The movie In the Heart of the Sea about the Essex, as previously mentioned, is coming out on December 11th. Here is a cool article about the film:

"How Nantucket Came to Be the Whaling Capital of the World: Ron Howard's new film "In the Heart of the Sea" captures the greed and blood lust of the Massachusetts island":

And here is author of the book the film is based on, Philbrick, on Nantucket:

Bad weather had thrown off Pollard's lunar navigation. On the night of February 11, 1823, the sea around the ship suddenly churned white as the Two Brothers hurtled against a reef. "The ship struck with a fearful crash, which whirled me head foremost to the other side of the cabin," Nickerson wrote in an eyewitness account he produced some years after the shipwreck. "Captain Pollard seemed to stand amazed at the scene before him." First mate Eben Gardner recalled the final moments: "The sea made it over us and in a few moments the ship was full of water."

Stefan Jovanovich writes: 

Here is a cool report from the NY Times from 1861 about the whale oil business.

Contrary to what the Smithsonian and Mr. Philbrick have written, Nantucket was never the center of the American whaling industry. The trade journal for the industry, the "Whalemen's Shipping List and Merchants' Transcript," began publication in New Bedford in 1843 and was still being printed (as a single broadsheet) when Walter Sheldon Tower's History of the American Whale Fishery was published in 1907. Tower's comment: "New Bedford was a greater whaling port than Nantucket ever was."

FWIW, Melville's adventure sagas - Typee and Omoo - (also freely available both on Kindle and on Google books) are actually a better portrayal of life at sea than Moby Dick, which Melville wrote as an attempt to emulate Homer's prose poem of Ulysses. The American public loved the South Sea tales but they found the great work heavy going. Contrary to the usual biographies, Melville was not heart-broken by his novel's "failure" (sic), only worried because he needed the money. But, then, he got a decent civil service job and went back to his first love - simple poetry - and became the Wallace Stevens of the NY Custom House.

anonymous writes: 

No argument on the ultimate rise of New Bedford over Nantucket, but give them a little credit for being one of the main birthplaces of commercial US whaling.

Relatedly, I finally successfully made it through all of Moby Dick a few months back. Although not much of it came easy, I enjoyed it overall, and actually found parts of it pretty amusing.

I am looking forward to going to the Whaling Museum in New Bedford for the first time as soon as I can squeeze it in. I've heard it's quite nice.



 I am told that the students at Harvard were highly impressed by President Obama's talent for telling his law professors exactly what they wanted to hear. Some of the subversives even went so far as to channel their inner David Mamet and develop a grading curve for sucking up. It was called the Obamameter. According to someone who was there: this was, unlike Olympic judging, an absolutely pure and unbiased measure of a student's brown nosing skills. It used the standard 10-finger scale. The President never scored less than a 10.

There is no question that this is the only way to succeed in school and, so it would appear, in public life. The question is why anyone would ever do anything else.

The Navy has had a useful corollary, the Seaman's cardinal rule: "If it moves, salute it; if it doesn't, paint it."



 The contango between current prices–oil for delivery within 90 days–and those 6 years out attracted my attention for what is probably a very stupid reason. I have been rereading Charles Dow's journalism, and I was struck by his comment that the "commercial cycle" (his term) in prices ebbed and flowed every 6 years. Not 4, not 11, but 6. Dow thought that scientific speculation (also his term) was a matter of finding values within the prices that the markets produced each moment. Values for him were not some Platonic idealization but a matter of commercial sense. One of the rare complaints he ever wrote to his readers about them was that, in dealing with the stock market, they abandoned the very commercial sense that had given them the money to speculate.

Is there value in a future commodity price that is, once again, at a rare extreme compared to the costs for present delivery? Dow would have thought so.

P.S. FWLIW, Dow thought a scientific speculator should expect to double his money in every commercial cycle–i.e. earn 12% compounded annually.

When I asked "is there a value in a future commodity price that is, once again, at a rare extreme compared to the costs of present delivery?", Charles Dow would have thought so because, as he wrote, "the best profits in the stock market are made by people who get long or short at extremes and stay for months or years before they take their profit." Contrary to modern journalists, Dow made no presumptions about his own abilities to find where in an extreme the profits were to be found. In oil itself? In E&P stocks? In refiners? What made Dow such an exceptional journalist was his rare combination of humility and curiosity. He wanted to know what the market would tell him; he never thought he had advice for the market.

Jeff Watson writes: 

That's the difference between a professional and everyone else. The professional lets the market speak to them, tell you the story, and everyone tries to tell the market what to do based on their own cognitive biases. 



"The stock market leads the economy, not the other way round"

Are we sure of this old bromide?

anonymous writes: 

Yes, the data support the conclusion. Even more so because we know the results of the stock market immediately, and we get the GDP number only each quarter, and then after a delay of months that is then revised three times.

Andrew Goodwin writes:

A statistical method for testing this theory with precise equations is given here for those who would care to update the work:

"The Stock Market as a Leading Indicator: An Application of Granger Causality"

To summarize the conclusion reached using this "Granger causality" method:

Our results indicated a "causal" relationship between the stock market and the economy. We found that while stock prices Granger-caused economic activity, no reverse causality was observed. Furthermore, we found that statistically significant lag lengths between fluctuations in the stock market and changes in the real economy are relatively short. The longest significant lag length observed from the results was three quarters.

Stefan Jovanovich writes: 

"Is the causality relationship more consistent with the wealth effect or with the forward-looking nature of the stock market? The results from this project are consistent with both the wealth effect and the forward-looking nature of the stock market, but do not prove either. Another possibility for future research is to further evaluate where expectations about the future economy are coming from. Our results reveal that expectations for future economic activity are not simply formed by looking at the past trend in the economy as the adaptive expectations model would suggest. Expectations are being formed in other ways, but how?"

The argument for the "wealth effect": rich people's spending is the Keynesian pump that gets its money flows from the drift towards higher stock prices. The argument for the forward-looking nature of the stock market: the same one that applies to all asset and credit pricing, even those for "true" bills. The argument for "adaptive expectations" models: straight lines are easier to draw.

Stock prices go down because enough rich people think they will go down. God only know what makes them decide to think that, even though they have all the lessons of the past to tell them otherwise.

As Eddy and her Mom and others remind me, my sarcasm can be a bit heavy-handed, obscure and unfunny.

Let me try again, now that Big Al (who has saved me from gold standard oops moments and other follies) has come to my rescue.

The Chair's drift is a fact of enterprise itself; people get richer because they figure out how to do things better, faster and cheaper, and the price for that know-how rises steadily because it is the means of producing more wealth.  (Marx was not wrong to focus on the means of production; he just left our distribution and exchange as the other necessary parts of the deal.)

The people the Chair left behind at Harvard, Berkeley and elsewhere share their own kind of Marxist illusion; they think that people can manipulate the way we all keep track of wealth - the unit of account, the interest rate on government debt - and have the manipulations produce further drift which will, in turn, somehow produce greater wealth.

This all reminds me of what a WW II veteran once told me about sharing a bivouac with the Russians while Truman, Churchill and Stalin carved up the world at Potsdam.  The Americans, with their wonderful energy, had set up tents and installed GI showers and faucets after running lines to the nearest pond with clean water.  After seeing the GI walk over to a faucet and turn it on to fill a pail of water to feed the radiator in his Deuce and a Half, a Russian soldier yanked off the faucet, walked over to the Russian side and defiantly banged it into a post.  He was enraged when he turned the tap and nothing came out.

Fat thumb correction:  stock prices go up and down because enough rich people take one side of the trade or the other that they change the price of wealth expectations for that particular company. There is no way of knowing what their particular "reasons" are; markets are part of Heisenberg's universe.

Bill Rafter writes: 

Allow me to come into this party late and probably tick everybody off. What drives markets most of the time (i.e. 90+ pct.) are two things: momentum and sentiment. If you have a handle on those you can make money. Probably the same two things drive the economy, but you cannot make money trading the economy, as the data coming out of the economy is more lagged than the data coming out of the markets. Hone your skills where they can count.



 I'm in Ushuaia Terra del Fuego Argentina en route to Antarctica. Argentina is experiencing severe inflation. Some years ago (say mid 2001) the Peso was on par with the dollar. In 2013 it was 8:1. Now it's 12 Peso to the dollar. A hamburger is 85, a beer is 50, a crab dinner is 170. Classic economics defines inflation as higher price goods. However I see 3 different causes of inflation that seem to be different mechanisms and have different results

First is classic. Inflation where demand grows or supply shrinks and price goes up. Second is the situation in Argentina where the Peso devalued due to government default on its international loans The third is the Fed increasing the money supply and causing the oversupply of dollars to (in theory) raise prices. But it doesn't work. The latter two do not seem to either increase demand or relate to supply change. To me they seem to be different mechanisms at work. The problem with increasing money supply is that it doesn't increase demand. Instead the money flows to a bubble. The classical definition of inflation does not accurately describe the latter two mechanisms. Isn't there a better way to describe them?

Stefan Jovanovich writes: 

There is no way to separate the causes of an increase in the nominal current selling price of a good or service - let's call it Item X. Is it the result of a decrease in the supply of Item X? Is that decrease the result of sellers actually running short of Item X or are the sellers holding back inventory from the market in anticipation of a future price rise? Or have the suppliers all gotten together somewhere and agreed to form a cartel that will restrict the supply of Item X? Or are the sellers all agreed that the unit of account that prices Item X is now in greater supply? And is the unit of account that prices Item X in greater supply because lenders are offering less restrictive terms for borrowers? Or is it because the government has issued more checks or made more electronic transfers from its central bank account exchangeable on demand for the currency that the Sellers and Buyers of Item X accept as the unit of account?

These are just some of the supply questions that affect pricing; there is an even larger list that can be written about the variability of demand.

The Peso's devaluation relative to the U.S. dollar can be explained quite simply; people holding dollars do not want or need as many pesos as they once did and their counter-parties, the people holding pesos, are now far more eager to swap Argentina's currency for ours. When one then asks why, we are back in the land of multiple explanations: Argentina is not seen as a profitable place for holders of dollars to buy businesses or property, the risks of regulation, currency controls, legislated devaluation and other forms of legal confiscation have increased, etc. etc.

"Inflation" only has a a theological definition; it is part of the modern economists' vocabulary for describing how many monetary angels should be standing on the tope of a GDP pinhead. And like those other now obsolete serious academic questions, it has a very useful purpose; for its presumed answer one must look to the diviners of expectation.

What Samuel Butler wrote as a satire in Erewhon is now how the world worships; we no longer spend much time in the Musical Banks because we all know that the important messages now come from those who sit on the thrones that are Reserved.



 I think DailySpec baseball buffs will really like this history on the greatest to ever play the sport.

"Ty Cobb: Anger in Athletes"

Stefan Jovanovich writes: 

I have my usual quibble. Dr. Mirkin really has no idea what he is talking about when he writes that "the only reason that (Cobb) was not among the home run leaders was that he played before the age of steroids and weightlifting." Cobb was stubborn. He stayed with the small taper thick-handled bat to the end of his career in 1928. That allowed him to have a broader hitting zone (in the same way modern tennis rackets have expanded the "sweet spot" with their much larger string area); but he had to pay the cost of reduced bat speed (something aluminum and then composites saved tennis players from having to sacrifice). One theory (that I subscribe to) is that Babe Ruth was able to achieve his revolutionary change in hitting technique because he was a pitcher before he was an everyday player. When he started experimenting with the "toothpick" bat (because of his its handle that shifted weight to the middle of the barrel), none of the baseball purists minded because Ruth was a pitcher and a left-handed one at that (everyone knew Southpaws were crazy). It also helped that he was already "The Babe" - a kid the size of a polar bear who was always having fun with everyone, including the manager.

Steroids had nothing to do with it. By the early 1920s the rest of baseball had caught up, and Rogers Hornsby - as good a hitter as Cobb - had gone to the toothpick. Hornsby hit 42 home runs in 1922, nearly twice as many as anyone had before then in the history of the National League. That helped the Giants beat Ruth and the Yankees 4 to 1 in the World Series. 




 The notice of the anniversary of this special date in the year 1800–"The Great Moltke's birth"–is being sent to the DailySpec because the Field Marshal was a dedicated speculator. His family lost all its wealth when the French burned their estates in Mecklenburg-Schwerin (north of Brandenberg, east of Prussia) during the War of the Fourth Coalition (1805-1807). Prussia lost half its territory and Napoleon and the Czar divided up the rest of Europe south of the Baltic between them at the Treaty of Tilsit.

The family moved to Holstein (then in Denmark) and sent Helmut to the cadet school in Copenhagen. By the time he was old enough to be a soldier (first in the Danish, then in the Prussian Army), all the fighting was over. In spite of his love and knowledge of art and music, von Moltke managed to be attached to the Prussian General Staff when he was 32. Over the next decade he produced the first German translation of Gibbon's Decline and Fall and traveled to Constantinople to serve as an adviser to Sultan Mahmud II. In his one direct experience of combat von Moltke and the rest of the Sultan's army were routed by Muhammad Ali of Egypt at the Battle of Nizib (1839).

von Moltke survived and returned to Germany to write, marry an Englishwoman, become a member of the First Board of Directors of the Hamburg-Berlin Railroad, which is still going strong.

And that was only the beginning.

Wikipedia has the rest.

One of Ulysses Grant's rare disappointments in life was that he did not get a chance to see the Field Marshal when he visited Berlin. He did get to see Bismarck and most of the other members of the General Staff. What they discussed remains almost entirely unreported; and–alas–what little is known is the fiction of the journalists–Adam Badeau, being the worst, who were repeatedly pissed off about not being allowed in the room.



In obedience to the command of the Constitution, it has now become my duty "to give to Congress information of the state of the Union and recommend to their consideration such measures" as I judge to be "necessary and expedient."

But first and above all, our thanks are due to Almighty God for the numerous benefits which He has bestowed upon this people, and our united prayers ought to ascend to Him that He would continue to bless our great Republic in time to come as He has blessed it in time past. Since the adjournment of the last Congress our constituents have enjoyed an unusual degree of health. The earth has yielded her fruits abundantly and has bountifully rewarded the toil of the husbandman. Our great staples have commanded high prices, and up till within a brief period our manufacturing, mineral, and mechanical occupations have largely partaken of the general prosperity. We have possessed all the elements of material wealth in rich abundance, and yet, notwithstanding all these advantages, our country in its monetary interests is at the present moment in a deplorable condition. In the midst of unsurpassed plenty in all the productions of agriculture and in all the elements of national wealth, we find our manufactures suspended, our public works retarded, our private enterprises of different kinds abandoned, and thousands of useful laborers thrown out of employment and reduced to want. The revenue of the Government, which is chiefly derived from duties on imports from abroad, has been greatly reduced, whilst the appropriations made by Congress at its last session for the current fiscal year are very large in amount.

Under these circumstances a loan may be required before the close of your present session; but this, although deeply to be regretted, would prove to be only a slight misfortune when compared with the suffering and distress prevailing among the people. With this the Government can not fail deeply to sympathize, though it may be without the power to extend relief.

It is our duty to inquire what has produced such unfortunate results and whether their recurrence can be prevented. In all former revulsions the blame might have been fairly attributed to a variety of cooperating causes, but not so upon the present occasion. It is apparent that our existing misfortunes have proceeded solely from our extravagant and vicious system of paper currency and bank credits, exciting the people to wild speculations and gambling in stocks. These revulsions must continue to recur at successive intervals so long as the amount of the paper currency and bank loans and discounts of the country shall be left to the discretion of 1,400 irresponsible banking institutions, which from the very law of their nature will consult the interest of their stockholders rather than the public welfare.

The framers of the Constitution, when they gave to Congress the power "to coin money and to regulate the value thereof" and prohibited the States from coining money, emitting bills of credit, or making anything but gold and silver coin a tender in payment of debts, supposed they had protected the people against the evils of an excessive and irredeemable paper currency. They are not responsible for the existing anomaly that a Government endowed with the sovereign attribute of coining money and regulating the value thereof should have no power to prevent others from driving this coin out of the country and filling up the channels of circulation with paper which does not represent gold and silver.

It is one of the highest and most responsible duties of Government to insure to the people a sound circulating medium, the amount of which ought to be adapted with the utmost possible wisdom and skill to the wants of internal trade and foreign exchanges. If this be either greatly above or greatly below the proper standard, the marketable value of every man's property is increased or diminished in the same proportion, and injustice to individuals as well as incalculable evils to the community are the consequence.

Unfortunately, under the construction of the Federal Constitution which has now prevailed too long to be changed this important and delicate duty has been dissevered from the coining power and virtually transferred to more than 1,400 State banks acting independently of each other and regulating their paper issues almost exclusively by a regard to the present interest of their stockholders. Exercising the sovereign power of providing a paper currency instead of coin for the country, the first duty which these banks owe to the public is to keep in their vaults a sufficient amount of gold and silver to insure the convertibility of their notes into coin at all times and under all circumstances. No bank ought ever to be chartered without such restrictions on its business as to secure this result. All other restrictions are comparatively vain. This is the only true touchstone, the only efficient regulator of a paper currency–the only one which can guard the public against overissues and bank suspensions. As a collateral and eventual security, it is doubtless wise, and in all cases ought to be required, that banks shall hold an amount of United States or State securities equal to their notes in circulation and pledged for their redemption. This, however, furnishes no adequate security against overissue. On the contrary, it may be perverted to inflate the currency. Indeed, it is possible by this means to convert all the debts of the United States and State Governments into bank notes, without reference to the specie required to redeem them. However valuable these securities may be in themselves, they can not be converted into gold and silver at the moment of pressure, as our experience teaches, in sufficient time to prevent bank suspensions and the depreciation of bank notes. In England, which is to a considerable extent a paper-money country, though vastly behind our own in this respect, it was deemed advisable, anterior to the act of Parliament of 1844, which wisely separated the issue of notes from the banking department, for the Bank of England always to keep on hand gold and silver equal to one-third of its combined circulation and deposits. If this proportion was no more than sufficient to secure the convertibility of its notes with the whole of Great Britain and to some extent the continent of Europe as a field for its circulation, rendering it almost impossible that a sudden and immediate run to a dangerous amount should be made upon it, the same proportion would certainly be insufficient under our banking system.

Each of our 1,400 banks has but a limited circumference for its circulation, and in the course of a very few days the depositors and note holders might demand from such a bank a sufficient amount in specie to compel it to suspend, even although it had coin in its vaults equal to one-third of its immediate liabilities. And yet I am not aware, with the exception of the banks of Louisiana, that any State bank throughout the Union has been required by its charter to keep this or any other proportion of gold and silver compared with the amount of its combined circulation and deposits. What has been the consequence? In a recent report made by the Treasury Department on the condition of the banks throughout the different States, according to returns dated nearest to January, 1857, the aggregate amount of actual specie in their vaults is $58,349,838, of their circulation $214,778,822, and of their deposits $230,351,352. Thus it appears that these banks in the aggregate have considerably less than one dollar in seven of gold and silver compared with their circulation and deposits. It was palpable, therefore, that the very first pressure must drive them to suspension and deprive the people of a convertible currency, with all its disastrous consequences. It is truly wonderful that they should have so long continued to preserve their credit when a demand for the payment of one-seventh of their immediate liabilities would have driven them into insolvency. And this is the condition of the banks, notwithstanding that four hundred millions of gold from California have flowed in upon us within the last eight years, and the tide still continues to flow. Indeed, such has been the extravagance of bank credits that the banks now hold a considerably less amount of specie, either in proportion to their capital or to their circulation and deposits combined, than they did before the discovery of gold in California. Whilst in the year 1848 their specie in proportion to their capital was more than equal to one dollar for four and a half, in 1857 it does not amount to one dollar for every six dollars and thirty-three cents of their capital. In the year 1848 the specie was equal within a very small fraction to one dollar in five of their circulation and deposits; in 1857 it is not equal to one dollar in seven and a half of their circulation and deposits.

From this statement it is easy to account for our financial history for the last forty years. It has been a history of extravagant expansions in the business of the country, followed by ruinous contractions. At successive intervals the best and most enterprising men have been tempted to their ruin by excessive bank loans of mere paper credit, exciting them to extravagant importations of foreign goods, wild speculations, and ruinous and demoralizing stock gambling. When the crisis arrives, as arrive it must, the banks can extend no relief to the people. In a vain struggle to redeem their liabilities in specie they are compelled to contract their loans and their issues, and at last, in the hour of distress, when their assistance is most needed, they and their debtors together sink into insolvency.

It is this paper system of extravagant expansion, raising the nominal price of every article far beyond its real value when compared with the cost of similar articles in countries whose circulation is wisely regulated, which has prevented us from competing in our own markets with foreign manufacturers, has produced extravagant importations, and has counteracted the effect of the large incidental protection afforded to our domestic manufactures by the present revenue tariff. But for this the branches of our manufactures composed of raw materials, the production of our own country–such as cotton, iron, and woolen fabrics–would not only have acquired almost exclusive possession of the home market, but would have created for themselves a foreign market throughout the world.

Deplorable, however, as may be our present financial condition, we may yet indulge in bright hopes for the future. No other nation has ever existed which could have endured such violent expansions and contractions of paper credits without lasting injury; yet the buoyancy of youth, the energies of our population, and the spirit which never quails before difficulties will enable us soon to recover from our present financial embarrassments, and may even occasion us speedily to forget the lesson which they have taught. In the meantime it is the duty of the Government, by all proper means within its power, to aid in alleviating the sufferings of the people occasioned by the suspension of the banks and to provide against a recurrence of the same calamity. Unfortunately, in either aspect of the ease it can do but little. Thanks to the independent treasury, the Government has not suspended payment, as it was compelled to do by the failure of the banks in 1837. It will continue to discharge its liabilities to the people in gold and silver. Its disbursements in coin will pass into circulation and materially assist in restoring a sound currency. From its high credit, should we be compelled to make a temporary loan, it can be effected on advantageous terms. This, however, shall if possible be avoided, but if not, then the amount shall be limited to the lowest practicable sum.

I have therefore determined that whilst no useful Government works already in progress shall be suspended, new works not already commenced will be postponed if this can be done without injury to the country. Those necessary for its defense shall proceed as though there had been no crisis in our monetary affairs.

But the Federal Government can not do much to provide against a recurrence of existing evils. Even if insurmountable constitutional objections did not exist against the creation of a national bank, this would furnish no adequate preventive security. The history of the last Bank of the United States abundantly proves the truth of this assertion. Such a bank could not, if it would, regulate the issues and credits of 1,400 State banks in such a manner as to prevent the ruinous expansions and contractions in our currency which afflicted the country throughout the existence of the late bank, or secure us against future suspensions. In 1825 an effort was made by the Bank of England to curtail the issues of the country banks under the most favorable circumstances. The paper currency had been expanded to a ruinous extent, and the bank put forth all its power to contract it in order to reduce prices and restore the equilibrium of the foreign exchanges. It accordingly commenced a system of curtailment of its loans and issues, in the vain hope that the joint stock and private banks of the Kingdom would be compelled to follow its example. It found, however, that as it contracted they expanded, and at the end of the process, to employ the language of a very high official authority, "whatever reduction of the paper circulation was effected by the Bank of England (in 1825) was more than made up by the issues of the country banks."

But a bank of the United States would not, if it could, restrain the issues and loans of the State banks, because its duty as a regulator of the currency must often be in direct conflict with the immediate interest of its stockholders. if we expect one agent to restrain or control another, their interests must, at least in some degree, be antagonistic. But the directors of a bank of the United States would feel the same interest and the same inclination with the directors of the State banks to expand the currency, to accommodate their favorites and friends with loans, and to declare large dividends. Such has been our experience in regard to the last bank.

After all, we must mainly rely upon the patriotism and wisdom of the States for the prevention and redress of the evil. If they will afford us a real specie basis for our paper circulation by increasing the denomination of bank notes, first to twenty and afterwards to fifty dollars; if they will require that the banks shall at all times keep on hand at least one dollar of gold and silver for every three dollars of their circulation and deposits, and if they will provide by a self-executing enactment, which nothing can arrest, that the moment they suspend they shall go into liquidation, I believe that such provisions, with a weekly publication by each bank of a statement of its condition, would go far to secure us against future suspensions of specie payments.

Congress, in my opinion, possess the power to pass a uniform bankrupt law applicable to all banking institutions throughout the United States, and I strongly recommend its exercise. This would make it the irreversible organic law of each bank's existence that a suspension of specie payments shall produce its civil death. The instinct of self-preservation would then compel it to perform its duties in such a manner as to escape the penalty and preserve its life.

The existence of banks and the circulation of bank paper are so identified with the habits of our people that they can not at this day be suddenly abolished without much immediate injury to the country. If we could confine them to their appropriate sphere and prevent them from administering to the spirit of wild and reckless speculation by extravagant loans and issues, they might be continued with advantage to the public.

But this I say, after long and much reflection: If experience shall prove it to be impossible to enjoy the facilities which well-regulated banks might afford without at the same time suffering the calamities which the excesses of the banks have hitherto inflicted upon the country, it would then be far the lesser evil to deprive them altogether of the power to issue a paper currency and confine them to the functions of banks of deposit and discount.

Dylan Distasio writes: 

Thanks. The failure of Ohio Life Insurance and Trust in the panic is slightly reminiscent in broad brush strokes to AIG. The naive, good old days of specie, eh? No parallel there unfortunately.

Stefan Jovanovich replies: 

The Ohio Life Insurance and Trust Company's failure did not come from doing an AIG - extending massively leveraged bad bets with financial counter-parties. Its failure was pure fraud: it was an Enron or, if you prefer, a Madoff. The insiders had literally looted the Cincinnati bank while publishing fictions about their outstanding loans to farmers and merchants. Its failure is one of the main reasons that Cincinnati lost out to Chicago as the center for the meat trade.

Anonymous comments:

The excerpt above is apparently from President Buchanan's annual message of the president to congress, December 7, 1857.



 A beautiful bio: "Om Prakash Munjal, cycle tycoon - obituary". Entrepreneur who conquered the Indian bicycle market.



 In some states, like Oklahoma, there are no emissions inspections. So it would seem like now would be a good time to buy one of these cars on the cheap before the software upgrade and then not do the upgrade (assuming that is, that you don't care about the emissions).

A friend said: "Don't underestimate the seriousness of this.  I am not a lawyer, but isn't triple damages common due to fraud, if proven?"

My answer: Ha! You are assuming that laws actually apply to top corporate executives.

Jordan Low writes: 

I almost purchased a "clean" diesel vehicle. Even if the government is out of the picture, as a consumer I would be outraged. As a consumer, wouldn't you want to return a product that has fraudulent specifications? The liability would already be huge for VW.

Stefan Jovanovich writes:

Read the fine print, people. The car does pass regular emission standards; the software fix was needed so that it could also pass the higher standards that made it eligible for "clean" (sic) energy tax credits. Those were, for a brief period, so ginormous that they would, by themselves, sell the car. That was the incentive for the cheating. 



 Scott Sumner, of Bentley University talks with EconTalk host Russ Roberts about interest rates. Sumner suggests that professional economists sometimes confuse cause and effect with respect to prices and quantities. Low interest rates need not encourage investment for example, if interest rates are low because of a decrease in demand. Sumner also talks about possible explanations for the historically low real rates of interest in today's economy along with other aspects of monetary policy, interest rates, and investment.

Jim Sogi writes: 

If real interest rates are in fact negative, then the FED rate is still high and offers the best return. Rates at banks are in fact negative when you subtract bank fees the return is negative. Its not real clear what negative interest rates are to me. I suspect it has something to do with international currencies and the strengthening of the US dollar, and the FEDs warning on the global situation. Maybe the US doesn't want a flood of foreign (Chinese) money.

Martin Armstrong writes: 

The Fed is really caught between a rock and a very dark place. Yes, they have the IMF and the world pleading with them not to raise rates for it will hurt other debtors who borrowed excessively using dollars to save money. The Fed is also caught between domestic policy objectives that dictate that they MUST raise rates or they will bankrupt countless pension funds internationally and emerging markets will go into default because commodities have collapsed and they have no way of paying off this debt that has risen to about 50% of the U.S. national debt. 

Gordon Haave writes: 

Perhaps I am not understanding something. Is this saying:

A. We can't raise rates or emerging market economies will be hurt due to their dollar debt, and; B. We must raise rates because if not emerging markets will go into default?

This makes no sense to me but perhaps I am misunderstanding what he is saying.

Stefan Jovanovich writes:

The presumption of central banking in the late 19th century was this: through adjusting the discount rate on its own good as gold credit, the Bank of England could literally regulate how much net foreign exchange (specie) flowed into or out of Britain. The presumption was believable, provided that no one questioned that the Bank of England would redeem all its own paper in gold. After 1914 there were nothing but questions.

Central banks now have two presumptions: by talking about adjusting the discount rate and by actually writing checks to their national treasury they can control not only foreign exchange flows but also how much credit its citizens and domestic companies will use in the immediate future.

Montagu Norman went to an early grave precisely because he knew there was now way for Britain to have its cake and eat it, too. If the Bank of England's own paper was going to continue to be priced based on private demand and not ability to pay out specie, on demand, then either the Empire would have to restrict trade to its own colonies or counter-parties would be the ones who determined the discounts at which foreign exchange could balance (translation: the Americans would have to let their gold go overseas by running a persistent deficit).

3 Trillion in U.S. IOUs is supposed to give the Chinese "power" but that pile of another central bank's money only has use if it is spent abroad. Like the Americans' gold in the 1920s, it is worth nothing if it is not allowed to be drained away. There is no reason to think that anyone with a higher education will allow that to happen in China or, if that miracle occurs, that the politicians in this country will not respond with the same imperial preference mercantilism that guaranteed Britain would win the war and lose its empire.

Larry Williams writes: 

So you really think we at Dailyspec are smarter and have more information on our fingers than the people at the Fed? I don't. In retrospect over many many years the Fed has done a remarkable job. I know, you people dis them at every turn, claim you know the answer, we know the answer, but the truth is year in and year out compared to what could've happened they have not done a terrible job. Probably I should explain something called upward drift for those who are not aware of it. It seems to be pretty important.



 From the 1960s-1982 the Dow stayed in a range between 600 and 1000, with several 40% swings. Then came the great bull market.

Is there any reason why we might not return to such a range for 20 years or more? We are off all time highs, but with quite the penumbra around 1950s. Also, it's been a bull market for 7 years.

anonymous writes: 

In real terms (adjusted for inflation) from the peak in 1966 to the bottom in 1982, that was a 75% decline in the value of the Dow, and a 29-year trough before a new high was made. The decline from 1929 to 1932 by comparison was 85%, also with a 29 year valley before the 1929 peak was surmounted.

Ralph Vince writes: 

Yes, but in August of 1982, you KNEW the lid was coming off.

On Friday the thirteenth, after a languishing bear market, things jumped. It had a different feel to it. By the next Tuesday, the 17th, it was off to the races.

I remember it well. It was a complete change in market character from what had been going on for several years before it (at least since the Summer of 1980, and August of 82 was profoundly different than that even).

My point is, you didn't have to be a contrarian to know something big was just getting going. It came in with bang,

We live in an era where damn few remember — if anyone ever knew — how to read a tape, the pace of whats coming across the Electro-Lux. I've tried to catalog this in terms of patterns of volume bars. If you go back and look at the Friday, August 13, 1982, it occurred on a low volume bar turnaround — v. bullish (assuming a descent into it).

But the real tell came later — the 18th, a high volume bar day, the end of the short term runnup, On the 18th, the DJIA dropped a small amount, on very heavy volume, marking the high that day as an interim high that should hold for a few days. Not only did the market blow through that, showing extreme strength, but the coup de grace was the following week when the market continued higher on very high volume. Often, a single bar making a high on high volume markets an interim high (there are fine points I am not mentioning here), or, even stronger still, if there is a few bars in between and another high on high volume. But a series of 3 or more bars, on very high volume, where the market continues to grind or grind higher, is very, very bullish.

There was a confluence of factors leading up to that — negative sentiment, bank failures, bankruptcies, etc. amid an environment of declining energy prices, falling rates, technological breakthroughs (as evidenced by Ipos in the 18 months leading up to it — Apple, Genentech, etc.) the pc was in its infancy , Apple was talking about "Lisa," the mother of Mac, there was by many people's accounts, a political climate favorable to business.

There are perhaps many similarities to today, and many differences. I suppose it could happen, could happen in the coming months (look at the advances in cancer treatment, and I don't think we've even begun to feel the effects of the technological advances afforded by a true, coast-to-coast high speed network drones and mass transport, or even the productivity created asa result of the handheld devices most of us use today). But if it's anything like the last, great bull market, it come in with a roar, and I would expect it to be evidenced by inexplicably high trading volume that generally persists.

anonymous writes: 

I miss the noise those Trans-Lux jets made, with those funky fluorescent black lights and those little colored pegs. They were crude, but effective. The bars around the exchanges all had jets so you could have a drink and still see the prices, real time. Nobody minded in those days if a broker went down to the bar for a quick one or three as long as they were good earners. The Germans, Irish and Italians were the ones who went to the bars for a quick one during market hours……..the Jews at the CME always wanted to maintain decorum and control, and never show public intoxication…..the drug of choice for the Jews was cocaine and naturally they didn't drink like the Germans/Irish, and the lack of good drinking establishments around the CME was evidence enough. The bars around the Merc were never legendary like the ones at the CBOT like Broker's Inn, Sign of the Trader, Trade Inn, and Alcotts around the corner. Those bars were in a league of their own and the back stories of what went on in those establishments would be worthy of Runyon or Hemingway. I have sources that have the 1970's Russian Grain Deal being worked out at a back table of the Broker's Inn. Whether or not this event occurred and is verifiable, I wouldn't say it would surprise me. I've seen 20mm tonne cash grain deals done on the back of a napkin and with a handshake.

Steve Ellison writes: 

It took the S&P 500 7 years to regain is 2000 high, but it could not hold that level for long. It was not until 2013 that the S&P 500 again reached its 2000 high, so we already had a retrospectively-defined trading range for 13 years. I have a hunch that the next "great bull market" is already here. The so-called millennial generation in the US is larger than the baby boom generation. I keep noticing things about this decade that remind me of the 1980s, including a commodities bust and concurrent strength in the US dollar and US stocks.

Stefan Jovanovich writes: 

Steve gets my vote. Part of what happened in the 80s was the destruction of previously secure franchises. Mr. Walton's stores destroyed thousands of local "downtown" merchants who had enjoyed distribution monopolies in the villages and towns of what became known as flyover country. Even as AT&T decides that satellite streaming of NFL football games is worth $3200 a customer, the kids are growing up wondering why anyone would be so stupid as to subscribe to a service whose ability to provide programming on demand is as ancient as a Betamax recorder.

anonymous writes:

But where can rates go, Steve? Or perhaps it isn't the direction of rates, so much as their absolute values?

The other big element that concerns me is not the systemic liquidity problem (which we had a taste of on 8/24) but that volume has been tapering off throughout this run up from the 09 bottom.



 On my last haircut before moving, I gave my regular lady a $100 tip on a $17 haircut (applause line here?). That small gesture brought her to tears. She is a very interesting older woman. I've enjoyed talking with the past few years. She knew I worked in investments/trading and asked if I had any ideas for her. I asked about credit card debts and she told me she just cashed in 25K of an IRA to pay down 25K of credit card debt, yet already had accumulated 2K since then and was getting in the hole again. I might invite her down to do some murals in my kids room, and perhaps do some studies on trees (She is an artist who made a living cutting hair for the last 40 years).

The point is (perhaps? At least the relevant one?) is the deadly financial problem of never having working capital that provides the flexibility that keeps one off the spike of usurious interest.

This lady had been sold on long term investments (by her branch XYZ big box bank) in high fee mutual funds with perhaps at best a 5% yr expected value over the long term, while paying off 25% interest rates on credit cards. The scams run on the lower middle class or working class are obscene.

And it is not income. Clearly if these folks can pay these obscene high interest rates, they can afford much more than they have. The problem is that they never understood the idea of having "working capital". I told my friend that her best investment is at least 6 months of living expenses in the bank. As basic as it is, and at such a low margin for error that standard that is, for many it is an alien concept. Her recent issue was a car repair that blew up her budget and started the credit card problem again. With no working capital plus compound interest against, it is like a giant pit metaphorically with wood spikes and lions at the bottom to gobble one up.

So in trading and investing, how can we use this idea? Victor has taught "never get in over ones head" as one of the key tenants of speculation. So how do we manage our cash in our speculations, investments, life's "issues" to have the flexibility to seize opportunities and avoid pit of being bent over a barrel–while still getting a solid return.

Scott Brooks writes: 

The problem is deeper than that.

The people that Ed is referring to don't have the mentality to accumulate wealth and get rich. They are sold on the "here and now" mindset. They go into debt to satisfy the here and now. Something will always come up that will prevent them from succeeding. The only thing they are really good at is coming up with PLE's (Perfectly Legitimate Excuses) to justify their failures.

They are defined by their failures.

anonymous writes: 

Especially with respect to this site, I would wonder the data and testing behind those assertions. Otherwise, one might consider them to be presumptive, elitist, and uncharitable, with mean-spirited implication. But for the grace of god….

Ed Stewart writes: 

"presumptive, elitist, and uncharitable, mean-spirited"

Yes but who cares. I'm guilty of most those things at most times. Is time preference the essence of trading? That might be a more interesting question vs. my original one. Can it be quantified? I think so, as a hypothesis generator. Does it work better than other thought models?

Russ Sears writes: 

Sorry, I disagree Scott. Ed is correct, it's a matter of education and coaching. Have a plan, believe in the plan, stick to the plan.

The average working poor Josie is not a loser. It's the average bank has learned they are more valuable dumb and paying fees than smart with small accounts. The stats say that the fees are several hundred dollars per person in the USA. So some are paying several times that. The banks have the average poor working single parent or mom in a snap trap that they can't figure how to unsnap and lift the door.

The first thing I tell kids is that you need a minimum of $1,000 in emergency cash preferably $2,000. Have a garage sale, stop buying lottery tickets, no gambling, stop buying new clothes, stop cable, and stop smart phones, etc until you have that emergency fund. Also budget, if you can't fix the budget to the pay, downsize housing, get roommates, no car, bus, pay for car pool, whatever it takes to have a workable budget. Then save for the 3 to 6 months expenses in a cash account ready for a big expense. Only then should you invest.

Most people in this problem don't have anyone they can trust to give them the advice and perhaps the tough love they need to stop living in denial. The truth is the banks want the poor.

What does this mean for "investors". Frankly I think most investors have it wrong. It's not so much managing your risk as it is managing your cash flow first, then manage your risk. You can take a lot of equity risk if your investment horizons 20 years out.

Also the lesson to investors is just because someone is in the best position to give you advice and would make some money off you if they gave you that advice, it doesn't mean they will give you the advice that's in your best interest when it conflicts with their best interest. Their best interest is CMA (cover my …) by silence or sin of omission. Then it's to make more money by selling what gives them the most profit to "cover" you like payday loans.

anonymous writes: 

The thing I practice (and I don't know if it adds any edge that can be computed) is to always take some off after a good run. No mater what, be it trading, investing, bonus, etc. Never spend it all–or even most of it. Put it away for when SHTF, because as day follows night, it will…

Andrew Goodwin writes:

A major part of the problem is the thinking that makes the credit limit on credit cards equivalent to ones own money.

For my part, I will never willingly stop at a gas station that has two prices for gasoline with one higher for the credit card user than for one paying cash.

In a world where there are card rebates on gasoline, what is the point of acting responsibly with credit when those who did not act responsibly get subsidized by those who did. The dual pricing also serves to support a cash economy against the public interest.

Peter Grieve writes: 

I feel that I am unique on this site as having been in this hairdresser's situation for most of my life (Hello, Peter). Obviously this is not due to a lack of economic education or upbringing. I feel that the factors include a lack of skepticism regarding my own appetites, a lack of faith in the future, a certain immediacy in response to the world. These are traits associated with immaturity, to which I confess. Of course this leads to tremendous inefficiencies, even when viewed from a purely hedonistic perspective, but it does have its compensations.

I do not regard Scott's comments as elitist, presumptive, uncharitable, or any of that baloney. On the contrary, I find the the use of the word "uncharitable" to be condescending. I do not feel that people in my position are a fit object of charity.

Everyone has their irrationalities, and they are often incomprehensible to those who do not share them. Scott's words are simple, honest truths, which many people (including me) would benefit by internalizing to a greater degree.

Stefan Martinek writes:

It is good to have an emergency cash for at least a decade; locked, untouchable for trading or similar. The rest can be at risk. And after MF Global steal from client accounts (is Corzine still free?), I think it is prudent to keep as little as necessary with FCM. In case of a brokerage failure, the jurisdiction matters (Switzerland is preferred, the UK is too slow but ok, then Canada, and the last option is the US broker).

Ralph Vince writes: 


I entirely disagree; emergency cash has a shelf life which is very short, and our perspective warped as we are speaking in terms of USD. Being the historian you are, you know full well how quickly that cash can be worth nothing. (And again, a many of our personal experiences here would bear out, money is lost far quicker than it can be made).

A bag of air on hand is good for one breath.

People are taught that "saving" is virtuous, borrowing a vice. I would contend that we have crossed to Rubicon in terms of the notion of stored value — no more able to contain that vapor than we can a bottle of lightning. The circulation brought upon by a zirp world, turning all those with savings into the participants at a craps table, the currency being used the product of a confidence game, among the virtues to be taught to tomorrow's youth is that of creating streams of income — things that provide an economic benefit their neighbor is willing to pay for, as opposed to a squirrel's vermiculated nuts.

"Stored value," is a synthetic notion we have accepted and teach as a virtue. It has no place in nature, it is a synthetic construct, one that is not scoffed at in the violent, life-and-death world of fire and ice. Young people need to be taught the fine distinction between the confabulation of "storing value," and that of using today's fruit to generate tomorrow's.

Stefan Jovanovich adds: 

From the other Stefan: I agree Ralph. "Stored Value" is another part of the economist dream that platonic ideals can be found. Money is and always has been one thing: the stuff you could voluntarily give to the tax man that would make the King find another excuse for throwing you into the dungeon. The gold standard did not change that; it simply gave the citizen a chance to make the same kind of unilateral demand on the government. It is hardly surprising that the fans of authority and "government" hate the Constitutional idea of money as Coin. How can you have a permanently elastic official debt if the citizens can ask for payment in something other than a different form of IOU?

However, Stef does have a point. Having a hefty cash balance is a wonderful gift; it gives you the time to figure out your next move. The sacrifice is the absence of leverage; the gain is having literally free time.

Scott Brooks comments: 

There are a lot of companies out there that take advantage of them and the bad advice they were given from their parents. Banks certainly do. Then you've got insurance companies and brokerage firms selling them crap products as well.

But that doesn't hold water in today's society with Suzie Orman and others like her being nearly ubiquitous on the airwaves and net.

These people live beyond their means. Plain and simple.

Yes, they lack education, but even with education available, they don't take advantage of it. They are just doing what they were taught as kids. For far to0 many of these people, as long as they've got enough money for their 1-2 packs of cigarettes/day and their quart of Jack/week, they go and live lives of quiet desperation, hoping that they don't lose their jobs and are lucky enough (i.e. like not spending money on stupid stuff is "luck") to pay off their debts by the time they are in their early/mid-70s so they can live out their remaining few years (if they even make it that long) on social security.

I know. I grew up with these people. I know how they think. But for grace of God (as was mentioned earlier), I might have been one of them. But for some reason, I was blessed with gray matter that works, and I saw the error of those ways, and I was able to get out.

Ken Drees writes: 

I knew a guy–lost touch with him over the years–who exclusively dealt with hairdressers and salonists. He sold variable annuities to them since these people had no retirement plans given to them from the salon owners. I believe in his mind that he was doing them a service–and I really do not know the quality of his products–but at a glance I saw them as mutual fund annuity hybrids that came from heavy fee fund families. He was a tall, dark and handsome gent and he would actually get entire staffs of salon ladies to invite him in after hours for a group meeting/financial planning discussion presentation.

He always said that business was brisk! 

Jim Sogi writes: 

When young friends ask me, how should I invest, I give them a simple asset allocation model based on ETFs or Vanguard and an averaging model. Invest x% of your paycheck off the top each time. Doesn't matter how much really.

Russ Sears writes: 

 Scott, since this is the DailySpec let us bring a little science into the discussion, even if it is social science.

Where we differ is not what is causing the hairdresser's problem. It is in what can be done about it that I differ. I believe you can coach people to delay gratification. I coached kids that never did homework before and got "D's" and "F's" during a summer and by fall the kid was an "A" or "B" student. You probably owe a hardy thanks to the coaches in your life.

Perhaps the greatest social science finding has been the "marshmallow experiment" done at Stanford. They did test on 600 4 year olds telling them if the child did not eat a marshmallow for 15 minutes after they left, they would get a second marshmallow. 1/3rd of them made the whole 15 minutes, a small percentage ate it immediately after the others had waited various amounts of time. They followed up on these kids several time in the last 40 years. Just about every way you can think of to define success was highly correlated with the time the 4 year old delayed gratification: SAT score, college/HS graduation rate, credit scores, long term committed relationships, contentment etc. And almost any way you can define failure was inversely correlated: jail time, high school.

The correlation was stronger than IQ, social economic status at 4 years old. In other words even the dumb poor kid that delayed gratification was happy/content/successful 40 years out. He may not be making much but he is happy with it.

For a humorous view of this experiment reproduced: Joachim de Posada: Don't eat the marshmallow! 



 Our last Ulysses Grant-inspired pilgrimage was to Penn Yan. It has one of the few monuments to the cause of Union from the Civil War. There are literally a thousand courthouse square monuments here in the South for the Confederates but there are almost none for the Unionists in the towns of the North. The winners seems to want to have forgotten the cause of the thing as fast as possible, while making sure that everyone however remotely connected to the Federal army and bureaucracy got a pension.

I mention all this because many of the Amish from Pennsylvania have moved up there–cheaper land, far fewer tourists. The local merchants are welcoming; the local Aldi has spaces in its parking lot with hitching posts.



What fascinates me about cricket is that it is the inverse of baseball. In baseball the really good pitchers are the rarity. Against them even the best hitters can only hope for mediocre performance. At any one time, almost everyone in the major leagues can hit a 90 mph fastball (those few who can't don't last long). So, on the days when a mediocre pitcher or pitchers are unable to control their other pitches, the scores can balloon to lopsided totals that are not seen in even the most thorough drubbings in cricket. The rule for the really good pitchers is the same one Craig has just shared: you have to get to them early. Once a great pitcher has adjusted to the shape of the ballpark's mound and the effects of the day's weather and gotten the first few outs, he will be nearly unhittable.

Galen Cawley replies:

Agreed, but you can't omit this guy!
More importantly, I found this entire discussion on pitching and the art of deception to be utterly fascinating. The video analysis is eye-opening.

It tells you why you know what you know pitching (and hitting)…and makes your knowledge better.

Stefan Jovanovich comes back:

Absolutely. The entire art of pitching is to not let the batter get comfortable with where he is looking. "The plate is 7 baseballs wide; until you get to 2 strikes, you look at either the inner 4 or the outer 4." (That is a steal from a MLB hitting coach whose name escapes me right now.) If you let the batter look in the same horizontal box, he can hit the pitch, as Husband says, even if he is looking "in" and the pitch is thrown "out".

My only quibble is to point out that Maddux's performances in the post season were mediocre. By the time the best teams get to the playoffs and especially the World Series they finally get enough rest between games to be really quick with their bats. That is when a pitcher needs to be able to simply throw it past them - as Maddux couldn't. The pitchers who could reach a virtual speed of 95+ - "virtual" because there are left-handed pitchers like Warren Spahn and Madison Bumgarner who used their high leg kick/body turn to hide the ball as they delivered it on the diagonal Husband describes. Their balls came faster than they were thrown.

Of course, there was also a pitcher named Koufax who hid the ball but didn't need to; he was positively unfair.

Craig Mee comments:

What are the market analogies? Could this conclusion below, for the very best batsmen in cricket be suitable for the top performing markets / sectors . IE The greatest risk is for them to stumble early in a session otherwise it pays to expect further strength?


"The conclusion seems to be that there is a very small window in the beginning of a batsman's innings in which there is a greater chance of dismissal than there ordinarily is. This makes sense — batsmen take some time to acclimatise to the game conditions. But this is a small window — once the batsman has scored about three runs, you have the same chance of dismissal whatever the current score. Interestingly, tiredness does not seem to play a part — the exponential distribution holds well out to 250 runs (quite a few hours of batting).

It should be remembered that this analysis was completed on the top 34 run scorers of all time (5953 innings) and so represents the best ever batsmen. Lesser batsmen are likely to get low scores, so perhaps this window is slightly wider for them. But if we turn to the greatest of the great, Bradman, the window is essentially one run. His effective average before he had scored was a very mediocre nine runs. After he had scored two runs, this effective average had risen to 69. You had to get Bradman out very early!



This is a must read!: "Randomness and Order". It's about what randomness and order mean in different disciplines.

Stefan Jovanovich writes:

The historian's comments were revealing: "Quantum physics is in a formal sense random – the same electron can be in two places at the same time – whereas my stuff is random in a different way. It reminded me that data are random everywhere. And our job is to turn them into something more coherent, and that's true across all disciplines."

The idea that "history", like physics, could be formally random, that people are not, in fact, "in control" is still a completely radical idea. The only place you find even a hint of that understanding is among the classicist scholars who are now dying off. For them the archives were and are limited enough to be fully known, and enough time had gone by for the grand Whig and Marxist and German historical school generalizations of earlier historians to have been not been proven by the actual evidence. That still left the details of what could be known and inferred from the limited records; from those the classicists (A. R. Burn, to name one) were able to find "coherence". But it was the coherence one finds each day in the responses individuals make to their particular circumstances, not a grand discovery of a lasting pattern.

Of course, with such a view, there could only be individual histories of times and places and people. No wonder Marx remains fundamentally popular. He granted permission for the permanent presumption that the true generalizations are, as the X-Files put it, "out there".

As Professor Wickham puts it, "Historians love to study tiny details; I love to study tiny details too, but I like to put them together. I think that putting-together process is a very important one."




 Are there market analogies here? Could this conclusion below for the very best batsmen in cricket be suitable for the top performing markets/sectors? The greatest risk is for them to stumble early in a session otherwise it pays to expect further strength.

"The Curse of the Duck":

The conclusion seems to be that there is a very small window in the beginning of a batsman's innings in which there is a greater chance of dismissal than there ordinarily is. This makes sense — batsmen take some time to acclimatise to the game conditions. But this is a small window — once the batsman has scored about three runs, you have the same chance of dismissal whatever the current score. Interestingly, tiredness does not seem to play a part — the exponential distribution holds well out to 250 runs (quite a few hours of batting). It should be remembered that this analysis was completed on the top 34 run scorers of all time (5953 innings) and so represents the best ever batsmen. Lesser batsmen are likely to get low scores, so perhaps this window is slightly wider for them. But if we turn to the greatest of the great, Bradman, the window is essentially one run. His effective average before he had scored was a very mediocre nine runs. After he had scored two runs, this effective average had risen to 69. You had to get Bradman out very early!

Stefan Jovanovich writes:


What fascinates me about cricket is that it is the inverse of baseball. In baseball the really good pitchers are the rarity. Against them even the best hitters can only hope for mediocre performance. At any one time, almost everyone in the major leagues can hit a 90 mph fastball (those few who can't don't last long). So, on the days when a mediocre pitcher or pitchers are unable to control their other pitches, the scores can balloon to lopsided totals that are not seen in even the most thorough drubbings in cricket. The rule for the really good pitchers is the same one Craig has just shared: you have to get to them early. Once a great pitcher has adjusted to the shape of the ballpark's mound and the effects of the day's weather and gotten the first few outs, he will be nearly unhittable.

See Sandy Koufax and Nolan Ryan

Galen Cawley adds: 

Stefan, agreed, but you can't omit this guy!

More importantly, I found this entire discussion on pitching and the art of deception to be utterly fascinating. The video analysis is eye-opening. It tells you why you know what you know pitching (and hitting)…and makes your knowledge better. It's positively Baconian. Key excerpts:

"What he means by this is that if a hitter swings at what he thinks will be a 90-mph fastball down the middle, he can still accidentally run into either a 96-mph fastball down and away or an 85-mph pitch on the inside — all intersecting the arc of his swing — and make solid contact. Husband believes this happens far more frequently than one might think. Standard baseball strategy says that all a pitcher must do to avoid this dilemma is mix up his pitches — fastballs, sliders, changeups, curveballs. Because they come in at different speeds, the hitter will be confused. Simple, right?

"The problem," said Husband, "is when pitchers pitch backwards."

This means that if a pitcher throws an 86-mph slider high on the inside corner, and follows it with a low-and-away 92-mph fastball, the pitches' EV readings would be exactly the same: 89 mph. And hittable by accident.

[My emphasis: i.e., most pitchers throw to the hitters' bats because they lack command — most retail investors throw money at the markets because they chase the form, and have poor execution to boot!]

There is an imaginary stripe that runs diagonally across the strike zone, from the batter's feet to shoulder level in the opposite batter's box, where a pitch's EV equals its actual speed. Husband calls this the Zero Line. He calculated that for every 6 inches the ball moves closer to the hitter from that line, it picks up 2.75 EV mph; for every 6 inches it moves away, it loses an equivalent amount. This gives strikes thrown at identical speeds on a given horizontal plane about a 6-mph fluctuation in reactionary speed from one end of the strike zone to the other. Add vertical differences into the equation and that spread can easily double, all for pitches that are thrown at the same actual speed.

This idea is far less important on a single-pitch basis than it is when integrated into a sequence. The hitter's perception of the speed of a given pitch is affected by the speed and location of the pitch or pitches that immediately precede it. Roughly speaking, a pitch that follows slower pitches can appear faster, and something slow, when following a faster pitch, appears to be even slower.

"Hitters are like sharks to blood," Husband explained. "When they see two pitches in the same place and at same speed, they begin very quickly to be able to time them, and when they can time them, they attack. But that timing maxes out at about a 6-mph difference in pitch speeds."

I Love the idea of a sequence…how many times has the market changed up on my and put me in an 0-2 count?

Stefan Jovanovich replies: 

Absolutely. The entire art of pitching is to not let the batter get comfortable with where he is looking. "The plate is 7 baseballs wide; until you get to 2 strikes, you look at either the inner 4 or the outer 4." (That is a steal from a MLB hitting coach whose name escapes me right now.) If you let the batter look in the same horizontal box, he can hit the pitch, as Husband says, even if he is looking "in" and the pitch is thrown "out".

My only quibble is to point out that Maddux's performances in the post season were mediocre. By the time the best teams get to the playoffs and especially the World Series they finally get enough rest between games to be really quick with their bats. That is when a pitcher needs to be able to simply throw it past them - as Maddux couldn't. The pitchers who could reach a virtual speed of 95+ - "virtual" because there are left-handed pitchers like Warren Spahn and Madison Bumgarner who used their high leg kick/body turn to hide the ball as they delivered it on the diagonal Husband describes. Their balls came faster than they were thrown.

Of course, there was also a pitcher named Koufax who hid the ball but didn't need to; he was positively unfair. 



 Several years ago I saw an off-Broadway production of "Harvey" starring Jim Parsons because I loved the James Stewart film and because I liked Jim Parsons in "Big Bang Theory." It was a disappointment partially because it was hard to follow Stewart's depiction of Elwood P Dowd. It was like seeing "Sheldon" playing Elwood. Creepy. Being a big Holmes fan and having always felt that no one was ever able to follow Basil Rathbone in the role (except perhaps Jeremy Brett), I was primed to see a Holmes played like Gandalf. But Ian McKellen is a good Holmes, not Gandalf at all, albeit one who is past the end of his career and is struggling to remember… things. I don't want to spoil it. A big plus is some awesome cinematography of the English countryside and the White Cliffs of Dover. Overall a really nice character study and quite diverting.

Peter Grieve writes: 

I loved Rathbone when I was a boy, and was blown away by Brett (particularly the earlier episodes). But painful though it is to admit, Benedict Cumberbatch is my favorite Sherlock. In the first two years, anyway. Holmes series (both TV and film) seem to veer away from Conan Doyle's intent before the canon is exhausted.

Stefan Jovanovich writes: 

I agree with PG. I think having Martin Freeman as Watson is what puts them first. The first episode is truly a classic. Rubert Graves, Mark Gattis, Louise Brealey, and Philip Davis. Thank God for the Brits and their Empire.

Where would we Americans be without their performers and writers–watching endless Blue Screen ballets performed by people who don't even know how to dance.



 Buffett is a charlatan precisely because he hides his secrets behind his Barnum act of public-spiritedness. One secret has been pretty well outed by now, both here on the site and elsewhere– namely, the man is the Capablanca of the tax code.

The other secret is the one he hides in plain sight. He gets extraordinary earnings out of his headcount. For a sane company that avoids stupid leverage on its balance sheet, the employees are the liability that matters most; and the Oregano manages that liability with the same skill that the 19th century Titans did. BRK-A's known earnings (the average of the current year's report and the consensus prediction for the next 12 months) are roughly $65K/employee. GM has known earnings/employee of $28.5K.

As a number, known earnings/employee may seem bizarre but it is the best predictor of how consistently a company can continue to generate profit.

We have used the same kind of benchmark in our own assessment of our private businesses; and it has never failed. We have, every time we have gone away from it in the name of "investing in growth", etc.

We don't actually know if this really is Buffett's secret sauce; this is likely pure vanity on our part. But, if, like him, you invest by buying stakes in public companies as if they were private businesses



 More snark from your 19th century correspondent.

1. The world still runs on the Parsons steam turbine.

2. When the New York Times' readers discover the collapse of the obsolete industry that fuels the brand new age, it is finally time to buy.


Stefan Jovanovich adds:

Rhino Energy LLC is a proxy for the Appalachian and Illinois Basin coal industry. The stock symbol is RNO. We do not own it and it offers zero trading opportunities, but it is the closest I have come to finding a public company that publishes numbers about what is happening in the eastern U.S. coal bidness. The news is terrible, as every reader of the New York times knows. RNO has just suspended its distributions, and its $10 stock from 4th quarter 2014 is now under a dollar. But, even as this particular canary continues falls over in its financial cage, operating margins increase slightly year over year and production is sold out for 2016.

The region now has a number of coal "start-ups" that are completely invisible to the public eye. Their registered public addresses are in and around Lexington, KY. They have taken over some coal leases and lands from the bankruptcies and forced sales of the historic companies that have been part of this depression and opened new mines. They have no legacy union contracts and - more important - no "history". None of the miners who work their operations has any thoughts about being owed anything for all the terrible things Mr. Peabody's company did to them or father or grandfather.

So, we have begun buying shares in Joy Global (JOY) on the Howard Hughes theory of investing - i.e. even as the depression in the oil business continued through the 1930s, people needed drill bits; and with the increase in oil consumption from WW II, they needed even more.

Full disclosure: In 2 weeks we are already down 5%; we expect the happy ending, if any, to come years from now.

Stefan Jovanovich further adds:

I am not an engineer and I don't play one either so these comments are even more questionable than my usual rants. But I did get the short course from my uncle, Aunt Mary's husband, along with the cook's tour of the gas and coal fired steam plants around Denver. Uncle Charley loved the prospect of direct use of gas combustion that Carder mentions. Perhaps because he was old and sick, he also saw the limitations of the brave new world he would not live to see.

Uncle Charley's lesson plan for his idiot nephew.

Coal is a poor competitor in HHV values. Where gas on average has 21k HHV BTUs per pound, lignite coal has only 8k and the highest grade coal - anthracite - 14k. On average the bituminous coal used for steam generation has only half the HHV/pound of natural gas. So, coal per pound has to be half as expensive as gas simply to break even on HHV efficiency.

That still leaves the efficiency of the turbines–steam vs. the CCGT. According to thermodynamicist folks at Mankato State steam turbines using coal can do close to 50% at best while CCGTs are, as Carder says, now at 60%. So, coal per pound has to be another 1/3rd cheaper still in order to stay even with gas on efficiencies alone.

Then there are the environmental costs, nephew. Put them all together and coal has to sell for no more than $.25 a pound when gas is at a dollar.

So people will stop building steam generating plants in North America and the rest of the world will keep building them because coal delivered by ship or barge can be had for fixed contracts for a decade @ 1/4th the price of current prices for gas while no one will be willing to bet on natural gas deliveries beyond a year or two at most.

I checked Uncle Charley's numbers before buying JOY.

the U.S. I.E.A. price history for residential natural gas

The current futures price for gas - $2.89 per 1m BTUs which converts to roughly $.09 per pound at the standard prssures and densities - and coal - $43 per ton or slightly more than $.02 per pound.

If Carder is right and Uncle Charley and I are wrong, natural gas suppliers will be willing to offer long-term supply contracts the way people in the oil bidness did before 1973; if Uncle Charley is right, California will have brownouts and demand the right to buy Kentucky coal fired wholesale power before the decade is out. We shall see.



Here are some lessons I've learned during the past 8 years:

1. Call options. If you truly have conviction, buy long dated call options as volatility tend to be under priced for long maturities.

2. Short selling. It is harder to short sell than most think, and almost no one is good at it. One hurdle is the drift, but there are countless more.

3. Romance. You're clearly better off to marry someone in management than to marry the stock.

4. Dip buying. The successful buys on dips and vice versa, it follows that the unsuccessful do the opposite.

5. Market. Everyone is always bearish on the market, only the super successful dares to be bullish/naive.

6. Story. Human brains are hard wired over thousands of years to build stories around your beliefs/thesis.

7. Flexibility. The super successful are always ready to change their mind/direction. Go from long to short or from short to long.

8. Art. Stock picking is as much art as science and very rarely are the smartest the best at this game.

9. Top-down. Local knowledge remains under appreciated. The top down guys ends up shorting the best companies and vice versa.

10. Management. Always invest with the best in class management, however you are better off with a good end market and bad management than the other way around.

Stefan Jovanovich writes: 

Yes! Especially #10. "You are better off with a good end market and bad management than the other way around". It applies even more to private business than it does to public companies. Believe me. 

Gary Rogan writes: 

#10 is a lot like the Sage's favorite. When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

Russ Sears writes: 

Most people cannot admit when they are wrong, in over their head or incompetent. If the tide turns and a business with good economics but bad management becomes a business with bad economics and bad management, then the fraud, accounting tricks and pleas for government bailouts come out. The "smartest guy in the room" is leading the way.



 Joel McCrea, who was the classic Southern Californian, told an interviewer that he had become a rich man because he followed Will Rogers' advice: "Work Hard, Save Half of What You Make, and Live on the Other Half".

It is the only advice I ever offer anyone who "wants to start his own business". If the young person's response is anything other than "what do you mean by 'save'?", I know the rest of the conversation is going to be an utter waste of our time.

My definition of saving is hopelessly uneconomic by schoolie standards; it does not include investing in equipment or any other type of "capital" for the business. Only cash or securities the person is willing to own for at least a decade count as saving. And, still worse, the savings cannot be treated as operating reserves for the business.

For the speculator, none of these rules apply–nor should they. For the speculator the markets in which he/she trades represent opportunities–as Shane's post "when to look for what you are looking for" beautifully explains.

For the business owner the market is not an opportunity but a threat because you have absolutely no control. You are always all in and you can never fold your hand. This is why business owners in this most competitive of nations, the United States, have always so readily formed associations with their seeming competitors. The "market" is the enemy, not the guy down the street who is as much of a price taker as you are.

P.S. There are two reasons why you have to save Half. The first is that thrift is your job; figuring out how to satisfy the customers while spending less and less money is the only thing you can control. The second reason is that, contrary to all the Ron Chernow biographies, the titans of industry became almighty rich by not expanding when times were hard. They prospered by cutting costs and hoarding cash and waiting patiently for the market to destroy nearly everyone else.



 When I visited the Rosslyn Chapel near Edinburgh I was amazed by the beauty of this masterpiece built in the 15th century. Interestingly, the chapel became the subject of speculations related to connections to the Knights Templar or Freemansonry. The topic became popular when Dan Brown wrote about these symbolic designs in The Da Vinci Code.

A specific aspect of the architecture I found fascinating at one end of the chapel, is the ceiling with 4 cross-sections of arches containing designs on each array of cubes. The cubes are attached to the arches in a musically sequential way. Some claim there is a code behind the cubes sequences, which hide melodic and harmonic progressions. In some of the decorations others can recognize symbols similar to Chladni patterns.

Chladni was a German physicist and musician (1756-1827), who was considered as the father of acoustics. He did research on vibrating plates. A metal plate, supported by a post in its center, is vibrated at a single frequency by use of a mechanical driver. For most frequencies, nothing at all happens; when certain special frequencies are hit, however, standing waves appear on the plate, driving the sand away from the points of large vibration to the points of no vibration. By varying the frequency of oscillation, we can find a large number of the so-called resonance frequencies and their accompanying patterns, which become increasingly complex and beautiful as we up the rate of oscillation.

I was intrigued by the concept of a code to interpret what you see, that is the beautiful symbols organized in apparently random sequences. The idea of a hidden key that allows you to read the real message to be delivered in the form of visual patterns corresponding to specific frequencies and, when built harmonically together, to melodies. Interesting is also the concept of resonance, which is responsible, in Chladni's experiment, for moving the sands to the points of no vibration.

There are parallels with financial markets. Do visual patterns in markets hide apparently random price relationships? How to apply the concepts of frequency, amplitude and resonance to breakout moves and mean reversion? Higher harmonics imply more nodes and therefore mean reversion is likely? Could round numbers be associated to points of no vibration as they function as attractors? It is beautiful, however, to observe how sequences offer interpretations that are not obvious at first.

Stefan Jovanovich writes:

The vibration technology testing suggested is 1950s era Soviet/US related and is dated. A quick read about "The Thing" is available to those interested. Basically you throw a broad range of frequencies until you hit one that creates feedback. The Thing had the advantage of passivity and no power source so it was not detected for years.

I'd like to see testing of the hypothesis that the round number effect is more an effect created by options strike price standards and larger open interest at round numbers in home markets Forex rates and price scaling change key index values for international specs.

A brain in the past was Leon Theremin who worked with musical instruments and bugs.

The revelations about "The Thing" and its detection give an idea of how to test for key vibrations or their absence. From wiki:

The illuminating frequency used by the Soviets is said to be 330 MHz.[6] The Thing was discovered in a stroke of luck by a technician with an untuned video receiver[citation needed] — a wideband receiver with a simple diode detector/demodulator, similar to some field strength meters. It was then located during a technical surveillance counter-measures "sweep" of the Ambassador's office, using a signal generator and a receiver in a setup that generates audio feedback ("howl") if the sound from the room is transmitted on a given frequency; the generator was tuned to 1800 MHz. The device was first assumed to operate on this frequency, but tests showed it was unstable and insensitive. Peter Wright, a British scientist, then got the Thing operating reliably at 800 MHz.

For land-based structures, this debate continued through the 1980s. It was important to the nuclear power industry. They were required to design against probable seismological events. Millions of engineering hours were dedicated to modeling flexible and rigid systems. Both worked. Billions of dollars were lost as the industry switched from one approach to the other. Flexible models require detailed analysis of harmonics, which varied by geography. In the end, the industry settled on rigidity–mostly.



 To my surprise both "alarmist" and "deniers" (I guess that I'm quoted as a "denier") measure the average temperature for the whole earth for a whole year to a fraction of a degree, and that the result is significant. Of course it's not!

How can you possibly measure the average temperature for the whole earth and for the whole year and come up with a fraction of a degree? So, I have this cry here. I think the average temperature of the earth is equal to the Emperor's New Clothes. There was a boy who said, you know, who cried at might, "The Emperor has no clothes on," and I would cry out and say, "You can't measure the temperature for the whole earth with such accuracy!"

Chris Cooper writes: 

Is this not addressed by the law of large numbers?



 I don't think history carries a tune, has any lyrics or rhymes, and it most certainly has no moral/political lessons–i.e. the proletariat will triumph. History is always and everywhere just a story about what people did, and one either enjoys stories or one doesn't. The problem with the schoolie versions of history is that they are always fictions with a purpose; the writer reliably distorts, ignores, lies about the known facts of what happened to fit everything to their version of a dialectic. It may not be Marx's but it always has the same presumption of inevitability. They may be "conservatives" like Carlyle or modern day liberals like David McCullough, but either way you end up with a sermon that the writer already knew he wanted to preach. (What makes Gibbon, the historian most often used for lessons in the 19th century, fascinating is that he keeps ignoring the lesson he has in mind in favor of finding the next twist in the truthful narrative. The story wins out over the moral/political lesson.)

This nattering is my apology for offering a historical comparison that today's anniversary brings to mind. On this date, in 1924, the U.S. Marines finally left the Dominican Republic (they had been there since 1916).

The United States has had thirty years of filibustering (not Senators talking but the other kind–adventuring with guns) in the Middle East. Nearly twice that long if you take away most of the guns and leave only the CIA and the American oil companies. By the time the Marines left Dominica, the filibustering in the Caribbean/Central America had been going on for almost a century, if you start with the Texas War of Independence. To this day the importance of all that chasing after sugar, tropical fruit and petroleum gets largely ignored, except by the Zinnistas who use it as yet another proof of the fundamental evil of the United States of America.

I have no doubt that the saga of Texans and others chasing Saudi/Iranian oil will be equally ignored when it comes to understanding what happened to America after Bush I became President. One can only hope that some day the Marines will go home once and for all.



 "Widened Suez Canal to Open in August"

This is the first significant expansion of the canal's carrying capacity in its 145 year history.

Paolo Pezzutti writes:

The Panama Canal is also expanding. The size of ships has increased. They need important changes also to port infrastructure.

"The Panama Canal expansion project (also called the Third Set of Locks Project) is intended to double the capacity of the Panama Canal by 2016 by creating a new lane of traffic and allowing more and larger ships to transit."

anonymous writes:

This latest development is positive for Israeli stocks. The project was underwritten by Egyptian citizens and they are making a bet on the absence of events that will threaten the revenue from the widened canal like and Egyptian attack on Israel or a nuclear bomb exploding in the region. And the fact the Sisi's government decided to undertake it and declared it "military led" is a concrete (no pun intended) sign that their rhetoric of being business-oriented (as opposed to say oriented to destroy Israel).

anonymous writes:

Egypt is a military dictatorship, as such there is of course no "free will" exercised by "the people" of Egypt, but it's certainly a polity. Usually when a dictatorship wants to create an investment by someone other than the core clique it has two choices: coercion or guarantees of repayment of questionable quality. After all, they can change their mind at any time and all the guarantees will be gone with the wind. So observing a non-coercive investment process in a dictatorship is useful to estimate the confidence in the dictatorship by either foreign or local investors. Often large foreign investors have substantially more leverage since they can threaten a military or political retaliation via their own government. In this case, Egyptian citizens, of their own free will, trusted the military to repay them by buying the investment certificates that sold faster than expected. While this is certainly no example of Western property rights, this means that some relatively savvy citizens in a very impoverished country (thus no money to waste) trust their leaders. This is a useful datapoint in evaluating investment and other stability-related prospects in that part of the world.

Gordon Haave writes: 

What everyone is missing because (per our discussion last week) the watch and read US propaganda media is that last week the Deputy Crown Prince of Saudi Arabia, The Saudi defense minister, the Saudi foreign minister, and more importantly the Saudi Oil Minister met in Russia and inked 6 new deals including defense, nuclear, and energy deals with a goal towards a "petroleum alliance".

But hey, an Al Jazeera columnist was once quoted as saying something he shouldn't have 15 years ago, so by all means keep reading US media.

Gary Rogan writes: 

Gordon, as the likely target of the last comment, let me respond. While this bit of news from All Jazz TV is valuable in it's own right (and most certainly no propaganda) and is likely to have major worldwide implication from the war in Syria, to Russia supplying Iran, to Israel, to the Saudi relationship with the US, the price of oil, Egypt, and more specifically Suez Canal, it is unlikely to have had an impact on why the Suez canal project was started many months ago. If it did, the world is even more convoluted than I could ever imagine.



From my limited experience, assessing equity from balance sheet information can be a non-trivial exercise. An issue is the company's assets. Specifically, what are those assets? How were they acquired? What was the accounting treatment?

I've been involved in situations where companies debated the merits of expensing capital costs and capitalizing expenses. Accountants tend to see this question as a black and white issue. Financial officers tend see it as a strategic issue.

The issue frequently arises in project finance. In particular, long-term capital improvement projects tend to finish with complex cost structures. In my experience, capitalized costs can represent half expenses and half assets (bricks and sticks). Some of those expenses include officer salaries, professional fees, corporate allocations and other distributables. In the end, retirement accounts prorate those costs according to the strategic need of the parent company. Once the accountants retire the plant (that is, allocate final costs across company retirement accounts), the asset capex strategy is locked in.

The issue also appears in operations and maintenance. Sometimes replacing expensive equipment is expensed. Sometimes it is capitalized. Often, there is a combination. Again, accountants tend to see this as a black and white issue. Financing, legal and regulatory people understand it as a strategic issue.

The issue pops up in special cases. It is common for utilities to create regulatory assets out of expenses. They do this with the knowledge and approval of their respective state regulators.

I've found the accounting of assets is not consistent within the utility industry. Policies change over time and by geography. They change as economic conditions change. They also change as corporate administrations change.

Finally, there are the subsequent issues of asset depreciation and mark-to-market values. While depreciation appears simple, it is not. How depreciation schedules are developed and used is complex and difficult [impossible] for third parties to analyze. In addition, the depreciated value of the asset is often uncorrelated to the asset's mark-to-market value.

For me, assets can be fuzzy numbers. Any analysis using asset values as a critical component can also be fuzzy.

Ed Stewart writes: 

All good points Carder.

Another issue is when a company clearly has very valuable intangible assets that are almost completely unrepresented on the balance sheet. Consider Nathan's Famous, best known for its flagship hotdog restaurant and sponsorship of the eating contest. They build on top of that brand value to create a licensing business. Last year (ending march 31) they did 18M of this business, which is almost pure pre-tax profit as they just get a % of sales, renting the brand to a manufacturer/distributor. Capitalize that at a reasonable rate (licensing revenue streams usually valued at a premium) u see it is worth quite a bit of money. Yet, on the balance sheet intangible assets is only something like 1.4M, which is absurd from an economic perspective. 

Stefan Jovanovich writes: 

Accounting was developed to catch internal fraud; the whole point of double-entry was that it required two different people to keep track of every transaction. As long as enterprises were family businesses, single-entry worked just fine (as, for example, in the Rothschilds' books well into the 19th century). In that sense, all "book" numbers will be maddeningly disappointing in terms of their economic logic.

Rocky Humbert writes: 

S-man makes an excellent point. To wit, some of my worst investments have been in insurance company stocks that were trading at significant discounts to their stated tangible book value. What seems to happen (with annoying regularity) is that the company "discovers" that they under-reserved for claims and they write-off massive amounts of tangible equity — leaving the stock at a premium to book value. Hence I view a substantial discount to book value as a warning sign of impending bad news rather than a blue plate special. Mr. Market may go through bipolar episodes, but he's quite astute most of the time.

Ed Stewart writes:

Ive seen another situation beyond unforeseen markdowns that can cause trouble for an investor looking at book value to find undervaluation. The issue occurs when an investor marks book value assets "to market" and finds a supposedly huge undervaluation. The first problem I have seen is that it is very easy for a bad or even mediocre business with a good asset to somehow encumber or use that asset in a way that is not helpful to shareholders - feeding a lousy "growth initiative" or simply mortgaging an asset to fund continued operations. It's amazing how many "value bloggers" write about truly crappy, sketchy businesses because they think they spot this type of situation.

In the case where the business is decent, that by no means the business is going to realize the value of the asset over any reasonable time frame, which means that the value must be discounted far off into the future. So far and so uncertain it might be impossible to assign much value to it at all. In this second case, it might add some positive option value to a decent business that is otherwise worth considering, nothing more. My conclusion is that without an activist situation or change of heart by the CEO or some similar circumstance, undervalued assets are not always what they are cracked up to be.

Gary Rogan comments: 

A bet on undervalued assets IS a bet on an activist situation and/or if not "change of heart by he CEO" change of the CEO. Undervalued assets will not of course suddenly start performing by themselves. That's why "undervalued" cash on the books or undervalued assets combined with a substantial cash flow are so much better than an "undervalued" steel plant or similar: cash is easy to understand and reuse and attracts activists, acquirers, and CEO replacement.

Andrew Goodwin writes:

Not sure why the talk on ratios attracted so much interest. In a group that favors scientific modeling, why no thoughts on finding the significance of each industry valuation ratio through regression studies? 

Charles Pennington writes: 

Stefan, what's your definition of "soft jobs"? Do you have an opinion about which companies out there are wasting their money on "soft jobs" and which are acting more wisely?

Stefan Jovanovich replies:

This is a feeble answer to your question, Charles, but it is all I have. Cantillon wrote that nations got into trouble when their tastes for what he called "luxury" outran their capacities to make enough money to pay for them in foreign trade. He was not a mercantilist, but he thought that nations had to accept the verdict of the foreign exchange market when it went against them. They could not use "Chinese paper" (Singleton's phrase for puffed-up securities) when their counter-parties expected coin. As Cantillon put it, nations cannot use use finance as a substitute for commerce and they cannot indefinitely leverage their credit so that rich men's wives could continue buying more lace. For at least some of the time, even the wealthy have to endure being less rich until trade once again comes into something approaching balance.

It seems to me that many, many companies are now like Cantillon's luxurious nation. David's drug companies are one set. Their profits are projected to continue to grow enormously even as the savings and earnings of the hospitals and governments and individual paying customers have stagnated and even begun to fall again. The drug companies' happy futures are based on the assumption that the centrally-banked remedies to the world's savings "glut" can somehow be transmuted into continuing demand without anyone having to endure even temporary insolvency. There is no arguing that the plan has worked up to now (cue John Hussman's explanations of why he has missed the last 5+ years). But, as the Orioles and other clubs regularly demonstrate, the last innings can be very rough even when the guys coming in from the bullpen have had such sterling records.

P.S. Ignore all monetary puns; this is not a recommendation to buy gold.



 Those of us in the bleachers remain bewildered. We had assumed that the ECB, like the Fed, had control over the actual printing of money. Wrong.

"The ECB does not have a cash office and is not involved in any cash operations."

Where the U.S. Treasury's banknote printers have only one customer - the Fed, the production of Euros harks back to the days of wildcat banking in the United States. Each central bank in the Eurosystem that uses a different language has both the responsibility and the legal authority for printing its own Euros.

Since 2002, euro banknotes have been produced jointly by the national central banks (NCBs) of the euro area. Each NCB is responsible for, and bears the costs of, a proportion of the total annual production in one or more denominations. The annual production of euro banknotes needs to be sufficient to meet expected increases in demand, such as seasonal peaks, and to replace unfit banknotes. It also has to be able to cope with unexpected surges in demand. Production volumes for the years ahead are calculated on the basis of forecasts provided by the NCBs and a central forecast made by the ECB, thus combining national expertise with a euro area-wide perspective. The figures calculated need to be approved by the Governing Council of the ECB.


The comparisons with the Cyprus bank crisis are likely to be wrong for one very simple reason: the Greek National Bank can print as many Euros as it likes. It does not need to go to exchange controls; people can withdraw as much as they want as long as they take it in Euro notes.

In April 2001 the ECB's Governing Council decided that the production of euro banknotes should be decentralised and pooled after the initial cash changeover. Therefore, since 2002 each national central bank of the euro area has been allocated a share of the total annual production of euro banknotes in respect of certain denominations. The respective bank bears the production costs for the share allocated. In September 2002 the Governing Council decided to establish a Eurosystem Strategic Stock (ESS). This stock is intended for use in exceptional circumstances, i.e. when logistical stocks in the Eurosystem are insufficient to cover an unexpected increase in the demand for banknotes or in the event of a sudden interruption in supply. The logistical and strategic stocks ensure that any changes in demand for banknotes can be handled at any time by the national central banks, irrespective of whether the demand comes from inside or outside the euro area. The logistical stocks meet the demand for banknotes in normal circumstances in order to replace unfit (poor-quality) banknotes returning from circulation; accommodate an expected increase in circulation; meet seasonal fluctuations in demand; and optimise banknote transportation between central bank branches.

How exactly does the Eurosystem evict a member national bank simply because it has lousy collateral? I have been chewing on that one for a few days now without finding anything in the bottom of the Cracker Jack box.



 How would President Trump and the Dow react if he runs, and if elected?

Shane James writes: 

Reagan, Eastwood, Schwarzenegger…Trump? Why not! 

Stefan Jovanovich writes:

Ronald Reagan was President of a Union in the 1940s; he was, as the journalists put it, "active" in politics for more than two decades before he ran for governor in California. (To this day I find it wonderfully funny that the Brown clan thought that Reagan - the supposed "amateur" - was an easier opponent than William Knowland.)

The comparison with Clint Eastwood is pretty dodgy. Eastwood is a movie star who can green light any project that interests him, and he has had that power for 4 decades. Reagan was a talented actor who never starred in anything with more than a "B" budget and never made any money in Hollywood at all. Unlike Reagan Eastwood has always been a Republican.

As for Trump, he is the Colonel Sanders of contemporary politics–a recognizable name for a brand that is all signs and no voters. 



 A turn to the Origin is always good to put the moves of the markets most beautiful and wonderful and often circling back to the beginning according to the fixed laws of gravity, constructalism, and flexionism after a week where SPU begins and ends at the exact same level.

It is interesting to contemplate a tangled bank, clothed with many plants of many kinds, with birds singing on the bushes, with various insects flitting about, and with worms crawling through the damp earth, and to reflect that these elaborately constructed forms, so different from each other, and dependent upon each other in so complex a manner, have all been produced by laws acting around us. These laws, taken in the largest sense, being Growth with reproduction; Inheritance which is almost implied by reproduction; Variability from the indirect and direct action of the conditions of life, and from use and disuse; a Ratio of Increase so high as to lead to a Struggle for Life, and as a consequence to Natural Selection, entailing Divergence of Character and the Extinction of less improved forms. Thus, from the war of nature, from famine and death, the most exalted object which we are capable of conceiving, namely, the production of the higher animals, directly follows. There is grandeur in this view of life, with its several powers, having been originally breathed by the Creator into a few forms or into one; and that, whilst this planet has gone circling on according to the fixed law of gravity, from so simple a beginning endless forms most beautiful and most wonderful have been, and are being evolved.

-Charles Darwin

Stefan Jovanovich writes: 

The tangled bank is Darwin's theology; no one, certainly not John Murray (his publisher), forced Darwin to insert and keep the phrase "by the Creator" into the 2nd and subsequent editions. Blaming "popular pressure" is a libel on the pubic which embraced Darwin; the demand from the public is what caused Murray to print another 3000 copies (what would be 300,000 now). The criticism of Darwin's views about God and Nature came entirely from the schoolies.

There is no question Darwin ceased to believe (if he ever did) in the literal truth of Jesus' resurrection. In that regard he was following a hundred years of apostacy going back to George Washington and Voltaire and Hume. What he believed in was the miracle of life itself, what Washington called Almighty Providence. As to the origins of that miracle– as opposed to the laws that governed life's evolution, he declined to offer any opinion and was happy to have his remains left in a church with the memorial markers conventional for that time and place.



 About a year ago I clicked on 'Al Jazeera America' with the preconception that I'd be treated a glaring example of biased journalism, but instead found their news coverage was presented from a middle-of-the road perspective and clearly not US centric.

Marion Dreyfus writes: 

Al Jazeera acknowledges they no longer hove to the neutrality/journalistic vantage they promised years ago they would. There is a major lawsuit afoot where the failings are bruited–discrimination to non Arabs, women and hirelings, as well as an abdication of following news that is not pro-Arab and involved almost wholly in Arabic and Arabist affairs. It pretends to a journalism it simply does not follow. People of integrity have abandoned them as they noted this falloff.

Stefan Jovanovich writes: 

Much of what passes for today's journalism is, depending on the publisher/broadcaster, disturbingly and unapologetically, skewed one way or the other. I find myself visiting Al Jazeera regularly - so, too, with Russia Today, NPR, and HuffPo. None are particularly congenial to my world views but each provides in its own way, the dialectic missing from those with whom I find favor. Once upon a time it was recommended that for a view from the right one had to check out the Chicago Tribune, for a view from the left, the NYT, and for a straight account with little or no clever manipulation of adjectives or adverbs, the Christian Science Monitor.

Most other news sources still provided enough of an editorial mix to escape being pigeon-holed. Perhaps the worst thing to happen to print journalism (and with a knock-on effect to the other branches) was Woodward-Bernstein. Hailed then (and still now) as journalistic heroes, their work brought about substantial changes in "straight" reporting. College J-grads increasingly aimed for opportunities to break the next big expose - straight reporting became a dull backwater.

It didn't take long for TV to pick-up on the trend (a liberal trend) which went largely unremarked if not un-noticed . Then Limbaugh and others created some pushback with "talk radio" - which didn't go unremarked, but received a considerable amount of flack - from print and TV…with which I had no complaint…at least initially.

However, what was once a battle between rich publishers with conflicting world views, moved from the Op-Ed pages into the rest of the publication and, eventually, it became increasingly difficult to find a "news story" that didn't, in one way or another, skew the narrative into one that reflected the views of either the author and/or publisher - whether that manipulation occurred during the writing of the article or during the editing process has remained a matter of contention. That question is no longer germane as media outlets increasingly hire only those whose views conform to readily identifiable "values" (to be fair, it is an unusual applicant who applies for a position at an organization hostile to his views.)

Unfortunately, this absence of dialectic has spread to the one place where it should be most strongly championed: the university. No better example can be found than the recent pronouncements of Bettina Aptheker (now Professor Aptheker), an admitted "red diaper baby" and one of the notable participants in Mario Salvio's noted "free speech" crusade at Berkeley - an event whose 50th anniversary will be "celebrated" later this year. Unfortunately, though not unexpectedly, Aptheker has had an epiphany. I quote:

"Freedom of speech is a constitutional guarantee, but who gets to exercise it without the chilling restraints of censure depends very much on one's location in the political and social cartography…We [Free Speech movement] veterans … were too young and inexperienced in 1964 to know this, but we do now, and we speak with a new awareness, a new consciousness, and a new urgency that the wisdom of a true freedom is inexorably tied to who exercises power and for what ends."

A growing number of California's public universities have instituted restrictions on free speech. Sic transit gloria mundi.

A final comment. For somewhat different reasons I have a problem with a List issue that came up some time last week. Rocky has regularly challenged the veracity of Zero Hedge's reporting; others throughout the Net have made similar observations. However, as a source regularly referenced by many other commentators/posters, I find it unwise to not keep abreast of their "contributions." However unmeasurable, they do have an impact - one I believe that should be monitored rather than ignored.



 In January of this year Forbes published a piece by Michael Lingenheld of Cup & Handle Macro reciting the known knowns about the new car business:

1. Average duration new car loans - 5.5 years
2. Sub-prime borrowers are the debtors on roughly 1/4 of total outstanding car loans
3. Delinquencies for car loans made in 1st Qtr. 2014 as of November of that year - 2.6%
4. First year delinquencies for car loans made in 1st Qtr 2008 - 3%

IBD has a more recent story with the same "news".

ALLY, the largest auto lender in the U.S., just had its most recent flooring loan Master Trust rated Aaa by Moody's.

Russ Sears writes:

While this is true is it anything new? Aren't auto dealerships and manufacturers like farmers–prepared for a few bad years and if the cycle is deep and broad enough the Feds have a history of stepping in?

Stefan Jovanovich writes: 

The "everybody knows" history Russ refers to is remarkably short: 2009 is the one and only time auto manufacturers and auto lenders were rescued, even though the depth of the cycles in both 1919 and 1929 were far, far worse. And the difference was?

Here, for those of you who remain curious, is a brief history of GMAC (what ALLY was before its rescue):

Founded in 1919. Initial capital: $2.5M. First branches opened in New York City, Detroit, Chicago, San Francisco, and Toronto. The following year a branch was opened in Britain. By 1928 GMAC had made 4 million retail car loans. 30 years later they had made 40 million; to celebrate, they entered the home mortgage business. 1999: Record earnings, buys Bank of New York's commercial lending unit and forms Commercial Finance Group. 2001: Further record earnings: $1.8 Billion Celebrates 150 millionth car and truck loan, totaling more than $1 trillion in total financings over its history. 2002: Another record: $1.9 Billion. Now lending in 41 countries. 2003: Earns $2.8 Billion 2004: $2.9 Billion, 10th straight year of earnings growth, begins lending in China, opens GMAC Automotive Bank 2006: General Motors sell 51% to Cerberus Capital Management
Rocky and the other pros can carry it on from there.



China has granted another 1 trillion yuan ($161bn) quota to provinces to swap high-interest debt into low-cost bonds, doubling the previous amount, according to people familiar with the matter.

The increase comes as the first stage of the bond swap is under way. Commercial banks have been buying such bonds after the central bank flooded the interbank market with cheap funds…

The expansion will help the government cut risks from a record surge in borrowing that local authorities took on to fund a glut of investment projects. The process — which includes inducements for banks to buy new, longer-maturity, lower yielding bonds — is alleviating a funding crunch among provinces that had threatened to deepen the economy's slowdown.

Local-government obligations may have reached 25 trillion yuan, bigger than the size of the German economy, according to estimates from Mizuho Securities… That compares with the figure of 17.9 trillion yuan as of June 30, 2013 given by the National Audit Office."

- Bloomberg



 So I wish to present the argument that various interests and groups, notably including "Keynesian" economists, have sold to the public a "quasi-doctrine" which teaches, in effect, that "less is more" or that (in other words) "bad money is better than good money". Here we can remember the classic ancient economics saying called "Gresham's law" which was "the bad money drives out the good". The saying of Gresham's is mostly of interest here because it illustrates the "old" or "classical" concept of "bad money" and this can be contrasted with more recent attitudes which have been very much influenced by the Keynesians and by the results of their influence on government policies since the 30s.

"Capitalism is not intelligent, it is not nice, it's not fair, it is not virtuous and not keep promises. In short, we dislike it and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed."

-John Maynard Keynes

Stefan Jovanovich writes: 

Gresham's law only applies when a country has legal tender coinage of different metals. When he was brought in as agent for the Crown in Amsterdam, Gresham had to explain to Warwick (the head of Edward VI's Regency Council) how he and others had made a hash of things by taking more and more silver out of the shilling coins they were minting. As a result, the Crown's credit was lousy; and no one would accept the "new" shillings except at a severe discount. Because Warwick had authorized several successive debasements, no one in their right mind paid their debts using the still unadulterated gold coins of the realm; those people kept in their strong boxes or sent to Amsterdam where they could profit from the arbitrage opportunity. (In England, of course, "the law" required them to accept all coinage at is face legal tender measure.)

None of this applies to the present situation for the simple reason that coin are no longer legal tender anywhere in the world. The only measure of "bad" money that now applies is whether or not someone will swap your legal tender IOUs for some other legal tender IOUs; now it is the bad money that disappears, not from hiding but from the disappearance of the traders willing to hold it even for a millisecond.

The goldistas, like the Jacobites, still keep thinking that the rightful king will return to the thrown, that, because gold once was money, it will be so again. It may; but, if it does, there will be little arbitrage opportunity - just as there was little opportunity when Grant strong-armed Congress into adopting resumption. Gold will become legal tender again only when a government accepts the wisdom of the authors of the American Constitution - i.e. "the law" cannot put a price on money. As I wrote recently, Cantillon's reform for Greece would be similar to what Gresham did in Amsterdam for Edward VI - a combination of absolute default and establishment of a new currency based on a fixed weight and measure. (I should note that Gresham did not solve the secondary problem of bimetallism; when the coins are "honest" and have the amount of precious metal that the law requires, the ratio of the legal tender values will still create the problem of arbitrage. The actual demand for silver and gold bullion will be at variance with the official ratio. Grant also solved that inescapable problem by limiting silver coinage to secondary coins and limiting the amount minted so that there was no opportunity for arbitrage.)

There is, in Gresham's and Grant's sense, no money in the world right now; there are only IOUs that countries have defined as their legal tender.

This does not make a difference to the people who are "in the market". But, to the great majority of people, who have only their small savings of money, it makes an enormous difference. The great thing about "deflation" - the ability of people to make things better, faster and, therefore, cheaper - was that it rewarded thrift and gave folks a return on investment simply from holding their coins and deferring spending. When people "did not trust banks", it was not simply out of ignorance; they knew that their hoards of gold coin would be worth more and more in the future. So, too, would bank deposits; but only if the bank actually paid out in coin. Default was the risk that debasement now is.



 An excellent book is The Wool Trade in English Medieval History by Eileen Power, the "most interesting woman" of the 1930s. Shows that they counted every aspect of the sheep better than technicians do their counting today. Also shows that the entire English Constitution devolved from the free markets of the pastoral shepherds and the exporters versus the merchants of wool in medieval times.

The wool entrepreneurs developed into the middle class of England from whom the industrial revolution, the constitution,and prosperity evolved. A typical passage:

In these baillifs accounts, the long rond of the shepherd's year unrolls itself like on of those horizontal Chinese scrolls that have taken one from spring to winter by the time the eye has traveled along their length". In the manorial roles sheep were carefully divided into ewes, wethers and yearlings, lambs, and there was set down the number with which the reeve started the year, the numbers added by purchase or natural increase, lost by disease, sold or given in tithes, (the number that disgraced themselves by not giving progeny) and the number left at Christmas when the account was drawn up. Of course every purchase was accounted for, and balanced with the ending sales to wholesales.

A great admirer of Eileen Power to whom I owe the introduction to this great scholar is Tracy Quan   whose books and persona are equally scholarly and interesting.

Stefan Jovanovich adds: 

 Amazon has a free Kindle edition of Power's best seller from the 1920s: "Medieval People"

(Caution: Historical Hobby Horse in Use) Power was a colleague of Norman Angell, Ramsay MacDonald and C. P. Trevelyan in the Union of Democratic Control - the last "pacifist" organization that was not simply a front for the Comintern.

What Angell wrote about the Grand Illusion of Imperialism is still true and is worth considering in light of recent efforts to find a new cause of war in the South China Sea:

"wealth in the economically civilized world is founded upon credit and commercial contract (these being the outgrowth of an economic interdependence due to the increasing division of labour and greatly developed communication). If credit and commercial contract are tampered with in an attempt at confiscation, the credit-dependent wealth is undermined, and its collapse involves that of the conqueror; so that if conquest is not to be self-injurious it must respect the enemy's property, in which case it becomes economically futile. Thus the wealth of conquered territory remains in the hands of the population of such territory. When Germany annexed Alsace, no individual German secured a single mark's worth of Alsatian property as the spoils of war. Conquest in the modern world is a process of multiplying by x, and then obtaining the original figure by dividing by x. For a modern nation to add to its territory no more adds to the wealth of the people of such nation than it would add to the wealth of Londoners if the City of London were to annex the county of Hertford."

Angell was equally prescient about the Balkan Wars and their danger:

"The fundamental causes of this war are economic in the narrower, as well as in the larger sense of the term; in the first because conquest was the Turk's only trade -he desired to live out of taxes wrung from a conquered people, to exploit them as a means of livelihood, and this conception was at the bottom of most of Turkish mis-government…..

"If European statecraft had not been animated by false conceptions, largely economic in origin, based upon a belief in the necessary rivalry of states, the advantages of preponderant force and conquest, the Western nations could have composed their quarrels and ended the abominations of the Balkan peninsula long ago-even in the opinion of the Times. And it is our own false statecraft-that of Great Britain-which has a large part of the responsibility for this failure of European civilization. It has caused us to sustain the Turk in Europe, to fight a great and popular war with that aim (he is referring to Crimea), and led us into treaties which had they been kept, would have obliged us to fight to-day on the side of the Turk against the Balkan States"



 A recent post by Tim Melvin noted that Baltimore may be a shit hole, but it's our shit hole. That of many of us on the list. Even if we no longer live there, we identify with it. The glory of Fort McHenry. The commanding of Johns Hopkins. The ignominy of Bankruptcy Tower. The notoriety of Payoff Row. The poverty and lack of hope for a better life in some places in the city. And of course, The Block. Once two blocks (go figure), it's now not even one. Maybe that's the effect of being right next to the police HQ. Add in a dysfunctional education system in the city, the three decades of the departure of industry and the conversion of the town to a bedroom community for DC (in part), and you have a shit hole. I'm sure that some (many?) may contest that conclusion, but try contesting the elements leading me to it.

In the 1960s and early 1970s, if one were to hear a screaming crowd at Memorial Stadium, 33rd Street, Baltimore, chances were good that it was Sunday and the Colts were playing at home. The stadium was usually sold out. It was the era (the "Diner" era—and the Hilltop Diner really did exit, across Reisterstown Road from the Crest Theater—providing relief from the infernal Baltimore summers—and Barcelona Nut Shop) when Colts season tickets were inherited and valued as much as a car or a prized bottle of Lafite or Mouton. It was the golden era for the Orioles, but they did not commandeer the attention, the love the Colts did.

But all of that changed in 1979, specifically June 22, 1979. Edward Bennett Williams had just bought the Os and was complaining about the lack of enthusiasm (and attendance) by the good people of Baltimore. Maybe the team should move to Washington. Lots of interest in DC. and it took forever to drive back to DC. By his chauffeur. The BCPD tailed him once and clocked his trip as 45 minutes, not much more than from York, Pennsylvania (Birdland North) to the Grey Lady of 33rd Street It was the night of the birth of "Orioles Magic," which eventually had an accompanying song (until "You can do magic" replaced it for when relievers entered the game in a tight pitching situation during the early 1980s).

So 1979 wasn't shaping up to be a great year for the Os. Until June 22, 1979. On that night, in the bottom of the ninth, with one on, Doug DeCinces homered to left field. Anyone in the stadium that night will surely remember it. The roar of the crowd was deafening, and the stadium didn't really begin to empty for at least 15-20 minutes after then. Carley Eckman's call (I was listening on a transistor radio, not unusual for someone in the bleachers, not far from the orange and black "Here" flag) was memorable, too. Objective calling of the game flew out the window that moment. The entirety of the Orioles team greeted DeCinces at the plate (for DeCinces, the hit became, at least in part, redemption; it's hard being the position successor to a baseball legend, the "human vacuum cleaner" aka Brooks Robinson), making for an award-winning photo. The next day, a Saturday, that HR was the talk of the town. The following Monday, discussions around the water coolers and over coffee included at least some mention—and often much more—of the HR. 1979 wore on, and the Birds flew high. No one expected much of that team. There were few dominant players, and it was the rare season when Jim Palmer was out of sorts during the season. The World Series that year found the Os against the Pirates, losing in seven games with the final one at home. It was the last time that a visiting team won the series in seven games.

The night of May 29, 2015, also a Friday night, may go down as the renaissance of Orioles Magic. The game was a hard fought pitchers' dual. Gonzalez had pitched a good 8 innings for Baltimore, giving up only one run—earned. Going into the ninth, the score tied, at 1-1, Darren O'Day, a journeyman pitcher who had become the Os middle relief/setup man, came in, proceeded to give up back-to-back hits and promptly loaded the bases with no one out. A situation pregnant for a hit and an RBI to take the lead. But that wasn't the script that was followed on that Friday eve. What followed were two strikeouts and the final out of the inning, a grounder by Elmore to Machado for an unassisted out at third. O'Day had thrown 24 pitches that inning. 24 (or was it 25?). One inning. That's a lot of pitches. For that final out, the crowd was on its feet and the Camden Yards reverberated with cheers and stomps. The bottom of the inning found Os on 1st and 3rd with 2 down. JJ Hardy, an infield specialist with a batting average south of .200 (Orioles faithful will recall Mark Belanger as having somewhat better production at the plate, which isn't saying much), strode to the plate and promptly hit a single to left field. It was all that was needed. Somewhere between 1st and 2nd, after the winning run had been scored, the Os mobbed Hardy as the sellout crowd registered its approval.

The night felt like that of June 22, 1979. One of those days when many in Birdland can recall where they were when DeCinces homered. Will the Magic reappear? The excitement? Hard to say. Let's revisit it in a month. This year's Os are hardly dominant in just about any position on the field, save maybe Zach Britton as a closer. Jimenez is having a good year, and compared with 2014, a great one. But that's about it. And the Os are in 3rd place in the AL East as a result. One game under .500 and one game behind the Yanks. Who ever would have thought that a third of the way through the season the pace would be set by a team one game over .500. At least the Birds have the best home record in the division. So the team has its work cut out for the next three months—not to violate the first rule of holes for the next month as it gets its act together and the, in a reprise of last year's performance—rise to the top.

We've had some discussions recently about the decline of baseball in the US, and yes, the sport has had its troubles. But it's always managed to find a champion and grittily renew its place in the national entertainment firmament. Babe Ruth, Cal Ripken.The sport is shaking off the self-induced haze of the steroid era. And the helicoptering of kids doesn't auger well for a rebirth of the national pastime, which has indeed become passed time. As the country struggles economically with a recession possibly looming over the horizon, with dysfunction in DC and political sex scandals seeming to be the order of the day (I don't recall them being this common, but maybe it's like FDR's wheelchair, no one ever reported them)—the latest being inappropriate touching by the pre-political life former Speaker of the House (does it much matter that it was pre-political life?)—it must have been some serious touching to merit a $3+ million payoff—the country needs to rally around something. As President Snow observed, hope is the only emotion stronger than fear, and while complacency is the rule on Wall Street for the moment, there's some fear being voiced by those with memories of times before ZIRP, of times when interest rates actually ascended, not declined. Memories of the early 1980s. With deflation the concern du jour of the NFL if not the BEA, it may be baseball's time to shine again.

So, in Baltimore, is it Orioles Magic, 2015 edition? We'll see. As for the moment, it's to be savored. Go to war, Miss Agnes! Let's go Os!

Play ball!

Stefan Jovanovich writes: 

This notion of baseball's "decline" is entirely a construct of the Fairness Police. There is now, in fact, far greater "diversity" (sic) among the players of Major League Baseball than there ever has been; the only problem is that the darkest-skinned players are more likely to be Cubans than American blacks. Measured by money paid to the players (baseball, unlike football and basketball and hockey, does not have a hard salary cap), valuations for franchises, television revenues, ticket sales, and concession revenues, these are the best of times. And, regarding the play itself, Buck Showalter is right: "this is the Golden Age". 

Paul Marino writes: 

Here is a great video of the great player for the Buccos, Andrew McCutchen, making some little kids' life last night when playing in San Diego.

Would love to see Pitt make a run at playoffs again, but in a tough division with the best organization in the league St. Louis playing .660 ball, almost a clean + .50bps win % over entire MLB.

anonymous adds: 

I hated the fact that the Giants had to play Pittsburgh for the wild card; they have a wonderful ball park and a really great organization and they are all around good guys. So, clearly the plan for this year is that the Giants beat the Dodgers outright and the Bucs have their wild card game on the road.

Having your loyal fans cheer for you can be a tremendous handicap when it is all or nothing. The Giants have been lucky to be the road team in their "Big Games". The last 4 times they have won the World Series - 1954, 2010,2012,2014 - the deciding game was in the other guys' park. The one time it was at home - 1962 - they lost even though they had Willie McCovey at bat and the winning run on second base and he absolutely smoked the ball - right into the Yankees' second baseman's glove.



Perhaps it was a good 25, 30 years ago, Gramps and made the track to L'ville, this particular time, arriving early, for the Friday races, the Oaks — roses for the Fillies.

We had gotten there early, the first race hadn't gone off, and there was a platoon of school kids visiting Churchill (before the garish remodeling). Their teacher was a woman, and this kids couldn't have been more than 7 or 8 years old. They young buys, couldn't reach the urinals, they simply weren't tall enough.

In the days before blue M&Ms, when you would offer to do such things without fear of being accused of something, we offered to hold the youngsters up, in front of the urinal, one by one, asking each a question, "Where do you go to school?" or "What's your name," to ease the tension and so they could do what they had to do.

There must have been a dozen or so of them we each held up, and finally Gramps lifted one, who, I couldn't help but noticing, was particularly blessed.

"What grade are you in young man?" Gramps asked the little fellow he was holding suspended above the urinal.

"I'm riding Silver Spurs in the seventh, I've been outta school as long as you old man," the little man shot back, "But thanks for the lift."



 I read a terrible story about why children are abandoning baseball from Forbes based on a WSJ story of same title.

Stefan Jovanovich comments: 

Baseball was never the "default" sport for young children. The ball is damn hard and a good one has always been expensive enough to be worth stealing. It was the sport for "grown-ups" that you could hope to play when you got big enough to keep up. Until then, you would play catch with your family adult (thanks, Mom) and use a tennis or rubber ball to pitch and hit with your neighbor/brother/sister, using the barn/garage for a backstop. It took years of those repetitions before you could even hope to play well enough to keep up with the men and have it actually be baseball. The game flourished in all the places where men played the sport and let children join them. That is why it still flourishes in all the places where men and their children play it together for fun– the American Southeast, the Dominican, Cuba (although that is dying), South Korea, Japan. Little League was baby-sitting and adults pretending to teach the game instead of simply showing how it is done out on the field against each other. 

Paul Marino writes: 

 This story lends no credence to the fact that southern states play baseball year round vs more northern regional leagues and the population disparity between the two. Baseball is a regional sport on all levels, pro on down vs football and basketball which are national sports.

Also, this article makes no reference to global, specifically lat-am baseball which is a religion in places such as Cuba, DR, PR, etc. last I checked Puerto Rico is part of the U.S. Unless they default on their munis. Plus immigration will lead to a generalized balance in players against the author's "the Great Recession no-baby meme" which has had us all feel poor as humans since they state red the meme. I can tell you my family and friends in their 20-30s are having babies, just a little later in life.

The article would have been more relevant to US if distinguishing the lack of African Americans choosing basketball and football over baseball. White kids will always play baseball at one point or another out of love of the sport or parental pressure to do something where you can't get too hurt. 

Stefan Jovanovich replies:

If Paul means that baseball is "regional" in the same sense that hunting/shooting is "regional", I agree. But the notion that "white kids" will play baseball at one point or another because of "love" or "parental pressure to do something where you can't get hurt" seems to me very far off the mark. No one in their right mind "loves" baseball; it is so relentlessly demanding that it has minute-by-minute failures. There is no room for the fantasy of "we are the champions" that football (American and world) and basketball allow. The best teams in baseball have won-loss records that would disqualify them from the Champions League or the basketball or football playoffs; and the home-away advantage is trivial (52-48%) while, in the other sports, it is nearly overwhelming. It is like chess; you either have the addiction or you don't see the point.

None of this says anything about the game's popularity as a spectator sport. People now love going to professional baseball games more than at any time in the past because: (1) compared to basketball and football ticket prices, it is still a very cheap date, (2) it is like visiting the old amusement parks like Elich Gardens - you can stuff yourself silly while walking around and you don't really have to watch the game, and (3) unlike almost all the other public spaces in American cities the parks themselves are not dumps. Coors Field in Denver, which is a delightful place to see a game even if the altitude makes the game itself seem like a parody, is the 3rd oldest baseball park in the country. Only Wrigley and Fenway are older. 

Paul Marino adds: 

I should clarify "love" as in the love a child has for a player and that gets them interested in playing, the other love is the kind I had where I played for 15 years and got into the minutiae of the game over time.



 This coming Monday is Memorial Day. That means different things to different people. For me, it will be my mother's yahrzeit, as well as remembering those whose efforts provided the cover under which the USA lives. But it also means the running of the Indy 500. And switching to the summer comforters. For one of my neighbors, it's setting up the outside grill for the summer—which he does after visiting his brother's grave (he died in Vietnam) at the national cemetery up the road. I'm sure there are lots of similar activities at one another's homes. Some many no longer give much thought to those whose deeds provide that cover, to those who sacrifice assured that we may live under it. But they should.

A couple of years back, Tim Melvin penned a piece that encapsulates the meaning—for at least some of us—of the day. (It will be reposted below)

It is one of the more eloquent expositions of the holiday.

Stefan Jovanovich comments: 

 First of all, it was not Memorial Day. It was Decoration Day; the particular day on which the public would officially do what people regularly did on their own–go to the cemetery and put flowers on the graves of the departed. And it was a Sunday, not a Monday.

Second of all, how does anyone presume to speak for the dead in war? That is the sickest of all sick jokes. If you are lucky/skillful enough to survive one, the one thing you know is that medals for the living are pure vanity; and Grant was–as with so many things– right: parades are only tolerable if they are parties where you throw ticker tape out the windows (ticker tape, windows?) and can make noise in praise of the living. For the dead there should only be flowers, no speeches.

FWIW, the first decoration day was on May 1, 1865 in Charleston, SC. It was held in honor of the Union soldiers who had been held and died as prisoners of war and buried in a common grave. After the Federals occupied Charleston, one of the first things they did was give each of the soldiers' remains its own individual burial and marker. In gratitude for their liberation the Negroes in Charleston built a fence around the new burial ground and an arch over the carriage entrance. The "Union" cemetery was opened that May Day; according to the newspaper reports ten thousand people came to walk among the graves and put flowers on them. (This is what David Blight of the Rocky Ghostly Academy concludes from his research into the subject.)

For "Memorial Day" and this bathetic dishonesty, we have to wait for World War I and segregated mourning.

At least baseball still does it right; people simply stand in silence for a moment, as they did when they remembered Christy Mathewson, a casualty of that truly awful war.



 David Lillienfeld writes:

Last year, Tim Melvin posted a classic piece about Memorial Day. It brought me to tears then, and it did so this morning when I went through it again. It is some of the most eloquent writing I have seen about Memorial Day, and it's a shame that it hasn't received more notice outside of this site than it has to date—it certainly merits it.

Tim Melvin writes:

They call to you this weekend. From Flanders Field, from Normandy, Khe San, Gettysburg, Concord and Lexington, the Chosin Reservoir, from the hull of the Arizona, and from all the hundreds of thousands of resting places marked and unmarked they call to you. The call to you from the depths of the Pacific and the jungle of Asia, from the deserts of the American Southwest, from the fields and cities of Europe, from Cuba, from around the world they call you with a request this weekend. Remember me.

Remember who I was and the hopes and dreams I willingly laid upon the altar of the great American experiment. Remember that like you I was once flesh and blood and I gave that up to secure a portion of the American Dream and secure essential liberties at home and even for people around the world. You may not have agreed with the rational for some of the conflicts we have ensnared ourselves in over the centuries and I am not even sure I fully understood it. But our nation called and I answered. Liberty carries a price tag and I paid it for you. Remember me.

War is an idiotic human endeavor and I wish we never had to go engage in such a wasteful exercise. But at times throughout history it has been necessary for good men to take up arms to secure our freedom from tyranny and defends ourselves against expressions of pure evil and hatred. When such times have arisen I have taken arms and defended the freedom and liberty in which I believed and for which all humanity years. Remember me.

Do not remember me with tears and sadness. Pray solemnly and shed tears if you must but that it is not my preference. Remember me in a violent celebration of all that is America. Take your families to the seashore and frolic as man has done since we merged from the sea. Go out on your boats and go as fast as you can over the waves with the winds of a free land and a free people blowing back your hair. Fire up your grill and invite the neighbors up for food, drink and laughter. This is why I laid down my life. Not so you would cry for me but so you could enjoy your life and your family, your loved ones and friends. Remember me in the laughter and joy of being alive.

Hear me in the sound of loud music coming from a dock bar. Hear me in the growling of a stock car engine taking a green flag or the whine of Indy car hitting 200 mph on the backstretch. Hear me in the laughter of a child skipping in the surf or running through the sprinkler in the back yard. Hear me in the chatter of friends around a BBQ pit. Hear me in the swell of an orchestral pop concert on a wide meadow as the sun settle over the land. In all the joyous raucous noises of being alive, hear me and remember me.

 See me in the flag unwinding in the breeze. See me on the baseball diamond, the soccer pitch the basketball court. See me at the bar with my friends raining a glass to good times gone by and still to come. See me in the smile of your wife, your girlfriend or male equivalent thereof. See me in the hammock beneath the tree taking a slow summer nap. See me in all the moments and times of that make life special. See me and remember me.

Remember me best in living well. Think of me when you are passing around the steaks and steamed crabs. Remember me as you sip the cold gin and tonic in a sweaty solo cup under a shade tree. Think of me in the fisszt of a beer bottle opening, the fizzing of soda pop in a glass, the shaking of a martini, the pop of a cork, and the tinkle of ice. Remember me in the sounds of the party of life.

I do not want you to remember me in solemn sweaty ceremonies and pompous parades of politicians. You do not need to go to the cemetery to remember me for I am not there. I am at the beach, the ballgame and in the backyard. I am at the lake, on the boat and fishing on the riverbank. Do not remember me simply because I died. Forgetting to duck or being ordered to charge impregnable positions is a crappy legacy if you ask me. Remember me because I lived and I died protecting your right and ability to live and experience all the joys and madness that is life.

I am not merely a dead soldier who died in the service of his country. I am all the things that were made possible by freedom gained and protected. I am Mark Twain, William Faulkner and Hunter Thompson and all the words written by the geniuses spawned in the America. I am the music spawned among a free and talented people. I am Robert Johnson, Miles Davis Liberace and Ted Nugent. I'm all the great scientists and inventors that have graced this land. I am Edison, I am Feynman and I am Ford. I am all the great athletes born in the towns and cities of this nation. I am Mantle. I am Unitas. I am Jesse Owens and Jim Thorpe. I am every greatness achieved by this nation born in a sea of blood and protected by rivers of it over centuries. Do not mourn me for the time has past for that, but remember me.

Remember me for I am also the future of this great nation I died to build. Remember me as you live, as you build as you work and as your create. Remember me as youprotect my legacy from the charlatans, thieves and idiots who make up our political class. Remember me when you refuse to cede personal liberties I died for to those who have good intentions and bad ideas. Remember me when you take chances and reach for your dreams and ideal. Remember me when you refuse to participate in limiting freedom or opportunity based on skin color, sexual preference or genital make up. Remember me when you dream, when you achieve and when you celebrate. These are things for which I died and for which I would be remembered.

My voice calls to you today. Life, love, laugh dream, build achieve. Do this in remembrance of me.

Happy Memorial Day. Remember me.

Stefan Jovanovich writes: 

 Memorial Day used to be Decoration Day — the day when the graves of soldiers were draped in flags — and there was no official Federal date. In Gettysburg it was held on November 19, the day the cemetery was dedicated. In the South it was on various dates in the Spring. It was never, ever a day for speeches until the official South decided that the soldiers graves should be part of a general uprising to justify the Rebellion — the same political movement that gave us official segregation; at that same time - the late 1880s — the states began legislating official holidays for Decoration Day, they also made Jefferson Davis' birthday a state holiday. What we now observe dates only from WW II, and the date itself was fixed in the 1960s. It is strictly a Cold War ritual that has been revived for the war against unspecified terrors.

I hope Tim finds an equilibrium somewhere between thinking that everyone who ever died in uniform as a hero and believing war is everywhere and always to be considered the worst of all things. I hope everyone enjoys the ceremonies today. If I don't, it is not out of disrespect for what people have done. I don't like official remembrances for the same reason Grant hated parades; they tend, by their very nature, to be organized lies.

They allow the people in the reviewing stands to preen and they present a picture of order that is the very last thing that wars ever are.

The truth is that some wars are worth their awfulness and some are completely stupid. The people best qualified to judge are the ones who have done the fighting; as with so many other things in life, those who know the most are the very ones who don't say much. There are exceptions, like Professor Sledge:

"War is brutish, inglorious, and a terrible waste… The only redeeming factors were my comrades' incredible bravery and their devotion to each other. Marine Corps training taught us to kill efficiently and to try to survive. But it also taught us loyalty to each other - and love. That espirit de corps sustained us."

"Until the millennium arrives and countries cease trying to enslave others, it will be necessary to accept one's responsibilities and be willing to make sacrifices for one's country - as my comrades did."

anonymous comments: 

I differ…greatly.

I preface by saying I have not served in the services nor in a war.

Yet I've known many…young, naive or foolish men who have answered the call. Many didn't believe in the cause and thought their superiors to be idiots. Yet they stayed and fought. I respect and remember that loyalty, and buy dinner or drinks for them and their family when I come into contact with them. I do it out if loyalty and not guilt. They upheld their end of the bargain. The least I can do is acknowledge them.

These are not the she-men that appear to surround me, those who talk about shat should be done yet are never there to do it. They have loyalty to no one.

There are pieces meant to rouse the animal spirits and conscripted ranks. I felt Tim's piece wasn't a call to enlist as other pieces.

The generation of Vietnam castigated those who were drafted and required to fight. That double bind or catch-22 has always bothered me. There's a similar thinking in DC now, where you are encouraged to break laws and obey them simultaneously.

One if the primary social contracts is to take care of your own. Tim's piece echoed that sentiment. The Chair demonstrates it too, as do many on the list.

In the Catholic Church, there are many celebrations of saints. I have learned, not having been raised Catholic, that many saints were far from perfect. There was a similar idea in his piece. Monday isn't a celebration of personal perfection or success in war. As Tim writes, it is recalling the guy who once sat in the empty chair at our table.

Semper Fi et Ductus Exemplo. 

Ralph Vince writes: 

There is nothing more inadvertently dangerous than a young man.

There is nothing more potentially vicious than a woman on her own.

One must tread carefully around these. 



 Vanderbilt used to cross at slack tide. There appears to be no slack tide in Europe:

"Schaeuble Said to Raise Possibility of Greek Parallel Currency"

Stefan Jovanovich writes: 

Vanderbilt sold the last of his steamships in 1864; like the Greek shipowners (Onassis et. al.) whose fortunes got going after WW II using the money paid by the British government in war damage compensation, most of the sales proceeds for Vanderbilt came from the public purse. That was the money he used to buy and build what later became known as the New York Central. The Commodore would have agreed with John about the tides in Europe; for him there was only one currency - gold coin. The arbitrage between greenbacks, Treasury bonds - redeemable and non-redeemable, and coin were the Commodore's first serious speculations in the market (as opposed to the largely private battles for control of the feeder Boston railroads to the Long Island sound that were the source of his steamboat passenger traffic). Then, as now, FX was THE GAME.



 When the Bank of England "suspended" during the Napoleonic Wars, it had not run out of gold; and it did not stop paying out gold and silver coin based on their relationship to the unit of account known as "the pound". Neither did the U.S. Treasury during the Civil War, when thanks to the currency acts that created National Bank Notes, the Treasury had become America's first central bank to control the country's legal tender. There were still outstanding debts that continued to be paid off in coin. What was suspended was the redemption of the bank/Treasury's own near money;in both cases what Cantillon called "the state bank" would no longer redeem its paper notes in coin on demand.

The present American central bank has no redemption obligations for its reserve notes; neither does the U.S. Treasury have any outstanding debt obligations that require interest and principal to be paid in coin. So, there is literally nothing against which dollar paper notes can be discounted as money within the boundary of the U.S. of A. At home the dollar will always be at par; and there will be no "gold cases".

As the bond pros and even us idiot amateurs know, the Fed has gone on an acquisition spree. Its assets have grown from $900 billion at year-end 2007 to over $4.5 trillion, which serious money. To support those holdings, the Fed's has also raised its own capital - from $37 billion in 2007 to $58 billion now.

The question that this raises for us idiots in the bleachers is this: what happens politically when the Fed starts to lose money?. At some point the market value of the Fed's assets is going to fluctuate in the wrong direction enough that the losses are more than the Fed's capital.

Under the Fed's rules adopted in 2011 that will require the Fed to suspend making payments to the Treasury of its "net" profits. The pros who long ago flagged this are not worried.

We amateurs who insist that dealings in money raise questions of "political economy" think the headline: "Fed Goes Broke" may have somewhat larger market implications.



 Roughly 47% of "Debt Held by the Public" ($13.1 trillion as of March 30, 2015) is now owed to people (individuals and institutions) who do not use the dollar as their own unit of account. The rest is owed to holders who do their accounting in greenbacks.

I can remember Galbraith making one of his royal appearances at the one undergraduate class he still taught and entertaining the assembled worshippers with a quip about the national debt not mattering because "we owed it to ourselves".

"We" are about to become the minority creditors. Clearly, the solution is abolish the use of cash itself so that even the vague historical memory of currency as the yardstick for measuring debt can go bye-bye.



This is probably old news to our serious counters: "Gridded Population of the World (GPW), v3"



 When Harcourt, Brace & Company bought World publishing, the wags said that my father Bill Jovanovich had taken over the world. (The better joke came later when the firm changed its name again to Harcourt Brace Jovanovich and someone said that Dad had replaced the world because he knew better.)

The second joke was funnier to me because in the world of testing (which is what World Publishing did) Bill Jovanovich always did know better. He understood something that was so simple and radical that it will be another century, if at all, before the world catches up.

The only sensible use of testing is to allow people to find the full range of their failures; then they can decide what are their best chances for success.

Dad wanted "school" to be nothing but tests– of reading, hopscotch, sewing, everything possible. He wanted them to be voluntary, and he wanted them to be subject to the competition of choice. His idea of open enrollment was literally that– people could send their children to any courses they chose.

That was the only way for "society" to allow people to figure out what they "should" and "could" learn. He thought standardized education was an abomination, precisely because it allowed the helpers to always know best and gave the students and parents no escape from "the permanent record".



 The charity industry is America's oldest profession (the whores came only after the British took over New Amsterdam and brought in the young men in uniforms).

"Helping" in the name of God/Progress/Equality was established as the primary career for the properly educated even as the Indians were coming close to driving the colonists back into the Atlantic.

Without "helping" there is no justification for compulsory primary and secondary education, college attendance and all the soft subjects that are now the bulk of graduate school education in the United States.

It is– and always will be– the real "jobs" program because it is the only way the commercially-inept can maintain their social status and pass on their sinecures. As the First Lady reminded us the other day, she is "an Ivy-League educated lawyer". So there.

Russ Herrold writes: 

The thought that I had when I saw the initial post was this meditation:

"I am for doing good to the poor, but … I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed … that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer."

― Benjamin Franklin



 The only reasons why Europe is recovering (euphemism) are the collapse of the euro (ie almost a return to the old currencies (peseta, lira, franc and drachma, etc ..) and the collapse of oil.

Steve Ellison writes:

Stef, this is an excellent point, and there is a meal for a lifetime if one can understand and anticipate how markets move to correct imbalances. As one who trades only S&P 500 futures, I have noticed that every time that market sold off in the past 5 years ostensibly over Greek worries, the euro went down at the same time, which directly alleviated the root cause of Greek non-competitiveness. Soon enough, there was no longer any reason for the S&P 500 to decline further.

anonymous writes:

I threw challenge a few weeks back: could anyone test "5 year expected earnings" vs ES.

I'll re-post these links as a trailhead at least for how one might go about such a study:

"Expectations and the Valuation of Shares
", Burton Malkiel, John G. Cragg

And the book.



 From Strategy Page:

There has not been a war between the Great Powers in Europe since the surrender of Nazi Germany on May 8, 1945, a peace that has lasted 70 years so far. This is the longest period of major-power peace in Europe since before the fall of Rome 1500 years ago. The second-longest such period of peace among the European Great Powers was the 43 years between the end of the Franco-Prussian War (January 31, 1871) and the Austro-Hungarian declaration of war on Serbia (July 28, 1914), which signaled the outbreak of the First World War two days later. In effect, since November 5, 1988, every day that the European Great Powers have not been at war with each other has set a new European regional –and pretty much a world– record for the duration of a peace.



 At times like this one is reminded of Horatio Nelson's admonition to Aubrey: " Forget the maneuvers and go right at them".

Stefan Jovanovich comments: 

But if your men cannot go right at them, your only choices are to avoid engagement either by using the ocean's wide spaces or by staying in port. Pierre-Charles Villeneuve was shrewd enough to know that the only role for the French and Spanish fleets was to be a potential threat but never to actually come out and fight, except in those brief moments when they had overwhelming local superiority. That threat of a "fleet in being" would compel the Admiralty for political reasons to devote most of its energies to patrol duties in the Channel to guard against invasion and to blockading the Atlantic and Mediterranean ports of the enemy. It would maintain a stalemate which would, in fact, be a victory for Napoleon's continental system. But Villeneuve had the bad luck to work for a man who could never sustain a strategy that was working if it contradicted his latest impulse. So, Villeneuve was doomed to be ordered repeatedly to use absolutely the worst of all possible tactics. To this day, the French continue to blame him for the defeat at Trafalgar. They even join the English is questioning the Admiral's character for finally obeying Napoleon's stupid orders when faced with the choice of obedience or execution.

P.S. Nelson's contemporaries had the grace to acknowledge that Villeneuve was a better sailor than Nelson; when he attended the funeral ceremony, his presence was not considered shameful but a further endorsement of Nelson's military greatness.



 One notes the almost 5 year decline in the prices of Maize, Wheat, Soybeans and notably/most importantly, in the price of Rice.

I am often told to pull my head out of my ^%$#% and look at the real world. Well, I look directly at it now and say this: Why are the international food agencies not involved in these markets now (maybe they are?) buying whatever amounts necessary to begin alleviation programs.

They seem more interested in blaming evil speculators when prices are high.

Perhaps Stefan and Jeff could both rightly put me back in my myopic little box and correct my interpretation of the current situation?

Stefan Jovanovich writes: 

I can't, Shane. Your comments are literally a meal for the billion and more who still live have not to mouth. The central banks and national treasuries and the electorates have avoided the follies of the 1930s; they have not assumed that only preparations for war can justify income subsidies. But those people who have "learned the lesson" of the Great Depression have also done their best to ignore what the people who survived WW 2 did to get back on their feet again. They hoarded.

The rise of grain prices that had Britain remain on food rationing longer than West Germany came not from crop failures but from the producers' decision to build up inventories rather than release them.

The Marshall Plan was about bribing the American farmers to trust the government for once to pay them a log-dated premium over the market large enough to justify current sales from the inventory and a commitment to "overproduction". Without such a Marshall Plan output could remain flat while prices rose because farmers were still reminding themselves of the lesson of the past half-decade.

After restrictions of the the risks that come with a world in which commentators on current events no one can remember.

Scott Brooks adds:

Because there's no power to be gained by actually helping people get ahead. A downtrodden, hungry, oppressed man will reach out to grant power over his life to anyone who tells him the lies he wants to hear.

Stefan Jovanovich adds:

I thought Shane was pointing out that the non-profitistas were not buying low after complaining about the speculators selling high in the past. That seemed to me a shrewd observation not only for its comment on the nature of the helping professions but also for its implicit reference to how international food relief got started in the first place. In any case, I appreciated taking what he wrote as an invitation to discuss the political origins of the Marshall Plan and an amateur exploration of how grain producers might be shifting to hoarding. (Jeff has been silent because he is busy actually trading; I suspect he is also being kind enough to refrain from publicly reminding me that current production is controlled by entirely different government rules than those around in 1948.)

Where, in this meander, does Scott's comment fit? Are we supposed to say "Oh, dear, the poor are being stupid - again?" In my own direct experience of being poor (not just broke but also cut off from the safety nets of family and professional connections), I don't remember having any "power". If I had, I would have been happy to trade it for lies, if there had also been some cash to go with it. The poor don't mind being used as the excuse for the ministering to their needs; why should they? They may get only one piece out of eight from the money being spent but it is still better than nothing.

Neo-socialism does not exist in America because "the poor" demanded it but because the markets are as cruel to the well-educated as they are to the rest of us. The Congregationalist claque in Massachusetts and the Quaker gang in Pennsylvania learned that straight off; and they did not like it. Their solution was no different from the 19th century Progressives, Kennedy's Peace Corps or the current LDS - tithes and non-profit jobs for respectable children and their elders and, of course, price supports paid for by government paper money.

The lie that will always sell is the notion that people can be helped "to get ahead" through anything but commerce.



"Credit Supply on the Housing Boom":

"An expansion in credit supply was the fundamental driver of the surge in household debt and that borrowing against the increased value of real estate accounts for a significant fraction of this build-up in debt."

anonymous writes:

And it was prefaced by a fed rate hiking cycle in 2004 where financial market conditions did not tighten, but in fact, loosened significantly. Yellen's comments this morning seem to support the idea of a "yellen collar" on equities, while the recent sell-off in bond prices seems to also fit nicely with her master plan.



 Courage to write freely comes in many forms and only some are proper.

This article contains the latest list of those writers who require that any First Amendment bravery be "fastidiously exercised for the good of humanity."




 Give me the place to stand, and I shall move the earth."

This is the translation from the Greek of what Archimedes is quoted as saying about the power of the lever. (Pappus of Alexandria, Synagoge, Book VIII, c. AD 340; Chiliades (12th century) by John Tzetzes, II.130.)

Since 2008 the predictions of doom by the goldistas have all been wrong. There has been no hyperinflation among any of the countries whose currencies can be cleared in large amounts through the central banks of the world. Gold has proven to be no more reliable a "store of value" than any other investment, even if you go all the way back to Nixon's cutting the last feeble fetter in 1971. (Yes, over that 4+decades gold ownership has been wonderfully rewarding for those early investors but no more so than ownership of the shares of Philip Morris, for example. As in the past tobacco has proven to be a more than adequate pseudo-money.)

The best explanation for why fiat money has not utterly failed is the simplest: currency itself no longer counts towards leverage. In a U.S. banking system with nearly 3 Trillion $ in "excess" reserves, vault cash on hand has become a footnote to any reserve accounting. Even the amount of money in circulation in the country becomes an inert variable compared to the volume of credit card transactions. (One suspects that even the traditional #1 users of dollar bills - those in the U.S. illegal drug trade - have moved on the debit cards.) So, we are in a new world where John Law's experiment has succeeded, where credit is the means for all transactions and the form of all savings. Law's system failed because gold was still the ultimate unit of account, and foreign exchange dealings remained in private hands. The livre could be traded for coin, and the governments, for all of their monarchical tyrannies, lacked the mechanisms to prevent people from taking their specie and running over the border. But, in the new world of central bank mercantilism, that is not a problem; the players at the table cannot cash in their chips. They can only exchange them for a differently colored legal tender IOU.

"Monetary policy" has been based on the assumptions that (1) banks wanted to lend to consumers for transactions and real estate asset purchases, (2) consumers wanted to borrow to buy now and would pay for the privilege, and (3) interest rates would control how much lending took place. But what if the consumers decide that they, too, want to hold "excess" reserves in the credit system? In a world of debit cards both consumers and banks may have discovered that they have less need or use for hassle of short-term leverage. The Fed has already hinted that it will be frowning on the uses of credit that are not "investments" - i.e. loans to existing members of the Fed club. "(W)e will use the rate of interest paid on excess reserves (IOER) as our primary tool to move the federal funds rate into the target range. This action should encourage banks not to lend to any private counterparty at a rate lower than the rate they can earn on balances maintained at the Fed, which should put upward pressure on a range of short-term interest rates."

If the Fed is going to keep its promise to draw down the assets on its balance sheet while tugging upward on the IOER, won't its interest rate policies necessarily be drawing private credit balances from consumption to savings? How else can they help create the necessary customers for the issuances of fresh Treasury paper; there has to be someone out there to do the buying so that the Treasury can actually send principal back to its best old customer. There are only two alternatives to that dreadful scenario of higher interest rates and lower consumer spending: (1) the Fed continues to be the Treasury's best new customer, or (2) the U.S. Treasury issues further regulations under the Trading with the Enemy Act outlawing "private counterparty" (sic) interest-bearing bank accounts.

But who can imagine the Fed breaking its word or the U.S. Treasury outlawing the private holding of money - er, credit?



 Is one that puts the liar in a somewhat but much reduced negative light while hiding the real gravament of major culpability? A good example is Cole Porter saying that he was a member of the French Legion and that the reason that they took him was that they wanted an American to be in it for public relations. But he really wasn't in it at all as he had gone to France to avoid the Draft. And Gross's upside down thing that the secular in stocks and bonds, is over is an example of that perfect lie, although one would guess that he is not aware he is lying and just would not ever say anything good about stocks because that would hurt allocations to his fixed income activities. And he's been calling for the end of the rally in stocks since Dow 1000 or so.

Stefan Jovanovich writes:

"In July of 1917, he set out for Paris and war-engulfed Europe. Paris was a place Cole flourished socially and managed to be in the best of all possible worlds. He lied to the American press about his military involvement and made up stories about working with the French Foreign Legion and the French army. This allowed him to live his days and nights as a wealthy American in Paris, a socialite with climbing status, and still be considered a "war hero" back home, an 'official' story he encouraged throughout the rest of his life."

From Cole Porter's bio on

Draft registration began June 5, 1917.

To justify the enslavement of American citizens, the Supreme Court looked not to the Constitution but to "the law of nations" - i.e. what the Europeans had always done.



 "Calvin Peete, golfer, obituary: American golfer who came late to the game and overcame physical limitations to become a top player"





 Cantillon got his start by doing the accounts for the exiled Irish money from Kerry that landed in Daniel Arthur's hands. He got his real boost from becoming the agent in Spain for James Brydges, who got rich as the Paymaster for the British Army during the War of Spanish Succession. In both cases finance was ecumenical; no one complained about the Catholics negotiating bills of exchange for the Anglican sovereign.

Until recently, the same generosity of spirit had governed current financial matters involving Ireland and the continent. But, as the Apple disclosure about tax liabilities noted, the EU is not happy that American companies have used Ireland's intellectual property laws to such extreme advantage. Even more important is the fact that the most recent Irish budget seems to have decided that 12.5% is to be a real and not fictional rate on trading profits, even those made elsewhere.

For some people this could be a nasty scissor between U.S. recapture which takes effect in 2017 (just in time for a possible Republican Secretary of the Treasury to take office) and the Irish desire to clip the virtual coins that have already passed through their jurisdiction.



 1. Are there any idiosyncratic moves for 4 trading day weeks that are not around on other weeks?

2. Hammerstein liked to sit with his back to the audience and listen to the ruffling of programs, and the number of coughs to tell if the audience was responding well to his shows. This is similar to Galton's method of counting the number of fidgets. Are similar indirect measures indicative in market moves?

3. When will someone make a good study of the expected moves of individual stocks when they break through round numbers such as 100?

4. Is one of the major causes of the decline of the Roman Empire the hatred and contumele aimed at the rich and the lack of banking during the centuries surrounding the C. E causing a lack of growth, and the need to extract resources by military conquest and slave labor? The book The Invention of Enterprise by David Landes makes this case.

5. To what extent do Hong Kong, Japan, and the US equity markets move in a feedback relation with each other, and is it predictive for any of them?

6. What does the inordinate rise in us stock/us bond and us stocks/dax in the last several weeks foretoken?

7. One is asked frequently why one doesn't trade the 10 year bond versus the 30 year bond because the former is 15 times as liquid as the latter. One notes that the 30 year had a 6 point range last week, and the 10 year a 1 pt range. Ending up down 1/2 a pt or so. Versus 3.5 pts for the 30 year. The answer is that the rake, the vig, is too high on the 10 year.

8. Everything that should have worked last year in predicting the crude is working this year as is generally the case.

9. Are the equity moves bullish in year 5, and bearish for year 7 predictive in any sense?

10. To what extent will Centrals, and plunge protection teams or their counterparts shield major declines in the market during election years?

Stefan Jovanovich writes: 

Quibbles re #4:

We moderns see the fall of the Italian half of the empire as "the decline" because Rome is where the Pope lives; for Gibbon and his readers, the important decline and fall was the loss of the wealth of the East - Egypt and Damascus and Constantinople.

There was no decline in banking around the C.E. That was the period of its tremendous growth, which continued in the East until Gibbon's villain–Christianity–had succeeded in converting the Mediterranean world as a whole into believing that the very notions of profit and interest were sins (of which the Jews were, of course, particularly guilty).

Slavery was always at the root of all economic systems in that world; acquiring slaves was, as they became in the American South, the primary means for an ordinary (sic) person to save and invest. (The first investment a successful free black or Indian made was to acquire his own slaves.) Productive land was already owned by the established families–just as it is in our American West–and you needed a lot of it. That was beyond the means of any "entrepreneur". But slaves could be acquired one at a time; they were fungible and they could be rented out to the landowners as seasonal or long-term workers. ("Rome" (the TV serial drama) gets this right. Vorenus plans to retire from the legion by saving up the rewards from his military service–i.e. the slaves.)

The fiction of an independent libertarian-believing yeomanry of Roman citizens electing a representative government is just that–a fiction. The appeals to the mob began generations before the Republic "fell"; and every successful "middle class" (sic) Roman was a slaveholder.



 All hades broke loose in Europe in 1846, and the Rothschilds played the same role, begging favors, and granting pocket money to the politicians, and financing debt that their modern counterpart of faith and Flexionicism played in 2007-2008, albeit none of them officially received a post in the cabinet. However, despite the revolutions in Germany, France, and Italy, the Rothschilds' offer to take down Austrian debt at 4 3/8% was only 1/4 % higher than the going rate prior to the Hades.

It was interesting to learn how openly the Rothschilds influenced the rates with well timed purchases to help their changing political alliances along. Natah proudly told Metternich "I raised the rates very easily yesterday by buying Mettelligique". In those days a rise in the stock market was good for raising confidence and lowering rates.

The general impression from reading the history of the Rothschilds in this period was that their influence was quite similar to their modern counterparts in Treasury but their grand balls and mansions seemed to the observer from the grandstand to be of a much more ostentatious scale. Hopefully, the great historian Stefan will correct and sharpen these observations.

Stefan Jovanovich comments: 

There were two differences: (1) the Rothschild brothers had to raise the money they lent and paid for their trades. They could not print it or engage in a perpetual swap of one debt instrument for another. They had to have customers believe in their resources and also have the actual specie reserves to back up that belief. Their personal displays of wealth were important as theater and necessary as investments in private accommodations in an age when important visitors became house guests, not hotel customers. (2) they never indulged in national policy. Being permanent outsiders as Jews allowed them to avoid the corruptions of patriotism. They were accused of being guilty of caring only about self-interest and at the same time trusted because no other interest would supersede. They would act in a way that benefited themselves and their clients but never at the expense of their reputation with others. It is impossible to imagine their advising any of their sovereign clients to choose devaluation at the expense of their trading partners.

David Lillienfeld adds:

The Rothschilds did not earn their money from banking. They worked for sovereigns, too, as when they ran the funds for the British government to Wellington's army in Spain. Supposedly, no one else was willing to do it and the Nathan and company earned a nice fee for their troubles. That was supposedly not an unusual undertaking.

Stefan Jovanovich comments: 

Er, not quite. The Rothschilds were merchant bankers; if you can imagine a band of brothers of Larry, Watsurf, the Zachar et. al. dealing in everything from cotton bales to consols, you have a picture of who they were and what they did. They took deposits, underwrote loans and also dealt in used furniture, as the Maturin saga notes.

The story about Wellington's Army has been retailed for over a century; the Sharpe books (and the TV serial made from them) have an episode with Nathan pretending to be a Quaker (or Baptist? this part is entirely from recollection) woman missionary riding in a coach through Spain so he can smuggle a letter of credit to Wellington. It makes - I suppose - good fiction; but absolutely none of it is true.

With Wellington paper would have been more than useless; the French were paying their allies in script. If Wellington and his allies were to win what was the first modern Spanish Civil War, they had to pay in gold. This is where Nathan and his brothers came in; they dealt in bullion. The Rothschilds were sensible enough never to stray very far from their security; Wellington's gold was delivered to John Charles Herries in London. He and the Royal Navy had the responsibility of getting it to Lisbon.



 "There is one good thing about Marx: he was not a Keynesian."

-Murray Rothbard

Stefan Jovanovich writes: 

Marx also agreed with Rothbard about central banking: "Talk about centralization! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralization, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner— and this gang knows nothing about production and has nothing to do with it." (Das Kapital, Volume 3, chapter 33).

They also shared - along with nearly everyone else - the notion that money was something other than the unit of account that the people with guns and official uniforms accept in payment of taxes.

Neither they nor the best current historians on the Constitution (Rakove, David. O. Stewart) understood the full genius of the Federal answer contrived by a collection of planter debtors, merchant lenders, lawyers and army pension holders in 1787:

1. The country would have only coin as money because no other form could avoid the cheating that can be produced by the stroke of a lawyer or accountant's pen or the vote of a State Legislature

2. Congress had the power to define what the Coin would be, provided that the unit of account for both U.S. and foreign money was a specified weight and measure

3. What the States and people and the Federal government did with their freedoms to get, borrow and spend was up to them



 "Steel rain" was the tactic developed by both the British and Germans in WW I (it was eventually copied by the French and Americans after they surrendered their illusions that elan could have much effect against enemies who kept their heads down). It was–literally–the idea that exploded artillery shell fragments and bullets would fall from the sky directly on top of the enemy's trenches. The British developed their techniques of indirect fire to the point that Lewis guns were aimed not like rifles but like mortars so that the bullets would arc up into the air and then come down on the Germans.

In his memoir "Storm of Steel" Ernst Junger writes about how he found comrades being killed by bullets striking the tops of their skulls. Trench mortars were even more effective; they could be fused so that they exploded just before hitting the ground, turning the enemy's own defensive wire into shrapnel.

Hollywood shows wars with rifles and gas bombs (those fireball explosions that never happen when artillery shells and rockets strike home); but, going back to Napoleon, most of the killing and maiming of the other guys in uniform got done not by individual firearms but by the explosions delivered from large tubes. (Aerial bombardment was spectacular but woefully inaccurate.)

There is a good argument to be made that the Allied Air Forces helped defeat the German Armies not by their actual bombardments which killed mostly civilians (more French civilians died from Allied bombardments in the weeks up to and immediately after D-Day than Allied soldiers on the beaches at Normandy.) Where the Allied Air Forces succeeded was in diverting so much of the German artillery from the Eastern front to anti-aircraft duty defending Berlin and other cities of the Reich.

Steel rain is not going away; but the large tubes are. It is difficult to fit GPS guidance onto shells that have to withstand the heat and pressure of being shot out of an artillery piece; but with rockets there is no problem. Two hundred years after Congreve's rockets were a miserable failure, his idea has become THE ANSWER.



 Glenn Beck is Savanarola withut political control; he is no more reactionary than Huey Long. Beck also admires Jefferson; he is the Father Coughlin of our age–full of righteousness in the name of the common people.

As for Thomas Paine, few of the people who made the United States into a country had any quarrels with his ideas. They did find him to be a pain in the ass personally because he never could accept the fact that other people also had interests and sometimes he would have to come second. He was–like so many of the people who despise Americans for wanting to keep their own religions–convinced that the state could ultimately get them to think straight. All it would take was some benevolent central authority. The French Revolution would have killed him but for Morris and Washington's intervention, yet it was the American one he repudiated.



 Kyle Bass recently opened a new strategy against drug companies: short their stock and then attack their patents, using a law from three years ago that basically opens the door to such things.

"Hedge Funds Found a New Way to Attack Drug Companies and Short Their Stock"

Even if the challenge results in no action by the PTO, it will take a while for that to come to closure. In the meantime, there's some discounting of the presumed NPV of the portfolio as those wily masters of earnings estimates on the Street (who are never ever wrong) conclude that the company's earnings will be adversely impacted in this way or that. Stock drops, shorts cover, and PTO denies the claim. If the patent is for a cytokine, the challenge may be upheld based on recent SCOTUS rulings, but that's about it.

Some patents may seem absurd (and some are!), such as Schering's (now Merck's) patent on interferon alpha (used for Hep C) dosing—how many times a week, and so. That patent was challenged, and the challenge was denied. That doesn't stop the perceived value of the company from dropping, though.

For big pharma, this may be more of a pain than a major matter. Sure, they will go to Congress to get the law repealed or at least reformed. And the structure of matter patents key to industry are probably intact so long as they are not straight copies of a naturally occurring molecule (I think that's been the new SCOTUS standard). After all, if they were at risk, the chemical industry would be at risk, too. And the capitalization of the majors is such that a drop, while unwelcome, can be weathered.

However, for the start-ups, this may be a bigger problem. Not only is there usually tight spending already so that paying attorneys' fees has a potentially major impact on the budget (could it mean needing to raise more capital, likely with significant dilution??), never mind management's attention more productively spent on product development.

Then there's the stock price. Many start-ups look forward to being acquired as an exit strategy for investors in the company. However, they prefer to do so when the company is in Phase 3, when the valuation has considerably risen. (Including product failures and the like, peak valuation of start-ups is midway through Phase 3). However, if the stock drops because of shorts piling on the company, the market cap will drop, potentially enough to attract the attention of a major pharma looking at the company's assets as priced at a bargain. If this is early enough in development, the market cap isn't going to be that great to begin with. Consider, InterMune's valuation about a decade ago was 100 mil. Pirfenidone, the stuff it's marketing now (whether it's worth using is a different matter), was in Phase 1 / 2. Early development. Go ahead 9 years, and Roche bought the company for 8.5 bil. (Roche is a conservative company; someday, I want to get the BD fellow responsible for the deal off to a quiet corner of a bar and ply him/her with enough cognac to understand the thinking behind the purchase—but that's just my view of it).

So while the biotech frenzy continues (there may be a bubble, except there are real products generating real earnings (and lots in the pipeline from acquisitions) that's supporting much of the valuations. And while you can say that Celgene is a bit stretched, but Gilead sure isn't. Take a look at its PE, its revenues, its products and therapeutic areas and then its pipeline. Not stretched at all. So, is there a bubble? If you look at Valeant, you might be pardoned for thinking so. At some point, Valeant is going to be big enough that the M&A isn't going to support the company's valuation anymore. Kind of like what happened to PDL before the Facet spin-off. At that point, Valeant has to start functioning like a pharma (and not an PE enterprise) and generating some increases in earnings to support its market cap. Either that or watch the air come out of its balloon (guess where I stand on that assessment).

So back to the patents. I think Congress will do something at some point, just not the current Congress, which could barely pass a bill mandating that Reagan National should remain open. In the meantime, there will be some raids by the shorts until everyone else starts to discount rumors of invalid patents. At that point, it's Game Over. Until then, though, while the big pharmas aren't going to be bothered much, there may be some significant damage on the start-up front. And before you pooh-pooh that sector of health care, it's worth remembering that the amount of productive research in big pharma labs is pretty poor these day. Innovation is taking place in the start-up world (not for big pharma, which may get some bargains, but for the investors in those start-ups, who may decide not to invest as much in the area, or in any given company, citing this "play" as a major risk and lowering RoI as a result. in VC terms, that RoI has to be high enough to cover the costs of the all-too-prevalent product failures).

Stefan Jovanovich writes:

I don't think BIOTEK will go upper 162 (hope).

anonymous writes: 

Not to insist, but this latest bounce on BioTek is particularly strong on the numbers/ participation. Will be a maximum of less? The swan song? 



 "The Surprising Downsides of Being Clever" :

The first steps to answering these questions were taken almost a century ago, at the height of the American Jazz Age. At the time, the new-fangled IQ test was gaining traction, after proving itself in World War One recruitment centres, and in 1926, psychologist Lewis Terman decided to use it to identify and study a group of gifted children. Combing California's schools for the creme de la creme, he selected 1,500 pupils with an IQ of 140 or more – 80 of whom had IQs above 170. Together, they became known as the "Termites", and the highs and lows of their lives are still being studied to this day.

Stefan Jovanovich writes: 

Francis Galton had raised the question of intelligence measurement in the 1860s, and it was one that absorbed people's attention because it raised an important issue: could "society" - i.e. civil servant bureaucracies and charitable organizations - make the common people smarter. For the English-speaking world this was a topic for endless debate because it was really about how much more money Progressives could get spent on public schools. The French, with their universal childhood conscription (no child was allowed to avoid public schooling), did not have to debate the issue; they brought their usual scientific rigor (at least in that period) to bear and had Alfred Binet create a standardized test for all elementary school age children in 1905.

By the Jazz Age (sic) the IQ test was anything but "new-fangled"; on the contrary, it was old hat. When Terman's book, The Measurement of Intelligence, was published in the U.S. in 1916 (it was an almost complete rip and translate from Binet's work), it had been "new-fangled" and was wildly popular. One important reason for its popularity was that it was the first book in American education history that allowed parents the opportunity to test their own children. But, ten years later, when Terman began his longitudinal study, people were sour enough on the question of "I.Q." to make jokes about it. For one thing, they had already suffered through the comedy of seeing the U.S. government try to apply the test results to winning the war. (When the U.S. Army hired Terman in 1917 to use the Stanford-Binet test, it was not a "recruiting" device. The Army took everyone who was drafted now matter how stupid; the test was given to people after they were inducted to try to figure out what MOS they should be trained for.)

This article has a decent summary of what Terman did, but you will have to ignore the usual retrospective judgments that have become part of all current academic writing.



 In the US, coal is on the ropes for several reasons. First, the strong dollar is making exporting coal [and LNG] relatively uneconomic.

Second, coal has become uneconomic. Coal burners are turning to lower-cost natural gas or renewable energy. In fact, no US utility is seriously considering building a new coal-fired power plant. To make matters worse, most utilities who own coal-burning assets are seeking exit plans.

Then, there's this:

"Recent report reveals dramatic decline in number of active W.Va. miners"

The article describes declining mining activity in WVA. They report that 2,596 WVA miners lost their jobs in the first quarter. It should not be a surprise. What they do not say is more jobs will be lost in 2015 as dozens of uneconomic power plants exit from the nation's deregulated power markets.

The article is exaggerating when it suggests the root cause of WVA's mining woes is a federal war on coal. There's no federal war on coal. There is federal [and state] war on carbon.

Just ask the natural gas burners. Ask oil burners. Ask nuclear burners. Ask state regulators. But, don't ask the media. And, for heaven sakes, don't ask a politician.

Victor Niederhoffer asks: 

If all this supply is coming off the market, isn't that bullish? 

Carder Dimitroff writes:

Interesting question. The answer is not simple.

Coal mining will struggle. Coal transportation will struggle. Gas boilers will struggle. Manufacturers supporting these types of assets will also struggle.

Turbine manufacturers are gaining. General Electric, Siemens and other turbine manufacturers are seeing growth in high technology turbine sales (combined cycle gas turbines). They offer turbines that are 60 percent fuel-efficient (coal burners are approximately 20 to 30 percent fuel-efficient). The combination of high fuel efficiency, low fuel costs and low labor costs offers buyers a significant competitive advantage.

Energy prices are unlikely to improve. Market-clearing prices for wholesale power are challenged as low-cost gas turbines enter the market. Ohio alone expects six new gas turbines (the equivalent of four new nuclear power plants). These turbines will likely lower average market-clearing prices by displacing less competitive sources (coal).

Energy prices are also challenged as renewables and energy efficiency programs take hold and grow. As California demonstrates, it only takes a small amount of renewable energy (or energy efficiency and demand-response) to shave off average market-clearing prices.

Nuclear power is winning on the carbon war argument. The State of Illinois recently passed a carbon bill, which helps existing nuclear power plants (Exelon) and renewable energy sources.

While existing nuclear power is a winner, new nuclear plants are losers. It appears no new nuclear plants will be built for a long, long time. Yes, there are nuclear construction projects underway. Yes, nuclear power displaces carbon and other air pollutants. However, it's not enough. After watching TVA, SCG and SO struggle with spiraling nuclear construction costs, it's unlikely other utilities [or state regulators] will repeat their mistakes. In fact, it appears most other applicants have put their nuclear ambitions on the shelf.

Capacity markets are improving. Old and inefficient plants cannot compete. Some assets are failing to clear auctions. As such, it shouldn't be a surprise that the market's losers are forced into permanent retirement. They can blame the "war on coal" if they want, but it's mostly operating economics that are driving retirement decisions. Those decisions are also capturing other types of plants; not just coal plants.

In the spirit of markets, there appears to be clear winners at the expense of losers.

Stefan Jovanovich writes:

Thanks to another part of my misspent youth, when the U.S. Navy wasted its money teaching me about marine propulsion systems, turbines continue to fascinate me. So, any pretense of knowledge here is restricted to that subject only. The inefficiency of what Carder calls "coal burners" comes from the fuel, not the gas that moves the turbine blades. Steam is actually slighty more efficient than natural gas in its isentropic efficiency because it is easier to capture the residual heat energy from steam after it passes through the first (and second) turbines. (Note: "isentropic efficiency" is the ratio of a turbine's actual power output to those of theoretical turbine with perfect physics with the same inlet conditions and discharge pressures. Or, to put it in engineering speak - actual enthalpy drop divided by the isentropic enthalpy drop).

So, "coal burners" - i.e. plants that burn coal to generate steam - are "inefficient" only because coal has a much lower energy density than other fuels. (This why the British Navy switched from coal to bunker oil; the same ships could go much farther without refueling using the same fuel storage spaces.)

As to how prices for fuels will arbitrage the energy density differentials, beats me; but List members should not take the relative electrical generating efficiency numbers to be a statement about the obsolescence of steam turbines. This is not a repeat of the fate of the railroad steam engine.



 Richie Benaud, who has died aged 84, became so celebrated as the most intelligent and articulate of television cricket commentators that his youthful triumphs, as one of Australia's greatest all-rounders and most inspirational captains, tended to be overlooked. In his seventies Benaud wryly observed that he had lost count of the number of times young cricket fans asked if he had ever played the game. He was, in fact, the first Test player in history to achieve the double of more than 2,000 runs and 200 wickets.


Craig Mee writes: 

Well spotted Stefan. Richie was always short sharp and to the point, loved and respected in England almost as much as in Oz, not an easy feat when it comes to sport. He was stoic and always positive. He was often quoted about cricket and life through its ups and downs, something we should all pay careful attention too, and on reflection all of us, no matter their position could say about trading and financial markets.



 One of the most frustrating things in trading is when you research a (qualitative, not a systematic) trade, stay up late figuring out how you want to express the idea to maximize gain and minimize loss, and then the next day when you want to put on the trade that stock is up near 3%.   

Considering it has done nothing for months you figure, "I will wait till to buy on a decline a bit lower".  Then the next day you see it is up 8% and the options you had looked at were would be up 60% in a few days had you conceived of the idea just 1 day sooner. 

I think at such times (similar things have happened to me 3 times so far this year) one is very prone to going on tilt, such as finding some other market to chase, or otherwise do something out of frustration that is not logical and end up losing what you would have made had you been one day sooner.   

I am wondering if there is any way this sequence of events can be generalized beyond specific circumstances of one trader, to general market phenomenon, maybe even events that lead to predictable circumstances.

Jeff Watson writes: 

Whenever I go surfing, I miss a lot of good waves. I either am in a wrong position, miss it completely, or just blow it off thinking a better one will be behind. I never feel bad about missing a wave because there will always be another wave sooner or later. I look at trading exactly the same way I look at surfing.

John Floyd writes: 

Agreed, put another way as someone once said to me “there is a bus every 5 minutes”.  Also importantly in terms of the limits of time and energy don’t spend it worrying about missed moves, focus on what is ahead.  

I read a poignant quote recently in The Joyful Athlete: ”Second tier athletes tended to beat themselves up for mistakes, while the champions simply noted their errors and moved on, wasting no energy on self-recrimination.” 

Stefan Jovanovich writes: 

I have the same problem. Sometimes I wait on a trade too. I think it is greed, the desire to seize the least/highest perfect. So I remember: "Luke, trust your instincts!"

Anonymous writes: 

I strenuously disagree with the philosophy that "there is a bus every five minutes." (My late great father used to say, "there's always another street car.")
This is a rationally flawed analysis. Because it treats an opportunity cost as economically different from a realized cost.  The reality is that the P&L from an opportunity cost is real, and it compounds over time. And this is true so long as one is consistent regarding timeframe, methodology and performance benchmarking. The most pernicious thing about this street car delusion is that it can be hidden,  rationalized and forgotten.
By way of example, our fellow Spec Lister and Bitcoin Booster, Henrik Andersson declared on March 12: "Crashing commodity prices, currency war, crashing yields (with a big chunk of European debt trading at negative yield), surely this can't be because everything is so rosy in the world, this cant possibly be 'good' news. Couple this valuations close to ATH  and I have for the first time in 25 years sold everything (I started investing when I was 12). Everything." 

Since this declaration, the SPX, Dax and Nikkei have all risen between 3 and 6% — and the DAX is at an all time high.  If Henrik measures his performance on a daily or weekly basis, this is a bona fide opportunity loss of substantial note. But if Henrik measures his performance on a long term, multi-year basis, it is way too early to render a verdict and this opportunity cost may well morph into an opportunity gain.

John Floyd comments:

Point well taken and a good one. I was afraid my quick comment might garner the need for elaboration.   The point I was trying to make is if you “miss” a trade you should learn from the experience and move on, while trying not to repeat the same error in the future. Juxtaposed against expending energy lamenting the perceived lost opportunity, which also has a cost. Assuming this is done with some degree of improvement I think it is both rational and sound.  In this way the opportunity cost is treated as real and minimized over time. If there is improvement made then returns are compounded in a positive fashion as opposed to a pernicious one.  In anonymous’ example that might even mean Henrik recognizes what may or may not have been an incorrect thesis and “buys” everything the minute he read anonymous’ post.  

Sushil Kedia writes: 

My two cents on the table:

Opportunity costs as well as realized costs are both known and quantifiable only after the market has moved. At the instant of a decision as to whether to decide to take a trade or not, both are unknown.

Since a real P&L is a progression of a series of unknown infinitesimally sized but infinite number of moments, it is likely a flawed debate to undertake whether or not opportunity costs compound, since if those said opportunity costs actually turned out to be realized losses they too would compound.

Transliterating approximately what the Senator has said often in the past, the purpose of a trader is not to be in the market, but to come out of the market, one would like to tune one's mind to focusing on how much could one gain without losing beyond a point. For each this is a unique set of numbers despite the market being same for all. This uniqueness comes not only from different skills, but different restrictions on the types of trade one is allowed to take, the different marketing pitch each has to use for garnering risk capital (oh we keep transaction costs low), the different risk tolerances each must remain within etc. etc.

So each needs to focus on how one will travel from an infinite series of infinitesimally small pockets of time in deciding when to not decide. 

Paolo Pezzutti writes: 

With regards to missed opportunities, I have two observations.

Firstly, I think our mind is biased in focusing on the good trades that one could have made. We tend to forget the bad calls. It is true, however, that if your trading methodology is systematically not "efficient" then your performance will eventually be sub par.

Secondly, if you continue to miss opportunities, you may have an issue in pulling the trigger when it is the right time to do it. I have a long way to go to improve my trading and I think I have to work on both these areas. My trades are inefficient, because I can spot good entry points but my exits too often get only crumbles that the market mistress is willing to leave on the floor after a lavish dinner. Moreover, one tends to be afraid of taking the trade right when the risk/reward is more convenient, that is when fear is the prevalent sentiment in the market, the moment when you should "embrace you fears" as Larry Williams would say.

As a final comment, I have to commend the market mistress for her naughtiness and deceitfulness. The employment report on Good Friday released with markets closed saw prices of stocks plunge seriously (20 pts in 1 hour) to get 30 pts back on Monday.  Many opportunities during the Easter weekend in stocks, bonds, currencies, commodities because of ephemeral end deceptive moves. Who knows if they were orchestrated or simply "random". 

I went short gold on Thursday at the close (1715) at 1202.6. The first price  printed on Monday was 1212.7. I eventually took a loss later that day of about 14 points. After 2 days gold was down at 1994. Focused on my potential loss, I did not exploit the huge opportunities offered. Afraid of even bigger losses, I liquidated my position instead of trying to close the big gap printed at the open. Moreover, I did not buy stocks or bonds to trade the obvious lobagola move. Double damage.

It is a matter of mindset.  There are coincidences, situations; there is the ability of a trader to translate into action tests, statistics related to these conditions created by the market mistress. The more extreme the conditions, the more compressed is the coil, stronger and more powerful it will be the reaction in the opposite direction. Much to learn.

Duncan Coker writes: 

I have always had a hard time reconciling opportunity costs/gains with realized costs/gains, though I know in economics they are comparable. For example, a casual friend offered me a private investment opportunity which didn't smell quite right and I declined and I left the money in cash earning -1% real rates. Shortly thereafter the enterprise went bankrupt and all would have been lost. I suppose on an opportunity basis it was a huge success for me, 100% gainer, and yet my cash account is the same earning -1%. Every day trading is a missed opportunity to be fishing on a nearby river which is easier for me to grasp and adds to the overall cost of the trading endeavor. Being able to forget and move on is a useful thing in trading. A swim or run at the end of the day does it for me.

anonymous writes: 

I do believe one can go broke from taking profits. Maybe if one has very few positions at a time this could take a while to notice (the benefit to marketing a long term strategy of any sort– few observations) but everyone will fail.

Think of football, a defense might determine that if they can hold the other team to 17 points that they have won their part. What if the offense deploys their secondary after 14 points? May your successes be larger than your defeats.

We are playing an unbounded game, we have no idea the amplitude of future gains or losses, let alone their frequency. Taking profit when unwarranted may not give us a chance at tomorrow.

As for opportunity, we all balance the fear of missed opportunity with the fear of loss. The more successful traders I've known are slightly more fearful of leaving money on the table than losing money. Slightly.

But that depends on the difference between the value and utility of the opportunity. Duncan, you bring up the ultimate question about the purpose of life. Way to make this a deep conversation.



 The forced parallels of the current events in Greece with the events before WW I, WW II and the Cold War in Europe fail to fit the facts. The Russians are now using half their effective combat power to support the "volunteer separatists", the Germans spend less than 1% of their GDP on defense, and neither France nor Britain nor Spain nor Italy nor the Netherlands nor Germany has any imperial interests or even pretensions.

A comparison with the events of 1880 to 1890 in Argentina would be more useful. No one with any sense has believed that the Greeks were going to be able to pay the debts they had, yet Greek sovereign debts traded at tiny spreads to German ones for most of the period of this "crisis" (sic). During the 1880s the spread between Argentina's long-term sovereign bonds and the U.K. consols remained equally calm even as "underwriting banks demanded higher fees and Argentina's government accepted leaving more money on the table by underpricing its IPOs as its fiscal position deteriorated."

By 1890 the annual interest on Argentina's debt was 40 percent of that year's fiscal revenue.

anonymous writes:

What do you think about the idea that even closer in time one might draw similarities between Argentina in 2001 before the peg to the US$ at 1.0 broke and Greece today?…

1. In an effort to import policy discipline an ill-suited, rigid fixed exchange rate is adopted. Argentina in 1991 starts peg at 1.0 and Greece in 2001 enters the Euro.

2. Domestic economic policies that are inconsistent with the currency regime are pursued.

3. End game develops as official support wanes, domestic unrest waxes, and fewer pieces on the board heighten the disparity. Further to elaborate on the US dollar comments and some posts earlier…

As mentioned based on current volatility of around 10% markets have a reasonable chance priced of seeing 1.0 in the Euro within the next 18 months.

The Euro was at about 1.40 in May, 2014 and the recent low was 1.0458 March 16, 2015. The all-time low was about .8300 in October, 2001.

In terms of direction I would ask the question of what the drivers of direction have been in the past and what the drivers of direction are likely to be in the future.

Where is the change and variant perception that may cause an acceleration in current medium term direction or a reversal?

Further, given the "blip down" US economic data relative to expectations over the past month or two and the "short term" blip up in European economic data relative to expectations who else is asking this question and perhaps acting upon it? Has the EuroUsd 1.05-1.10 range created some complacency and perhaps allowed some steam to build up?



 Today is the anniversary of the Blitzkrieg. The tactic of using an armored division as an independent assault unit was first put into practice not by the British, Germans or French but by the Italians.

It makes me wonder - again - why so wonderful a writer as Rick Atkinson chose to do the long unrewarding slog of following the American Army's follies in North Africa. Some topics are better left buried - like the Seminole War.

If you spend much time there, you come away with a sense of how thoroughly incompetent the official American Army has been whenever it could not leave the bulk of the fighting to someone else. Thank God for the citizen army.

The reward, if any, is to realize how masterful Jackson and Eisenhower were as Presidents. They both knew that Americans' vaunted capacity to fight and win wars depended on having (1) effective allies - France in the Revolution and again in WW I, the Soviet Union in WW II and (2) outnumbered opponents. Yet, each man was able to convince the rest of the world and Americans themselves that the United States had exceptional military skill. Without that triumph of marketing the country's most profitable victories - against Mexico and the Soviet Union - would not have been possible.



"The forty-eight hours after the march into the Rhineland were the most nerve-racking in my life. If the French had then marched into the Rhineland, we would have had to withdraw with our tails between our legs, for the military resources at our disposal would have been wholly inadequate for even a moderate resistance."

This "quote" of Hitler's is now being used to justify arming the Ukrainian Army. It will undoubtedly succeed because "we all know" that, had the Allies stood up to Hitler, nothing bad would ever have happened.

What will be conveniently ignored are these trivial facts:

(1) The only two European victors in WW II - Britain and the Soviet Union -both supported the German military reoccupation of the Rhineland over France's objections.

(2) The actual testimony at the Nuremberg trials of the source of the quote, Paul Schmidt, who was the German Foreign Ministry's translator.

"Considerable fear had been expressed, particularly in military circles, concerning the risks of this undertaking. Similar fears were felt by many in the Foreign Office. It was common knowledge in the Foreign Office, however, that Neurath was the only person in government circles, consulted by Hitler, who felt confident that the Rhineland could be remilitarized without armed opposition from Britain and France. Neurath's position throughout this period was one which would induce Hitler to have more faith in Neurath than in the general run of 'old school' diplomats whom Hitler tended to hold in disrespect."




 In the 19th and early 20th century the arguments against the gold standard were these:

1. It was barbarous to have the unit of account be determined by the luck, brains, sweat and the money to pay for it that gold mining required

2. Only the rich and the clever would have access to gold

It is difficult to see the difference between Bitcoin and gold mining. The BitCoin miners are clearly putting as much luck, brains, sweat and money into their work as anyone who worked the Comstock. (One notes that the actual costs - electricity - are not being paid in Bitcoins themselves but in the national money that the miners exchange for their production.) If they are not yet rich, they are certainly clever.

In the 19th and 20th century and this century the arguments for a managed currency have been the same: it will have a stable value because it will be supervised by the government.

The mine manager explains away Bitcoins' price fluctuations by the fact that the currency is in "an early stage of development"; he is as confident as any central banker that, when the Chinese government gives the currency its official blessing, it will have a "stable value".

What is fascinating to those of us in the bleachers is how successfully "stability" became the standard of monetary virtue. Even the current defenders of the gold standard believe that its primary justification is the promise of "stable value".

Nothing in the experience of work and saving even hints at the possibility that prices will be stable. And, when the Marxists get their way and the capitalists disappear, the rations fluctuate in the same way the prices once did.

Peel and Grant both knew that there was one reason only that money should be a defined weight and fineness of gold. In the world of promises the clever will always lead; but, with gold as money, the clever have to meet the simple demands of the ignorant if payment in cash. With coin, even the stupid who had teeth could determine whether or not the promise to pay had been met in full. No one, rich and poor, clever and stupid, could hope to escape the fluctuations of the market - except, of course, the people who had a guaranteed government salary and, as the government, could assure that those payments were stable in value.



John Cochrane explains it:

"The Fed may have deliberately dug itself in a hole. By buying lots of long-term bonds, the Fed will take big mark to market losses if interest rates rise, and stop remitting money to the Treasury. This is a precommitment not to raise rates. So, a good answer to "how did QE 'work'" is not just by implicitly promising to keep rates low for a long time, but by making it very hard to raise rates!"

and the sequel: 

If "respectable central banks" have agreed that no exchanges between them will be refused, then the primary risk of domestic "easing" has disappeared for those countries. Their banking systems can simply accept central bank transfers instead of customer deposits as the base on which to issue credit. The problem for the unrespectable countries is that they cannot rely on foreign counter-parties to take their IOUs. They can, like all other countries that lack a weight and measure definition of money, have their central banks redeem their outstanding debts by issuing reserves; but they can't sell their new debt to anyone but themselves. When Bagehot wrote that the Bank of England could draw specie from the moon if it raised the discount high enough, he was assuming that the Old Lady's credit rating - its ability to redeem paper with coin - was unaffected by the change in rates. If, as Cochrane argues, reserves that pay market interest rates have no monetarist effects for prices, then credit creation is now being rationed even in the "respectable" countries not by reserves but by uncertainty about repayment by anyone not already a member of the primary dealer club.



 What is striking is the shift in TOTAL preference for the Democrats. In 2008 it was +20. The best Bush II ever did was in 2003 when preference for the Democrats was only +3. But, in the last four years (2010 to 2013) the numbers have been -4, -3, +4, +5. That really is news; the Republicans have never had 4 years when party preference was statistically EVEN, not once in their entire 150+ year history. We will have to wait for the numbers for 2014, but the election results hardly suggest that the Democrats had a rebound in overall popularity.



 Whether Grexit is on or off the table, it would appear that the Greek government is boxed in not only by the EMU but also by its own electorate. At one time, I thought that whatever happened in Greece short of Grexit would stay in Greece. Now I'm not so sure. Nationalism is a theme on the rise in the EU. To what degree will responses such as this one by the Greek electorate "spill over" to other countries in Europe?

"Europe Has Approve Greece's Reform Plans"

Stefan Jovanovich writes: 

David's use of the domino theory surprises me. In the Balkans there has never been a need for "spill overs"; nationalism is all that these small, poor countries have. What you have to understand about the Greeks is that they actually do remember the Nazis. If the French, British and even Putin have forgiven the Germans and shifted to the Gaullist notion that it is all the Americans' fault, the Greeks still think about what the Third Reich and its Muslim allies did to their country. They think less about how WW II was followed by a hot and cold civil war that continued, with various interruptions, for another 40-odd years - until the fall of the Berlin Wall.

The combination of those historical memories - one remembered, one deliberately forgotten - is what allows practically everyone in the country to now have the politics of a Beverly Hills communist who has just received an audit notice for his/her tax shelter.



 I am finishing The Deluge by Adam Tooze, an ambitious undertaking of a book which covers the post-WW1 rebalancing of power on a global scale. WW1 was largely a war of feuding imperialist nations with entangled alliances. But after the war the world became a different place. One particular issue that has relevance today is that of debt. Europe was very familiar with debt with from 1917 to 1925, particularly Germany. All the powers, Germany, England, France and Britain had borrowed heavily from their populace and international bankers (JP Morgan and friends) to finance the war and reconstructions. The populace could be easily taxed or the currency devalued to eliminate a portion of the debt. The foreign debt holders, however, demanded payment in hard currency or gold and were ruthless in collection. Their was no debt forgiveness by friends or foes. The Entente (Britain, France, Russia) had their ongoing currency and gold wars amongst themselves and with the US over debt. Germany was crushed by debt during that period. Perhaps Germany's intransigence today is due to their history. No one showed them much mercy at that time.

All told today in Greece the total debt at par is roughly 400b euro. A reasonable haircut could easily be absorbed by the central banks and official institutions who own most of the debt. I think the battle is one of ideas. The German notion of aggressive self reliance and go-it-alone attitude, versus the dream of a family of nations which Wilson wanted ( at least for everyone outside the US). I predict in Europe the latter path will prevail. No one wants another war, metaphoric or otherwise. The cost of a write off is negligible when the ECB is prepared to spend 1.6 trillion euro on various paper. The 5 and 10 year Greek bonds appear to agree as they started to rally in October well in advance of the current debate and are up roughly 40% since that time.

Stefan Jovanovich writes: 

Adam Tooze has written a very good book on the Nazi economy. Now he has written a very bad one. There was only one foreign debt holder for Britain and France after WW I - the U.S. The only justification for describing the Americans as "ruthless" is the Keynesian one: the U.S. Should not have insisted on being paid back in the same money that it had lent - gold priced at the U.S. Exchange rate. The U.S. Did not, in fact, collect any war debts beyond the amounts lent to Germany under the Dawes and Young plans which were paid to the European Allies as reparations and then sent back to the U.S. Finland is the one country that actually paid back what it borrowed. Germany was not crushed by debt; the hyperinflation literally wiped out all the creditors. The reparations demanded by the Allies were large, but they were less than a third the size of the ones demanded from France after their defeat in 1870. The French actually paid, in gold; the Germans never did pay up. The British thought they could ignore their default by adopting a gold exchange standard - i.e one that only applied to account reconciliation between central banks but not to money held privately. The French and the Japanese, to their credit, actually tried to restore fully so that their money would once again be automatically exchangeable to specie. The Japanese were defeated by the Tokyo earthquake and fire of 1925; the French by the U.S. Reversion to mercantilism under Hoover and Roosevelt's planned economies and the devaluation of the dollar. The great sin of the U.S. Was not to have tried to collect the war debts; it was to have violated the Constitution by failing to value foreign coin. Without the U.S. Treasury and Federal Reserve's connivance, the New York banks would not have been able to discount francs and pounds at pre-war par; and the war in Europe would have ended by summer 1915.



 Since Eddy and her mother abandoned me for the pleasures of visiting Charlotte and Charleston this weekend, I have had to amuse myself with reading Marx and Engel's (mostly Marx's) dispatches to the New York Tribune. Poor man; if only he had lived a century or so later, I am certain he would have been able to win the Nobel Prize AND write for the Times.

It is fascinating how much Marx despises the man who gave him and Engels their claim to fame. David Ricardo's assertion that profits and wages inexorably contend with one another is surely the basis for the Marxist's "labor theory of value". Yet neither revolutionary author has even a single kind word to say about the first great English-speaking practical speculator. Neither, for that matter, does Wikipedia. One wonders why. Ricardo was an abolitionist, he opposed the Corn Laws and favored an expansion of trade as the only means by which the poor could escape permanent destitution.

There are only two explanations that I have come up with in a weekend's reading of MarxEngelian journalism (which could, with a few changes of names, easily be reprinted as commentary on the current "Greek" crisis. One, Ricardo was truly at home with international finance and counting; his father was a stockbroker, his sister a mathematician and his family, through its religious connections, had ties with Holland and Portugal. In an age when nationalist rivalries, religious bigotries and Marxian envy were as stupidly persistent as they are now, Ricardo's 19th century liberal belief in freedom and enterprise was an insult to both Right and Left. The other explanation is that Ricardo at the end of his life (he died in 1823) was abandoning the very idea of "value" that was to dominate the ideologies of economics itself. The longer he worked on the idea of labor as the basis of value, the more he came to see it as a theological question that had no practical meaning. There were only prices expressed in currencies; and markets were the only free way of setting those prices.

We are, yet again, at that lovely point where the official Left and Right can come to agreement. How can the Greeks, who are clearly unable to pay the debts to themselves, let alone those to other nations and entities, be allowed to declare bankruptcy? Unthinkable in the minds of anyone whose opinions are likely to be heard on the subject. In the great game of central bank cold warfare, such a surrender to the speculators would be an absolute heresy. Leaving Greek enterprise and labor to find their best prices would be anarchy. Leaving the discounting of the various monies used to price that enterprise and labor and "capital" would be absolute anarchy. Everybody with a proper education knows that the fluctuations of credit can be restrained; it simply requires wise administration by people with the authority to own the means of production or regulate the measure of capital (choose One).

Whatever the current solution to the crisis of "Grexit", the end resolution remains the same: default by the borrowers and– depending on their perceived leverage– large or small trouble for the lenders.

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