strong countries should not prey on weak ones. The Russians, British, French, Germans, Austrians and Hungarians, Italians all brought themselves miseries beyond measure in their efforts to pick over the carcass of the Ottomans. Only Bismarck had the sense of want to leave the dubious rewards of the Middle East to others, and he lost his job and Germany its imperial future because the Kaiser decided it was more important to make friends with the Turks than with his own cousin in St. Petersburg.

Nov

13

When I was out at Purdue at my final residency last week, my professor, an unapologetic Keynesian and MIT classmate of Punxsutawney Paul, argued that inflation was nature's way of getting out of debt because of old reliable forces…

He based it on the notion that we "Still haven't paid for WW2". We grew our way out and "inflated our way out."

And while that may be well and good, given that we've had massive game changers to our economy — roads, internet boom, faster transport of goods and information, facilitation of trade on a massive scale –what exactly will be the driving innovation that will get us out or this situation to help us grow.

Growth and inflation seem like natural partners to our economic professors. But growth is sitting on the sidelines. We are still using the same plane technology as the 1950s, the same highway strategy as the 1950s, the same internet moving at the same speed of light. How can we move goods faster with more expensive sources of energy, and not be able to move cash or information faster than we already are. So, how do we grow, expand trade, and do so economically?

And then at the same time, I'm hearing that Bernanke's experiments in economic alchemy aren't stopping deflation and the Lost Decade under the past two administrations will stretch on til 2023. Now I'm just downright confused…

Will good rum be more expensive in 2014 or not. I have to put money aside. I just hope there aren't carbon taxes added to the VAT on said rum.

Stefan Jovanovich writes: 

Great phrase - Punxsutawney Paul.

Those of us who prefer currency debasement as the description of what how the U.S. fixed - temporarily - the liability side of the balance sheet, agree with Garrett's professor - we "still haven't paid for WW2". We never will. The Keynesian notion that the organized breaking of windows in Dresden and Tokyo somehow "boosted" the wealth of the United States of America remains the great Big Lie of our nation's history. Our relative wealth increased dramatically and allowed the U.S. public debt to become what it was for the next 5 decades and still is - to a lesser extent even now - the primary obligation against which the world measures debt and foreign exchange instruments. Those seignorage profits were and - at least for now -still enormous; but it is, as Garrett notes, questionable whether that alchemy now offsets the fact that, measured in money savings, the "average" American is now as broke as he/she was in 1938.

If the rum is really good, it will most certainly have greater relative value in the future than it does now - for the simply reason that, in a world of debasement, good "old" things become that much more scarce. It seems just as likely that energy will be less expensive in the future because efficiencies in the use of generated electricity and transportation and production fuels will outpace growth in demand.

The "driving" innovation will be the one Google is working on; the application of machine intelligence to the steering, accelerating and braking of automobiles and trucks. What warehouses now have as the default setting - forklifts and other moving vehicles guided by sensors - will someday soon happen on roadways - but only after the D.O.T. and public ownership of the roadways monopoly finally crumbles under the weight of its collective stupidity.
 

Oct

24

Mr. Carling's comments ["Self Sustaining Leviathan", in reference to the welfare system] omit the most important fact. The people handling the transfers — the government employees and the private contractors — do a rake off that would make Vegas blush.

The greater part of "Welfare" spending long ago ceased to be actual direct cash given to the applicants; the budgets that create the 47% figure are largely consumed by the people who determine eligibility, etc. Some of us who delivered beer and bombs to the wide spots on the river used to joke about Lyndon Johnson had forgotten his Texas political upbringing; if he had simply offered cash bribes equal to our war spending (the most reliable statistics at the time were that it cost $1 million to kill one VC), there would not have been a communist left in the delta.

That same sick sense of humor applies to public spending on education, job training and the other efforts to bring Quaker enlightenment to the huddled masses: simply dividing up the money being spent and giving it directly to the heathen would have long ago solved the social problems. The difficulty, of course, is that it would take away all the sinecures. The barbarians certainly did their part to end the western Roman empire but its financial downfall was the inevitable result of having more and more people on the government payroll even as the Empire's income (i.e. collection of conquered peoples) declined.

P.S. The best estimate is that from the beginning of the current era (1 A.D.) to the beginning of the 3rd century the Roman Empire's armies captured and sold half a million people a year.

Oct

2

Dad's advice about how to do well in secondary school and college in all subjects other than math and physics and chemistry (the ones where God provided the answers) was brutally simple:

"Write down everything the teacher says, study it so that you remember everything and repeat it back to him or her on every test."

In his business he took it for granted that the same rule applied. If the English teachers believed Noam Chomsky had discovered a better way to teach grammar, then you gave them watered-down Chomsky regardless of what you thought of his theories or his politics.

This would appear to be a lesson that at least some of his competitors failed to learn…

"From the Halls of Chicago Schools: Memoirs of a Textbook Salesman"

Richard Owen writes: 

Is handing back to your boss his own prejudices not a recipe for success in all fields?

Keynes' conventional failure trumping unconventional success?

e.g., Some of the smart investors you speak to who were up big in 08. They had prior caution in 07 and so got redeemed. They made their big alpha off trough assets. For "showing off" their peers disclaimed them. Some I have met question if it was worth the bother and are swapping to grind it out market neutral. You can only sell yourself close to the index, even if it's an alternatives index.

Oct

1

There are professors and then there are professors like Peter Rossi.

Here is his summary of his Metallic Laws - his observations about social programs and their effects.

"Following a 19th Century practice that has fallen into disuse in social science, these laws are named after substances of varying durability, roughly indexing each law's robustness.

The Iron Law of Evaluation: The expected value of any net impact assessment of any large scale social program is zero. The Iron Law arises from the experience that few impact assessments of large scale social programs have found that the programs in question had any net impact. The law also means that, based on the evaluation efforts of the last twenty years, the best a priori estimate of the net impact assessment of any program is zero, i.e., that the program will have no effect.

The Stainless Steel Law of Evaluation: The better designed the impact assessment of a social program, the more likely is the resulting estimate of net impact to be zero. This law means that the more technically rigorous the net impact assessment, the more likely are its results to be zero—or no effect. Specifically, this law implies that estimating net impacts through randomized controlled experiments, the avowedly best approach to estimating net impacts, is more likely to show zero effects than other less rigorous approaches.

The Brass Law of Evaluation: The more social programs are designed to change individuals, the more likely the net impact of the program will be zero. This law means that social programs designed to rehabilitate individuals by changing them in some way or another are more likely to fail. The Brass Law may appear to be redundant since all programs, including those designed to deal with individuals, are covered by the Iron Law. This redundancy is intended to emphasize the especially difficult task faced in designing and implementing effective programs that are designed to rehabilitate individuals.

The Zinc Law of Evaluation: Only those programs that are likely to fail are evaluated. Of the several metallic laws of evaluation, the zinc law has the most optimistic slant since it implies that there are effective programs but that such effective programs are never evaluated. It also implies that if a social program is effective, that characteristic is obvious enough and hence policy makers and others who sponsor and fund evaluations decide against evaluation."

My 2 favorites of his are Armed and Considered Dangerous and Just Punishments. His most famous work was Homeless in America.

Sep

27

This site is devoted to the scientific method… expectations, the real world, actual decisions that people make under uncertainty. Any individual taking an economics course learns that consumer choice takes into consideration a myriad of expectations about the future subject to constraints and substitutions and alternatives. Please go back to the economics texts to see why prediction markets are much more accurate than polls. The prediction market is 75% for the incumbent. That's an all time high. Gentleman, does it have to go to 99% before you see that people actually making bets with their money is a much better predictor of outcomes than a poll? A good article assessing accuracy of expectations and margins of error for predictions versus polls is by Berg. Please. No more self supporting ideas about how close the polls are.

Stefan Jovanovich writes:

Ouch. Since all my ideas are self-supporting, I can only confess to absolute guilt. I also have to agree that money is and should be the litmus test. Intrade is not about money, however. The current "market" for Obama is 1 share offered at $7.51 and 104 shares asked at $7.46. Their comment stream, on the other hand, is unending; it dwarfs even the Huffington Post in frequency. Polls matter precisely because they are about money. They are the only device the campaigns (including the supposedly independent issue ones) can use to decide where to spend their advertising dollars and where to schedule the candidate appearances. Professor Berg's assertions about Intrade's markets are 10 years old; they also go back to the golden age when those markets themselves were so obscure that they were, indeed, pure. They are anything but that now, even if they remain shallower than the Platte River in September. I suggest that we all look at these questions the way the advertisers and producers look at audience ratings in television and radio; the overnights matter but P&G, Colgate and the car companies all want to see the internals so they can decide where to put down their next bets. What everyone knows is that trusting the raw numbers during sweeps week is not the best way to decide how to spend the hundred million dollars required to launch a new household cleaning product.

Jeff Watson writes: 

If polling offers more predictability than incentive markets, then perhaps one should look at the paper traders for guidance in the markets.

Rocky Humbert writes: 

Unless someone changed the law when I was not looking, it is unlawful for a US Citizen to bet on Intrade. When I tried to open an Intrade account several years ago, this fact was made very clear to me by the Intrade people. (And I didn't open an account.)

Hence you either have the US Election being predicted/decided by non-voters. Or you have the US Election being predicted/decided by Americans who flaunt the law.

I report. You decide.

Jason Ruspini adds: 

Liquidity used to come in during US hours and looking at just the past two days for the Obama contract, that still seems to be the case. The federal law that might be most relevant for listers is the Commodity Exchange Act. With Cantor movie futures and Nadex, the CFTC signalled jurisdiction over prediction markets, which would make Intrade an illegal commodity exchange. I guess they are busy with other things…

I have a theory that the hassle of wiring money in clips of less than $10k coupled with the margin system (you post $6 to buy a 60% contract but $4 to sell it) means that not only are the markets thin, but prices tend to be closer to 50% than they otherwise would, beyond the usual longshot issue near extremes.

EDT Hour    Volume

0                111

1                 36

2                 193

3                 60

4                 198

5                 283

6                 148

7                   22

8                  297

9                  537

10                270

11                3334

12                6621

13                1883

14                3079

15                2819

16                  262

17                8171

18                1961

19                6897

20                 101

21                 346

22                 536

23                 400
 

Sep

24

The wish for a strong father figure seems to be eternal in markets. Sometimes it was The Fake Doc, other times The Scholarly Chair, or a president or chairman. Like the rookie who starts the season off with a 400 batting average, you have to hand it to Draghi. He seems to have captured the fatherly longings. Whenever the market goes down, the cry of "Where's Draghi" can almost be heard across the lands.

Stefan Jovanovich adds: 

It helps the rookie father figure if everyone agrees not to throw any curve balls:

"Despite the surge in federal borrowing in recent years, net interest outlays are projected to hold steady at 1.4 percent of GDP through 2015, primarily because interest rates are expected to remain near historic lows for the next few years. Interest rates are anticipated to rise noticeably thereafter, causing net interest outlays to increase to 2.3 percent of GDP by 2020".

Sep

9

My Dad used the rails to commute to his summer job in college (through a friend he had an "in" at the Hotel del Coronado in San Diego and he worked there first as a busboy, then as a room service waiter). It took him two, sometimes three days to get from Denver to Southern California by way of the Union and Southern Pacific. He said it wasn't anything like the movies. No "bulls" chased anyone in the rail yards when the cars were in motion; it was too dangerous for them or anyone else to be running around moving trains. He said the railroads were sensible enough to know that their security risks were not from people riding the empty cars but from people breaking into the loaded ones. That was the reason the empty box cars had their doors locked open; the railroads didn't advertise the rule but, Dad said, everyone knew it. If someone was caught touching a locked car, they would have the crap beaten out of them; if you road in an open car, the most that would happen would be a verbal roust. He also said the reason people jumped off the cars as they came into a yard was not from fear of the bulls but to catch the next train. There was no point in riding the freight all the way into the switching yard where the individual cars were uncoupled and recouped. You wanted to catch your next freight after it had been assembled and was about to head out.

Dad loved movies — all movies; and one of his favorites was The Emperor of the North. But, he loved movies for their fiction, not their reality. (He told a wonderful story about his disappointment the first time he went to the Stork Club. It was so "tiny", nothing at all like the places where Fred and Ginger had gone to dance.) Hoboes did get beaten up by cops; but the violence of that life came far more from the other hoboes than the cops. He said Jack London's On the Road was much closer to his experience than Wild Boys; the time he worried most was when he was on his way home, with his summer's savings in postal money orders. The risk was that one of the younger, angry drunks would become enraged enough to badly hurt him when they realized the "money" they had robbed from him was worthless. (For insurance he said he carried a few silver dollars in his pockets - Roosevelt had not confiscated those - and kept the money orders folded up under the inner soles of his shoes.)

T.K Marks writes: 

I used a much similar strategy during college when riding the NYC subways, a mode of transportation that was completely foreign to me.

At the time the City was in the throes of a fiscal calamity, to the point of police layoffs. The cops that managed to keep their jobs were dispirited and overwhelmed. As mayor, Abe Beame was in charge, but didn't remind anyone of John Wayne in that capacity.

Beame was a bookkeeper by trade. Bad guys of the violent variety are generally not intimidated by men who wear green eye-shades for a living. Thus, in the NYC subways of the late-70s, it was halcyon days for hooligans.

I hadn't grown up in an urban environment, no less a lawless one. As such I felt about as home in these new surroundings as Kosinski's protagonist in "The Painted Bird" did in his.

Welcome to predation, young man. Next stop, perdition. And it's a dark length of track in between.

The trick is to switch metaphorical trains, when the switching's good..

So I would routinely take the preemptive measure of keeping an illusory couple of dollars in my pocket while putting the bigger balance deep in my sock, under my sole. No tell-tale bulge. Those bills could ultimately have been fresher, but chances are at least they'd still be mine.

Luckily, was only accosted once. It was on a lonely, late-at-night #1 train, going up the West Side. They approached, and asked in no uncertain terms if I had any 'spare change'. My hayseed innocence generously complied, gave them the minor contents of my pocket, and that was that. Though I can still hear my heart from that night…Thump…Thump…Thump.

I bear no lasting ill-will towards them. They let me keep the Herodotus book that I was reading.

All of which I found only appropriate. He was a worldly historian from antiquity whom I guarantee would not be at all surprised how little the world has changed since.

The reason being, when it comes to understanding the driving forces of human nature, circumstances are made of sand; themes, of stone.

I think.

Well…actually…on second thought…I'm pretty sure of that one.

Whatever the case, in the millennia that have passed since his time, I'm not sure Herodotus has ever before been mentioned in conjunction with some kid getting rolled on an uptown #1 train, but that's how it went down so what can I say.

Sep

5

If one presumes that a ZIRP is a form of command economy, without complicating the question with other similar restraints, haven't the current structure of global markets just become state sponsored speculation? That would certainly explain the increase in correlations.

I've been thinking about the line that divides investment from speculation. Prior to this administration, I considered the difference to be based on time window and interest/dividend cash flow differences.

Anyone's thoughts?

Stefan Jovanovich writes: 

To avoid real work I have been reading Sumner's History of American Currency; it is a delightful reassurance that "state sponsored speculation" began as soon as Washington left office. The present may be dreadful, but it is hardly unusual. I would argue that the present "command economy" is, in fact, far less under the thumb of the government than it was before ZIRP. Is there anyone on the List who thinks that, freed from the shackles of the Federal Reserve and the Treasury and the alphabet agencies now guaranteeing home loans, the U.S. single-family housing industry would boom and passbook savings rates would go back to 5%? Roosevelt's legalized theft of American's specie savings had terrible consequences for the American economy because it represented the complete triumph of state sponsored mercantilism. World trade literally evaporated. That is hardly the situation now. The Federal Reserve, ECB, and Banks of England, Japan and China can tinker with the maturities of their IOUs all they want and the national Treasurers can hint broadly at the need for a strong (weak) national currency; but the markets call the tune.

Gary Rogan writes:

Let's say you discover that on a particular day the stock market is likely to sell of based on historical patterns, so you short the market. In a different situation you find a promising young company that you believe will create a product that will sell in the billions several years from now so you buy the stock of that company. Wouldn't the first example be more of a speculation and the second one more of an investment? To generalize, could speculation be betting on the market participants' behavior, generally in the short term, and investment betting on the underlying fundamentals, generally longer term? 

Aug

29

Now that Shark Week on the Discovery Channel is fading from memory, it seems appropriately bad timing to revive the question that drives many DailySpecs to reach for their academic harpoons.

For those of you unfamiliar with the history of this argument, a brief summary:

The authors of the United States Constitution and the people who voted for its approval thought that money's special purpose was to serve as a final unit of account - i.e. the stuff that people use for pricing their own and other people's assets and liabilities - under the "law"- i.e. the courts and the government would recognize the unit of account as legal tender. The authors of the Constitution and those who ratified it were also wise enough to know that the greatest risk to their new Republic was to allow anyone - private or public - the privilege of debasing the country's legal tender unit of account. If Congress or the State legislatures had the power to debase the currency, they would most certainly do just that. The war veterans who were the majority at the Constitutional Convention had seen the Revolutionary War come close to being lost because Congress and the states had literally written more checks (actually, printed more notes) than their credit could support. That would not be allowed to happen again.

The Founders' solution was wonderfully direct and subtle. The states would retain the power to charter banks but they would surrender the authority to legislate what would be the legal tender unit of account. Only Congress would have the power to "coin Money". Congress, on the other hand, would have its authority over the country's legal tender unit of account limited to regulating the weight and measure of domestic and foreign gold and silver coin. It would not have the authority to make its own IOUs into money. In the periods when the Constitutional gold standard was observed by Congress (1789-1862;1869-1914), the Federal government was required to pay all its bills, including redemption of its debt, in specie at the weight and measure that defined the dollar as a legal tender unit of account. Even now, a century after the Congress, the President and the Supreme Court all decided that the Constitution could be safely ignored in the name of the War to End All Wars, our laws still observe the restriction on the states' ability to define money. The U.S. dollar is now paper, not gold; but only Congress can authorize its printing. The Coinage Act of 1965, specifically Section 31 U.S.C. 5103 ("Legal tender") limits the country's unit of account to "United States coins and currency" and affirms that they are "legal tender for all debts, public charges, taxes, and dues."

What seems to confuse nearly everyone is the fact that, from its very beginning, the country did not do business in money but in credit. That part of our national legacy remains unchanged; and it is so elemental a part of the American political economy that even the Federal Reserve finds it hard to explain that we are all - sharks and prey both - swimming in a credit sea. When asked why the Federal and state governments often refuse to accept cash but will take payment by checks, money orders, and credit cards - none of which are, under our law, "United States coins and currency", the Fed could only answer the question by referring to the very language of the Coinage Act that raises the question in the first place.

Americans have always dealt in credit, not cash. Even the opponents of the authorization of a national bank accepted, as obvious, the right of banks to issue notes that would be broadly accepted as a means of payment. The First and Second banks of the United States and the State chartered banks were all authorized to issue notes, and state laws even allowed state bank notes to be considered legally sufficient payment for state taxes. But, no one believed that bank notes themselves were to be considered actual money. That truth was reflected in the pricing for goods and services. As Sumner notes in his History of American Currency, while pricing would use a consistent unit of account, the prices themselves were determined by what exactly was being paid. So, in Connecticut, under the example Sumner took from Felt's study of colonial currency, a sixpenny knife cost in 12 pence in pay but only 6 pence in money. ''Pay " was the state issued currency price (Connecticut, Massachusetts, Pennsylvania and other colonies all tried at various times to issue paper currency to "save" (sic) their precious metals); "money" was Spanish or New England coin, (with) only wampum, no paper, accepted for any change (fractions of a penny). To deal with the complications of government price fixing (colonial governors were always trying to deal with shortages by establishing official prices), people even dealt in "pay as money"; the official price would be acknowledged but the government's paper money would be discounted by 1/3rd from the nominal government exchange rate.

By dealing in credit Americans had precisely what the Federal Reserve Act promised to provide - a flexible and adaptable means of payment. What they also had was the assurance that the government itself could never risk its own credit because it would always pay up in cash. A state legislature might - foolishly - adopt laws that recognized the state's own bank notes (but not those issued by out-of-state banks or local private banks) as sufficient payment; but Federal customs and excise taxes were only payable in gold. It was precisely the desire of South Carolina to avoid this restriction that led to the first of the many nullification crises. Everyone applauded sound money; but no one liked using it to pay their out-of-town debts. Sumner explains it beautifully: "The colonists began, soon after the settlement of Massachusetts Bay, to use a barter currency, ostensibly because they had not money enough: really because they wanted to spare the world's currency to purchase real capital, which was their true need. The currency history of this country has been nothing but a repetition of this down to the present hour. It has always been claimed that a new country must be drained of the precious metals, or that it could not afford so expensive a medium. The new country really needs capital in all forms. The only question is whether, being poor and unable to get all that it wants, it can better afford to do without foreign commodities or without Specie currency. No sound economist can hesitate how to decide this question. The losses occasioned by a bad currency far exceed the gains from imported commodities….. Credit, in its legitimate forms, is priceless to a new community, but when used in illegitimate forms, as in a pure credit currency, or in a currency into which credit enters in an indefinable element, it makes true credit impossible."

What is remarkable about American history is that, thanks to the leadership of Sumner and Sherman (John, not Cump) and - most of all - President Grant, the United States chose, after the Civil War, to restore its Specie currency and to honor its greenback IOUs in gold. What is equally remarkable is that entire history - and its remarkable successes - are not entirely forgotten. Resumption forced Congress, the Treasury and the banks to all have notes constantly discounted against "money" prices by the market. The result was something that no modern economist understands; neither the government nor Wall Street ran the country. Wall Street could "panic" and repeatedly did; but enterprise did not suffer. The bank crises of the 19th century were severe, but they lasted for months, not years; and there had no lasting effects on the country's growth and accumulation of wealth. The investors and depositors in untrustworthy banks lost their funds; but the trustworthy banks were able to expand. In the absence of a central bank, failures were not socialized; in the absence of fiat currency, the money "supply" (sic) was not an issue. The gold did not evaporate, and entrepreneurs and laborers were free to take their savings and invest them in new, credit-worthy ventures. J.P. Morgan became so powerful, even though he was, as Rockefeller observed, a man whose personal fortune was comparatively small, precisely because Morgan's bank notes always sold at par. In times when other banks were caught short, Morgan's deposits would swell. That was - and is - the beauty of the Constitutional gold standard; it allowed the market to set the relative prices of money and credit by never confusing the two.

Aug

12

The announcement of Paul Ryan's candidacy took place in Norfolk where the U.S.S. Wisconsin is now berthed. The Wisconsin is an Iowa-class– the last and largest type of gunned surface ship.

It is interesting to compare statistics of the Iowa class battleships with the ones for the last two classes of WW II submarines — the Tench and Balao.

The submarines had crews 2.5-3% of the size of the battleships. Their displacements were 4-5% of the battleships.

Overall, the submarine force was 1.6% of the total number of personnel in the U.S. Navy engaged in the Pacific theater. Submarine attacks accounted for the sinking of over 5 million tons of Japanese military and merchant shipping - 54% of the total. This is remarkable given the fact that U.S. torpedoes were close to useless for the first 18 months of the war.
 

Aug

12

As Chaos Manor finishes reassembling itself here in North Carolina (2 months after packing up and driving cross country from California with the cat), I find myself thinking about "capitalism". It seems to me the perfect term for what a committee would come up if it were attempting to define political economic liberty. Enterprise used to be defined quite simply by people taking money and hiring people to do things. That still seems the only true definition of an entrepreneur: can he/she write a check and hire/fire people without getting anyone else's approval.

What is remarkable about Sloan's General Motors, Rockefeller's Standard Oil and Morgan's Bank is that the enterprise was stuffed full of entrepreneurs — "lowly" parts managers/depot heads/clerks all had the ability to spend money and to hire and fire people without having to check with the home office. What is even more remarkable is that there is often no one left inside modern organizations who, as an individual, has such political economic liberty. No wonder the most that can expected is a defense of "capitalism"; defending absolute liberty would be an insult to everyone with assigned parking privileges.

David Lilienfeld comments: 

I think you're confusing managers who were empowered to manage (Rockefeller was a master at this) and in so doing, manages risk in the course of producing, as opposed to entrepreneurs, who identify an opportunity and use risk to address that opportunity, and in the process creating something new. If that something new creates wealth, it's a for-profit enterprise (non-profit means untaxed, nothing more), and if it doesn't, it's a charity. In high performing organizations, the two will overlap, the higher performing, the more the overlap.

In Sloan's GM, Rockefeller's SONJ, and Morgan's bank, there was sufficient distance from HQ that if managers were empowered to manage, then the enterprise would come to a halt as orders from HQ were awaited and then received through the mail. With the rise of communication technologies, first the telephone, now cellphones, and the net, HQ thinks nothing of maintaining control. That's true in the corporate world, it's true in the military world as well. It used to be that the individual service chiefs were accountable to their respective secretaries (SecNav, SecArm, etc). After the 1979 aborted hostage rescue, the Congress changed that system to one in which all operational command was vested in the Chairman of the Joint Chiefs and the individual service chiefs ran their respective staffs and were consulted but they did not have an operational role. At least that's my understanding of the changes that were put in place. There have been few CJC who haven't exerted direct control over operations, and if't not infrequent that POSTUS hasn't taken control from the CJC. Not surprisingly, military commanders don't like to be second guessed any more than corporate ones, and after a few years, those commanders stop trying to manage risk.

One of my observations having lived in Silicon Valley is that the thing that differentiates it from other places is that it accepts risk and thrives on it. At least it did. And that was why failure in an enterprise wasn't something that destroyed your career–if you learned from the experience and understood how to avoid a repetition. Unfortunately, since the late 1990s, with the dot-com boom and bust, the VCs in the Valley decided to minimize risk. VCs focus on finding an enterprise that can produce a product within 18 months, 24 months at the latest, and allow them to IPO the company so they can earn their fees. And it's become rare that they've tried doing things that are really innovative, as the internet browser was with Netscape or the development of tPA at Genentech. By the way, this is a big reason why the last major American pharmaceutical companies were founded in the mid-1990s. Since then, the goal has been to sell the company as quickly as possible to some big pharma so the VCs can get their fees. After all, if you get out in 18-24 months, at least in pharmaceuticals, there isn't much risk. The risk is in Phase 3, and there are few start-ups that get that far these days. For more than decade, there isn't a pharmaceutical company I can think of which has revenues north of $500 million a year which didn't exist prior to 2000. You might argue that that's because of the FDA, but the FDA hasn't really changed that much. (The issue isn't just with the VCs being unwilling to embrace risk–entrepreneurial style–as those running the R&D groups at most of the major pharmas are similarly risk averse.)

I don't think it's a function of what capitalism is as much as the increasing tendency of HQ to micromanage. Unfortunately, that mentality is creeping at an alarming rate into Silicon Valley. A decade plus ago, it was very different than it is now.

Aug

6

The upside down man's objection: "If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year" is easily rebutted by Philip Carret's observation that common stock is like a leveraged investment. Bondholders are first in line to be paid, but their claims are fixed, so all upside of earnings beyond a fixed percentage belongs to stockholders (as does all downside if the company fails to perform). If the typical capital structure is 50% debt and 50% equity, the typical common stock is a 2:1 leveraged investment, so an expected return approaching 2x GDP growth would not be unreasonable.

Stefan Jovanovich writes: 

There is a complimentary explanation. GDP figures are a sub-set derived from the monetary Marxist notion that nominal expenditure by the government is just the same as voluntary private spending. (This is the same notion that the CIA and all the Galbraithians depended on to decide in the 1970s and 1980s that the Soviet Union had matched or even surpassed the US in economic output.) Er, no. Sherman Tanks may be useful and necessary but their "cost" is not the same measure as the spending to buy a combine harvester. The same applies to civil service pay versus private payrolls; the one measures a Keynesian cost, the other measures an expenditure in search of profit. It should hardly be surprising that, in order to support the dead weight of wars and "public" investments that no private market demands, the equity residual has to grow at twice the rate of the overall "economy" measured in nominal Marxist terms.

Ralph Vince writes: 

Stefan,

Yes, this was the case I made on this or a related list about 4-8 weeks ago and had my economic naivete was assailed. In fact, I would posit that not only should government expenditures NOT be included in the positive column of GDP, but rather might best be place in the negative column. A good portion of government spending is in the form of capital outflows, interest payments to foreign entities, outright gifts to foreign entities (when we give the UN a billion dollars, is that really a billion dollars added to out GDP? 10 billion to Israel, does not increase our GDP by 10 billion), nation building (building schools in Afghanistan does not increase GDP). Outflows such as exports, count on the negative side of the GDP ledger — so too should government spending, or at best, it should be a wash.

If GDP growth is anemic now, remove the YoY increase in government spending from GDP and it's a pretty bleak picture in recent years (and no, I'm not being political about the Oreo presidency of the past 11 1/2 years. Same guy, same party, same people, different faces and names).

Jul

31

On his headstone Cyrus McCormick has this epitaph: "He Made Bread Cheap"

The inventors of the gene sequencer will deserve similar praise - "They Made Health Common".

Jul

18

My favorite economic witticism (I think it's funny; others may not) is R. G. Hawtrey's comment that "currency is better explained in terms of credit than credit in terms of currency". Hawtrey thought it was self-evident that money existed in a society only because there was a government that required money to be used in the payment of taxes. In that sense he agreed with the Paulistas; in a perfectly free world there would be no need for legal tender because, in the absence of a government, people could freely agree on whatever they wanted to use for the settlement of private accounts. But, with governments and their monopoly authority, the payment of debts became a matter that involved "policy" - i.e. making certain the mandarins got paid for sitting and talking and writing and meeting. For governments to exist, money had to be invented because, unlike private parties, the government had nothing to offer in exchange.

Hawtrey had no success in convincing others in his profession that the importance of the gold standard was to let people go back to speculating about each other's credit and stop worrying about some final settlement of accounts into a sovereign currency or currency of all sovereigns. Whether or not a country stayed on the gold standard, left it, or tried to cheat by imposing capital controls would become simply a matter for discounting between private parties as long as one country in the world was willing to follow the simple rules and let its currency supply fluctuate depending on how much people wanted to hold gold or gold certificates and how much they wanted to convert dollars (for example) into bullion and send it abroad or do the reverse. That country's currency would be come the universal unit of account precisely because it would be the one money that would not have a political speculation attached to it.

Believing that the political manipulations of a currency could somehow rule economic behavior was, in Hawtrey's mind, literally to put the cart before the horse. (To my mind it also means the "wise" men and women are even worse the committee in charge of describing an elephant; they spend all their time looking at the ass-end of the wagon and talking about where it is going even as it stands completely still.)

Europe was broke in 1919 not because it failed to adopt the proper monetary unit of Keynesian design but because all of its nations had utterly ruined their public and private credit in the extravagance of 4 years of world war. This was no more a popular an opinion in the 1920s than it is now; reviewers of Hawtrey's book on the gold standard took him to task for arguing that money itself was unimportant except as a measure of credit-worthiness and the gold standard - at whatever value - was only important because it prevented the governments of the world from fudging the measurements. Hawtrey thought that governments' credit-worthiness was entirely dependent on their ability to conform their legal tender to what the country could, in fact, afford to pay to its foreign creditors and tax collectors; and that was all there was to it. Here is what he wrote in 1919: "There never was a time at which the currency systems of the world were so exposed to danger as they are likely to be in the immediate future. The portentous profusion of paper money affords unparalleled opportunities for deflation while the development of credit and the elaboration of such devices as the exchange standard have opened the way to an almost indefinite further inflation cloaked under the disguise of an economy of gold. Between these two contrary dangers there seems to be no clear principle to keep mankind in the middle way and it is even possible that one may succeed by way of reaction to the other.

Footnote: Under the "exchange standard" countries could pretend to pay each other in gold for the net balances of trade and credit without actually delivering the bullion. It was "the gold standard" without the essential element of that system - namely, the ability of the creditor to ask the borrower to actually settle up his account in specie. It was, in that regard, indistinguishable from our present fiat money system.

Britain did not, in fact, restore the gold standard until 1925. Britain's comparative success during the 1930s (even as Orwell was writing The Road to Wigan Pier British unemployment was slightly more than HALF what it was in the U.S.) can be attributed to the fact that Britain's banks did not, in fact, fail after the country went back on the domestic gold standard. Neither, for that matter, did the French banks fail as France also restored it promise that the franc could be changed into specie. In academia the severe U.S. depression is blamed - as David suggests - on the collapse of the Credit Anstalt, etc. yet the volume of U.S. trade in 1930 to central Europe was less than 1% of U.S. GDP. Smoot-Hawley raised the effective tariff rate by less than 5% for a country whose economy was almost entirely focused on domestic consumption; yet that also is the villain. What is ignored is the central fact; all the debtors to the U.S. were broke and, once they defaulted on their sovereign debts, they were in the position debtor-in-possession companies usually are - they could do business at a much lower cost. It was the U.S. response to this fact that made the defaults of the European debtors into a world collapse. Instead of accepting the fact that American consumers would now profit from cheaper imports - if Americans were allowed to send their money abroad, the Hoover and Roosevelt administrations decided that the solution to the problem was the ultimate Keynesian response - the country should do away with the barbarous metal by permanently hoarding its gold reserves and NEVER PAYING THEM OUT TO ANYONE.

That was, of course, Hawtrey's point; you kept money reserves precisely so they could be used in a credit crisis; but the reserves had to be actual money, not more pieces of government paper. The "global" banking collapse occurred throughout the 1920s, along with sovereign defaults from the German and Austrian and Italian and Polish and Czech and Russian (er, Soviet) hyperinflations; but the severity of the U.S. depression cannot be blamed on those events. It is attributable to the efforts of the U.S. to pretend that its underwater debtors could pay their war debts by having the U.S. lend them the specie and then have it immediately redeposited in the New York Fed's vault (quantitative easing's grandfather). The irony is that the U.S. decided that it had to abandon the gold standard and run away from world trade just as its European allies were finally ready to pay for their own imports with real money. Enough said, indeed.

Jul

13

Perhaps someone can explain this one for me:

Facebook is valued at an astronomical amount. Its revenue base is, basically advertising. But FB is sustained, use-wise, by kids and young adults ( <30 ), who at one time had a fair bit of purchasing power and/or influenced significantly what a typical family bought.

Today, however, that demographic group doesn't have that kind of purchasing power. So what's the appeal for advertisers in supporting FB? Is there any data to suggest that ad buys on FB have a higher ROI than other media venues?

If not, is FB just a lousy investment, or a good one because these things are temporary?

Anatoly Veltman writes: 

Also, consider the theory of reflexivity in the case of FB, of self-perpetuation. I notice that my 11 y.o. daughter has gained self-confidence (and self-absorption) via FB-ing.

Those kids flaunt their "social edge" over the older purse-holders, and pull on purse-strings with ever-increasing zeal.

Like Henry Ford said, "I'll pay my workers enough to buy my cars", FB is fostering its own consumer channel.

Gary Rogan writes: 

The hope with large end-user software companies has always been that they (a) create dominance in their particular specialty (b) use this dominance to figure out as yet unpredictable way to monetize way beyond their current valuation (c) use this dominance and their speed of execution to stay ahead of adverse end-user trends. If often hasn't worked out this way, but of course when it does you get outsized returns.

Stefan Jovanovich writes: 

For the most recent quarter FB generated roughly $.5B in EBITDA - the same result that my favorite submarine with screendoor investment - AMAT - produced. FB did it with 1/4th the number of employees and 40% of the revenue. Does that justify a valuation 5 times what the market now pays for Applied Materials? Yes - if the belief continues that network effects will predominate in social media as they have in paid search. The world will need the production of foundries - both steel and silicon - but it will only pay a premium for businesses that promise that their profit margins will increase on marginal sales because there is no used/distressed inventory out there to compete with the "new" products. The answer will be No only if the world of corporations and teenagers decides that Google+ is a better way to sell their virtual images to the world. (Note to file: since those of us here at Chaos Manor now buy and own stocks as if they were cars and houses - i.e. once we find one we like well enough to buy, it is usually a decade and more before we even think about selling, these comments are only for people - all 3 of you - still willing to attend early morning mass at the church of Buy and Hold.)

Peter Tep adds: 

Above all else, Facebook is just a huge time sink and besides being a networking tool, is another place for people to gloat and boast or climb the social hierarchy — meant in a non negative way. With so many kids using it and literally connected to it 24-7, it's probably going to be a good investment if Facebook finds more ways to market to it's users on an even more emotional level. Has anyone seen the series posted on Ritzholtz blog about this?

I guess it is a great investment because it keeps people emotionally connected, like a great movie is playing out in front of them and they are part of it. If Facebook refines its marketing strategies even more using its users' data, then I guess the sky's the limit.

Jack Tierney writes: 

David asks some important questions regarding FB and its value. I agree that the current price is astronomical, but have very little knowledge of the operation — I am not a member and, barring any unforeseen developments, will not join. I have followed FB for sometime and have not joined because of the incredible amount of information they can gather regarding your personal history, preferences, and affiliations.

That very knowledge, though, explains why this could be a very rewarding investment. Back when I was still employed I did some work with the "research and marketing" groups. One of the first puzzling discoveries I made while going over some data was that, although our newspaper regularly received a huge amount of national food advertising, the relatively small markets covered by the Miami Herald and the Milwaukee Journal, received more.

It was explained to me that both cities were unique in that they were split almost evenly demographically. The wealthy, well-to-do, and upper middle class occupied one half of town, those not that well off, the other. This gave General Mills, Coca-Cola, Proctor & Gamble, etc. ideal platforms from which to launch new products, different packaging, innovative couponing programs, size and container preferences (12 oz. cans vs. 16 oz. bottles).

These two cities gave marketers some valuable insight into buyer preferences…yet it was no where near good enough. The Holy Grail, what each individual preferred, was not only impossible to discover, but impractical to reach. That may now be achievable with FB.

While many who are members argue that they reveal very little about their preferences, few are aware of how much their "friends", directly or indirectly, reveal about them. The most memorable story sent to me regarded an English woman who had been "on the dole" for a couple of years, receiving whatever that country's monthly stipend is for an unmarried, unemployed woman with two children. Someone from Inland Revenue (apparently the equivalent to our IRS) decided to check up on her. Rather than checking her page, he started with the pages of some of her friends.

He happened to come across one that featured a several month old picture of the woman in question, relaxing on a beach in some exotic, expensive European resort — with her new husband. Her friend also happened to mention how fortunate she had been to have an employer who let her take a month long paid vacation.

Well, the outcome was not a pretty one. But the story illustrates that if a "friend" should just happens to mention you're a pizza lover, expect to get an uncommonly large number of pizza promotions - from Pizza Parlors in your very own neighborhood. (How did they know???)

If FB plays this right, they could pull in billions. Marketing has always been about reaching the maximum number of potential buyers for the least cost. From what I've read about FB, this is within their reach. If they follow through, or allowed to follow through, their reach is incredible and I would consider buying.

J.T Holley writes:

I'm 41. I choose to "like" The Jefferson Theater so that I could see the feeds/updates of concerts that were being booked. I got notice that they were having a Southern Rock Band "Blackberry Smoke" play on July 25th. They also said that if you "liked" the announcement then you would be put into a drawing for free tickets. I won. I have two free tickets and allowed them (they asked) if they could say that I won.

GM and all others that don't understand the power of FB are foolish. It reminds me of A. Miller's "Death of a Salesman" and Charley's wise words:

"The only thing you got in this world is what you can sell. And the funny thing is that you're a salesman, and you don't know that." Charley

and he best double negative ever to be used in writing when Charley addresses Willy (foreshadowing).

"Nobody's worth nothin' dead." Charley

Google became the yellow pages.

FB is becomin' greater than the yellow pages.

It's a tectonic shift that many aren't willin' to accept or grasp. I'm nobody and humble and I get it.

Dylan Distasio writes: 

While I think your example is a good one of what Facebook COULD monetize, they are far behind Google on most advertising metrics and have a very low click through rate on the ads they do allow. It's understandable, Google is in the business of ads and has been at it for longer. Zuckerberg seems hesitant to admit or embrace the fact that FB is also in the business of advertising.

And the fact that Google is a yellow pages should not be scoffed at. It is a large part of why their ads in search work and demand higher prices. They are for things people are looking for and highly targeted.

I think with the amount of personal data Facebook has, they have great potential to monetize ads. The big question is whether they are interested, and if so, will they be able to execute.

The current issue of MIT Technology Review has a great article on a team at FB that is looking at the bigger picture in sociological terms of what they can do with the data. While their explicit goal is not focused on monetizing the data, some interesting techniques for doing so may come out of it indirectly.

Facebook has to be careful about how far they go in using people's data in the interest of monetizing it, and has to build a more sophisticated toolbox of ad types and techniques if they want to compete with Google. While they have certainly reached what appears to be critical mass as a social network, people can be fickle with their allegiances, and are happy to jump ship to something else when they get bored or feel slighted. FB will be forced to walk the same tightrope Google does if they want to seriously compete with them.

It should be an interesting couple of years watching this unfold. That said, I think based on the current view of things, FB is tremendously overvalued unless they are willing to start heavily exploiting the data in their possession. I'm not sure Zuckerberg is willing to, and he controls the company with 51% of voting shares. He's now a billionaire and can run his own agenda for quite awhile at the shareholders expense. As an example, I would question his acquistion of Instagram for $1 billion dollars but I guess time will tell. It will help them in the mobile space where FB is currently very weak, but we'll see if it was worth a billion to buy a company with no revenue.

Jul

3

In my quest to bore everyone to death, I have been working my way through the Coinage Acts. My favorite so far is still the first - The Coinage Act of April 2, 1792

The dollar was made the unit of account and defined by a weight and purity of gold and silver and the ratio between the two metals was fixed at 15 to 1. The provisions say nothing about the money supply; but they say a great deal about the assaying and engraving of the coins. They also provide for a 1/2 of 1% seignorage charge for the immediate exchange of bullion for gold coin. All coins shall be "legal tender". To make certain the Mint was doing its job properly, there would be an annual inspection by a committee of the Chief Justice of the Supreme Court, the Secretary and Comptroller of the Treasury, the Secretary of State and the Attorney General, with a quorum being 3 persons. The inspection was to be held on the last Monday of July and was to assay coins taken from each batch produced by the Mint during the preceding year.

As in most things legislative, the important provision is at the end.

The Coinage Act of April 2, 1792

(1 Stat. 246)

Statute I.

April 2, 1792 Chapter XVI.–An Act establishing a Mint, and

regulating the coins of the United States.

Mint established Be it enacted by the Senate and

at the seat of House of Representatives of the United States

government. of American in Congress assembled, and it is

hereby enacted and declared, That a mint for

the purpose of a national coinage be, and the

same is established, to be situate and

carried on at the seat of the government of

the United States, for the time being; and

that for the well conducting of the business

of the said mint, there shall be the

following officers and persons, namely, –a

Director, an Assayer, a Chief Coiner, an

Engarver, a Treasurer. …

Species of the And be it further enacted, That

coins to be there shall be from time to time struck and

struck. coined at the said mint, coins of gold,

silver, and copper, of the following denomi-

nations, values and descriptions, viz.

Eagles EAGLES–each to be of he value of ten dollars

or units, and to contain two hundred and

forty-seven grains and four eighths of a

grain of pure, or two hundred and seventy

grains of standard gold.

Half Eagles HALF EAGLES–each to be of the value of five

dollars, and to contain one hundred and

twenty-three grains and six eighths of a

grain of pure, or one hundred and thirty-five

grains of standard gold.

Quarter Eagles QUARTER EAGLES–each to be of the value of

two dollars and a half dollar, and to contain

sixty-one grains and seven eighths of a grain

of pure, or sixty-seven grains and four

eighths of a grain of standard gold.

Dollars or Units DOLLARS OR UNITS–each to be of the value of

a Spanish milled dollar as the same is now

current, and to contain three hundred and

seventy-one grains and four sixteenth parts

of a grain of pure, or four hundred and

sixteen grains of standard silver.

Half Dollars HALF DOLLARS–each to be of half the value of

the dollar or unit, and to contain one

hundred and eighty-five grains and ten

sixteenth parts of a grain of pure, or two

hundred and eight grains of standard silver.

Quarter Dollars QUARTER DOLLAR–each to be of one fourth the

value of the dollar or unit, and to contain

ninety-two grains and thirteen sixteenth

parts of a grain of pure, or one hundred and

four grains of standard silver.

Dimes DIMES–each to be of the value of one tenth

of a dollar or unit, and to contain thirty-

seven grains and two sixteenth parts of a

grain of pure, or forty-one grains and three

fifths parts of a grain of standard silver.

Half Dimes HALF DIMES–each to be of the value of one

twentieth of a dollar, and to contain

eighteen grains and nine sixteenth parts of a

grain of pure, or twenty grains and four

fifths parts of a grain of standard silver.

Cents CENTS–each to be of the value of the one

hundredth part of a dollar, and to contain

eleven penny-weights of copper.

Half Cents HALF CENTS–each to be of the value of half a

a cent, and to contain five penny-weights and

a half a penny-weight of copper.

Of what devices And be it further enacted, That,

upon the said coins respectively, there shall

be the following devices and legends, namely:

Upon one side of each of the said coins there

shall be an impression emblematic of liberty,

with an inscription of the word Liberty, and

the year of the coinage; and upon the reverse

of each of the gold and silver coins there

shall be the figure or representation of an

eagle, with this inscription, "UNITED STATES

OF AMERICA" and upon the reverse of each of

the copper coins, there shall be an

inscription which shall express the

denomination of the piece, namely, cent or

half cent, as the case may require.

Proportional value And be it further enacted, That

of gold and silver the proportional value of gold and silver in

all coins which shall by law be current as

money within the United States, shall be

fifteen to one, according to quantity in

weight, of pure gold or pure silver; that is

to say, every fifteen payments, with one

pound weight of pure gold, and so in

proportion as to any greater or less

quantities of the respective metals.

Standard for gold And be it further enacted, That

coins, and alloy the standard for all gold coins of the United

how to be regulated States shall be eleven parts fine to one part

alloy; and accordingly that eleven parts fine

to one part alloy; and accordingly that

eleven parts in twelve of the entire weight

of each of the said coins shall consist of

pure gold, and the remaining one twelfth part

of alloy; and the said alloy shall be

composed of silver and copper, in such

proportions not exceeding one half silver as

shall be found convenient; to be regulated by

the director of the mint, for the time being,

with the approbation of the President of the

United States, until further provision shall

be made by law. And to the end that the

necessary information may be had in order to

the making of such further provision,

Director to report It shall be the duty of the director of the

the practice of mint, at the expiration of a year commencing

mint touching the the operations of the said mint, to report to

alloy of gold Congress the practice thereof during the said

coins. year, touching the composition of the alloy

of the said gold coins, the reasons for such

practice, and the experiments and

observations which shall have been made

concerning the effects of different

proportions of silver and copper in the said

alloy.

Standard for silver And be it further enacted, That

coins–alloy how the standard for all silver coins of the

to be regulated. United States, shall be one thousand four

hundred and eighty-five parts fine to one

hundred and seventy-nine parts alloy; and

accordingly that one thousand four hundred

and eighty-five parts in one thousand six

hundred and sixty-four parts of the entire

weight of each of the said coins shall

consist of pure silver, and the remaining

Alloy. one hundred and seventy-nine parts of alloy;

which alloy shall be wholly of copper.

Penalty on de- And be it further enacted, That

basing the coins. if any of the gold or silver coins which

shall be struck or coined at the said mint

shall be debased or made worse as to the

proportion of the fine gold or fine silver

therein contained, or shall be of less weight

or value than the same out to be pursuant to

the directions of this act, through the

default or with the connivance of any of the

officers or persons who shall be employed at

the said mint, for the purpose of profit or

gain, or otherwise with a fraudulent intent,

and if any of the said officers or persons

shall embezzle any of the metals which shall

at any time be committed to their charge for

the purpose of being coined, or any of the

coins which shall be struck or coined at the

said mint, every such officer or person who

shall commit any or either of the said

offenses, shall be deemed guilty of felony,

and shall suffer death.

Money of account And be if further enacted, That

to be expressed in the money of account of the United States

dollars, etc. shall be expressed in dollars, or units,

dimes or tenths, cents or hundredths, and

the milles or thousandths, a dime being the

tenth part of a dollar, a cent the hundredth

part of a dollar, a mille the thousandth part

of a dollar, and that all accounts in the

public offices and all proceedings in the

courts of the United States shall be kept and

had in conformity to this regulation.

Jul

1

Some non partisan predictions based on the ACA implemented as it appears it will be. Simple supply and demand tells me with an additional 30-50m people having subsidized access it must drive up health care costs. If there was a pure index on health care costs I would go long. Premiums on average will go higher as the costs are just passed through and the incentives are structured to consume more not less heath care.

Health insurance only companies I think will be driven out of business by two factors; they can no longer perform their basic function which is actuarial expertise. Second their gross margins are capped at 20% and most margins will be lower as premiums won't be able to keep up with the rising cost. I would not want to be in that business.

However, the more diverse companies like Wellpoint and United Health have a valuable asset. This is decades of health care record on millions on individuals. So these companies and other like them will convert themselves to care providers, administrators of self insured plans, and offer diagnostic or preventative care services. These I see as big growth areas. Retail companies with direct access to consumers like Walmart will expand further into providing heath care services to meet rising demand.

From the market reaction this week it seems the ruling was a non event. The added burden to large Fortune 500 companies will be passed on to employees in the form of higher co pays. As long as the expense deduction is there, providing health insurance is still a good way to transfer compensation to employees void of taxed. The middle range companies (50-100 employees) will do the same or can opt our entirely and pay a fine. Of all the articles I read in last two weeks I found Sowell and Asness had some insightful writings on the subject.

Stefan Jovanovich adds: 

The Armed Forces have been privatized. Conscription is no longer -politically - available. Intraservice competition among what are now 4 branches of the service - Army, Navy, Air Force and Marines - and the effective abolition of the draft have forced the official dealers in death and destruction to continue to innovate. It no longer requires 55,000 bullets to kill a single enemy (that was the effective kill ratio in the Viet-Nam war). If we had the "single payer" system David wants and the one Truman wanted for the defense department as well as for American healthcare, we would have seen the U.S. follow the disastrous path the Canadians and Europeans and now - sadly - even the British have followed. The budgets would have remained largely intact (as they have for NATO), but the ability to break things would have disappeared.

As with so many quasi-political arguments on the List, this debate really comes down to the fact that "yes, the conservatives want the government to cheat just the way the liberals do". As, I hope, David would agree, political conservatives like DeMint wave the bloody flag for freedom but still want the full-employment act for prison guards and cops (aka the drug laws). But, this is hardly news. Adam Smith observed the phenomenon over 200 years ago. The fact that Jim DeMint also argued for a monopoly system is hardly an argument in favor of autarky; it is a reminder that liberty - like virtue - needs to be practiced in the small things every day no matter how tempting it is to believe that cheating just this once won't really do any harm.

As for the defense contractors, they have been going broke since the end of WW II. The process has been masked - just as it has in American farming - by the fact that the losers have sold up to their larger, better financed competitors rather than simply sold off their assets at auction (that, too, has happened); if large medical insurers and hospital companies had faced the same competitive pressures, there would be - as there is in the weapons business - half a dozen suppliers, not the hundreds that not only exist but continued to thrive and prosper under a cost-plus system that would have made even the pirates at Ling-Tempco-Vought blush for shame.

P.S. American medicine still has conscription - for the customers. People are not allowed to sell their organs, to get pricing information about medical services in advance of purchase, to buy catastrophic only insurance coverage. The absence of fundamental liberty - for the providers and the customers - in the area of medicine is truly staggering.
 

And further, why is 20% of GDP the magic number for healthcare spending? Shouldn't people be free to spend their money as they choose? If people, as opposed to the government, want to spend half their incomes on everything from Botox to liver transplants, isn't that their choice?

There have, in fact, been numerous proposals to abolish single payer. Here is one.

As for no one having much trouble with Medicare, you have got to be kidding. No sensible doctor in private practice is willing to accept Medicare patients any more; they will - out of loyalty to their existing patients - continue to treat those who shift from private insurance to Medicare; but for new patients with only Medicare and no supplemental insurance, forget it. I know this because I have just gone through the process of finding a new cardiologist and internist here in North Carolina; if it is any comfort, this part of the nationalization of medicine has succeeded - my internist and cardiologist back in California told me the same thing years ago.

Very few people think we have a "high quality system" in medicine any more than we have a "high quality" system in plumbing fixtures. There is an awful lot of crap out there. What people know is that, if competition is allowed to flourish, the mediocre providers who are now sheltered by government monopoly protections - those at the VA and government hospitals and those in private practice who use government payers as their sole source of revenue - will have to face the intolerable discipline of the marketplace.

The arguments used in favor of drug regulation are the same ones used in favor of zoning, gun control and all other bureaucratic restraints in the name of the public good. They rely on the horror stories to justify restraints whose costs are far more murderous. A hundred times more people die every month now because they cannot buy organs from willing donors than died or were maimed from thalidomide. But no one takes photographs of their slow declines or charts their pain unto death. We can't let people use their money to save their own lives; that would be against the greater good - i.e the full employment of professional minders of other people's business.
 

Jun

26

The trans-Atlantic shipping trade is about to have its 200th anniversary. The first Atlantic packet sailed from New York to Liverpool on 1/5/1818 under the flag of the Black Ball Line. Its owners established regularly scheduled trans-Atlantic shipping with freight and passenger service. 132 years before Malcolm McLean, Thompson, Wright and Marshall were accepting less-than-shipload cargoes and delivering them - intact - to the customers on the other side of the ocean.

May

30

I'm involved in some utility-grade solar projects in the US. The ideal size is 4 to 5 MW, which will require approximately 20 acres. With all government incentives combined, solar projects are currently not bankable.

If homeowners are going to take on solar, most shouldn't use their roofs as their platform. Most homes are oriented incorrectly and will their roofs will not produce the optimum amount of power. A better approach is to mount panels on the ground. Ground-mounted panels are cheaper to build, cheaper to operate and will always produce the optimum amount of power.

In most states, net-metered panels cannot produce more power than the customer normally consumes. This is normally not a problem for homeowners because panels only produce power a third of the time and peak consumption tends to occur slightly after the panels are dark.

For U.S. consumers, it is not worth the investment to go off the grid. Energy storage equipment are costly and inefficient; they will consume approximately 20 to 30 percent of all energy produced.

When judging the efficacy of solar, consider the various points of view. If you are a consumer in a deregulated state, you want your neighbor to build a lot of solar. Solar has production costs approaching zero. The market-clearing price of wholesale power is largely based on production costs. If your neighbor's solar facility is producing power, it displaced the marginal generator or most expensive power producer. In deregulated states, solar reduces the cost of wholesale power.

If you are a utility in a deregulated state, you are indifferent about solar. Electric utilities in these states are not regulated power producers.

If you are a policymaker, solar is a winner. It is an ideal peaking generators as it produces power during the peak of the day. It will displace the the most costly generator and, in all likelihood, the dirtiest generator. You have an economic win and an environmental win. Score!

If you are a utility in a regulated state, you are also indifferent about solar. Electric utilities in these states will get a return no matter what assets are deployed.

If you are a consumer in a regulated state, you might have some concerns about solar. The levelized cost of solar is high and you will have to pay that price plus a margin. High prices are offset by lower fuel adjustments, but not a full offset.

If you are an independent power producer such as Calpine, GenOn Energy, Dynegy, Exelon and Entergy you might not like solar. Solar is hitting your gross margins. When solar power facilities are producing, market clearing prices fall and so do your gross margins.

Keep in mind, most power production policies are set at the state level, not the federal level. This might explain why northern states (deregulated states) endorse solar power and why southern states (regulated states) do not.

Bruno comments:

This is what you said. The little guy is making sacrifices for the future.

If you look at the problem only from an energy standpoint, the German look stupid. They are building renewable capacity which is more expensive than nuclear.

But if you look at the whole picture, this is brilliant. They pay more today to have an even more competitive economy in the future.

It is like building autobahns and panzer divisions. Out of the box thinking, a bit of daring going against conventional wisdom, sacrifice for the population, flawless execution (> 26 GW solar installed in less than 3 years, that is no small feat, and they are doing the same with windpower), incredible discipline (they are doing exactly what they said they would do a few years ago).

If you were the little guy, what would you prefer? Consume a bit less today and still have a job in 10 years, or consume more today and have no job in 10 years?

Does it mean that each household is forced to pay for the "their" piece of the renewables infrastructure? If so, is this the new advanced German "invention": let's make the little guy pay for our competitive industry and that's how we'll finance our future competitiveness? Sounds surprisingly old school, if that's the case.

Stefan Jovanovich comments:

A few minor quibbles. The Germans did invest in panzer divisions; what they did not invest in were maintenance and supply corps. The basic logistics of the German Army in the field in WW II were handled as they had been in WW I - by horse-drawn wagons off-loading from rail depots.

When the German General Staff ran the military exercises for Barbarossa, they found that they had to stop in front of Moscow, even if the Russian Army completely disappeared; the forage loads for the horse transport were consuming 100% of the supply chain capacity.

The autobahns were almost entirely a show-piece; the national transport network was rail. The U.S. alone produced nearly 2.4 million trucks in WW II; the Germans made fewer than 350,000. The British built 100,000 more lorries. Using WW II as an example of Teutonic foresight is not - perhaps - the best example.

The local market for power is, as you say, deregulated; but the market for capital has the Federal government's thumb on the scale, along with many of the state's that have deregulated the buying and selling of power itself. It is, as you say, what it is. I may be expressing my bitterness at California's capacity to do everything so badly - slaughter raptors in the name of wind power, adopt the one kind of deregulation that could allow the clowns at Enron to think they were the smartest guys in the room since the ones from Baldwin-United. Happlly, after tomorrow, that is no longer my concern.

May

30

The Third Industrial Revolution (link is to a video of Rifkin speaking) will create thousands of businesses and millions of jobs and usher in a fundamental reordering of human relationships, from hierarchical to lateral power, that will impact the way we conduct business, govern society, educate our children, and engage in civic life. Rifkin writes on his website:

With Oil at 147 a barrel people stopped buying, because all the supply
change was too expensive…the entire economic engine of the industrial
revolution shut down, July of 2008, ..that was the great economic
earthquake of the 2nd industrial revolution, the collapse of the
financial markets 60 days later was the aftershock…. we now know the
outer limits of how far we can globalize this world based on elite
fossil fuels its about 150 a barrel and it will shut down.

From the man's home page:

Rifkin's vision is already gaining traction in the international community. The European Union Parliament has issued a formal declaration calling for its implementation, and other nations in Asia, Africa, and the Americas, are quickly preparing their own initiatives for transitioning into the new economic paradigm.

Stefan Jovanovich comments:

Any "revolution" — industrial or otherwise — that needs an "international community" is — by its own definitions — a non-starter. As for the people "stopping buying" when oil was $147 a barrel, a question: did they start buying again at $146? Renewable energy is the canal craze of the 21st century. The one part of it that has worked is the one that people fully understood 100+ years ago when Buffalo, NY was the center of the electrical world - hydro. Everything else has been a crock for the simple reason that it has - and still does - require subsidy. Mr. Watt needed no subventions from Parliament, only the liberty to build an engine without having a committee decide whether or not it was an "appropriate technology".

See the wiki pages for Matthew Boulton and James Watt.

May

25

Mark Perry posted this today on his website. It bears repeating:

"Legal plunder can be committed in an infinite number of ways. Thus we have an infinite number of plans for organizing it: tariffs, protection, benefits, subsidies, encouragements, progressive taxation, public schools, guaranteed jobs, guaranteed profits, minimum wages, a right to relief, a right to the tools of labor, free credit, and so on, and so on. All these plans as a whole—with their common aim of legal plunder—constitute socialism.

But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime."

Kim Zussman wrote:

A friend asks, "If I pay tax, which pays for a fire department, and my house never burns; but your house burns, and my tax money is used to put out your fire, that's 'plunder?' "

Garrett Baldwin replies:

Perhaps it would be better if the fire department charged individuals directly instead of allowing monies to be transferred through a central local government that takes money off the top.

Then again…

"Firefighters Watch as Home Burns to the Ground" (because the family didn't pay $75 in annual dues to fire house). 

You would have to be ready to deal with the consequences of your market decision should you not pay.

Jeff Watson notes:


I pay for my fire protection every year.  My neighborhood association also pays for off duty Sarasota County deputies to patrol our neighborhood and keep us safe.

Stefan Jovanovich responds to Kim:

Kim's friend is assuming that fire protection is some kind of natural monopoly that requires state action. It is just the reverse. Fire departments were (and, as Jeff notes, still are in many parts of the country) voluntary. What made them "public" was not necessity but the discovery by progressives that private fire departments had "failed" - i.e. been unable to prevent urban firestorms. The truth was - and is - that no public or private fire departments can stop fires in balloon frame buildings once they get started. The best fire prevention technique is do do what the Swedes and other sensible people do: establish a perimeter around the fire zone and spray water not on the fire itself but into the air around the fire using a mist, not a stream so that any embers are cooled below ignition temperature. The U.S. techniques are - by comparison - nearly medieval. That is all the more surprisingly because the American Navy developed almost all the modern fire fighting techniques to defend its aircraft carriers and other ships during WW II; what I know about fire-fighting comes from the time and trouble they spent to train me and from one summer working as the lowliest of the low on a Forest Service crew in Oregon (even the work-release convicts had seniority over yours truly).

A typical California public fire department story: When the Oakland fire occurred, the response of the local fire department (3 pumpers, 2 ladders and a chief whose ANNUAL RETIREMENT PAY WILL BE $330K A YEAR) was to have the police tell everyone to evacuate. Those of us who had some experience with fires knew that for anyone not in the immediate holocaust zone the largest risk was from wind-blown embers being caught under the eaves of buildings or landing on shake roofs (like the one our then neighbors had because of its wonderful "rustic" qualities). Those risks can be answered with a well-aimed garden hose if someone is around to do the job. When the police arrived, Eddy's Mom told them we would prefer to stay. Very few people manage to tell Eddy's Mom to do things, but the figure of official authority might have been tempted to press his luck if I wasn't already up uncoiling the 100 ft. of forest service hose we had on a spool attached to the side of the house. It turned out, in the end, to be a false alarm because the wind shifted and pushed the fire back towards the Bay; that allowed it to burn itself out because it was moving back over ground that had already been burned. After the fire was over, everyone congratulated the heroism of the Oakland fire department, etc. What started the fire was a local blaze that the Oakland fire department had put out but not bothered to establish a fire watch over. When the hot winds from the Delta came over the hill that evening, they added enough warmth to allow the embers to flash over. IF the fire had been someone's private liability instead of an act of God (how else can sovereign immunity be justified), some poor Mexican would have been paid by the landowner to stand watch with another one of those garden hoses.

May

22

We are well into the Triple Crown season with just one race left to go. It's been fun for me so far as based purely on the name I liked I'll Have Another early on in both Derby Futures as well as Santa Anita. Now we have a decent shot at a real Triple Crown winner as the horse is one of the better closers we have seen in a few years and the length of the Belmont Stakes should favor the him. We have been disappointed several times since Affirmed in 1978 so we shall see what happens in two Saturdays.

I have always been a huge fan of horse racing, racetracks and all the associated depravity. Some of my fondest memories of the past decade are the trips we used to take to Keeneland in Lexington Kentucky every year for the Bluegrass Stakes. Lexington is a town founded by Irish gamblers and is made to order for me. A diverse group of traders, investors, professors and other assorted ner' do wells used to assemble for a long weekend of horse racing and bourbon drinking with the expected adventurous and occasionally disastrous results. I guess we all outgrew the trip or just got to busy but they will be telling some of those stories at my funeral in fifty years or so!

I don't hit the races or even the poker table the way I did in the past. A combination of marriage, kids, getting older, and the end result of the earlier explained IRR have kept me from wagering and whiskey in the quantities of days past. I still follow the ponies however and am always cognizant of the lessons learned at many racetracks and card tables over the years. A day at the track contains lessons in statistics, psychology, marketing, and a host of other scientific disciplines. Many of these I have found to be directly applicable to the markets and to life its own self.

The track contains many of the elements of the financial markets. You have the touters and system developers who look for the answer and failing to find it sell their services to others. It was Tom Ainslie who pointed out how these systems develop in his book on handicapping. *" A longshot wins a race. A disappointed bettor consults his Form and discovers that the longshot had been timed at 36 seconds in a breezing three-furlong workout a couple of days ago. No other horse in the race had worked so rapidly so recently. Powie! A new system is born!"* How many of these have you seen in the stock market. Someone curves fit data to show that the winning stocks of the past had a particular characteristic or price pattern and a brand new newsletter and web site is offered to investors as the answer to all their problems and a sure fire path to short term wealth. In truth none of it works any better on Wall Street than it does at the track but selling easy answers to greedy people has always been a source of profits for stock market and horse racing system developers.

Then there are the people you meet at the track. You have the bleary eyed beer soaked despondent souls who pick up discarded racing forms to search for a long shot winner to just get them back to even so they can start over again. They won once and hit some exacta or trifecta bets, usually by luck and have been chasing that short term success for a lifetime of almost and faded in the stretch. There are those who offer an informed opinion on each and every race with all the certainty of the Delhi Oracle. They bet each and every race and brag of their fantastic winnings before hopping in their classic car (a 1988 Buick Riviera with balding tires and cracked windshield) to head off to their luxury furnished studio apartment with a spectacular view of the railroad tracks and oil refinery. The stock market is full of these folks as well. The oracle of the last market cycle and the expert who never loses are everywhere on Wall Street and I am never sure if their hearts desire is to get to the winners circle or just drag as many others into their pool of disgrace and desperation as possible. Whichever the case, they are to be avoided in life, at the stock exchange and along the rail.

At every track I have been into in my life you can always find a few gentleman, usually older who sit through the race scribbling notes in their racing form each and every race. With the exception of perhaps a close friend or two they do not talk to anyone else or engage in the tip sharing and" who da ya like?" camaraderie of their fellow rail birds. They watch, take notes and perhaps sip a cold beer, or more likely a coffee. They wander off to the paddock before each and every race and the vast majority of the time they return to their seat to scribble some notes without bothering to place a bet. On rare occasions they get up, go the window and make a bet. These are the ones who have figured out the game. They only bet when they see an advantage and are more likely to fly over the grandstand than tell you how they derived their advantage. This is similar to investors who don't see the need to trade every day and only pull out their wallets when they have an edge and prices are favorable enough to offer a high probability of long term investment success.

One such astute gambler was among the best of them all. Pittsburgh Phil had a distinguished and successful career as a horse bettor. He once said *"Playing the races appears to be the one business in which men believe they can succeed without special study, special talent, or special exertion."* This is the case in the markets as well. So many people sit down and read a book or look at a chart and think that they, of all the speculators, traders and investors who came before them, have figured out the answer to market success. They do not study, research, or test and care little for other opinions. The worst thing that can happen to these people is initial short term success that makes them even more confident in their flawed opinions. Eventually the all go spectacularly bust. If this was easy everybody would be rich.

Phil, whose real name was George Smith also once said *"Know when to put a good bet down and when not to." *This is not only the best advice for horse gamblers but stock investors. Just because the window is open does not mean you have to get in the action. Patience pays at the racetrack and in the stock market. Just because they open the casino down at Wall and Broad does not mean you have to trade. Once a year or so you will get a steep decline in stock prices that carry 10 to 15% lower. Every few years you will get a gullywhumper of a selloff and prices will fall 20% or more from the highs. That's when you want to invest your cash. Keep in mind the excellent advice not only of Pittsburgh Phil but Henry Clews in his investing classic, 28 Years on Wall Street as well. *"But few gain sufficient experience in Wall Street to command success until they reach that period of life in which they have one foot in the grave. When this time comes these old veterans of the Street usually spend long intervals of repose at their comfortable homes, and in times of panic, which recur sometimes oftener than once a year, these old fellow will be seen in Wall Street, hobbling down on their canes to their brokers' offices. Then they always buy good stocks to the extent of their bank balances, which have been permitted to accumulate for just such an emergency."*

When I was a more frequent visitor to the track I used to look for horses that were stepping down in class in a race. I looked for a horse that had run middle of the pack races in higher dollar stakes race and are now stepping down a bit. If I could find a horse in a $50,000 stakes race that had run a few $100,000 races and had placed third or fourth I was interested. Racing against lesser competition the horse had a strong chance of running well and the past performance figures against better horses usually gave longer odds than should have been the case. The biggest ticket I ever cashed came from finding two of them in one race and hitting a badly underpriced exacta. It also provided a pretty steady diet of simple win tickets over the years. To me this is a lot like buying fallen angel stocks. Former blue chips that have had a reversal of fortune and fall into single digits have provided a fertile shopping ground for winning stocks over my career. It also applies to people. I am more comfortable being associated with someone who has fallen or failed and gotten back up to run again that I am with someone who has yet to taste defeat and disappointment. These temporarily blessed souls usually think it is their brilliance rather than circumstance that has so blessed them. When the fecal matter hits the the fan as it always does they are apt to become unreliable partners or friends in my experience.

If I was betting on a rainy day I always wanted to look for the mudder in the race. Some horses like Storm Cat just love the mud and run very well thought the slop. I have seen horses that need a taxi to reach the finish line on a dry day win by 10 lengths when the rain is falling and the mud is thick. This plays out in the stock market as well. Even in a crappy market and economy like 2008 there were some companies that will benefit from current conditions. In 2008 as the world and portfolio values sank like a well-ventilated submarine companies that catered to low end bad credit consumers did very well. AaronRents, Dollar Tree, Wal Mart, Family Dollar and others that catered to the broken consumer saw their stock prices do very well. Last year it was energy stocks and companies that sold to a resurgent upscale consumer that ran to victory in a flat market. In every economy and market condition there is a group of companies that will benefit and buck the trend.

There a lot of comparisons found at the track that apply to markets and to life. That sleek looking thoroughbred that goes off at short odds may win a good percentage of the time but if you bet him every race he will take your wallet for a ride. He will do well for his owners but gamblers will go broke betting short odds. The same can be said of buying high growth issues at very high multiples and trophy wives. The feisty little colt at long odds that has run well in the past but is under bet can make you a fortune. So can stocks that are experiencing temporary difficulties or just ignored by the investing public. The stunning high maintenance slut queen at the bar may attract all the attention but it is the good looking smart quite woman in the corner that will make you happy man for decades of life. Flash and short odds does not reward in any endeavor as does substance with a high payout.

I love the race track. Not only is it enjoyable and some of the best people watching you will ever experience but you can gain an MBA in Investing and Life $2 at a time.
 

Sam Marx writes: 

But how does one overcome the 17% edge that the track has?

The stock market vig was high in the days of fixed commissions but now you can have the edge in certain markets such as options especially options that are traded with a penny spread. 

Tim Melvin adds: 

The article is not intended to suggest one make their living at the track. Merely that there are lessons to be learned that may be applicable to markets and other areas of life…

Stefan Jovanovich comments: 

Tim's wonderful piece is better advice than some of us deserve. At the risk of being one of the beer-soaked wretches who used to hang on the rail at Hollywood Park, I have a "fallen angel" tip for the $2 bettors that even meets Tim's ''fallen angel" criteria: AMAT. And, if you want to make it a 2-horse parlay, add KLAC. The foundry business is like coking coal in the 19th century– ugly, unattractive and essential, as Mr. Carnegie and Mr. Frick well knew.

Sam Marx writes: 

From my experience of going to the track, always with a friend who talked me into it, I found interesting characters and observations there.

But I never bet there, even at the $2 window. Same with slot machines at Vegas or A.C.

Logically I know that a $2 bet would've given me something to root for, increasing my enjoyment at the track for a small amount, but my aversion to betting when the edge is against me is almost of a religious intensity.

To learn about markets and trading psychology when young, I'd recommend the stamp or coin market. If you know your markets there and try to avoid having the urges of a collector but as a trader and buy at close to wholesale prices, you'll do well.
Tim's piece was a very enjoyable read but I don't think horse players are the best source for learning about markets.

 

May

21

On December 8, 1981, Lloyd Free legally changed his name to World B. Free. This past September Ron Artest became Metta World Peace. hat further question is there that we are within months of an historic opportunity to buy U.S. equities?

May

13

I have been reading a memoir about David Ricardo, and researching the details of his life. Here are some interesting things I have learned:

Ricardo destined for the same line of business as his father; and received, partly in England, and partly at a school in Holland, where he resided two years, such an education as is usually given to young men intended for the mercantile profession. Classical learning formed no part of his early instruction; and it has been questioned, with how much justice we shall not undertake to decide, whether its acquisition would have done him service; and whether it might not probably have made him seek for relaxation in the study of elegant literature, rather than in the severer exercises of the understanding; and prompted him to adopt opinions sanctioned by authority, without inquiring very anxiously into the grounds on which they rested.Mr Ricardo began to be confidentially employed by his father in the business of the Stock Exchange, when he was only fourteen years of age. Neither then, however, nor at any subsequent period, was he wholly engrossed by the details of his profession. From his earliest years he evinced a taste for abstract reasoning; and manifested that determination to probe every subject of interest to the bottom, and to form his opinion upon it according to the conviction of his mind, which was a distinguishing feature of his character.

Mr. Ricardo, senior, had been accustomed to subscribe, without investigation, to the opinions of his ancestors, on all questions connected with religion and politics; and he was desirous that his children should do the same. But this system of passive obedience, and of blind submission to the dictates of authority, was quite repugnant to the principles of young Ricardo, who, at the same time that he never failed to testify the sincerest affection and respect for his father, found reason to differ from him on many important points, and even to secede from the Hebrew faith.

Not long after this event, and shortly after he had attained the age of majority, Mr Ricardo formed an union, productive of unalloyed domestic happiness, with Miss Wilkinson. Having been separated from his father, he was now thrown on his own resources; and commenced business for himself. At this important epoch of his history, the oldest and most respectable members of the Stock Exchange gave a striking proof of the esteem entertained by them for his talents and character, by voluntarily coming forward to support him in his undertakings. His success exceeded the most sanguine expectations of his friends, and in a few years he realised an ample fortune.

"The talent for obtaining wealth," says one of Mr Ricardo's near relations, from whose account of his life we have borrowed these particulars, "is not held in much estimation; but perhaps in nothing did Mr R. more evince his extraordinary powers, than he did in his business. His complete knowledge of all its intricacies; his surprising quickness at figures and calculation; his capability of getting through, without any apparent exertion, the immense transactions in which he was concerned; his coolness and judgment, combined certainly with (for him) a fortunate tissue of public events, enabled him to leave all his contemporaries at the Stock Exchange far behind, and to raise himself infinitely higher, not only in fortune, but in general character and estimation, than any man had ever done before in that house. Such was the impression which these qualities had made on his competitors, that several of the most discerning among them, long before he had emerged into public notoriety, prognosticated in their admiration, that he would live to fill some of the highest stations in the state."*

According as his solicitude about his success in life declined, Mr Ricardo devoted a greater portion of his time to scientific and literary pursuits. When about twenty five years of age, he began the study of some branches of mathematical science, and made considerable progress in chemistry and mineralogy. He fitted up a laboratory, formed a collection of minerals, and was one of the original members of the Geological Society. But he never entered warmly into the study of these sciences. They were not adapted to the peculiar cast of his mind; and he abandoned them entirely, as soon as his attention was directed to the more congenial study of Political Economy.

David Ricardo came, for the first time, before the public as an author in 1809. The rise in the market price of bullion, and the fall of the exchange that had taken place in the course of that year, had excited a good deal of attention. Mr. Ricardo applied himself to the consideration of the subject; and the studies in which he had latterly been engaged, combined with the experience he had derived from his moneyed transactions, enabled him not only to perceive the true causes of the phenomena in question, but to trace and exhibit their practical bearing and real effect. He began this investigation without intending to lay the result of his researches before the public. But having shown his manuscript to the late Mr. Perry, the proprietor and editor of the Morning Chronicle, the latter prevailed upon him, though not without considerable difficulty, to consent to its publication, in the shape of letters, in that journal.

The first of these letters appeared on the 6th of September 1809. They made a considerable impression, and elicited various answers. This success, and the increasing interest of the subject, induced Mr. Ricardo to commit his opinions upon it to the judgment of the public, in a more enlarged and systematic form, in the tract entitled "The High Price of Bullion a Proof of the Depreciation of Bank Notes." This tract led the way in the far-famed bullion controversy. It issued from the press several months previously to the appointment of the Bullion Committee; and is believed to have had no inconsiderable effect in forwarding that important measure. In this tract Mr Ricardo showed that redundancy and deficiency of currency are only relative terms ; and that so long as the currency of any particular country consists exclusively of gold and silver coins, or of paper immediately convertible into such coins, its value can neither rise above nor fall below the value of the metallic currencies of other countries, by a greater sum than will suffice to defray the expense of importing foreign coin or bullion, if the currency be deficient; or of exporting a portion of the existing supply, if it be redundant.

But when a country issues inconvertible paper notes, (as was then the case in England), they cannot be exported to other countries in the event of their becoming redundant at home; and whenever, under such circumstances, the exchange with foreign states is depressed below, or the price of bullion rises above, its mint price, more than the cost of sending coin or bullion abroad, it shows conclusively that too much paper has been issued, and that its value is depreciated from excess.

The principles which pervade the Report of the Bullion Committee, are substantially the same with those established by Mr Ricardo in this pamphlet, but the more comprehensive and popular manner in which they are illustrated in the Report, and the circumstance of their being recommended by a Committee composed of some of the ablest men in the country, gave them a weight and authority which they could not otherwise have obtained. And though the prejudices and ignorance of some, and the interested, and therefore determined, opposition of others, prevented for a while the adoption of the measures proposed by Mr. Ricardo and the Committee for restoring the currency to a sound and healthy state, they were afterwards carried into full effect; and afford one of the most memorable examples in our history, of the triumph of principle over selfishness, sophistry, and error.

From "On Profits":

Like all other contracts, wages should be left to the fair and free competition of the market, and should never be controlled by the interference of the legislature.

The clear and direct tendency of the poor laws is in direct opposition to these obvious principles: it is not, as the legislature benevolently intended, to amend the condition of the poor, but to deteriorate the condition of both poor and rich; instead of making the poor rich, they are calculated to make the rich poor; and whilst the present laws are in force, it is quite in the natural order of things that the fund for the maintenance of the poor should progressively increase till it has absorbed all the net revenue of the country, or at least so much of it as the state shall leave to us, after satisfying its own never-failing demands for the public expenditure.

This pernicious tendency of these laws is no longer a mystery, since it has been fully developed by the able hand of Mr Malthus; and every friend to the poor must ardently wish for their abolition. Unfortunately, however, they have been so long established, and the habits of the poor have been so formed upon their operation, that to eradicate them with safety from our political system, requires the most cautious and skilful management. It is agreed by all who are most friendly to a repeal of these laws, that if it be desirable to prevent the most overwhelming distress to those for whose benefit they were erroneously enacted, their abolition should be effected by the most gradual steps.

It is a truth which admits not a doubt, that the comforts and well-being of the poor cannot be permanently secured without some regard on their part, or some effort on the part of the legislature, to regulate the increase of their numbers, and to render less frequent among them early and improvident marriages. The operation of the system of poor laws has been directly contrary to this. They have rendered restraint superfluous, and have invited imprudence, by offering it a portion of the wages of prudence and industry.

The nature of the evil points out the remedy. By gradually contracting the sphere of the poor laws; by impressing on the poor the value of independence, by teaching them that they must look not to systematic or casual charity, but to their own exertions for support, that prudence and fore-thought are neither unnecessary nor unprofitable virtues, we shall by degrees approach a sounder and more healthful state.

Apr

29

It occurred to me this morning as Eddy's Mom sent me the links on Amazon to the new outdoor furniture we(she) will be buying that Amazon is Sears, Roebuck reborn. They started with watches; Bezos started with books, but the mail order/Railway express model is the same.

Apr

29

A bittersweet moment in Ty Cobb's life reportedly came in the late 1940s when he and sportswriter Grantland Rice were returning from the Masters golf tournament. Stopping at a Greenville, South Carolina liquor store, Cobb noticed that the man behind the counter was "Shoeless" Joe Jackson, who had been banned from baseball almost 30 years earlier following the Black Sox Scandal. But Jackson did not appear to recognize him, and finally Cobb asked, "Don't you know me, Joe?" "Sure I know you, Ty," replied Jackson, "but I wasn't sure you wanted to know me. A lot of them don't."

Stefan Jovanovich adds: 

Given the fact the Jackson remained a respected figure of the community and the liquor store was owned by Jackson and his wife and his name was above the door, the story could be one of Grantland Rice's maudlin inventions. For the people of his home town, Greeenville, SC, Jackson always was a figure of respect.

The site shoelessjoejackson.org has a link to the PDF of Furman Bisher's interview with Jackson — the only one he ever gave. Eliot Asinof's book (the one John Sayles relied on for Eight Men Out) is a very large pile of crap which completely ignores Bisher's interview and the Jackson's own grand jury testimony. If Jackson had, in fact, been guilty, it is hardly likely he would have prevailed on the civil suit against Comiskey for his pay for the 1920 and 1921 seasons.

Apologies to all — this subject always gets my dander up. During the series Jackson had 12 hits (a Series record) and a .375 batting average—the best record for a player on either team. He had no errors and threw out a runner at the plate. The principal "proof" against him was that the Reds had hit a number of triples to left field (where Jackson played) because Jackson deliberately dogged it in running the balls down. None of the contemporary newspaper accounts mention ANY triples being hit to left field by the Reds. Once again, the lies run round the world while the truth is still putting its boots on.

Thanks, Bill, for bringing up one the 10 greatest ball players of all time.

Apr

9

This is a review of the new book Alger Hiss: Why he Chose Treason relying on relatively newly declassified historical evidence about the Soviet spy Alger Hiss who was instrumental to the creation of the United Nations as well as several New Deal policies.

To those who doubt that the US can be controlled by a conspiracy, especially foreign-controlled, this should shed some light on what is actually possible in the real, not imaginary world of nefarious and anonymous Wizards of Oz. This also sheds light on how no amount of evidence no matter how obvious and undeniable will convince the left that there is treason in their ranks and in fact they themselves are involved in it.

"Why exactly were the intellectual elite so determined that Hiss was innocent? His accuser, Time magazine senior editor Whittaker Chambers – originally Hiss’s Soviet handler and author of the classic “Witness” – presented compelling written evidence. However, the intelligentsia were intent on supporting one of their own. They ignored the facts, a willful blindness that helped contribute to a polarization still in place in our country today.

Thirty years of intelligence analysis gives Shelton the expertise to approach the story from many different angles, especially:

* Her persuasive argument that communism and fascism are not polar opposites, as has so long been claimed, but highly similar ideologies.

* How Hiss’s central role at the Yalta Conference and the founding of the United Nations are examples of the significance of Soviet intelligence recruitment of high-level Americans who could influence U.S. foreign policy in their favor.

* Why the silence surrounding the implications of Hiss’s espionage continues—and why apologists fear that smearing his name would undercut New Deal policies and the United Nations. Shelton doesn’t just detail the body of evidence pointing to Hiss’s guilt; she suggests new layers of meaning in light of the current political landscape.

Today, the importance of understanding Hiss’s ideological commitment has never been more vital. His advocacy of collectivism and internationalism still resonate among the political elite, making this book an important and timely analysis of American thought at this critical juncture in our country’s life.

Stefan Jovanovich writes: 

It is a measure of our European bias that the discussions about betrayal by the State Department always focus on the part of the globe where the spies did no damage and ignore the part where the damage was immense. Regardless of what Stalin learned from his spies, the boundaries in Europe were going to be what they were. The Russians lost more men fighting the Battle of Berlin alone - nearly a million casualties - than the American and British armies lost on all front - North Africa, the Balkans, Italy, France, the Lowlands and Germany itself. The Patton speech in the movie is great theater, but it is complete nonsense. By 1946 the U.S. had 1 1/2 divisions east of the Rhine; the Russians had over 100.

Where the spies did immense damage was in the East. By persuading Truman that the Kuomintang had "lost China", they enabled the Chinese Communists to win. 2 expensive Asian wars later, we are still paying the price of that betrayal.

Gary Rogan replies:

My main point was that some spies are more than spies. When a spy is able to affect major wide ranging policies he has partially subjugated the country he is working against instead of just supplying the information about troop movements, etc.

My observation today is that essentially NONE of the foreign policy initiatives of the United States benefit the United States as a whole. It is also my belief that if you consider the interests of a few financial oligarchs, Saudi Arabia, China, Russia, and the cause of "global governance" in approximately this order you will figure out what steps the US is likely to take in any given situation.

For instance, Libya was easy: the head of the country was a personal enemy of the Saudi King, and "global governance" would benefit, so it was a decision to invade for no real American interest of any kind.

Syria is harder, because there Saudi and Russian interests conflict with each other and also with "global governance". Iran is really hard, since there Saudi interests are semi-ambiguous and conflict with both Russia and China. Removing the missile shield from Poland is easy since it benefits Russia.

Whether assisting the oil industry in Brazil, looking for some probably long dead murderous warlord in the middle of Africa, choosing what to do or not to do in the Middle East, Eastern Europe, giving some Alaskan islands to Russia, or doing anything anywhere else in the world there is no longer any discernible "American Interest" of ANY kind, misguided or otherwise the I can see. It's always what benefits one of the other major players.

 

Mar

28

From Politico's Morning Energy:

The EPA today will announce its greenhouse gas rule for new power plants, advancing a regulation that - if upheld - promises to change the way the U.S. gets its power.

The proposed standard would generally require that new power plants emit carbon dioxide at a rate comparable to or better than natural gas-fired power plants, which emit about 60 percent less greenhouse gases than coal plants.

In essence, that means that new coal-fired power plants will have to capture their carbon dioxide emissions - either for storage or, in many cases, to send the CO2 to oil and gas drilling operations where it can be used to help extract fossil fuels.

But the rule also includes a phase-in period, sources knowledgeable of the rule say, so that coal plants that are ready to build may move forward. The impending announcement was first reported Monday by The Washington Post.

Carbon capture is not a practical option. This rule will be the end for coal and it will also put an end to simple cycle gas turbines. This proposed rule seems to put the US in a box; reducing the capacity of base loaded power plants at the same time reducing peakers. If upheld, I don't see how this will end well.

Gary Rogan writes: 

From the summary:

"The EPA in 2009 found that by causing or contributing to climate change, GHGs endanger both the public health and the public welfare of current and future generations."

Another offering to the false god.

Ron Schoenberg writes: 

If the loss of Arctic ice, the decline in glaciers, the unprecedented extreme weather events such as eight serious droughts in the last ten years in Texas, tornadoes in January, the last decade's global temperatures being the hottest on record, the accelerating increase in sea level, unprecedented wildfires in Russia and other parts of the world, unprecedented droughts and floods in Australia, unprecedented insurance claims due to weather, if all of this fails to convince you of the seriousness of climate change, what would it take to convince you?

Like the mythical frog in the pot slowly being brought to a boil, you might get cooked if you fail to see what is happening. I'm genuinely interested, what would have to happen for you to decide that you needed to jump out of the pot? I'm not asking you to agree that it's happening. I'm not asking you to say there's a pot being brought to a boil. I'm just asking what would have to happen for you to admit that climate change is actually occurring.
 

Stefan Jovanovich responds: 

Of course, the climate is changing; that has never been the question. The debate has been over 2 issues: (1) the loss of individual liberty for people who will have unelected authorities regulating the details of their lives in the name of "saving the planet" and (2) the cost to the poor and ordinary (sic) people of the world who will need the energy produced by fossil fuels if they are to have any hope of seeing their children become secure enough to afford ecological sensitivities.

The central fact of the climate (formerly known as "global warming") debate is that there are no longitudinal data sets for terrestrial temperatures that can be cross-checked much before 1780; for sea temperature the records are not available globally much before the 1870s. All the other "facts" on offer - the hockey stick, etc. - exist only in mathematical models. The first rule of any prescriptive science is "do no harm". The cures offered in the name of "saving the planet" will prevent people in most of the world from ever getting drinking water as potable as the stuff people have in their radiators right now (excluding the anti-freeze). Without the pumps fueled either by oil, gas or coal-powered electricity and the plastic piping, there is simply no way. Fortunately, people seem to be much more aware of the choices than they were when the Brave New World was first put on offer at Kyoto.

Charles Pennington adds: 

It's worth noting that the most prominent physicists (as opposed to "climatologists") who have actually waded into this issue have tended to be on the skeptical side. These include:

Ivan Giaver (Nobelist)

Will Happer (heavy hitting Full Professor at Princeton)

Freeman Dyson (Feynman collaborator who probably should have gotten the Nobel for work they did together)

These guys were already so prominent when they spoke out on this issue that it was impossible to blackball them, but younger, less powerful scientists would risk being shunned if they spoke out–as the Climategate emails demonstrated.

Gary Rogan writes: 

Yes, the increase in atmospheric concentrations of CO2 is an undeniable fact.

And yes, the consequence of adding more CO2 into the atmosphere is unknown.

100 ppm is one molecule in 10,000. Try to visualize 10,000 of anything and think about the effects of adding 1 to it. Conversely, if it has 3 of something, than adding 1 more could be significant. Yet we hear that other participants in that 10,000 are really important, like water and methane molecules. The oceans are also exceptionally important in both diluting and releasing CO2.

Every time I hear about some "unique" phenomenon I can visualize many other "unique" phenomena of unknown provenance or importance. Unique phenomena don't prove anything, especially if one side is highly motivated to tie these unique phenomena to the outcome they seem to be highly interested in for good or bad reasons.

Many are convinced that this is obviously true. I believe this is utter nonsense because of the political circus and evidence of fraud that surround it, but it certainly is not as implausible as many totally faith-based things because people really are releasing carbon into the atmosphere in significant quantities. All I ask for is from some predictive ability of this line of thinking before I agree that bankrupting whole industries and impoverishing millions if not billions is called for. "Can't you see, it's all around you" is not enough for me.

Mar

25

There is a meal for a lifetime in understanding why otherwise intelligent people reach rash and completely wrong conclusions based on breathless internet headlines that appeal to their gut instincts.

One of the wonders of the internet is its ability to find primary source documents quickly and to NOT rely on pundits and commentators to summarize facts.

I am pleased to see that Drudge has now posted a confirmation of my statement below, namely that the new Executive Order is not news, and not a grab at martial law.

Stefan Jovanovich writes: 

There may be another explanation. People are –in their own rash way–beginning to ask WTF about what is considered "normal". The vast majority of executive orders that survive any one President's term of office. So do all the rules made by administrative law and formally-appointed Federal judges - neither of whom are ever subject to removal at the ballot box. With enough lobbying their follies and petty and major tyrrannies can be adjusted or amended or their enforcement ignored, but they are still there - ready to be used whenever someone wants to play "gotcha". Those of us lucky or foolish enough not to care what grades we got in law school used to make ourselves more than usually obnoxious by asking where in the Federal Constitution either the Congress or the President was given authority to delegate the use of their respective legislative and executive powers. The answer, as the Lististas who were not professional pains-in-the-ass also know, is that there is no authority for Congress to do so anywhere in the Constitution; the entire edifice of Presidential and administrative law authority rests on one clause in Section 3. of Article III: (he - i.e. the President) "shall take Care that the laws be faithfully executed". And from that we get the normality of our present soft tyrannies.

Mar

22

I haven't read all of Mr. Mee's letter on buying the worst but let me say that I completely recant and disavow all my conclusions about buying the worst individual stocks. My conclusions were not based on a prospective files but on compustat files. They didn't take proper account of survivor bias in many different ways nor did they uncover the 1000 fold gems that Gilespie used to like to buy. Dimson has a paper saying that buying the best is better than buying the worst, and he is a very careful researcher.

Stefan Jovanovich writes: 

There seems to me one occasion when the worst are the best — when the companies' futures as enterprises are flexion calls. As Mr. Einhorn said recently, "if the market capitalization of the equity is less than half of the face value of the debt, the stock remains in an option area"; buying those options can be profitable if one knows the central bank's is about to flex its rescue muscles. Buying $1 stocks in 1939 (after Germany invaded Poland) is another way of putting it. This is hardly a plan for sustained investing; over time the worst do come last, as the Chair says; but the longshots can be worth the bet if there is a near-certainty that the jockeys on the lead horses have all had instructions to pull back on the reins.

Gary Rogan writes: 

The well-publicized "magic formula" really says nothing more than both the price and inherent quality of the business are important, and some weighted average should be used for stock selection. If you can find something that's outstanding in both, as opposed to either outstanding in one of them this will pay off.

Yesterday I finished reading Great by Choice by Jim Collins and Morten Hansen and if I were to distill what's it saying about what it takes to outperform the market by 10x is that (a) you need to be good enough inter terms of both creativity and paranoia (b) more importantly you have to pace yourself for consistency, not moving too fast or too slow almost without regard to the external environment (c) have some sort of a detailed internal recipe that you maintain but also adapt to external changes as opposed to either not having a recipe or sticking wit the present version too long.
 

Mar

12

The other day I heard somebody say:

"Assuming the future behaves the same as the past, I reason that this way makes my funds efficiently used".

I wanted to say, my experience is that the past is never like the future so we waste valuable time and skills on a false postulate.

As I see it, it is better to have a core strategy to deal with equity drawdowns, etc –based on logic–as opposed to a strategy based on the past real results or back tested as that is for the most part a make believe world since it never happens quite that way again.

Gary Rogan writes: 

Larry's statement seems to be exceptionally profound in what it's saying and in the unambiguous nature of what it's saying. Speculation seems to be about predicting the future. Is there anything but the past, in some sense, that can guide us towards correctly predicting the future? If so, and if it's not similarity, what is it about the past that can help predict the future?

John Netto comments: 

There are ample proverbs espousing the merits of both deriving information on events which have taken place before us, as well as the the complexities in attempting to accurately predict the future due to the inherent uniqueness of the time we are living. As a speculator in the financial markets, sports arena, and poker, it's my experience the answer lies somewhere in between. For me, the ability to extract alpha is how well I can ascertain what qualitative aspects are unique and execute a strategy from there.

Two sayings which are both contradictory and complimentary:

"Past is not prologue" "Those who do not learn from history are doomed to repeat it"

Gary Rogan writes: 

There are many ways to use the past, such as:

1. Under similar circumstances, Security A behaved a certain way during a statistically significant percentage of the time. I will therefore bet that Security A will do it again under similar circumstances.

2. In the past, a certain class of securities had a certain trajectory under similar circumstances. I will therefore bet that this new Security B, which seems fit to be a member of this class, is statistically likely to follow this trajectory close enough to bet on.

3. In the past, when people were this excited/depressed/confused you could bet with them/against them and make money. Let's do it again.

4. The past rarely repeats under these circumstances. Let's bet against the past.

I'm sure there is an infinite variety of similar observations. Yet in every case the past was used SOMEHOW. There is nothing but the past as the basis for human knowledge, and that's why I was so fascinated by Larry's statement, especially because he is a master of his game.

Craig Mee writes: 

Running a stop with any position, regardless of the backtest, is both logical and prudent.

Stefan Jovanovich adds:

When the British and French were forced to give up their remaining military strength in the Arabian Peninsula and the eastern Mediterranean - abandoning the base in Aden, being forced to withdraw from their assault on the Suez Canal, the U.S. did not replace them on the ground. The great fear was that "the loss of the Canal" would result in "the oil weapon" being used against "the West". The actual result was the development of supertankers that by-passed the Canal entirely and increased by an order of magnitude the ability of the oil exporters to ship their crude to Europe and Asia. At the height of the Suez crisis the inflation-adjusted price of crude (using the 1947 nominal price of $15 as the baseline) rose to $18 a barrel - higher than it had been during the Korean War. A decade and a half later - even as U.S. supplies went from 40% of world production to 10% - the inflation-adjusted price fell by nearly a third, hitting a low of $13 in 1972 after production began flowing from the North Sea discoveries.

I find myself wondering if the U.S. eventual withdrawal from Afghanistan and the withdrawal from Iraq already largely completed will not have the same paradoxical effects as the Anglo-French withdrawals did. I realize that this question is completely irrelevant to the questions that anyone trading in commodities has to answer; but those of us in the bleachers are interested in what the professionals on the field think will be the effects of the closing of America's 25-year military misadventures in Southwest Asia.

Larry's maxim: "it never happens quite that way again" - certainly applies to political history. This is the second time in my lifetime that the American public has lost its belief in the virtue of our allies. Last time they were wrong; this time they are right.

 

Mar

12

What keeps me obsessing about Grant and his times is that there is so much real information (diaries, letters, memoirs) from the people who were there that the newspaper versions of what happened do not become the final word. One can, with very little effort, get to the truth of things and safely ignore (or accept) the opinions of the New York Times because they are - in either case - anything but "all the news". What is also fascinating is to observe how official opinion does its best to squash all contrary ideas. The internet truly is as much of a revolution as Gutenberg's infernal machine because it gives the means for circulation of all ideas - official and unofficial. Even 10 years ago that was not the case; you were a complete crank if you challenged the academic orthodoxy, and there was literally no point in going to conferences or meetings because all the documentary evidence in the world would not stand up against "what everybody knows". Of course, Grant was a drunk, a business failure, an anti-Semite, a corrupt politician, etc. etc. The Adams boys said he was, and they should know - they went to Harvard. "True, but lots of us went to Harvard, including Al Gore; what does that have to do with the facts or the truthfulness of the sources."

All of this is a veiled pitch for people to buy Timothy B. Smith's books. His work on Shiloh - This Great Battlefield of Shiloh: History, Memory, and the Establishment of a Civil War National Military Park - is the best book written about how a civil war battlefield now tells the story not of what happened but of what people wanted "everybody to know". Grant wrote that "the Battle of Shiloh has been perhaps less understood, or, to state the case more accurately, more persistently misunderstood, than any other engagement" in the Civil War. He would not have been surprised to be told that the park reflects that persistent misunderstanding. Smith's book is a wonderful history of how that came about.

P.S. Smith has a new book coming out on the Battle of Corinth and has already written one about Champion Hill. He has also written one about the Chickamauga Memorial - the first Civil War National Military Park. Buy them all.

Mar

9

As California has continued to run deficits during this recovery, the state has managed the shortfall by internal borrowings from its trust funds. Since California still uses U.S. dollars as units of account and holds its money in dollars, these internal borrowings have involved what could be called - for lack of a better word - "real" money. To deal with the current projected deficit, California's Governor has proposed a further tax increase. Since it involves paying more money to schools, the measure has broad public appeal; after all, education is now, by far, our largest single enterprise. The proposed "TEMPORARY TAXES TO FUND EDUCATION. GUARANTEED LOCAL PUBLIC SAFETY FUNDING. INITIATIVE CONSTITUTIONAL AMENDMENT." will increase personal income taxes on annual earnings over $250,000 for five years and increase sales and use taxes by 1/2 of 1 per cent for four years. The measure will allocate 89% of the new tax revenues to K-12 schools and 11% to community colleges. The latest Public Policy Institute poll has 72% of respondents supporting the measure.

But, there may not be any substantial new revenues from the tax rate increases. There will be at least some additional money raised (increasing sales tax rates brings in more revenue until you get to 30% plus levels; then, for some inexplicable reason, every further increase leads to a slight reduction in collections). But the increase in California's highest income tax rate may be a disappointment - as it has been in the past. Only a very small number of taxpayers have incomes that will be subject to the new rate; and in the past much of those large incomes has been money made from the capital gains from IPOs. To pay the school teachers, California will needs the Facebook IPO. (Historical aside: a half century ago (1963-1964 FY), the personal income tax generated only 18% of General Fund revenues.)

Eddy's Mom - the brains in the outfit - predicts that California will not only need Facebook's IPO but also its currency. Consider this: if you go on unemployment in California now, you receive a debit card; and you become a customer of the Bank of America. 

The next logical step, says the EM, is for salaries and pensions to be paid in debit card credits. Those of us who amuse our small brains by spending too much time watching the California legislature on public access cable would have agree (actually, it is less watching than listening; politics in California really has become show business for people too ugly to work even behind the camera). The theme for the legislature this year has been a discussion of how important it is for California's great wealth to be "invested" in the state - i.e. spent on the schools and school teachers.

If the latest attempts to soak the rich fail because the rich hide their money, the legislature could find itself wanting to require people to be paid in debit cards. When people decided to download their debit card balances to their checking accounts, as the unemployed now can, the state will want to place exchange restrictions on the debit card accounts. The DeLongistas (worshipers at the Keynesian pump) would certainly approve of such a policy; their models will prove beyond all doubt that California's economy will increase dramatically if only California's money is only being spent in California.

But why stop there? Shouldn't California have its own currency?

Silicon Valley will approve; my God, they will be wildly in favor it - provided people can pay their taxes in Facebook credits.

There would, of course, be a downside. The out-of-state retirees (and in-state recipients as well) will be tempted to find a black market for their debit cards. But think of the advantages: not only would California finally be able to show the rest of the country just how much more Progressive we are but we would also be getting rid of all the people who refuse to see the wisdom of mandatory electric vehicles. Of course, there would be people who saw such changes as the worst kind of mercantilist thought-control; but they are the very people who should not be here in the first place. They should leave, just the way the Jews, Protestants and free-minded Catholics did when they took their skills and evil Coin and went to the New World to found that evil place now called "America".

Mar

2

I find it pretty hard to argue with the Sage on this one. Here is what he actually said, in a Fortune magazine article (February 27, 2012 issue) based on his shareholder letter:

Today, the world's gold stock is about 170,000 metric tons. … At $1,750 per ounce … its value would be about $9.6 trillion.

…Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops–and will continue to produce that bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything.

Stefan Jovanovich writes: 

No one suggests that gold is somehow a magically superior investment; as Money it is not an investment at all, simply the means by which people can save wealth with the assurance that it will not be easily confiscated or corrupted by the government. Mr. Puffy has lived an indulged and indulgent life; since early childhood he has had the security of knowing that nobody would ever mess with him. Throughout human history many, many people have known that they would be the opposite of a Congressman's son. (Cue "Fortunate Son"). They have even been paranoid enough to think it wise to hold some of their wealth in a portable form. Calling the insurance company in order to collect on your policy might not be possible. As even the Oregano knows, there is always the regulatory risk that you may be on someone's shit list. At current prices I can fit the gold coinage equivalent of the average American's lifetime savings ($95K) in a tiny case; it will weigh less than an ultralite laptop. It is just such similarly-sized hoards of the stuff "incapable of producing anything" that allowed the Hugeunots, Moravians, Jews, Anabaptists, free thinkers and so many, many others to flee and save themselves and their families.

Comparing the world's Coin with the valuations of some of the things it could buy is a sensible exercise. Sometimes Money is overpriced, and sometimes it is not. That is for the market to decide. But using crude sums is a rhetorical trick that the Oregano really has to give up. It contradicts everything he has done in his own business practice. As he well knows, anyone who acquired even 10% of "all U.S. cropland" - let alone all of it and 16 Exxon Mobils - would find himself subject to envy regulation by the FDA and the entire Congress; the farmland would still be there a century from now - asteroid strikes being excluded as acts of God - but the returns on investment would not be. That is as certain as the fact that the people who regularly visit the White House will always want to assure the rest of us that the government's word is all we need.

The notion that the government should not "regulate" individuals' money savings is as radical these days as the idea that people have innate rights of liberty not subject to the will of the King was 250 years ago. I don't expect to win this argument in my lifetime; but things do change - sometimes even for the better.

George Parkanyi writes: 

Stefan, I fully understand why people still invest in gold. They/we believe that in the future is can be exchanged first for whatever currency prevails, and then with that currency buy goods, hopefully with roughly equivalent, or perhaps greater purchasing power. My point is that when you think about it - gold itself has limited intrinsic economic value. It does not contribute all that much to actual wealth-creating productivity. It's mainly just used as a proxy for wealth - only because enough people still agree that it is. It's not a commodity that people use day-to-day except for decorative purposes (jewelry and art) and in electronics. It's not something we need with which to sustain ourselves. That to me is its vulnerability. Yes it's tangible, but it doesn't really do anything.

I find it fascinating that in some African rural areas people use transferable cell-phone minutes as currency. That's the kind of digital-age utility I'm talking about. I think that abuses and corruption aside (you find that everywhere anyway) - electronic money is just so much more convenient, and modern economies are now totally structured around that. Modern economies use their productivity as the "collateral" behind their currencies. That actually makes sense as long as you put enough governance around it so that people are willing to trust the currency, and computer and network technology facilitates trade like never before, hugely boosting productivity. Apart from straight barter with things like refrigerators, I can't think of anything more cumbersome to use as a medium of exchange than gold. It's heavy, not easily divisible. I can't even sell my gold coin (received as a gift) to a bank without the original purchase paperwork - otherwise there's an assay charge that goes along with it. What a pain in the ass(ay). And it may not help you all that much in a Mad-Max world either - if food, water, clothing, tools, and guns are at a premium, who wants to be lugging around a heavy gold bar?

I do agree that its not going away any time soon. The emperor may have no clothes, but everyone has universally agreed to pretend that he does.

Stefan Jovanovich replies: 

The Founders and their British forebears like Isaac Newton were committed to milled coinage because, once one accepted the assay of the issuer - i.e. the Royal or U.S. Mint - the coins themselves could be valued simply by weight. Even sweating the coins (shaking them in a bag and then collecting the dust generated by the friction) and minor clipping would not affect their value because that was determined by the weight of the coins themselves, not the "face value". That is the point of the gold standard clause in the Constitution - Congress sets the weight and measure for a coin - i.e. so many ounces at the standard assay. That allowed a $20 gold piece that was worn to be discounted accordingly; the "gold clause" in a contract was a commitment to pay be weight and measure, not by face value alone. (And, yes, every store had a scale; one of the first demands of merchants for commercial regulation was to have scales themselves certified by state and county inspectors.) One of the many reasons Grant's Resumption and Legal Tender Bills (making greenbacks redeemable; setting gold as the only monetary standard for the first time in U.S. history) were so successful is that U.S. Notes - the promises of the Treasury to pay gold of a specified weight and measure - became more reliable than coin itself. The paper money did not itself have to be weighed and the printing and engraving and paper were sufficiently subtle that counterfeiting was too expensive to be profitable!

 

Feb

22

Here is an amazing spectacle. Everyone knows that the house must win and the players, over time, must lose. And yet casinos flourish all over the world. Nor, contrary to the standard arbitrage argument for efficient markets, does the smart money, the house, end up with all the capital in the world while the dumb money, the players, go broke losing the capacity to sustain inefficiencies in the market. To the contrary (and contrary to one of Jarrow’s assumptions) there is a continuous source of wealth for the house to keep winning; the dumb money is constantly replenished.

From the fantastic article: "How Big is Almost?: or why the finance professoriate is clueless about managerial effectiveness"

Stefan Jovanovich quotes from the paper: 

"The paradoxical notion that uncertainty is absolute, that randomness is an objective quality, first and foremost of nature but by extension of social and economic life as well, has been rampant in our time. It was at the heart of the Copenhagen debate over the direction of quantum physics. It drove Keynesianism and Marxism and Smith’s replacement of the entrepreneur with that invisible—but oh so heavy—hand. It drove centuries of absurd debate over the relative importance of “capital” and “labor” as if they were objective fungible commodities with capabilities separable from the particular capitalists and laborers who wielded them."

"(t)here are men who consistently hit the bull’s eye at 300 yards and men who never hit it once. There are baseball players who hit .300 over a career and those who ride the bench. There are engineers with dozens of important patents to their name and those who never amount to much. There are farmers who prosper year in and year out and those for whom the weather is always bad. And generally we say the successful shooters and hitters and engineers and farmers are “good” at their jobs and the unsuccessful ones less good. We do not generally say (unless we are feeling envious), “Oh, they were just lucky,” or “they were breaking the rules.”

Can securities markets be so special among all markets, among all the arenas of our experience that in them alone diligence and skill and judgment and even raw talent do not correlate with good outcomes?"

"Randomness or “incomplete knowledge” is a subjective phenomenon. Different observers will have more or less knowledge and more or less uncertainty as a result. Moreover we can gain knowledge by dint of hard work, natural talent, and sometimes luck. We can be well prepared or poorly prepared to make a decision, discover special relativity, or buy a security. Even our best efforts to increase our knowledge may be insufficient. We may know a lot but not quite enough. We may fool ourselves about our positive expectation. There is no guarantee that our search for knowledge will bring us close enough for success. But neither is there any basis for a dogmatic ssumption of failure—or futility."

"We celebrate successful investors with other successful entrepreneurs as risk takers. This is true in the sense that the successful investor, like the entrepreneur, routinely makes judgments in the face of uncertainty. Nevertheless, the essential job of both investors and entrepreneurs is to reduce that uncertainty. Successful investors make money not by accepting risk as a given, as Modern Portfolio Theory tells us to do, but by increasing their ****

chance of making good decisions as compared to the less informed, less diligent, less talented. Admittedly how good investors, or entrepreneurs, do this is not entirely obvious. Edison helpfully told us it was 99% perspiration and 1% inspiration, but he was distinctly unhelpful in explaining how we might come by that crucial 1%. The progress from the objective uncertainty of a coin flip to sound judgment or even inspired creation is only partly a matter of quantifiable factors like more research or better math. Psychology or character or knack or what you will play an enormous role. Ultimately it does seem to matter not only what the investor or manager or entrepreneur."

Easan Katir writes: 

This is the most articulate rebuttal of the random walk theory ever! Thank you for posting.

If the heat of debate contributes to global warming, then this long conversational thread alone may have raised the earth's temperature a degree or so.

Gary Rogan writes:

It still all comes down to how predictable and persistent someone's ability to outperform SOMETHING is. Whether or not the mathematics of price movements are distinguishable from brownian motion, which they clearly are, this whole never-ending argument is about whether outperformance is reliable enough to (insert your own criteria here, like "bet the house"). The world is a confusing place, for instance Victor seems to really like "Random walk down wall street" year clearly he does other things besides putting everything into some total world ETF. Even if someone has stellar history, how can you ever know that starting tomorrow they will be on a long losing streak that will either reverse all of their gains up to now or make them quit the game?

 

Feb

21

Walter Schloss died yesterday a 95. he was one of the true great investors with compound returns of above 16% net of fees for an astounding 47%. He and his son Edward practiced true value investing buying book value bargains with little or no debt and holding until they worked. By all accounts a true gentleman, genius and humble man. I always tried to meet him when I was in the Tweedy Browne offices where he hung his hat but he was semi retired by the then and his desk in the corner was never occupied when I occasion to be in the old Vanderbilt Avenue offices.

Stefan Jovanovich writes:

He was a great supporter of Freedom House; it is largely because of his influence that they had the courage to publish Peter Braestrup's book –at a time when no one else in New York or Washington would touch it.
 

Feb

21

Today is the Met's birthday. It opened in 1872 at 681 Fifth Avenue; according to Refdesk, the collection began with 1 stone sarcophagus and 174 paintings all of which belonged to John Taylor Johnston.

Johnston's father had been a merchant banker who raised his family in Greenwich Village and helped found New York University, where Johnston went to college (graduating in 1839) and law school (admitted to the bar in 1843).

Johnston was sensible enough to avoid courtrooms and go into business; he became the first President of the Central New Jersey railroad.

He was also the first person to bring marble to Fifth Avenue facades, building a mansion at 8 Fifth Avenue, where he died in March 1893, just in time to avoid the Panic.

Feb

15

I was playing Texas Hold'em Poker online yesterday. For about an hour, I had some very good wins. Then my wife came in from outside, and we had the Valentine's greetings. It was for less than half a minute. During this time, someone called all-in. When I discovered, the software followed the bet for me when my response was timed out. So I lost it all.

Things of this nature happen more often and more easily than we think. This is just another alarm for me to take the lesson seriously.

Jeff Watson writes: 

The real lesson here is to not play NL poker games. The risk of ruin in any NL game approaches 100%. Limit poker is much better for your longevity and bankroll….provided you are a good enough player to have an edge. If you don't have an edge, stay away from the game. This applies to any game, market, sport, or activity that is competitive in nature and has a win/lose outcome.

John Netto comments: 

Jeff, I have a different perspective in the limit vs. no-limit game discussion. As you hit on, much like trading, issues like bankroll, rake, skill of opponents, and ability to extract the greatest amount of expected value all play a roll. When discussing the risk of ruin in a No Limit game, it is important to qualify one game vs. a career. Limit hold'em can impede the ability to extract bankroll from weaker players who will egregiously overpay to chase draws or call after they have been beat. Over the life of a professional speculator, forsaking this volatility can come at a cost of giving up even greater alpha (we are trying to push the efficient frontier up and left, not down and right)…

In fact, playing no-limit tournament poker vs. no limit cash games is a different discussion all together, considering the variance as a professional tournament player vs cash game player (almost akin to being long gamma vs short gamma strategies in the market).

The reason why I am a professional sports bettor, former cash game no-limit poker player, and commodities trader is the ability to put myself into asymmetrical bets and judiciously control my bankroll. In fact, as unfortunate Leo's misfortune was, operational risk is a part of trading and poker. Many poker sites will give the option to check or uncheck the "call" button. There are benefits and drawbacks to both situations.

Sam Marx writes:

Can you imagine the damage a Flash-Crash would do if it occurred on an Option Expiration Day.

The previous Flash-Crash caused damage but much of it was later straightened out. But on an Option Expiration Day the damage might be insoluble

Ralph Vince writes: 

On a similar note, given this creeping-up market of recent weeks, Prechter's prediction (which, I am not discounting one speck) I was thinking this morning how the 2008 crash closely correlated with Obama's imminent election (please, I am not arguing political idealogy here. I do not care one joy who is in charge of the Magic Kingdom and it means nothing to me at all).

Rather, given the landscape of the political backdrop here (and making the giant assumption that a large part of the drop of 08, planet-wide, was a consequence of Obama's imminent ascent) should I be en guarde for perhaps a replay of this into the Summer? Does anyone concur to a recent complacency regarding a rapid, precipitous drop similar (or worse) than '08 ?

Enjoy the etouffee,

Ralph Vince

Stefan Jovanovich adds: 

These Presidents did not lose reelection during a war, but they did choose not to run again: Polk (the Treaty of Guadalupe-Hidalgo was signed in February and the last troops left Mexico in August 1848 but Polk had already announced that he would not stand for reelection), Johnson (Lyndon, not Andrew) and Truman. Eddy's Mom has the 30 months and out rule; if a war lasts more than 30 months, the incumbent President is in trouble. It seems to apply. The military winners have been Jefferson (Franco-American naval war), Madison (1812), McKinley (Spanish-American), Eisenhower (Korea) - none of whom had a war last more than 2 years while they were in office. That leaves Lincoln (who only won because of the votes of the Union soldiers themselves), Roosevelt (by 1944 everyone in America knew it was Roosevelt's last term and the Republicans invented the Michael Dukakis of their history - Dewey) and Bush I (which I think has to be discarded because 3+ person races throw out all the rules - vide 1860 and 1912). The only winner who has clearly violated the 30-month rule was Bush II. My explanation for that anomaly is that the Democrats lost because John Kerry was still trying to prove to himself and the world that he really earned all those medals he put in for. (Of all the issues on which to base a challenge, why would anyone choose: Incumbent reservist draft dodger vs. fake war hero?)

That leaves Obama. I agree with Prechter in his thesis about social mood; the arrow of causation runs in the opposite direction. The markets will tell us the fate of the President. So, if Ralph is right, elephants will be dancing in the streets in November.

 

Feb

9

The question of the gold standard has come up, and there are the predictable responses that involved (1) not identifying what the authors of the Constitution and their 19th century successors meant by a gold standard and (2) confusing the question of a gold standard with the issues involved in fractional reserve banking. A question for the List: can anyone explain why Murray Rothbard and the Misesians are so adamantly prohibitionist about free banking - i.e. letting the bankers decide how much specie will back their dealings in credit? It still puzzles me, given the fact that the ideas of free banking (where the government is neither the guarantor nor the owner of any bank, let alone a central one) were an integral part of the Constitutional gold standard.

Here is a reprint of my latest anonymous commentary:

The Constitutional gold standard did not set the price of the dollar; it established the weight and measure of gold and silver and copper that would be in U.S. coin. In the Anglo-French-Spanish-Dutch world of trade in 1787 gold and silver were the reference standards for Foreign Coin; the authors of our Constitution wanted the same standards to apply to U.S. coin. The difficulty came in trying to set ratios between competing precious metals. Copper was never a problem because small denominations were always fiduciary currency - i.e. their stated value as legal tender was less than their monetary content. Small denominations were in such chronic shortage that private script was often used as a substitute for "half-dimes", etc. The more commercially astute members of the Convention and subsequent Congresses understood that bi-metallism was unworkable because Gresham's law would always drive the good money - i.e. the coins worth more than the legal tender amounts - into hiding. Gouverneur Morris, the shrewdest of all of them, wanted only gold to be the reference standard. He thought fractional reserve banking was the best way for the country to expand the availability of credit; but he opposed outright Hamilton's notion that the government itself should get into the banking business. Morris, as a merchant, understood what Hamilton, as a lawyer, never quite grasped: if the government can make its own bank drafts legal tender, then the Constitution's fundamental restraint on spending - the requirement that Money be Coin - will be nullified. A true Constitutional gold standard has only existed during one period in U.S. history - from the date of Grant's Resumption Act (1875) to the enactment of the Federal Reserve system (1912). It is only during that 37 year period that all the conditions of the Constitutional gold standard were met: (1) no States would coin Money or emit Bills of Credit (Art. I Sec. 10) and (2) all obligations of the U.S. Treasury, whether Notes, Bills or Bonds, were payable in gold, on demand, (3) the U.S. would, on demand, mint gold into coin and (4) only coin and convertible Bills of Credit of the U.S. were legal tender.

Resumption would not be difficult. It simply requires a President who has Grant and Morris's understanding of the importance of a Constitutional gold standard. The Treasury would have to limit further production of Federal Reserve Notes to replacement of worn/defaced bills, and the Congress would have to enact into law a date on which U.S. dollar currency, as legal tender, would be freely exchangeable into gold. What should NOT be done is to set the price; the market exists to do that. (Note: when the U.S. resumed the gold standard in 1875 the "price" of the dollar was already being set by the market in gold; the Resumption Act simply restored - with a slight adjustment - what had been the original weight and measure of U.S. coin.) Resumption would also have to follow the path set out by 1875; the Federal Reserve's greenbacks would be treated as being direct obligation of the U.S. Treasury but there would be no more "printing". The U.S. Treasury would guarantee the convertibility of the currency but the Bills of Credit of the Federal Reserve and its member banks - i.e. their checks - would receive not Federal guarantee. The banks, including the central one, would be free to succeed or fail on their own.

This may sound like a plan for the apocalypse. That was certainly what President Grant's critics and political opponents said after the Panic of 1873; they even blamed that collapse in speculation on Grant's insistence that the country return to the gold standard. Yet, when the day of Resumption came, there were no bank runs and no mass conversion of currency into coin. On the contrary, the dollar became - for the first time - an equivalent to the British pound in world markets. Requiring the U.S. government to honor its Constitutional obligations under Art. I Sec. 9 would be a dramatic change; the markets would finally have a direct mechanism for discounting the never-never promises of the Congress and the President - and the Treasury would lose the captive customer for its Credit - i.e. the Federal Reserve. But, one has to ask the simple question: would the Credit of the U.S. be greater under a system that restored the Constitutional check and balance of the gold standard or under a continuation of the present fiat greenback fictions?

Feb

9

None of us here in Chaos Manor has been able to understand objectivism". Eddy's Mom, who can explain, in detail, the differences between Aristotle and Plato and reminds Eddy and me regularly about Wittgenstein and his tiger, thinks Ms. Rand should have spent a little more time working out the difficulties inherent in asking the universe to match our phenomenological desires. Eddy has never gotten more than 20 pages into any of the woman's novels; her taste in fiction runs much more to F. Scott Fitzgerald. And yet, all of us think the woman understood, even better than Orwell, what the 20th century and the present continuation of that age have been about.

"When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corrupting being rewarded and honesty becoming self-sacrifice - you may know that your society is doomed."

Jan

31

In an effort to prove or disprove Keynesian notions I looked at two data series since 1971 for predictive relationships, federal spending and GDP annual changes adjusted to 2005 dollars from CBO data. With lags of 1 to 5 years I found nothing of significance for federal spending affecting GDP 1 to 5 years ahead. For GDP predicting spending, I did find a slight positive relationship between GDP changes now and spending changes two years from now, rsq=.04. I think it fair to say marginal federal spending increases or decreases do not affect GDP much, now or 5 years from now, but the debate will rage on.

Gary Rogan writes: 

While I of course believe that Keynesianism is pure unadulterated nonsense and any attempts to create net wealth by the government are doomed to fail, the statement that 'if there had been an opportunity for profit, some clever merchant would have been making the stuff even without a government "investment". ' isn't easily provable.

Clearly two points need to be addressed. One is scale, and it's very relevant these days as the weird topic of "colonies on the moon" has become a hot issue in the Florida primary. Could it be that things so giant in scope that no real-world merchant, even a billionaire, would voluntarily attempt to do for the fear of a devastating loss may make a profit? Much as this topic has been discussed here, I encounter it all the time in my discussions elsewhere, as just yesterday I was reacting to a list of space program spinoffs.

Second is the strangely modern behavioral economics aspect of Keynesianism. Is it possible that when "fear grips the nation" merchants, along with everyone else, start behaving irrationally and their fear of loss overcomes their normally healthy interest of making a profit even when such profit-making opportunities are otherwise self-evident?

Stefan Jovanovich comments:

Er, no, Gary. The scale of current investment in the petroleum industry alone dwarfs the capital construction programs of the every government in the world. Nimitz class aircraft carriers cost roughly $4.5B each. The Ford class carriers that the Pentagon hopes to build will cost $8B each; right now they are building 2. The projected investment in oil sands in Canada alone for 2013 will exceed the entire budget for the Navy's 2 new carriers.

If there is an opportunity for profit, people with money will find it. Of course, that includes government contracting, as Adam Smith so ably reminded all of us. Keynes' theory of "animal spirits" was useful because it suggested that entrepreneurs themselves needed Keynesian economics, that - without the assurance of a government customer - no one would take the risk. That premise seems far less easily provable than mine. The many people on this List and throughout the world and throughout history who have literally made something from nothing seem to have a superabundance of energy and determination and guts and the necessary lunacy required to "make it new".

If there is a profit to be found in sending air breathing tailless monkeys into the void of space, Mr. Branson and his competitors will find it. What Speaker Gingrich is proposing is precisely what Keynes proposed, paying people in Florida to dig holes and fill them up again. Yet, somehow, he and not Governor Romney is the "true conservative". La Di Da.
 

Jan

30

The last time free stuff on the internet attracted so much capital was in 1995-6 when Excite, Lycos, Netscape, Yahoo et. al. went public. The last time information was "hot" was the mid-1960s when the New York Times and everyone else who put ink to paper had their IPOs. In retrospect, neither time was a profitable one for the people who held on to the stocks. The message of the media was very much buy short-term, sell long-term.

— keep looking »

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