This excerpt about Yogi Berra is from "The Last Catholic in America" (1973), a book I have treasured through the years as the author was in many ways my youthful, angst ridden doppelgänger, and Bapa, the grandfather who shared it.

The first man Billy Pierce had to face in the top of the ninth was Tony Kubeck. On the first pitch, Kubek hit a high chopper to White Sox second baseman, who threw him out by twenty feet. The next Yankee up, Bill Skowren, also swung at the first pitch and lined it right back to Pierce.

The White Sox were now one run away from shutting out the Yankees and Whitey Ford! One out away! Just one!

Then Mickey Mantle, the clean-up hitter, drilled a single to center field. Two out, a man on first, and we still led the New York Yankees by one run. One more out and it would be all over. Just one more.

Slowly, the Yankee kneeling in the on-deck circle got up and began moving toward the plate, waving four or five bats around his head. His squatty legs had apparently forgotten to keep up with the rest of his body. His beefy shoulders almost hid his neck.

As he stepped into the batter's box, he threw four of the bats behind him and leaned the chosen one against his shoulder. Yogi Berra was ready.

Billy Pierce checked Mantle's lead over at first. Then Pierce pulled both feet together and proceeded to slowly rear back on his left foot, stretching his left arm so far behind him that he appeared as if he were going to knock the center fielder's cap off. At the peak of his windup, Pierce's body became momentarily motionless. An instant later, Pierce started leaning forward , his arm came racing over his head, and the hand released the ball as the windmill lash of his body sped it toward the plate.

The ball was coming low and outside. Yogi Berra stood dumb. The ball was almost past him. Suddenly, the springs unleashed in Yogi's wrists, the bat ripped off his shoulder, and the smack of bat on ball migrained through the park…

I looked back toward the field. The ball was just beginning to come down. That familiar thud of Minnie [Minoso] went plowing into the wall and crumbling at the base of it. The ball landed in the upper deck, fifth row, seventy feet over Minnie's head. A two run homer.

As Yogi went into the dugout, a few of his teammates patted him on the behind as he walked by. None of the Yanks seemed too terribly excited, though. Pros don't get excited…Already the crowd was moving towards the exits even though the game had half an inning to go…By the time we reached ground level, the final score was being announced: New York Yankees 2, and the White Sox 1.

"Well," said Bapa, "one more time and Minoso will tie Wallerson's* record."

"Think he'll make it, Bapa?"

"Oh, I think so. Minoso's got the head for it."

*Woody, 'The Wonder' Wallerson, established the record for being carried off the field unconscious after running into the outfield wall seven times in 1914.



 The sentence passed on Dinesh D'Souza —the filmmaker, writer, and outspoken critic of President Obama—for violating the laws relating to campaign finance, I was horrified to read was the following: "As part of his probation, Mr. D'Souza will also be required to undergo therapeutic counseling."

From Wikipedia: "In the Soviet Union, a systematic political abuse of psychiatry took place and was based on the interpretation of political dissent as a psychiatric problem. It was called "psychopathological mechanisms" of dissent."

Punishment is not therapy; crime is not disease. The Soviets thought that dissent was crime and crime was disease: therefore, with them, dissent was disease. We have not yet reached that point, but "therapy" for illegal campaign contributions is coming uncomfortably close to it.



The difficulty of getting back in once you have sold in stocks is underlined vis a vis the buy and hold strategy, as well as the fate of short selling, as well as timing— by the fast 50 point move in stocks today.

Gary Rogan writes: 

It seems like generally speaking one should either trade, as in being in and out "often" or buy and hold. Buying and holding except for periodically being out or short seems to be what Victor is addressing, and I have always been suspicious of "market timing". All it takes is getting it wrong once, and you are in a hole that's expanding for a long time.

I'm still curious how Victor was so sure there would be a deal.

Anonymous writes: 

What was the effective date of the STOCK Act to ban congressional insider trading, I wonder. As a staffer, one could have slapped the emini around harder the Khan brothers squash ball.

Victor Niederhoffer replies: 

Let us hope that the profits from such activity were sufficient to assuage any such desires for a few days.

Russ Herrold writes:

The dance is a re-run and in prior seasons, the cliff is avoided. Sitcom writers can re-cycle plots endlessly.

Kim Zussman writes: 

It's the binary conundrum of markets:

Buy the rumor / sell the news (or buy the news)
Buy and hold (or sell and sit)
You can't time the market (but some can)
Stocks beat bonds (except for the last decade)
Printing presses lead to disaster (which may not come in our lifetime)

The President of the Old Speculator's Club writes in:

I heard a Congressman speak recently and have to admit it was an enlightening experience. Traditionally, members display a certain amount of restraint when speaking of colleagues with whom they find grievous fault. In a refreshing departure from good manners, this gentleman took the gloves off and bluntly stated that a goodly number of his fellow representatives are less than bright. The word "clown" came up several times and "stupid" might have been slipped in.

Although he artfully avoided specifying individuals or party, I couldn't help but believe that he, like many in the "beltway", had come to the same conclusion: the arrival of the Tea Party contingent has been nothing short of a national disaster.

Unsurprisingly, the congressman's public and scathing view is shared by the current establishment elite. (It's dangerous to out there and speak your mind if what you say is out of step with the conventional wisdom.) His case is provided with added cover by a host of recently published and similarly themed books ("It's Even Worse Than It Looks", Mann, "Do Not Ask What Good We Do", Draper, "Beyond Outrage", Reich, and "The Party is Over", Lofgren).

However, the "fiscal cliff" isn't a maiden making her debut. We've had two relatively recent encounters with her; so her charms, though formidable, are familiar. Her appearances in '91 and '95 were just as awesome and, as expected, so compelling that one of the parties bit into the proffered apple. Unfortunately, the fruit, which is bitter and often fatal, is the produce of the tree of Folly. On this most recent visit, though, she is confronted by a group so naive and simple that her blandishments have gone unrequited.

In any event, it's apparent that the respect (whether real or faked) House members used to show each other, at least in public, has been thrown over for a newer, more aggressive, in-your-face approach. Long gone are the clever and informed debates which provided a rich mix of facts, history, and truth. It seems important to figure out why this has developed and if, in fact, a functioning government is still possible.

If one studies what the House has been in the past and what it has evolved into, it's impossible to overlook that this body has lost, or given up, much of it's power and authority. The growth of the executive branch (the Imperial Presidency) is one factor. Back in '96 the congress and the president worked long and hard to create the first welfare reform package. Contrary to forecast of terrible consequences, the new programs worked well.

Yet, in one day, an Executive Order by the current president re-established the old, failed programs. Another assumed power has been the declaration of war, and the most recent threat: unilaterally raising the ceiling on the debt.

While the Executive Order has been increasingly utilized to usurp powers constitutionally granted to the House (and Senate), the greatest loss of power has been though Congress' voluntary abandonment of authority to "regulatory agencies."

Figuring that some issues were just to tough, complex, or time consuming, the country has had foisted upon itself the EPA, FDA, TSA, USDA (with 20 sub-agencies within it), the Dept.of Commerce (with 17 sub-agencies), Dept. of Defense (with 32 sub-agencies) and the list goes on and on. Each agency is staffed by unelected individuals, many with their own agendas, who dictate new regulations that possess the force of law. It's understandable that so much work has to be delegated, but to give it to agencies that are unanswerable to the body that created them is inexcusable.

Then, of course, there is "party discipline." Sam Rayburn of Texas, Speaker of the House for many, many years, gave each incoming freshman representative of his party one piece of advice: "If you want to get along, go along." And they did. Those that didn't faced many difficulties: in committee assignments, in getting their legislation to the floor, in receiving party re-election funds, and they'd be high on the list of targets should redistricting become an issue.

Unfortunately, this approach worked, and worked well. As a result, many constituents found that the views they wished their representatives to promote in D.C., took a back seat to the views favored by the party leaders - many of them from different parts of the country with substantially different interests and goals. The "house of the people" became a house held hostage. Matters reached a new low in representative government when the other party adopted the same process.

Then 2080 rolled around and enough citizens, aggravated at the apparent unresponsiveness of their representatives, threw them out and ushered in the Tea Party. A delicate balance has been disturbed and the Dysfunctional Couple, used to newcomers adjusting to them, failed to realize that these clowns - these yahoos, actually believed in what they'd declared. Whether they win or lose, prevail or fail, their chances for another re-election are small. But for a brief period they have served as reminders that doing the people's business is serious business and that a promise made is a debt unpaid.

For a brief period this collection of vagabonds has added a dose of virility to a confederacy of eunuchs.

As to the President's actions in the recent negotiations, he did nothing, offered nothing…he arrogantly summoned everyone back to D.C. Most came back assuming he had a proposition - he didn't - even CNBC's John Harwood was a little taken aback at the presumptuous gesture. Some time back I suggested I was all for giving this guy everything he asked for - and then letting him perform as he has suggested he would. He has received almost everything; now it's time to lead. This from a guy who, in his short term in the Illinois senate, voted "present" on over half the bills that went through. He is structurally averse to taking a position - preferring, instead, to demonize his opponents.

So, first time at bat, he (and his faithful followers), are hand-wringing over what roadblocks the GOP will/might place before a debt ceiling deadline is reached. It's time he quit talking and started doing.



The trophy

The awarding of the trophy to The Artist shows how 100% of voters are tilted towards the "change man". The trophy had to go to the show that had the least attendance during the season to keep man small, and to show how the public is stupid, and how the arbiters in the academy are on a higher plane of significance, a higher aesthetic than you and I.

How long before they all get invited to the Oval, and how consistent with the idea that has the world in its grip, and how bearish for the long term market.

John Tierney, the President of the Old Speculator's Club, writes: 

Considering much of Hollywood's output, it's surprising The Artist didn't also capture Best Screen Play….

Victor Niederhoffer adds: 

That's funny, Mr. President. But The Academy Awards is in the main a profit making deal which must cost 1.5 million a picture to enter, considering the perks and costs. The 1.5 million for the lowest budget film, The Artist representing a 10% capital contribution has the higher return to that input and is show in to win if it shows how deficient and low brow the public is in its taste. How beautiful to give it to one without talking that went out of style 100 years ago to show how we need redistribution and a raising of the capital gains rate as a solution to our problems.

Vince Fulco writes:

I was discussing a similar matter with someone this weekend re: Gingrich's plan for $2.50 gas. While not focusing on any one political party, what is it about the US citizenry that keeps them accepting (broken) promise after (broken) promise? Thereby guaranteeing they'll stay small.

Pete Earle writes: 

I suspect that the GAP's ability, and willingness, to get snookered by political actors and parasitical systems time and time again is the dark side of what, turned over again, is an exceptional ability and willingness to imagine enterprises and undertakings which in many other places would be cast off as unrealistic, insurmountable, or unnecessary.

Essentially, I believe that productive/entrepreneurial optimism is yin to political optimism's yang.



 It is, as usual, all about money. One has to question how a relatively poorly paid maid, already represented by NY's formidable prosecutorial team, found it necessary (or affordable) to hire barristers Kenneth Thompson, Jeffrey Shapiro, and Norman Siegel to represent her interests.

True enough she has since economized, releasing both Shapiro and Siegel, while retaining Thompson (who gave a real stem-twister presentation of her case immediately following the NY announcement that GSK would be given a longer leash).

The points underscored by Thompson clearly indicate that while the criminal case may be in doubt, the civil case still has legs. The always-available Susan Allred was brought on to re-emphasize the important "preponderance of evidence" guidelines that make civil cases (supposedly) easier to win.

However, there are still a few rarely referenced voices out there harping on the fact that besides GSK's "threat" to Sarkozy, the man had expressed the heretical idea that perhaps the bond holders, and not the public, should be tagged with any losses incurred with past and present bail-out packages.

In short, a dangerous man (to certain political and financial interests) has been effectively removed from the board. Frankly, what I find most disturbing about this case and other similar ones, is the government's increasing willingness to "leak" highly prejudicial information well ahead of it being substantiated.

Topping off this questionable (if not unethical) conduct is the burgeoning of coverage by Nancy Grace and her spawn. These so-called "legal experts" and their guests remind one of Madame Defarge (with little possibility of her eventual comeuppance) and her compatriots.

Sad to say, my wife is a huge fan of this programming (Casey Anthony being the villainess du jour). If that case, or any other like it, ever ends up with a hung jury (an unlikely event), one wonders if much of the jury pool for any subsequent trial is irrevocably poisoned.

I sure as heck would give serious consideration to pleading down (regardless of my innocence and/or bankroll) before giving those supposedly non- biased vultures a second crack at my bleeding (but still-breathing) body.

Stefan may disagree, but the price of justice is just way too high for the average guy to get his (equitable) day in court. Many of us would stand a better chance if we were to go back to "trial by ordeal." There, though overmatched against a seasoned knight of the realm, we might get lucky with a wild swing of the broad sword. Though unlikely, the procedure would be faster, far less expensive, and neither party would have to share with an "advocate" whose interests might well not extend beyond the pecuniary.

Rocky Humbert writes:

Although these pages were filled with cynical comments regarding DSK; there has been "radio silence" since we discovered that his rape accuser has a credibility problem (to say the least). My point is not to criticize fashionable Speclist cynicism, but rather to salute the hardworking (and comparatively low-paid) lawyers in the NY District Attorney's office on this Independence Day weekend. The DA has a sworn constitutional duty to upload our laws — and when he discovered that his case had some serious problems — the office promptly disclosed this to the Court and the Defense — rather than burying the facts in a back desk drawer (and hoping the defense wouldn't find the same facts.) If this case is dismissed (as it should be — in a he-said/she-said case where the accuser has no credibility and/or is deported for immigration fraud), then it will be an embarrassing political setback for Cy Vance Jr. (the DA), but a testament to the greatness of the US criminal justice system. Lady Justice is not only blindfolded, but her head swivels too! 

Here is a copy of the DA's letter. It says that the DA's investigators discovered DSK's accuser:

1) Lied abut her whereabouts and activities after the tryst…

2) Admitted to felony tax fraud.

3) Admitted to perjury regarding on her asylum application to the USA.

4) And other juicy tidbits….(And she had a good lawyer too.)

Marion Dreyfus writes:

Tarnishing one's reputation is a huge malevolence that cannot be expunged easily. I abhor women who accuse their soon-to-be-ex husbands of rape or abuse of their minor children if these are false. These charges are beyond ugly, and the man is often pilloried with no proof of wrongdoing– such women ought to be jailed and fined if their lies are uncovered.

He may be guilty, but her new facts are certainly exculpatory for his having 'raped' or 'forced' her– she was deliberately gunning for him, and she was less a maid than … made.



 Probably forever, roughly every week, Barron's has an article about a few big cap stocks that they say are pretty good bargains. What's different about the articles over the past year or two though is that they seem really compelling. That's true even now, after a big market rally.

This week's article is about drug stocks. Typical of the stocks they mention is Abbott, listed with a p/e of 10 on 2011 earnings and a 3.9% yield. All of them–Bristol Myers, Lily, Medtronic, Merck, and Pfizer–have similar numbers, yields higher than the 10-year treasury and P/Es around 10 give or take. They also list some European firms, AstraZeneca, GlaxoSmithKline, Novartis, Roche, and Sanofi-Aventis, that look even cheaper. E.g. AstraZeneca is at a P/E of 7.3 and yields 5.2%.

The point of the article is that some of the firms could help shareholders if they would do some restructurings, spin-offs, break-ups, but what struck me instead is that they are look surprisingly cheap as they are. Seems to me that a lot would have to go wrong for these to do poorly compared to bonds over the next 10 years.

Vince Fulco writes: 

That has been David Einhorn's contention for some time at least on PFE. I.E. the bad stuff is already well known.

Bill Humbert writes:

I suspect this situation of high dividends will continue for some time, but the causes are not being dealt with. The system, by which I mean the internal processes used in drug discovery, is broken.

All that is being done is shuffling managers in and out. Each old set of managers floats off on their golden parachutes. The new managers talk and talk but do not make real changes to return the system back to the productive way research used to be done. The industry will slowly decline, have more M&A, and golden parachutes, until eventually the internal research organizations are disbanded.

PFE is already chopping internal research hard. The big pharmas are turning into development and marketing organizations and will shed research completely. Once they all do that, it will be fascinating to see where they will get molecules to develop.

The biotechs are hurting bad. More than a few went under, and many of the remaining ones have had their research organizations corrupted by the amazingly stupid management practices of big pharma. Lots of big pharma people went to the biotechs and wrecked them, too.

Check this out. Some data on the drug industry:

Figure A: # new drugs by year

NME = new molecular entity (new drug, although its structure could be closely related to that of an existing drug, i.e., a me-too drug)

The industry is about half as productive as it was 10-15 years ago.

Figure B:

Pfizer R&D spend

"You can see that Pfizer's R&D spending has nearly tripled since the year 2000, but that cumulative NME line doesn't seem to be bending much. And, as Munos points out, two (and now three) productive research organizations have been taken out along the way to produce these results. It is not, as they say, a pretty picture."

Alston Mabry writes: 

As long as it's the weekend and we're kicking around stock ideas…consider TEVA: They will get huge new opportunities from the blockbuster drugs coming off patent, and they've been growing revs and earnings like crazy. They play well to the "rising cost of healthcare" theme, and they are global. You're buying growth, though, not dividend.

Dan Grossman writes: 

1. The Barron's article makes no sense. If a company is about to lose half its earnings because the patent on its most profitable drug is about to expire, how does it help to sell off products or a division where earnings are not expiring?

2. Teva is in much the same position as Big Pharma. While known as a seller of generics, more than 30% of its earnings come from its non-generic multiple sclerosis drug Copaxone, which will soon face generic competition itself resulting in disappearance of these profits. Only Teva has been a lot less honest about this than Big Pharma.

John Tierney writes:

….The problem is that they have failed to deliver any important new and important blockbuster drugs for years.

Right on the money. Some blame, though, must be placed on the FDA. This story from the NYT elaborates:

Medical device industry executives and investors are complaining vociferously these days that the industry's competitive edge in the United States and overseas is being jeopardized by a heightened regulatory scrutiny.

The F.D.A., they and others say, appears to be reacting to criticism that its approvals for some products had been lax, leading to a spate of recalls of some unsafe medical devices, like implanted defibrillators and hip replacements.

Device companies have been seeking early approval in Europe for years because it is easier. In Europe, a device must be shown to be safe, while in the United States it must also be shown to be effective in treating a disease or condition. And European approvals are handled by third parties, not a powerful central agency like the F.D.A.

This article follows another that the Times published (which I can't find at the moment) last week revealing that the two drugs most commonly used for surgical anesthesia are both made only in Switzerland. The drugs are no longer being made available since Arizona, running short of the primary drug, bought some from an independent supplier, and subsequently used it in an execution– a big EU no-no. As a result, Novartis, with no control over their customer's distribution, is refusing to sell any more in the states.

The article concludes by noting that venture capital spending on the medical device industry in the US dropped 37%. Yet billions and billions are sitting on the sidelines ready to pounce on the next techno-dweeb with a social networking idea. 

John Tierney adds: 

The study, covering 2004 through 2010, found the overall success rate for drugs moving from early stage Phase I clinical trials to FDA approval is about one in 10, down from one in five to one in six seen in reports involving earlier year.

Roger Longman comments: 

Guess I sort of agree.

But issue is that while downside isn't huge, the likelihood of some price decline is possible while near-term upside unattractive since tied so closely to successful product launches. BI is only company with really great recent news (launch of Pradaxa, which will likely be a blockbuster) — but BI is private. Bayer/J&J got great news on recent competitor drug — but launch some time away and by then BI will have sewed up most of the new prescribers. Novo could do well, given extremely successful launch of Victoza — but success probably priced into the stock. NVS has Gilenya (innovative small-molecule MS drug) but reports are that it's had a troubled launch because hadn't solved the neurologists' problems with cardiac monitoring when starting the therapy.

He's right that people could buy them for the dividends but I'd wonder if the potential downsides in the stocks might not negate the effects. Stuff can and will go wrong. Merck, for example, has lost a significant chunk of the future value of SGP acquisition thanks to poor launches of Bridion and Saphris, disadvantages of boceprevir vs. Vertex's telaprevir, and — the cause of its most recent stock problem — failure of vorapaxor (most important drug in SGP pipeline).



 Kids Believe Literally Anything They Read Online:

Anyone can publish anything on the Internet. Despite that, children aren't taught how to evaluate the reliability of information they read there. As demonstrated by a recent study, this is true to a shocking extent, and there may be dire implications for the future of today's young people….Donald Leu, professor of education at the University of Connecticut, selected 53 of the best readers from seventh grade classes in low-income school districts in South Carolina and Connecticut.

The page in question was devoted to an animal called the Pacific Northwest Tree Octopus. Yes, a tree octopus – an aquatic animal that allegedly lives in trees.87.5 percent of the seventh-grade subjects judged the Web page to be "reliable." More than half went so far as to call it "very reliable."

Victor Niederhoffer writes:

The octopus is very smart and could climb a tree if food were there, and it could get back to water in due time. One at the British Museum did that after opening its locked cage each night. That is one reason I am very abstemious in my eating of octopus.

Mark Schuetz adds:

It is a little disappointing that the article singles out the younger generation and web pages (Title: "Kids Believe Literally Anything They Read Online") instead of consumers in general and any form of media. As hinted in the subject, one wonders how many adults who worry about kids' "Critical Evaluation Skills" while browsing the internet would at the same time find a TV news segment about the tree octopus fascinating. Compare how sources are more often cited in Felix Salmon's blog than on CNBC– not to mention the comparison of number of factual inaccuracies (and subsequent public corrections) when comparing the two.

Similarly, compare reading one of the Economist blogs paired with browsing the much-hated Wikipedia ("Anyone can write anything! Horrible!") to gain a perspective about world events to watching Fox News.

Perhaps instead of shaking their heads in shame about 7th graders and targeting the internet, the article's author should consider how people of all ages watch segments on television or read their local paper, or really consume any type of media.



 London & Hong Kong Traders:

Open interest has fallen almost 30%, but gold has only dropped 6%. Normally if you are a short in a market and you start to have an asset correct because of significant liquidation, you will see a precipitous drop in price. Given the sheer volume of contracts that has been liquidated, we should have seen a massive correction in gold. Instead it has stayed incredibly strong.

More here.

Larry Williams writes:

Open interest rallies or declines must be put into perspective of who is causing the OI move, which group of traders…to just mention OI w.out background is not a full meal.

Rocky Humbert writes: 

I would add the following to Larry's comment — which is something that makes today's markets quite different from decades past — and which changes the character of OI and CFTC commitment of traders data.

In a futures market, the long positions must EQUAL the short positions. Hence it's a zero sum game. This is not true in the physical gold ETF!!!

For example, when a long liquidates his gold futures, the short is also liquidating his short position. And the open interest declines. Larry and Anatoly believe that there is predictive information in this.

However, in the gold etf, there is no genuine reduction in open interest. Instead, when an ETF long sells his gold ETF position, the gold leaves the ETF system — and the physical gold finds its way to another holder outside of the ETF system. Because gold is (mostly) not consumed by commercial end users, the gold remains in existence in perpetuity. In theory, in a futures market, if the open interest is zero (and remains at zero), the price of a commodity will not change. The price will just sit there. However, in the case of physical gold, the open interest can never be zero — since the physical bullion will continue to exist (whether inside or outside of the ETF system.) This means that gold (whether entering or leaving the ETF system) has a quasi-permanent open interest.

None of this is necessarily predictive of the gold price– however, it's important to understand that the CFTC data on gold futures open interest misses this nuance. 

Larry Williams: 

Great points, thanks for making them.

Who are the players in the ETFs? Relatively small specs, I assume.

And on gold consumption it is consumed, not like wheat, but the physical inventory is turned into rings and things so the inventory needs to be replaced my commercial users. Commercials do take delivery. 



 Just got done watching Juan Enriquez explain the future of genomics.

While the money-shufflers continue to promote the "We're out of the woods" scenario, take a look at this video ("seven years later") and see what a real entrepreneur is doing.

I've had him (Juan Enriquez [Cabot]) and his VC firm (Excel Ventures) on my Google Watch List for several years now. One might enjoy a couple of meals; while de Grey and Kurzweil remain in the prophetic camp, Enriquez is producing and investing in real advances that continue to remain little reported in spite of their potential to re-arrange much of our thinking.

59 minutes well spent.



Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely.

"Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."



 A stimulating excursion from the President. Vic.

John Tierney writes:

I read an interesting article today regarding two small Moroccan enclaves, Ceuta and Melilla, over which the Spanish have retained control for years. Franco refused to cede control as the location is at the southern entrance to the Straits of Gibralter.

The Moroccan government wants Madrid out; Moroccans, even many of them Muslims, want Madrid to retain control.

In and of itself, the story isn't especially exciting or interesting. In 1960 few had ever heard of Quemoy and Matsu; the islands, about the only territory that Mao hadn't wrested from Chiang Kai-Shek, controlled the Taiwan Strait. However, in the Kennedy/Nxon debates of that year many claim it proved pivotal in the outcome of the election…and, hence, reshaped history (what would a President Nixon have done about the Bay of Pigs, the Berlin Wall?).

Going back a little further, few had ever heard of Archduke Ferdinand. Whether true or not, his assassination is widely attributed to the outbreak of the First World War.

Interestingly many of history's major upheavals were triggered by seemingly trivial events. Like the one additional grain of sand that brings down the whole pile. For a while I have kicked around the idea of a website with a name like "The Final Grain."

However, I'm nowhere near worldly enough to even grasp a fraction of the potential locales or personalities that circumstance might place in the center of a world altering event.

However, postings from a multitude of intelligent, widely dispersed individuals with a multitude of different experiences, opinions, and contacts might create some interesting speculations on events that the conventional media would never think about twice.

Feel free to run with it…



 Distrust of Russia is not new. The belief that the cold war ended in '91 and that the Russian bear is now a docile, world loving nation with no international ambitions is new…and, I believe, mistaken.

We went from crawling under desks during mock air raids to worrying how we would spend the "peace dividend." Yet the country remains under individuals who comprised the leadership of the "defunct" KGB.

Today's Moscow Times quotes Putin as saying in a Larry King interview that : "I want to give some advice to our colleagues: Don't interfere with the sovereign choices of the Russian people."

Yet Russia feels no compunction about dictating ours. If we don't comply? Medvedev from yesterday and from the same article: …failure to develop a joint European missile shield with NATO could create an arms race in the next decade and force the Russian military to deploy new offensive weapons near the borders of the security bloc.

What would Sun Tzu do?



 No car idled in the parking lot as Sean Mac Breen exited the train…not unusual. No one answered his call home…very unusual. Though rarely received with excessive familial warmth, Sean was accustomed to a modicum of hail-fellow-well-met cheer on Friday evenings. It was, after all, payday. For the past year, the oldest brother's paycheck, though modest, promised to keep the wolf at bay for one more week.

Perhaps the Old Man, Connor Mac Breen, had finally found a position for the chemist he had been sending out on interviews for the past two weeks. He was hawking the young man for $13,000 a year. Success meant a ten percent commission, split equally with the engineers-only head hunter firm.

If this was the case, experience dictated that he would be found in the Deer Blind Tap, sipping vodka and sharing the wealth. Though checking this out entailed adding another mile to an already tiring three mile hike, Sean took a chance. Had it been December rather than June, he would have chosen otherwise. No one living in far northern Illinois walks an extra mile in winter.

As he entered the Tap, owner Charlie Guzack, who seemed to know the exact age of every young man in Sylvia Lake, greeted him.

"Sorry, Sean, you still have another year before your legal."

"I know, Mr. Guzack," said Sean, " I thought I might find Dad here."

"Not tonight. Haven't seen him in several days. You might check the bowling alley."

That received a hearty laugh from the several patrons. It was no secret Mac Breen's father regarded bowling as a pseudo-athletic exercise pursued by those who could do nothing else. That one of the town's best bowlers was legally blind lent this observation a gram of validity. Nor was it a secret that a goodly number of bounced checks had made the elder MacBreen unwelcome. An unfortunate circumstance since located in a dark nook was a pinball machine that the Old Man had mastered and viewed as a small, non-taxable annuity.

As he headed out the door Sean was followed by Lou Hahn, the local vet.

"I saw your Dad with all the kids early on Wednesday heading toward the Expressway. Had one of those rented trailers hitched to the back, too. I waved, but he ignored me…again."

"Probably thought you wanted your money," observed Sean absently.

"Naw, gave up on that a long time ago."

Though he didn't show it, Sean was jolted by the information. No one in his right mind would hitch a trailer and load four kids in a beat up '48 Plymouth and expect to get far. But then someone running from something might well try something that stupid. He headed home.

By the time he arrived it was completely dark; as was the house. All the drapes and blinds were drawn and little looked different…other than the new locks on the front, rear, and basement doors. It seemed that the other shoe, airborne for so long, had finally landed. The MacBreens had broken the most sacred of American covenants and been pinned with the appropriate scarlet letter "E"… for Evicted.

This was a communal sin shared by all family members. The money borrowed was not from some New York facility but from the bank in town. The bank where Sylvia Lakers saved. The MacBreen's hadn't stiffed the bank, they had stiffed their neighbors.

Actually, the event should have occurred much earlier but Sean's mother, Maria Therese, was a very much admired woman in that small community. Not that admiration is enough to warm the heart of a banker. But any woman with terminal cancer and four children under 10 presents the flintiest banker with an image problem. So they waited six months and then dropped the hammer.

With this in mind, Sean had little choice but to hike down the road to the home of his nearest neighbor, Carl Brenner. He hoped to get some more information but it was an encounter he had been avoiding for two years. Carl's son, Dale, had been a neighbor and classmate for six years; in that time Sean had probably spoken with him on a dozen occasions - and then only briefly.

Dale was always a quiet guy who never joined anything nor seemed interested in much. He never spoke in class unless called upon to do so. The space beneath his picture in the senior yearbook was blank. Three days after graduation Dale committed suicide. Although his father never said anything to us, it was common knowledge that he felt Dale's classmates' collective refusal to even once extend a hand of friendship played no small role in his ultimate decision. At the time most thought he was nuts; Sean wasn't so sure.

Brenner was sitting on the porch when Sean arrived.

"I've been expecting you, Sean. Have a seat. Want anything to drink?"

"No thanks, Mr. Brenner. Why were you expecting me?"

"Your father dropped by with something he wanted you to have," said Brenner, handing Sean a small box.

The box contained two prescription bottles and a note with a short message: "Consider the renewed prescriptions a gift. Don't bother going to the bank, don't call me at work, and don't look for us."

The note, though brief, was revealing. First, Sean, an epileptic, may have temporarily forgotten about his meds, but the Old Man hadn't. Of course he hadn't. Both were inordinately expensive and a never-ending drain on the family budget. They also provided a regular reminder that the unexpected inheritance which appeared to be a godsend a decade earlier had been immediately dissipated by the necessary brain surgery. Though Sean survived, a lot of dreams died on that operating table.

The more jarring element in the note was the mention of the bank. As a serial check-kiter, Connor had been rejected by every bank in a three-state area. Sean, along with Maria Therese, did the family banking; for the past six months Sean carried on alone. The check writing consisted of little more than paying the utility bills and auto insurance.

Yet with Maria Therese's death, Connor had shared less and less of the few commission checks he had since received. As a result, mother's old friend, Virginia, from the water company, was once again alerting the family to imminent shut downs. It's amazing how quickly a disciplined family can fill every tub, sink, pot, pan, and bottle. (Glass bottles were still the standard container; we had six, all of which were filled weekly with the much cheaper, unpasteurized product from a local farm.) For reasons Sean could never discover, the electric company was more compassionate and gave a week's warning when they were moved to act.

Well aware of his father's ability to con the unwary teller, it appeared that the Old Man had tapped out the checking account. However, of greater concern was the secret (he hoped) savings account he had opened three months earlier.

"Mr. Brenner, did he say anything at all?"

"Nope. Just thanked me and drove off." He paused for a moment and went on, "I'm assuming you still have business to settle and it's obvious your place is shut tight. If you need a place to stay, you're welcome to use Dale's old room."

Sean could certainly "use" Dale's old room, but he doubted he could sleep in it. Among his several private pursuits, Dale was manic about his model planes and ships. While most of us made the occasional attempt, we were satisfied to finish without any left-over parts. Dale not only finished but went on to give each a custom paint job, secure it from the ceiling (or to the wall), and dust it weekly.

Dale had taken on a presence he had never possessed in life. Hamlet fondly remembered Yorick for carrying him around on his back; Dale, Sean felt, was a painful memory riding the back of his once-indifferent neighbor.

"Mr. Brenner, we've talked more tonight than we ever have in the past seven years; but I know from others that you feel we - I - treated Dale poorly and I'm curious why you're being so nice?"

"I'm surprised at you, Sean. You're about the only one of Dale's classmates I still see at church on Sunday. Don't you listen Father Pearce's words? Or are you there to admire the subtle charms of Cindy Broderick?"

"I don't know that Cindy's charms are that subtle. And Father's repeated pleas to cling to the Golden Rule are hard to ignore -especially considering the downside. Frankly, it's easy to suggest it, but just about impossible obey. I mean I continually forgive Cindy for ignoring me for the past three years…so it's not totally impossible."

"Keep working at it. You're still too much like your father. Continue on and you'll turn into a real jerk, too."

"Sounds like he remains unforgiven."

"Not so," said Brenner with force, "it's easy to forgive cripples. Your father is a very frustrated man. He was going to be a real star - but Hitler and Mussolini screwed him up and he never got over it. The war did that to many, but most overcame it. A few, like Ted Williams, came back and triumphed. The rest of us just had to pick up the best we could. And, frankly, we've done quite well in spite of the early inconvenience - if that's the right word."

"How about "bad luck" instead?"

"No, no, no. Nobody born in this country can ever, ever plead 'bad luck.' Almost anyone born anyplace else might lay claim to that excuse. But to be born in America during this century - well - go pick up Thucydides, Herodotus, Josephus, or Gibbon and discover how miserable a world you could have been born into."

"You're beginning to sound like a history or philosophy teacher…"

"Once upon a time I was."

"And you gave that up to be a firefighter?"

"Oh, yes. Better pay, better pension, better hours, and the public I deal with is a lot more grateful, rarely criticizes my style or personality, and never claims to be able to do it better. And if I get hit in the head with a brick, it's almost certain to have come from a damaged building and not a vengeful teen…anyway, let's call it a night. I begin my next 48 tomorrow at ten and I'll drop you in town on my way."

 It was a long and revealing night. In addition to the models, Dale had put together a substantial library. In addition to the adventure classics Dale had read were a number of old beaten up selections: Rider Haggard's "She (who Must Be Obeyed)", Gogol's "Taras Bulba", Spengler's "Decline of the West", and Hugo's "Toilers of the Sea". The real discovery was Giuseppe di Lampedusa's "The Leopard" which he spent the greater part of the night reading and was given permission to borrow.

As he feared, the Old Man had not only found his savings book but also a pliable young teller. Surely this gentleman with four young children in tow wouldn't attempt to swindle the bank. And, yes, he had heard that the MacBreen's were moving on so the request to close both checking and savings accounts seemed reasonable. Sure the names weren't identical but everyone knew Sean was still a minor and that he would certainly defer to his father. Especially since he was driving in to Chicago specifically to pick Sean up for their destination "out west."

Had it happened to almost any other patron and the bank might have been willing to deal. But the MacBreens weren't just regular patrons; they were deadbeats. And the bank president, rather than being apologetic, was outraged that Sean would even contemplate hiring an attorney. No local attorney would accept him as a client and were one to come forward what would he use as a retainer?

He reluctantly withdrew and realized that the Food Stamp Pyramid would have to be rebuilt. No big deal. His loss amounted to $882, but with his $750 in working capital he'd have it back in a year. How does money compound at at roughly 9% per month?

Any government program offers untold wealth to the person in the right place at the right time with cash on hand, patience, and modest goals. It began innocently enough at Sean's first job in a mail order house. His duties consisted of receiving an invoice listing the ordered products and the products themselves. There could be as few as two items or as many as twenty. The first procedure was to check the invoice against the products provided. Half the time items were either missing or had been duplicated.

After assuring the correct items were present, he picked a box that could most economically fit all the items.The larger the box, the more the postage, the less the profit. Too small a box couldn't accommodate enough cushioning newspaper and led to broken merchandise, customer anger, and less profit. With newcomers like myself, the floor manager, Claude Harper, provided the box he felt would be most appropriate. His judgment was generally quite good but on occasion slightly off.

In Sean's case, they were all off. He was told it was an easy job and one he'd quickly learn. What Sean failed to appreciate was that this was still the "slow season" and his fellow workers, all from well south of the Mason-Dixon line, loved to haze the new kids. The truth was made known after two days but he couldn't understand why Harper would allow the deliberate accumulation of wastage that occurred in those days.

A week in the lunchroom taught Sean why. Old Claude was quite a pinochle player and each day did his best to fleece his employees out of their $1.60 per hour. On those occasions when he found himself losing he merely told his opponents to ignore the bell and play on. While the rest of us returned to work, Harper had his assistant punch in the remaining players and the game continued.

Lunch wasn't a big deal at first as Sean didn't have enough money to buy it. A round trip ticket on the Milwaukee Road cost $2.80 daily -a monthly ticket $42.30. The only money he had was in his coin collection and since the Old Man had assured him his aunt was sending a check for both their travel expenses, he sold enough Morgan quarters and halves to pay for a week's transportation. The downtown coin dealer Sean dealt with - and the only one within walking distance of the office - gave him less than fair value.

With nothing to do but sip coffee and read Sean noted two men always sat a table far away from all the other employees, addressed each other in an unfamiliar tongue, and ritualistically prepared their lunches. Every day each had his own lunch box and a thermos of coffee. Each day they pulled from the box two large pieces of rye bread, a small block of Philadelphia Cream Cheese, a half dozen or so green olives (with pimento), and an apple, orange, or banana.

After methodically spreading the cream cheese over one piece of bread they would slice the olives four or five times, sprinkle them over the cream cheese, and lay the second piece of bread on top. Then they would pull out a chess board with a diagram detailing where the pieces had been prior to quitting the day before. It became apparent that their separation from the rest was more at the direction of Claude. He may have been a conniver with everybody else but with these two he recognized talent.

Sean discovered that Kornel and Sandor were father and son, medical doctor and chemistry professor, Hungarian refugees, and the best sorters and packers on the floor. As a result they demanded and received a higher wage: $1.80 an hour. And this caused the southern contingent tons of grief.

Why were they packing boxes a full five years after escaping the Russian tanks? Because the AMA and the relevant university boards refused to recognize their credentials.

Sean learned this at the Monday lunch break when he steamed into the room with a measly three dollars he had received for three very nice Morgan halves. Kornel, the father, approached Sean as he sat chewing on his coffee cup.

"We saw you run out of here over to the coin store and come back angry. You do business there?"

"Yes, or to be accurate it was partially business, partially robbery."

"What kind of coins do you have?"

"Mostly Morgan quarters and halves, about a dozen Morgan dollars, a bunch of Peace dollars and some really old dimes and nickels, and Indian Head pennies."

"If you bring them in, we'll bring the coin book and give you fair price. After a while if you want them back, we'll sell them to you for same price."

"That's very fair, but why would you do such a thing when there is so little benefit?"

"Because there might be big benefit. We think these coins are good value and we will hold for long time. And even if you do buy them back, we will have made a friend; something it is difficult to do around here."

And so began Sean's first friendship of the work world. Several more obstacles presented themselves with the arrival of his first paycheck. Expecting $64, he was stunned to see $49.18. When he brought it to Harper, he was told to look at the stub attached to the check. Withholding tax and FICA. What's a FICA? Then he had to get the check cashed.

He quickly learned that there are banks and commercial banks. The latter can be found on just about every block in Chicago's "Loop." Unfortunately, commercial banks didn't sully their balance sheets with check cashing facilities for the day laborer. Only through the intervention of an imposing traffic cop and fellow Irishman did one of the banks relent and cough up the loot.

But winter was coming on and he still needed warmer clothes for the walk to Union Station across the Chicago River and toward the Lake. He thought northern Illinois was cold but at least it didn't have a giant body of cold water with a persistent northeast wind blowing over it.

Walking to the train station would be a little easier but lately the Old Man had been catching an earlier train home as Maria Therese's condition worsened. Those long walks in winter would be equally challenging. So he sold Kornel $250 worth of his coins, hid it away carefully, and spent it judiciously. A real nice new coat or jacket would be a tip-off to hidden wealth and a subsequent third degree on the source of funds. A new garment from Robert Hall, on the other hand, was a badge of impending pauperism and discouraged even the most avaricious.

He learned of food stamps at the beginning of the next month. Sean had heard of them but really didn't understand how they worked, and knew no one (or so he thought) who received them. Imagine his surprise when at least half of his fellow workers got together one day at lunch and started naming stores and prices.

It worked like this. For the eligible, every $6 purchased $10 worth of food stamps. A good deal in anybody's book. But no one wanted to admit they needed or used them. And those who lied to qualify (which his fellow employees did) wanted to get rid of them for as much cash as possible. Saloons and restaurants were not allowed to take them. So, as one would expect with any government program a black market quickly developed. Who would offer stamp holders the best deal?

The poorer the neighborhood the worse the deals. Saloon owners (who always knew someone who would factor the merchandise) gave less than anyone else; usually around .76 to .83. Grocers who didn't fear gaming the system might go as high as .94 or .96. With Maria Therese in bad all the time now, Sean had become the designated shopper. Bargains and coupons were quickly becoming a way of life even though Marie Therese insisted that all food money come out of Connor's pocket or out of his allowance.

This didn't last long as the Old Man's extended stays at home limited his already limited income generating opportunities. In short order it was determined that Sean would kick in one week's pay, With that and another $43 going for train fare, Sean was left with $104 a month. The ideal solution would be to emulate Kornel and Sandor. Unfortunately, a pre-made sandwich in a home with four growing and perpetually hungry young children had the life expectancy of a fly hitting a windshield.

The Eighty-Niner special at B&G ( a small sandwich and a cup of soup) was eighty nine cents, Add a cup of coffee and tax and it came to $1.09. Two dishes of hash browns at the Huddle House were $.90 - with coffee and tax, $1.06. The monthly meds now ran to $22. That knocked off another $45. That left $59 - two bucks a day barring any emergencies.

Food stamps offered a way to ease the burden. Sean would have had an easier time had he suggested the re-introduction of the Volstead Act. After determining that the local food store accepted food stamps he sold another $350 worth of coins and when food stamp day rolled around, Sean sat in. Prices bounced around but seemed pretty much in the $.83-$.86 range.

Sean offered $.89 and received $281 in stamps for a $250 outlay. That was for the family's use. The other $100 brought in $107 from one of the named groceries that paid $.96 on the dollar.

Pocketing the weekly funds for food purchases and using the already purchased food stamps, Sean was now clearing about $38 every month, Sean sold the remainder of his coins for another $400 and combined it with the other proceeds. He refused to go over $1000 a month. It was a big pie and no one bothered over a nibble here and there. But take a big bite and everyone got concerned.

A grand was chump change in the program and on a straight deal with an established grocer he could realize $90 a month, $1080 a year. If he played around the fringes, he could make a bunch more but each new buyer and each new seller presented an added threat of exposure. Nine percent a month couldn't be beat; but neither could it last. Things that were too good to be true were too good to be true.

Sean had gained some additional influence when it was discovered he could spell, touch type, and do complex math problems in his head. He was promoted to "chief label typer and postage man." The extra nickel an hour didn't make him any friends but it didn't create much antagonism either. As long as he was paying top dollar for the stamps, he was OK with those who counted.

It was hard to believe that the one course he had taken (actually Connor forced him to take it) and received a "C" in, was the one that gained him a promotion. Lightening was to strike a second time when he applied for an entry level job at one of the big newspapers. He went through the process to keep Maria Therese happy - it had been her contention that Sean would be best off at a newspaper. All because he had been an editor in high school.

When he was offered the job Sean was surprised and ambivalent. No doubt the new job was cleaner with better hours, no post-Christmas layoffs, and easy transportation from the train station. The paper also employed women!

The downside would be the loss of his sideline business, a $1 a week pay cut, and the expenses involved in upgrading his wardrobe to something appropriate to white collar employment (this had been emphasized when offered the job).

Out of curiosity he asked his boss-to-be what it was that got him the offer He was told he had done very well on the 50 question test. But others had done well, too. Of all the candidates, though, only he had passed the typing test - so much for the high school editorship and writing ability.

His major responsibility would be composing mass-mailing letters directed to food retailers, large and small. The thrust was an urgent call to stock up on Aunt Nellie's Peas or Hormel Spam as upcoming advertising featuring 15-cent-off coupons would have customers flocking to the store, stripping shelves, and demanding more.

It was a great job and really challenging. Every national advertiser (and there were many) was guaranteed a merchandising program the cost of which would equal 1% of the ad budget. While most consisted of letters on stock stationery with gimmicky headlines, the larger budgets involved the selection of appropriately related "premiums" (like specially designed ties with the advertiser's logo and the current theme stitched on).

The workload increased substantially when Sean's fellow copywriter and a member of the National Guard was called up for the Cuban missile crisis. (Sean was called in for his third physical, once for Berlin and twice for Cuba. He flunked it with flying colors. He asked the examining doctor if there was ever any chance he would ever be drafted. The doctor looked at his record and said, "Son, when the Russians cross the Michigan Avenue bridge, you'll be at the top of the list."

A big change was dictated by his new finances. So he left home and moved into what can best be described as a boarding house on the far north side. The building was owned by the Archdiocese of Chicago, was 4 stories high, with five 8'x12' rooms on every floor, and for men only (Christian men, preferably Catholic). Although each room had its own sink, the remaining bathroom facilities were in one large room on each floor. Everybody adjusted their schedules accordingly. The building was overseen by two ancient Irishmen (Mike and Brian), and the rent was $13 per week.

Three months later Maria Therese died. There were a lot of tears, a lot of relief, and a little bitterness. Sean's married sister was especially upset since she had married only 18 months earlier after solemn assurances from Sean that the illness wasn't that serious and the prognosis good. He well knew Susan would call off the wedding and hang around rearing the children. The Old Man knew this, too, and wished to tell her the truth. Sure he did. It would guarantee him an unpaid babysitter for years; but Sean's threat to walk out and quit contributions to the family budget dissuaded him.

Marie Therese's death brought significant changes. For the first time, Connor began drinking at home. He went to work less and less. Sean's younger sisters now 7 and 8, felt a sympathetic bond and began skipping school to care for him. Had I attempted that at the same age, I would have received a real thumping. But it appeared Connor enjoyed being the center of a tragedy and the girls, never enthusiastic scholars, enjoyed the absence of school. Of course, Sean learned none of this from them; it was only through Mr. Brenner that he was kept abreast of the situation. (Another big development for young Sean - his own phone - admittedly an office phone but, still, his own office phone.

His new living quarters had been found through the recommendation of Sandor who, with his father, had both lived there when arriving in Chicago. Though they were sad to see me leave they assured me it was for the best: "You're young, but you must think long - look to future - there is none here." We kept in touch and got together on an occasional weekend at one of their favorite Hungarian restaurants.

My new neighborhood was also inhabited by several guys from the mail order house. They, too, had moved there on Kornel's recommendation. He had informed them it was cheap and that they would find many other southern boys in the area. At first, this appeared to be a joyful development which foretold the continuation of my food stamp sideline. I was warned by Blitzer (a former Tide second string linebacker) that this was not a good locale for this type of business. The locals didn't like competition. I looked for competition but found none. Almost every retail outlet. restaurant, and service outfit was owned by an Asian - some Korean, some, Cambodians, some Chinese, some Japanese, and a few Thai.

Ethnic neighborhoods had long been a hallmark of Chicago. But, despite the common Asian background, this was really an extraordinarily diverse amalgam. I made regular stops at the local diner to keep in touch with my old comrades attempting to drum up business that, mysteriously, remained sparse. Not only that, but the local merchants wouldn't trade for the stamps; except at a significant loss to me. Something just wasn't right and I had to learn why…before I went broke.

If anybody knew what was happening in the area it would be Mike and Brian who had been watching over that building for more than 15 years. Both knew what my sideline was, heartily disapproved ("yes you're offering them a better deal, but it still isn't a fair deal -they're still not getting full value"), and had decided not to boot me out only because they knew I'd fail.

"Why will this fail? it's worked before with the same people."

"Yes, the same individuals, but now you're a part of this neighborhood - they, your opposition, know who you are and how to frustrate you," said Mike - Brian rarely spoke and then only to Mike.

"I still don't get it. I've looked for competitors but find none and find no one willing to do business with anyone."

"But you see, they are doing business with someone. They still trade for the stamps at discounts but only with the individuals to whom they're issued and at prices they set. What's the first thing you notice about the area that strikes you as unusual."

"No Jewish delis, no Irish-owned bars, no Italian restaurants, no ethnic bakeries - nothing but outlets of various Oriental backgrounds."

"Exactly. This is an exceptionally different Chicago neighborhood -the typical ethnic groups are absent. Things like this don't happen by accident, they occur by design."

"So, whose the designer?"

"You've heard of Bobby Chu?"

"Sure owns a huge joint in China Town - very successful - gives tons to charities, loves the Cubs, loves publicity more."

"Yes, that's him. He's been in Chicago for years. Was one of the pioneers and has been marvelously successful. But Bobby has always loved to expand; he currently owns three places in China Town but everything worth owning is owned and is not for sale."

"So why doesn't he look elsewhere?"

"He is. And you're witnessing it. Bobby wants to create a China Town North right here on Lawnmore Ave. This is the starting point and you're an aggravation."

"It will never happen. The cost of buying out all the locals out will be huge, the cost of rebuilding huger, and the aggravation he'll catch from City Hall isn't anything compared to mine."

"Let's take that a point at a time, Sean. First, there are no locals. All the Orientals you see running shops and stores were brought in and financed by Bobby. The titles may have their names on them but, trust me, they'll be signed over to Chu when the word comes down. Point two, financing. That's never been a problem for the Chinese. They know how to make, save, and invest money. Third, City Hall would love nothing more than to see this neighborhood cleared of rednecks and populated by highly productive, politically loyal, tax-paying citizens and enterprises.

"Next week it will be announced that a new group of investors have purchased the Armitage Hotel and that, due to much needed renovations, it will be closed down in three months."

The Armitage was a nine-story red brick structure of many years. It was a dump but because of its low rates, it was popular with the southerners I had come to know. This move would effectively displace them permanently.

"So Chu is aware of the kind of people he's about to turn out?"

"Of course."

"Mike, I don't mean any disrespect but these are not pliable people. They've been brought up rough, they've lived rough, and they have a curious sense of right and wrong. And if they feel they've been wronged, they'll not go gently."

"There's not a thing they can do, Sean."

"Probably not, Mike, but suddenly the neighborhood has lost much of its charm. And, I might ask, why aren't you concerned?"

"Nobody, but nobody, plays power games with the Cardinal. He'll get his price or this building will be here for the last trump."

If things weren't bad enough, Connor upped and died. A quickly called family conference determined all four would move to Nebraska with my sister before the state could get involved. So, after a brief funeral, lightly attended, Susan took off with the young ones and beyond the state line.

I returned to the city after a funeral dinner with Brenner, who was the only one from the old home town who showed up. I outlined what was occurring, my concerns, and my plans to move elsewhere before things got hot.

I stopped at the diner before going home and found Blitzer looking very content.

"Did ya hear what happened last night, Fingers?" (A nick name I acquired due to my typing skills.)

"Nope, Blitz, I was otherwise occupied."

"Buried the old man, huh? Sorry to hear it."


"Well, Sean guess who got the hell kicked out of himself right here on Lawnmore?"

"No idea, Blitz.."

"Bobby Chu! He and the driver got real thumpings and were left in the street."


"Nope. Ole Bobby still had his Rolex and a wallet full of cash and the keys were still in the ignition of his beautiful Caddy. The police can't figure out a motive."

"Yeah, Blitz, that's a real head scratcher. Probably a rival tong."


I found a new apartment for December 1st occupancy; same owner, different managers, right across from the Cathedral. Fifteen bucks a month. Location, location, location.

I called Brenner and told him what had happened. The word was going around that Chu was having second thoughts but nothing was certain. He asked what I was doing for Thanksgiving, and I told him I planned to spend my ill-gotten gains on a nice dinner for Kornel and Sandor. I wanted to do something with the six holdovers from the mail order house but couldn't find a place that would welcome a crew like ours.

Brenner said we'd talk again before the holiday.

On Wednesday night of Thanksgiving week, Kornel, Sandor, and I dined at a very nice, but very expensive Hungarian restaurant. We were treated like royalty - and the two of them were a sort of royalty in that crowd - they had actually defied the Russians and lived to tell about it.

By prior arrangement, the Mail Order Gang held a 10 o;clock meeting at the diner. Over much happy banter regarding Chu's change of heart was the quiet sadness experienced by those away from home on a family holiday. Around 11 o'clock a paddy wagon pulled up outside and two very large officers came in. They approached our table and announced we were all under arrest. Meanwhile another squad with two more officers pulled up.

"Let's not fight this, guys," I counseled, "let's just find out what the problem is and get it over with."

Although this was a first for me, several of my fellows seemed familiar with the routine. several commented that, for a paddy wagon, this was really clean and didn't smell like - well, it didn't smell. It was also pointed out that the driver wasn't making any of the real sharp turns that some seemed to delight in.

"I don't know where we're going," observed Blitz, "but it sure isn't the local station. We would have been there five minutes ago.'

We drove on for another 10 minutes, pulled into a building and rolled to a stop. The backdoor opened and revealed a huge hook-and-ladder truck in the background with two long trestle table in the foreground. Both were set for a formal dinner and already large plates of food were being laid.

Carl Brenner smiled and greeted us.

"Happy Thanksgiving, gentlemen, and welcome to Firehouse 732. If you don't see what you want, ask. If we don't have it, we'll get it. If we can't get it, then it just too darn bad. Barring an alarm, we have three hours. You'll be driven home in the paddy wagon so feel free to drink as much of the Jack Daniels as you wish. Sean has so graciously supplied an ample quantity.

"There will, of course, be leftovers. Firemen never under-serve. If you want sandwiches to go, speak up, if you want biscuits and gravy to go, let us know, if you want to take some booze home, that's too darn bad."

And so a bunch of urban ethics shared their Thanksgiving with a group of rural rednecks.



 The following is not a rhetorical question; I genuinely don't know the answer. The 12 hours of school, music lessons…sports programs–is that really what's going to be best for these kids?

There seem to be fewer and fewer pre-scripted routes to success these days. Alan Corwin wrote about highly skilled database programmers who found themselves obsolete. Medicine has gone from being very cushy to modestly cushy. (A few pathways that might still exist: 1] do well academically/go to law school/ become partner at law firm, 2] get a government job, or 3] be nice to your very wealthy parents) Increasingly you have to invent yourself.

So what happens to regimented and highly educated kids when they grow up? They can hit a passable forehand, play some of Beethoven's piano sonatas, and do integrals (on Matlab), but they grow up and find that what they really need out there is something that's unique, which they don't have. Most of the successful people that I know personally had unstructured lives as children, and they had to figure out for themselves what to do with all that time. Most unsuccessful people though had the same situation! That's why my question is a real one, not a rhetorical one, one in fact that I'm facing with my own children.

Scott Brooks writes:

Having an unstructured life as a child equating into success as an adult depends on your upbringing, parental guidance, and environment. I saw a lot of my friends growing up living unstructured lives because of single family households (mother couldn't do much more than work to support family), alcoholism of one or more parent, or other factors.

I think a lot of these kids would be much better off if they were in a structured environment that allowed them freedoms most of their day (12 hours or more), at least 6 days a week.

The problem is that the kids who need this environment are stuck in some kind of a governmental system whereby the teachers unions control the environment. I believe that is what has lead us to being a country of non-thinking sheeple and is destroying our children today.

Jeff Rollert writes:

Improv is the best training I've had, and I use the trapped time in the car to make the kids do it. Doesn't matter if it is story telling, music, jokes, etc.The only consistent skill I've seen in life that doesn't get obsolete is on-the-fly storytelling.

Jack Tierney comments:

 This is an important question and one that has great significance for the future. Recently I've come across more and more articles regarding this cohort and their predicaments.

The recent spike in student loan defaults has highlighted the fact that many of our "highly educated kids" have gone deeply into debt. Unfortunately, many have been highly educated in specialties that offer little opportunity to secure a wage sufficient to pay off the debt and live in a manner to which they've become accustomed.

In many of these households, the parental unit(s) have also taken on substantial debt to provide the education; unfortunately, their 401Ks and pension plans have been whacked by the market, and chances that junior will be offered a comfortable, all-meals-provided, rent-free existence dwindle daily.

I recently re-read "The Grapes of Wrath" for a discussion group. There was some conversation on whether current events could lead to a re-run of those days; it was suggested that our many undocumented immigrants would supplant the equally powerless and under-educated Okies. I suggested, however, that while both groups presented problems for their times, our well educated but un- or under-employed youth could present a significantly greater one.

During my lifetime it's been rare that major anti-establishment protests have been led and peopled by the under-classes…the poor rarely had enough time or resources to be regular participants or prisoners. Those movements were conducted by an educated but unhappy coterie that was rarely underfed or unqualified for well paying positions. Tomorrow's protest leaders could well be both.

Another disturbing element in this education scam is the adult re- education programs being offered and underwritten by the Feds and the States. There's heavy emphasis on computer skills, auto repair, finance, education, business admin, accounting, and nursing - fields in which there already exist many unemployed but experienced professionals, and others which have little future.

I can appreciate Dr. Pennington's concern. Of my three sons, only one appears to be moderately secure. All are now in their forties, so options are limited and not very promising. For my grand-daughter and grand-son (I have one of those now), I have major concerns as I feel they, too, are being offered yesterday's curricula for yesterday's jobs. Will they be tomorrow's Joads?

Stefan Jovanovich writes:

We already have Steinbeck's world here in California; but the traffic is heading east away from the state. The only people driving to our state are the people behind the wheels of the empty rental vans. (I urge List members to check out the differential rental rates to and from California.) People here are literally packing up and heading out because there is no work; and they know there will not be any.

Not to argue with John but the "anti-establishment protests" in American history have never been led and peopled by the underclasses. The Homestead strike was by the best-paid steel workers who were protesting the hiring of cheaper immigrants who spoke languages other than English. The Reuthers, the founders of the UAW, were skilled machinists; so were the auto workers who staged the sit-down strikes in the 1930s. The poorest workers - the blacks, the hillbillies - had already been laid off. The Wobblies my grandfather knew were skilled miners who had learned their crafts in the European mines before coming to America; the "scabs" (sic) were the Mexicans and poor white Southerners. Now, riots - like the Rodney King uproar - are another thing; then, the underclass comes out to smash windows.



 Aubrey sold lemonade in the heart of Wall Steet today and made a 40% on his cost which the collab put at 50 cents a cup. His selling techniques included doing a dance after each sale and hawking loudly "lemonade for sale." As Millhone would say, "I don't believe that the economy has bottomed yet" as the decline did not affect sentiment on Wall Street. Nor were competitors offended by his competition with them at the 75 cents selling price. As the bearish Barron's columnist would say, "There are still pockets of exuberance out there and until they're completely stamped out, we have not seen the lows."

John Tierney responds:

Here's another opportunity for Aubrey to pick up a little extra spare change:

( – President Obama's Environmental Protection Agency is encouraging the public to create video advertisements that explain why federal regulations are "important to everyone."

The EPA is managing the contest, part of the government’s eRulemaking program, on behalf of the entire government.

As explained in the EPA press release announcing the contest, the purpose of the videos will be to remind the public that federal regulation touches “almost every aspect” of their lives and to promote how important those regulations are.

“The contest will highlight the significance of federal regulations and help the public understand the rule making process. Federal agencies develop and issue hundreds of rules and regulations every year to implement statutes written by Congress. Almost every aspect of an individual’s life is touched by federal regulations, but many do not understand how rules are made or how they can get involved in the process.”

“Regulations have the power of law. Breaking them can result in fines and even jail time. Regulations outnumber Congressional statutes. For every statute passed by Congress and signed into law by the President, federal agencies create about 10 regulations, each of which have the force of law.”

Steve Ellison comments:

In my town in which home prices have dropped 60%, and an estimated 70% of mortgages are underwater, my wife thinks it is a good time to buy. She is finding that houses are selling quickly, and she cannot delay if she wants to visit a house she likes before it is sold. There are plenty of Millhonian signs, such as the notice of foreclosure taped to the front door of one house we drove by (when we called the agent, we found the house had already been sold), but the market is working as textbooks say it should: when prices decrease, demand increases.

I suspect there is a cognitive bias regarding change. It is very easy to notice the negative or threatening aspects of any change and who the losers might be, since we tend to think in terms of the status quo. However, it is much harder to spot the opportunities and who will benefit from the change. There are people in my town who did not go deeply into debt and still have jobs who can now afford much nicer houses.

Donald Sull, in his book The Upside of Turbulence, recounted that a business school class was assigned a project to advise Lakshmi Mittal about his steel company. The students nearly unanimously recommended that Mittal exit the steel business because severe disruptions in the industry were destroying profitability for nearly everybody. In the context of the assignment, the students had every reason to know that the main disruptive force in the industry was Mittal himself, and his company was prospering mightily. Somehow, the students could not see any benefits of industry upheaval, even when advising the chief beneficiary.



California wineryThis story from paints a very grim picture regarding California's wine industry. Those in the know may want to comment on whether the article is too extreme or spot on.

Alston Mabry writes:

the wine industry has been suffering from the same asset inflation that the housing industry was going through. Shelves full of $40-50 bottles of Kullyfornia reds with nothing to distinguish them at all. Even Ozzie wines were getting expensive, and now with the AUD trying for par, it's even worse. But there are plenty of very drinkable wines in the $10-20 range, especially now that Costco and the like carry wine, so it's easy to downshift one's spending habits in the wine budget. Bad for the folks trying to unload inventory.

Banks would need a winery manager because they would have to make sure the stuff is properly cared for and doesn't spoil.

Having spent years making trips to various wine regions on the left coast, I was also always struck by how trendy it had become to own a winery, especially for newly rich folks from Los Angeles or San Francisco. Money was cheap, so prices just went through the roof. And then they would build these very fancy tasting rooms. Not surprising to see a crash. 



I sympathize with this view.

Donald Morris, writing in June of 1993: "If all of the Greek islands were merged with the mainland, it would be about the size of Alabama; there are 10 million Greeks - and perhaps another 4 million living throughout the world who still think of themselves as Greek. They are, thanks to their history, magnificent patriots and nationalists - and abominable citizens, who deeply mistrust every government they've ever had. Essentially they are fierce individualists, who mistrust not so much whatever government happens to be in power as the very idea of government. The have almost no sense of civic responsibility - Pericles complained about this at length - and History has never given them much of a chance to work out a stable system of government. Democracy, yes (the Greeks invented it!), but stability, no."

Stefan Jovanovich comments:

Mr. Morris is stretching the truth a bit about Pericles. These are the words about democracy that Thucydides puts in Pericles' mouth: "Our constitution does not copy the laws of neighboring states; we are rather a pattern to others than imitators ourselves. Its administration favors the many instead of the few; this is why it is called a democracy. If we look to the laws, they afford equal justice to all in their private differences; if no social standing, advancement in public life falls to reputation for capacity, class considerations not being allowed to interfere with merit; nor again does poverty bar the way, if a man is able to serve the state, he is not hindered by the obscurity of his condition. The freedom which we enjoy in our government extends also to our ordinary life. There, far from exercising a jealous surveillance over each other, we do not feel called upon to be angry with our neighbor for doing what he likes, or even to indulge in those injurious looks which cannot fail to be offensive, although they inflict no positive penalty. But all this ease in our private relations does not make us lawless as citizens. Against this fear is our chief safeguard, teaching us to obey the magistrates and the laws, particularly such as regard the protection of the injured, whether they are actually on the statute book, or belong to that code which, although unwritten, yet cannot be broken without acknowledged disgrace." Those are hardly criticisms of democracy. Neither are these (from Isocrates): "For those who directed the state in the time of Solon and Cleisthenes did not establish a polity which in name merely was hailed as the most impartial and the mildest of governments, while in practice showing itself the opposite to those who lived under it, nor one which trained the citizens in such fashion that they looked upon insolence as democracy, lawlessness as liberty, impudence of speech as equality, and license to do what they pleased as happiness, but rather a polity which detested and punished such men and by so doing made all the citizens better and wiser.""…and preferring rather that which rewards and punishes every man according to his deserts, they governed the city on this principle, not filling the offices by lot from all the citizens, but selecting the best and the ablest for each function of the state; for they believed that the rest of the people would reflect the character of those who were placed in charge of their affairs.""Furthermore they considered that this way of appointing magistrates was also more democratic than the casting of lots, since under the plan of election by lot chance would decide the issue and the partisans of oligarchy would often get the offices; whereas under the plan of selecting the worthiest men, the people would have in their hands the power to choose those who were most attached to the existing constitution.""The reason why this plan was agreeable to the majority and why they did not fight over the offices was because they had been schooled to be industrious and frugal, and not to neglect their own possessions and conspire against the possessions of others, and not to repair their own fortunes out of the public funds, but rather to help out the commonwealth, should the need arise, from their private resources, and not to know more accurately the incomes derived from the public offices than those which accrued to them from their own estates." Mr. Morris has confused the historical figure with the historian. Thucydides had very good reasons to dislike "the people"; they had exiled him from Athens for his having a case of the "slows" (see McClellan, George) in coming to relief of Amphipolis. Blaming the Greeks for having "almost no sense of civic responsibility" - i.e. trust in civil servants - is a bit like blaming Israelis for worrying about the peaceful intentions of Muslims. For all but 150 years of the 2300 since the death of Pericles the Greek peninsula has been under the rule of an autocratic government that was not Greek. As with Jews in the Diaspora Greeks learned the hard way to save their sense of civic responsibility for their clans and their religion. In that regard, they have been a model of stability; their Orthodox Christianity has the oldest unbroken lineage of ecclesiastical authority of any of the world's religions. Mr. Morris also gilds over the worst part of Greek history, which does go back to Pericles and Isocrates and, indeed, the Iliad. Factions have been all too ready to slaughter other Greeks, in the name of patriotism and nation-hood. It is that aspect of Greek history that our Constitution Founders were wary of seeing America repeat. Washington warned against "faction", not against democracy. He wanted the citizens to mistrust all parties and all exercise of government authority that was not essential for the preservation of liberty.




the st. louis fedThe latest release of the bi-weekly velocity of money multiplier series at the St. Louis Fed shows that the velocity has fallen to an all time historic low. The current reading is .811 and means that a dollar of money supply only produces 81 cents worth of GDP in a year. Another way to look at it is that the Fed needs to print $1.23 of new money to produce $1 of GDP in the next 12 months.

Part of economic impetus driving this situation is extremely low interest rates. At short term rates under 1% there is little urgency to invest. Putting your money under the mattress results in little in the way of lost interest. But it does save one from the savings account counter party risk and hypothetical failure of the FDIC program. The mattress strategy might even yield a net real return if deflation is the future.

The following link is to the St. Louis Fed site with a chart of the velocity of money and the most recent numbers.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Stefan Jovanovich replies:

Dr. Phil's statistical expertise dwarfs my poor abilities to add and subtract, but we Hayekian arithmeticians remain stubbornly skeptical about the relationship between official monies and wealth. If all the Fed really needs to do is print $xx.xx of new money to produce $yy.yy of GDP aka the sum of private and public incomes, then those in charge are clearly derelict in not immediately printing 2, 3 or 4 times $xx.xx.

Could it be that the evil capitalists are huddling at zero maturities, no matter what the price being paid for their lending the government back its official money, because the risks of (a) 2,3, and 4 times $xx.xx being printed or (b) the collapse of the carry trade in world commodities priced in U.S. dollars are BOTH best hedged by having the shortest possible terms on their official IOUs?

Those of us who dream of a return to the stupidities of Austrian and 19th century American gold standard economics fantasize that there will be that magic day when some impeccably credentialed Dr. of Economics stands up at the Emperor's testimonial dinner and asks why the accounting tautology of MV=GDP is any more meaningful than the one that says Equity=Assets-Liabilities.

MULT: The M1 multiplier is the ratio of M1 to the St. Louis Adjusted Monetary Base.

M1: The sum of currency held outside the vaults of depository institutions, Federal Reserve Banks, and the U.S. Treasury; travelers checks; and demand and other checkable deposits issued by financial institutions (except demand deposits due to the Treasury and depository institutions), minus cash items in process of collection and Federal Reserve float.

Adjusted Monetary Base: The sum of currency in circulation outside Federal Reserve Banks and the U.S. Treasury, deposits of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories.

Rudolf Hauser writes:

 We do not live in a barter economy but rely on money instead. Anything that is convenient to use, that is very widely accepted in transactions and that retains it worth can be used as money. As with all goods and services, humanity is served by efficiency. Gold has the advantage that it is a limited commodity in nature, which keeps it relatively scarce and hence helps it to retain value, but one major disadvantage in that it is very costly to produce, making it an inefficient use of human resources. Paper money is cheap to produce but retaining value depends on the will of the producing authorities to provide an amount sufficient to meet demand for liquidity without exceeding it such as to neither increase or decrease its value (and the lesser problem of avoiding counterfeiting).

A decline in velocity indicates an increase in the demand for money relative to available supply. To measure velocity against economic activity (GDP) one most consider the lags typically involved. I prefer to use a two quarter lag. On that basis velocity was still declining for M1, M2 and MZM in the third quarter. But given the performance of financial markets I believe that the present monetary growth, while not that rapid of M2 and MZM, but more rapid for what I call liquid M2 (M2 less CD's, without institutional money market funds included in MZM), is adequate because of the increasing confidence which should be reducing the demand for money. Hence, the decline in income velocity is a reflection of the lags. Monetary growth was clearly inadequate earlier in 2008 given the rising demand for liquidity until the Fed finally panicked in the autumn.

Money creation does not increase real economic activity from a stable state level, although an erratic or inflationary monetary policy will probably decrease real growth potential. If money is inadequate to supply the effort to restore liquidity will drive down other financial asset prices and reduce economic activity. In such cases the supply of more money will meet that liquidity demand and result in an increase in financial asset prices and real economic activity. This is just a restoration from a prior inadequate supply of money. An increase in money from a starting state in which the demand for liquidity in a non-inflationary environment might increase real economic activity temporarily if there is money illusion, that is nominal demand increases are mistaken for real demand increases. Otherwise it will just cause inflation, with the lag depending on the state of the general view on monetary policy. In an inflationary environment the lag to an inflationary impact would be minimal to non-existent, but in a world with much confidence in the monetary authorities it is likely to be longer.

Stefan Jovanovich adds:

The arguments against the gold standard always come down to the "inefficiency" of having to carry around a heavy bag full of sovereigns or Double Eagles. This has, of course, absolutely nothing to do with the history of coinage or official money; but, given how few good arguments there are in favor of fiat money, it should not be surprising that it is the standard explanation for why our paper currency is no longer exchangeable for specie. One should never underestimate the determined historicisms of the monopoly academic mind. What is ironic is that the "inefficiency" explanation is made by people who depend on the credit records of the 19th century to establish their certainties about the relations between "money" (sic) and GDP (sic).

The gold standard, as adopted by the United States of America at its founding, and by the United Kingdom, France, Germany, Belgium, Netherlands, Italy, Spain - the list is too long to continue - in the last third of the 19th century did not require people to carry bags of coins. What is remarkable is that it did not even require people to a particular money. All the gold standard said is that the sovereign government would mint coin in gold of a standard purity and that, on demand, the government would redeem its debts in such coin. You can find that pledge in the American constitution and, for that matter, in the constitution of the Confederacy. The gold standard did not require people to demand bags of coin as payment for the Treasury bonds, and even at times of financial distress, very few people did actually demand specie from the government. But the gold standard gave them that choice. "Ordinary" (sic) people could demand that the government meet its promises according to a standard that the government itself could not manipulate. Now, as Rudolph points out, the measure and weight of money is dependent on "the will of the producing authorities".

As Hayek kept reminding us, with elegance and without intemperateness, the notion that the government "supplies" money is the fallacy. Governments have minted coins from the beginning of recorded history, but they have not supplied that wealth; they have only collected it. Governments insisted on an official money because they could not live with private money. The idea that, before governments, people lived only by barter is truly fantastic; there is evidence of private money in every literate culture in history. As soon as people figured out how to write, they started issuing IOUs to each other. But, the promise of Fred the grain merchant of Tigris to pay Harry the wheat farmer two goats and a dowry for Gharry's daughter was not going to be very useful in paying the hill tribesmen pay/bribes/rewards for serving in the king's own regiment. The hill tribesmen did not know Fred or speak his dialect; they wanted something of tangible value. Official money developed out of the need/desire/vanity for armies and the necessity of paying them. That is still official money's ultimate rationale; the state needs to be able to pay its minions with a money that they will accept.

But why, as Hayek asked, does official money have to be a monopoly? Why are our most "progressive" thinkers in favor of a world currency, for example? The inefficiency argument hardly applies in this case; having 3, 5 or even 50 different sovereign currencies is no more difficult to manage in the age of computers than a single currency. The answer is obvious: with competing monies there is still a means for people to accumulate and hold their own wealth. That liberty may only be available to the very rich but it is still a freedom that exists and that could possibly be expanded to include "ordinary" (sic) people; and that movable private wealth represents a very real threat to official power.

The one valid argument that defenders of the Confederacy have is that Lincoln did want to impose a Federal monopoly on money and that, once the Civil War started, he did just that. What the defenders of States rights do not acknowledge is that state governments had been as eager monopolists as Lincoln. They had also, like Lincoln, been willing to default on specie redemption for their borrowings.

The reason that you have a period of rare political unanimity on the question of the gold standard for the 4 decades between the Resumption Act and the closing of the New York Stock Exchange at the beginning of World War I is that Northerners and Southerners, Democrats and Republicans, of any sense all understood the monetary lesson of the Civil War: if government is allowed to exempt itself from a Constitutional standard for money, then ruin follows. When governments can literally manipulate the weights and standards of money itself, the currency becomes a mechanism for theft by those who sit closest to the King.

But, there is no point in quarreling with the true believers in the money supply. It is part of the same theology that has as an article of faith the certainty that, without compulsory government schooling, none of us would ever learn how to read. One can only laugh at the irony that it is the true believers who have the most at risk. The contingent payments to the civil servants themselves - those glorious pensions - are the promises most likely to fail. The coins cannot be clipped, and competing monies do represent a restraint on hyper-devaluation. All that is left is default. Given a choice between defaulting on Social Security/Medicare and public employee and school teacher pensions, there seems little doubt what the electorate will vote for ten or twenty years from now - assuming, of course, that the issue is even put to a vote.

Alex Forshaw replies:

But, there is no point in quarreling with the true believers in the money supply. It is part of the same theology that has as an article of faith the certainty that, without compulsory government schooling, none of us would ever learn how to read.

I'd go even further than this.

In my (thus far brief) speculative experience, for every one brilliantly complex idea which spectacularly vindicates the prophet lost in the wilderness, there are 99 "brilliantly complex" ideas whose complexity proves nothing more than a refuge for the proponent's ego, for him to delay admitting he's been wrong all along. Such is the case with the academic mumbo-jumbo that belabors arguments on monetary policy, among others.

Arguments about money supply, liquidity provision, bubbles and the gold standard revolve around some very basic presuppositions.

Can bureaucrats be trusted to Do The Right Thing when specialized constituencies' interests, and bureaucratic institutional self-interest, unite on the other side of the argument?

Or do they–under the cover of complex esoterica completely foreign beyond their own constituencies–generally convince themselves that The Right Thing happens to align perfectly with their own institutional self interest?

I do not understand how anybody can look at the history of money, and the history of human nature in general, different from "hell no."

In my opinion, if you take the other side of that question, as Rudolf has, you will find yourself justifying the most brazen monetary manipulations any of us has ever seen. The rest is just pedantry. How does anyone have the arrogance to set the cost of capital for an entire planet? How does anyone else sucker themselves into believing any one individual ever has that kind of "edge," on any kind of ongoing, predictable basis?

Theses that can't be explained simply, should not be trusted. There is a lot more egotism than truth in complexity. No amount of academic mumbo jumbo will help contemporary, "how D A R E you suggest our tripling M1 in 1 year was anything other than saving the economy from Armageddon?" Keynesianism pass the bullshit test; and that's where the line in the sand should be drawn.

If you accept the terminology and the givens of the monetary clergy, you tacitly concede intellectual honesty on their part. For someone not invested in the status quo (or invested beyond that), all debate beyond that point is a waste of time. You aren't going to change anything, so why not just find something better to do?.

Rudolf Hauser counters:

I am not going to persuade Stefan to abandon his love of gold, so I would not even waste my time trying. He like our sometime contributor Larry Parks are staunch advocates. But other members of the list might be open to alternative viewpoints. First of all, I do not advocate a government mandated monopoly on money. I believe individuals should be able to hold whatever assets they wish, gold included, and contract to deal in whatever medium of exchange they prefer. I like Stefan object to efforts to restrict such as was done when the gold standard was abolished under the FDR administration. The inefficiency I am thinking off is not people carrying bags of gold around but the human costs of mining the stuff. How many work under absolutely miserable conditions digging through mounds of dirt for a few grams to buy them a meager subsistence in Central Africa? How many work under extremely hot, unpleasant and I suspect not without danger depths of South African mines? How many wasted their lives digging for gold without most finding much in the gold field booms of California, Alaska, etc.? Digging for the stuff costs lives and ruins lives. People would still do so for the non-monetary uses of gold, but the price would be lower and the resulting activity less. The use of IOUs etc. in early human activity not expressed in a common medium of exchange is still a form of barter. Only when you have a substance widely accepted by a large group of people in which the value of all other goods and services are expressed do you have something that can be called money. A near money, like the non-M1 components of M2 are not transactional money, but may be considered as money for analysis if they can readily be converted to a transactional money without any or most minimal cost. Transactions in international trade involving two or more currencies represent additional risks and costs. Not only is your competitive position determined by what happens to the demand and supply of your products but also by the overall balance between the countries in question which will impact the exchange value of the currencies. Hedging will reduce the risk somewhat but not without cost. I am not advocating a single currency as that also creates even greater problems with regions growing at different rates, etc.-just pointing out there is both advantages as well as disadvantages to having to deal only in a single currency. A gold standard will not prevent a government from defaulting. It only changes the form that the default might take. A fiat standard makes it easier to do so without being so overt about it, but in extreme situations it will not prevent that from happening. For an economy to function most efficiently, it needs to have an adequate but not excessive medium of exchange. Gold is limited by the amount in the ground. Any currency, etc. backed by gold at a constant amount would still be limited by the available quantity of gold. Major gold discoveries have lead to inflation, albeit very modest compared to what happens with inflated fiat money. A shortage of gold leads to deflation. As the experience of the latter half of the 18th century in the U.S. showed you can still have good real growth with modest deflation. But there is a problem here. Most people rely in others to make investments in real ventures (that is, capital spending, etc. as opposed to financial investments). But since the nominal return on money practically go below zero (storage costs, etc. might reduce it slightly below zero), the amount of deflation will set the risk free interest rate floor. As that rate rises higher and higher, fewer and fewer investments will offer enough of a return to attract saver's dollars. As such, investment and real economic growth, with resulting improvement in living standards, would lag behind potential. Efforts to accommodate this by reducing gold backing, changing conversion rates get you right back to the issue of government discretion that Stefan was talking about in the first place. You could end up with a monetary shortage as people hoarded available money. Alternative private forms of money might develop, but as they would represent more inflation prone forms of exchange than would private money such as gold under current conditions, they do not strike me a first glance as an attractive alternative to a sound fiat standard.

Alex, M1 did treble-relative to Feb. 1985. It has increased 22.9% in the past two years. M2 was up 13.2% over those two years. On a continuing basis that would surely be inflationary. But given the financial uncertainty, it resulted in that time, it has probably been desirable. I am very concerned that it might not be reversed when the demand for money decreases again and then we might have an inflationary result.

Efficient societies depend on trust. Remove trust and the ability to make progress is greatly limited. But the biggest problem in modern society is indeed the need to restrict and control the power of government. We have different view on how that should be done and what government should be allowed to do.

Also, Alex, M1 did treble-relative to Feb. 1985. It has increased 22.9% in the past two years. M2 was up 13.2% over those two years. On a continuing basis that would surely be inflationary. But given the financial uncertainty, it resulted in that time, it has probably been desirable. I am very concerned that it might not be reversed when the demand for money decreases again and then we might have an inflationary result.

Efficient societies depend on trust. Remove trust and the ability to make progress is greatly limited. But the biggest problem in modern society is indeed the need to restrict and control the power of government. We have different view on how that should be done and what government should be allowed to do.

Jack Tierney comments:

 The arguments against mining (not just of gold but most other "raw materials") has become extremely popular. Much of the case made against the practice include elements similar to those put forth by Rudy (the larger and more revealing reason is that the government in general and the leeches in particular, want a bigger piece of the action, i.e., higher royalties).

Unfortunately, most are convinced that the maintenance and continued health of our "way of life" is dependent on computerized technology. It is not - not now and not ever. Our way of life began when individuals, so sympathetically described by Rudy, began digging holes. Our development as a country and our continued successes are wholly dependent on the mining, refining, fabricating, and moulding of raw materials. Autos exist because poor people dug holes in the ground in Michigan. The iron ore produced was useless without a refining process that called for other poor souls to harvest the coal beneath the soil of Appalachia. And what use is the auto without a group of speculators and rough necks drilling the world for oil?

The specialty steels used by defense contractors is insufficient without the necessary rare earths which greatly enhance its strength. Solar panels and longer enduring batteries are inconceivable without silicon & lithium (among others) which also must be mined and refined.

And all the miners, fabricators, designers, innovators, developers, and speculators still depend on someone digging a hole in the ground, dropping in a seed, adding a little (mined & refined) fertilizer, watering it (pumped from an underground aquifer), and, eventually, producing a crop which after further milling, purifying, packaging, and shipping is available as food.

Make any case you wish for or against gold, but we cannot do without hole diggers and those processes which follow the raw material in the production process. Yet we have abandoned all those incremental steps and continue to believe we can somehow maintain our standard of living. We are left to purchase many required finished products which, at one time, we produced in such abundance that we exported the raw materials (e.g., copper & iron ore) necessary for their manufacture (and, whether measured in dollars or ounces of gold, paying an increasingly higher price). We face a situation in which these manufacturing countries are still creating the end products but now, due to their internal growth, are consuming much of what they produce. Understandably, our need does not trump theirs.

I can accept that a great deal of the industrial transformations we have experienced can be related to global labor arbitrage. However, it behooves any country which pictures itself as an "international power" to continually monitor the world production of those raw materials (from origination to end product) which are essential to its continued health. We already have strategic petroleum reserves - but that reserve is exactly that: petroleum. It is not gasoline, diesel, or kerosene -products which can be used immediately. It must be refined; yet, in spite of no new refineries in 40 years, Valero just closed down another operation within the past week.

We not only need to consider strategic reserves of a wide variety of raw materials, but also the means to produce those essential end items. But we must keep digging holes.

Rudolf Hauser responds:

I agree with almost everything you write with regard to mining. My point was that I rather have people engaged in other productive activities, mining of those other minerals included, instead of doing unpleasant work digging for something that serves a function that could be served with much less human effort or cost. Much of mining has always been somewhat dangerous and hazardous to health, just as building railroads and canals was in the 19th century. People took those jobs because the need for the income and the available income was judged better than the alternatives. Keeping their families alive here and now was worth more to them than longevity. As overall living standards improved, so did mine safety. It is still difficult work but vastly improved over what it once was. Because living standards are lower, safety standards still lag ours in places like China. And yes, we are still dependent on the rare materials produced and the processing of such. The cost of externalities such as resulting water pollution still have to be allocated to the producers in some cases .

But while my main point was that it is more efficient to use paper money than gold or silver when possible to do so responsibly, I also made note of the human misery associated with gold. Just as people will gamble when they think that the odds of winning big are great but at the same time be reluctant to undertake a risky investment that is likely to yield a superior return with much less risk of loss than those activities and investments designed to make giant killings for the very few (like lotteries), so to it was with gold discoveries. Some made millions, but many more made little. Those with the best prospects were the merchants and others who serviced the miners. Digging for coal, oil or copper will not do the same. That takes larger operations. Even wildcatting is expensive. It's not like taking a few simple tools and looking for gold. Gold you measure in ounces, the other minerals in tons. Today there are dictators and war lords in central Africa who exploit people desperate to make a living by having them dig in unsatisfactory conditions for diamonds and gold. And the South African gold mines are some of the deepest mines in existence, and it gets hotter the further down you go. There have got to be better ways to earn a living.

Stefan Jovanovich replies:

I can't argue with Rudolph about the nastiness of mining. Grandfather Jovanovich was a miner; he dug for coal in Pennsylvania and Southern Illinois and Colorado and for copper in New Mexico, and his stories of those days were never, ever about the ease or safety of the work even though he loved it. But, using the particular barbarousness of finding and smelting the monetary metal seems to me a very weak argument to make against the lessons of several millennia. Lead mining and smelting are far more nasty, brutish and toxic; and that "near-gold" element is - so far - the unavoidable technological foundation for our brave, new Green world full of batteries. It is equally improbable that the gold miners in South Africa would be willing to trade places with the coal miners in China. The sociological argument against gold is, at base, pretty weak.

Gold's virtues are simple: it has been accepted throughout history as genuinely precious and scarce, it is not easily counterfeited (unlike, for example, diamonds and silver), and its costs of production seem to have a remarkably consistent relationship to the real costs of doing things when measured over centuries and even millennia.

The only argument that has even half-succeeded against the gold standard is the one that Rudolph makes. It is the one that was made in favor of the adoption of the Federal Reserve Act - namely, that a massive new discovery of gold - like the one then happening in South Africa - would unbalance the price structure of that newly discovered thing called "the economy" by increasing the quantity of money. But that argument only wins if one accepts the strict monetarist premise that prices change only because of the fluctuations in bank reserves. One had to believe that innovation, enterprise and science AND the varying animal spirits of the people getting and giving credit had no significant effects on prices.

What has worked to defeat the gold standard is the theological argument that Money and Credit are really one and the same. Given how bitterly we Christians have argued over the mysteries of the Trinity, it should hardly be shocking that the young science of economics has fallen into the snares that captured Church Councils, but one wishes that somehow, as a science, economics could avoid the mystical notion measure of Credit and Credit itself are both separate and one. To the rationalist Deists who voted for our Federal Constitution the endless analyses about M's 1 through pick a number would have seemed like the very doctrinal arguments they wanted their new country to set aside. The delegates who suffered through the true global warming of the summer of 1787 in Philadelphia formally adopted Article I. Section 8. for the same reason they insisted that there be no establishment of religion even in this nation formed under God. The delegates adopted a gold standard for the United States of America to prevent the Congress from extending its monopoly power over Money (which was granted by the Constitution) to a monopoly power over credit.

The original Constitutionalists would not have found Ron Paul's arguments any more persuasive than Rudolph's. In their demand for a gold-backed currency the Paulistas are not arguing for a restoration of the Constitutional gold standard; they are insisting that gold to be the sword that will slay the dragon of fractional reserve banking itself. To the delegates in Philadelphia in 1787, that would have seemed as lunatic as our present fiat Money system. Abolishing the ability of banks to deal in their own credit would have been as crazy as requiring all businesses to deal only in cash.

Having lived through a war, and its destructions, the original Constitutionalists were not in a mood to accept either Rudolph's monetary extremism or Ron Paul's. The country had lost its primary banker - the United Kingdom - and had destroyed its own currency - "not worth a Continental". What the Constitutionalists understood - and what we moderns still do not understand - is that thinking about money as a "medium of exchange" puts the cart before the horse. People will exchange things whether or not they have an official "medium"; what they cannot do, without money, is have savings whose future value is under their and not the government's control. That is, of course, the root of the problem we face now. If money itself is nothing but an IOU, then the government can resort to the form of cheating that had been a universal constant throughout history: the government can demand payment of its taxes in something real - grain, for example - and pay its obligations in something mostly false - adulterated coinage or paper like John Law's.

For better or worse, the original Constitutionalists gave the Federal government an extraordinary monopoly power; Congress alone, of all the governments in the United States, had the power to create Money in all its forms. See Article I. Section 10. "No State shall …coin Money, emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts". Only Congress had the power "coin Money". To assure that the Federal government would not abuse its monopoly power over Money, the Constitution required that Congress "regulate the Value thereof". (Article I. Section 8.) Morris' words need a careful reading. If one uses our current understanding of the word "regulate", one fails completely to understand the sense of what was written. In 1787 the word "regulate" was a technical term of science; it meant "to make regular" - i.e. to make uniform and consistent, in this case, in the assay. No other interpretation makes sense of why the founders then gave Congress the authority and obligation to "regulate the Value" of U.S. Money and also foreign Coin. Both were part of Congress' more general authority and obligation to "fix the Standard of Weights and Measures". Congress would have sole authority over Money, but that authority could only be exercised by fixing Money's Weight and Measure - i.e. purity.

The Constitutionalists took it for granted that the price of Money - what it would buy now and what it would be worth in future credit - would fluctuate. That was in the nature of credit itself. What should not fluctuate was the Value - i.e. the assay - of Money. If Congress wanted to add a further Measure - to define a particular weight and purity as a "dollar", that was certainly within their authority. What was not within their authority and certainly not within the President's Executive authority was to abolish their Constitutional obligation to regulate the Value of Money.

I don't really expect to convince Rudolph or anyone else who has been schooled in the modern Temples of Erewhon that Morris, Washington and Franklin had a greater understanding of money and credit than Paul Samuelson. But, the evidence seems overwhelming. The difficulties of arbitrage that Rudolph makes such a fuss over are precisely the difficulties that the original Constitutionalists expected the citizens to endure. No government on earth could make Money "safe" in the sense of guaranteeing its future purchasing power and assuring that its price in Credit would not suffer. Holding Money by itself was not enterprise; the citizens would have to take the daily risk inherent in either spending or keeping their Money. What they could be promised is that the Money itself would be true and "regular".

Alston Mabry writes:

Just by the way, I was thinking the Treasury and Fed kept separate gold accounts, but it appears they each list the same 261M oz, with the Treasury using market price and the Fed using $42/oz. The "gold stock" line on this Fed report dated today, shows the Federal Reserve Banks having ~$11B in gold, which, @ $42, equals 261M oz.




CycleI may well be wrong, but my belief is that we are at the end of a big cycle. The end of the "easy debt" cycle?

1/ 2008-2009 shows clearly that nothing will be done by borrowers to stop their dependence. Nothing will be even tried. On the contrary. Because of our debt levels, this triggers the question of solvency. At least, this makes the question of solvency exceed a significant psychological level for the lenders. Confidence lenders/borrowers is definitely affected (gone). (Even if little is publicly said about that).

2/ This situation of confidence loss is new. The exhibition of our attitude at such a level is new. The awareness/knowledge/understanding of this situation is new. Presently, neither the lenders, nor the borrowers, have exact plans to deal with this novelty.

3/ … but, under the calm and apparent status quo, they are of course actively searching. At least the lenders. With the intent to do something. (Something will be done, even due to randomness. At least some small domino pieces will fall.)

4/ so my belief is we arrive at a delicate/complex crossroads/nexus/crux/bifurcation point (à la Prigogine). We're now inside a huge, real-life, game theory exercise. Many many things can happen. (But I believe many probable scenarios will share common steps). (I believe even dramatic events are now made possible.) But the status quo seems me rather improbable (even if it would be the case, this would just postpone things).

The above sequence lacks numbers (and may look abstract), incomplete, too coarse and biased with a sort of "pessimism", (but it's not how I feel about it). I'll thank you for any help to remove the flaws/omissions/clumsiness of this reasoning.

Phil McDonnell replies:

Debt is an important part of the big picture.  But I believe that a better perspective on current economics is that private consumer debt will no longer be easy.  In fact current figures show that consumers are 'saving' in greater amounts.  To be sure this savings does not show up in savings accounts or other tangible assets.  Rather it shows up as consumers pay down credit cards and mortgages.

The key thing to understand is that the powers that be do not want a reduction in total debt.  The size of the world economy is directly related to the size of the world money supply and all of its assets.  Given the destruction of wealth in mortgages, real estate, stocks and commodities the only source of money creation to reflate the world balloon is government borrowing.  So in effect the consumer debt is being replaced by increased government debt and conscious efforts to print money out of thin air.

J. Rollert predicts:

The present environment will make people treat debt like our grandparents did… and not trust financial types in particular. This is a social change beyond the cycle.

Paolo Pezzutti recalls:

People will not change behavior and attitude unless they are forced to do it.  When I arrived in the US from Europe two years ago I went to a dealer to buy a car.  There were signs on the cars on sale indicating $400, $350 and so forth that I could not understand at first.  When I started to talk with the guy it became clear to me that the signs were the monthly payments you had to make.  When I buy a car I want to know first how much it costs, not how much I have to pay each month.  But in the US people are apparently either encouraged to buy on debt, or they like to buy on debt, or they must buy on debt because that is the only way they can afford a car.  Only if the behavior of the lenders changes, we will see a different attitude of consumers.  And this is what could happen. Even with 0% interest rates.  Unless lenders find "new" ways to lend "easy" money.

Russ Humbert writes:

It is not just Govt. debt in the traditional sense, that the Govt. is increasing, it is putting more risk on the Govt. balance sheet on the asset side as well.

The Bernanke plan is to keep it coming, from what I can tell, to those that are willing to beg from the government.  Securitization is not dead, for the government quasi guaranteed it… This includes education and housing loans for most people, up to the point of being "rich".  It would seem that those that have no real prospects of paying off the principal, those that won't better themselves will be frozen out. At the other extreme those that better themselves to the point that it's clear Government is impeding personal progress, will not get this "risk free" money.  There won't be another AIG to scoop up all the risks, without any real capital backing it, for a long time.

This may seem momentarily like we are headed back to the sixties, before even credit cards, because of the sharpness of the down turn.  But this still leaves the US with much more debt capability than existed 10 years ago, before things got out of hand.  And money will flow down to consumption, it just won't be direct and if direct not as cheap.

Legacy Daily is skeptical about big changes:

I perceive debt to be the current fuel in the engine of growth. Unless an "alternative energy" is discovered, I believe debt is here to stay. The donut maker got it wrong, "America runs on debt." One reason for the efforts to improve the geopolitical landscapes in emerging economies is to also help raise their asset bases against which further debt can be created to satisfy the unending need for growth that our markets, our 401(k), and our lifestyles require. Since there's nothing new under the sun, just as soon as this cycle of diet and slightly better behavior has run its course, the patient will be right back to the liquor store for more of the same and a new cycle will be born. When and in what shape? That's the really difficult question.

We received a contribution from thin air (or is it Thin Air?):

Let me introduce myself: my name is Thin Air. Yes, THE Thin Air. I've been around for eons upon eons and have enjoyed a fairly tranquil existence. Who or what am I? A Princeton web site defines me thusly: "thin air (nowhere to be found in a giant void) "it vanished into thin air." That's OK with me, I can even live with the example which characterizes me as the passive element in an inexplicable event. Over the centuries millions of people, things, explanations, excuses, villains, heroes, and life savings have "vanished" or "disappeared" into me.

No problem. If you humans lack the will or imagination to discover just whatever it was that was lost, misplaced, filched, or embezzled, that's fine with me. But trust me on this, I don't have any of those people or things….never even was aware they were gone until I looked me up on Google - imagine, almost 3 million references. Rosie O'Donnell's number is just slightly higher, Bill Clinton's is 7 times greater, Barack Obama's 25 times greater, and Michael Jackson's 70 times greater- a telling measure of your society's priorities.

Those individuals weren't chosen capriciously; as a member of the "thin" contingent I chose two thin representatives and, by contrast, two fat ones - although it appears I'm being dissed in relation to other "thins", I love it and want to keep it that way. But Philip McDonnell served as the straw that broke the camel's back when he penned: "So in effect the loss of consumer debt is being replaced by increased government debt and conscious efforts to print money out of thin air."

I'm getting so, so tired of hearing that. You can't get through an hour of CNBC or Bloomberg without hearing that phrase or a riff on it. But those people are pretty lame and I expected Dailyspec contributors to provide a creative twist to a tired theme. Additionally, when phrased as shown above, it appears that I had an active part in the event; that I somehow swooped down and dumped billions and billions of dollars upon a group of bankers. First off, I'm broke; I neither have nor need money (gasp). Secondly, if I did have money, do you really suppose I'd drop it on that group of dummies? Not a chance.

Being a disembodied element and not a human, I can still make value judgments, tell the truth, discriminate, and speak out without fear of being condemned, jailed, boycotted, or shunned. Among those things that are unquestionably bad is excessive debt. It would seem this is self-evident, and Mr. Andres ought to be commended for bringing it to the fore. Similarly, Mr. Conrad (on another thread) reveals that the WEEKLY treasury begging bowl calls for low-interest-loving optimists to pony up almost one quarter of a trillion dollars. If this occurred every week, Treasury's annual issuance would approach the nation's annual GDP.

One can hardly blame debt buyers, though, as it's a given that the system will get better (or as the Sage, a student of Pangloss, stated this a.m. "better than ever") and that American Exceptionalism will prevail where, in similar circumstances, similar efforts failed. On the contrary, we witnessed major adjustments following the Tulip Bulb mania, the South Sea Bubble, Teapot Dome, the Great Depression, the Salad Oil scandal, the S&L fiasco, Russia's Default, LTCM, Y2K and Tech Mania, Enron, and the Real Estate Bubble.

History has demonstrated that none of these came out of Thin Air, nor did their eventual solutions. You can check it.

Thanks for your consideration and

Please leave me alone,

Thin Air



I heard it suggested this morning that yesterday's boom in equities was a result of "T+3 window-dressing" and not necessarily a bullish endorsement of the market. It seems that there should be a multitude of studies on end-of-quarter window-dressing and whether the above mentioned suggestion is legitimate or another canard.



J DeweyI don't know if the Chair's broaching of this topic was to elicit fresh solutions or to re-establish old (if controversial) truths. I prefer to go with the latter only because it is there that 'fresh' ideas may be found.

The freshest thinker on this topic is one of the Chair's oldest sources of enlightenment: Albert Jay Nock. Modern education is not "modern" at all. Nock sees its big push beginning with John Dewey's "Democracy and Education" (1916) which posited (when distilled) that education's purpose was to promote a "good society" by creating good citizens. A curriculum which included Greek, Latin, and extensive studies of history was hardly one which fostered this ideal.

Indeed, exposure to a rigorous education might well lead to the production of a handful of thinkers, some of whom might discover that, for all the hooting and hollering, what is happening in education has its genesis in the actions or inactions of the governing class. And further, that those policies rather than being ill-conceived have been deliberately designed. The design's purpose is to create an "educated" class comfortable with the idea that problems can be best addressed through governmental action (tax now-spend now-pay later) rather than economic actions (work-and-earn, save-and-wait). This type of realization leads to the unacceptable conclusion that we just might do much better with much less government.

But the present system is destined for failure because as Nock suggests it is run on the theory that "…if a few qualified persons get this [educational] benefit, anybody, qualified or unqualified, may get it." But the "margin of diminishing returns" mandates that "the larger the proportion of unqualified persons" who attempt to receive the benefit, the swifter the benefits to all will vanish…the more unqualified students, the lower the standards."

However, before giving up on education entirely, Nock makes an important distinction between those who are "trainable" and those who are "educable." ""Education, property applied to suitable material, produces something in a way of an Emerson; while training, properly applied to suitable material, produces something in the way of an Edison."

And what exactly defines Nock's educated person? Someone who has developed "the power invariably, in Plato's phrase, to see things as they are, to survey them and one's own relations to them with objective disinterestedness, and to apply one's consciousness to them simply and directly, letting it take its own way over them uncharted by prepossession, unchannelled by prejudice, and above all uncontrolled by routine and formula."

A pretty demanding standard but one that explains why Nock felt so few were educable. Robert Maynard Hutchins , Mortimer Adler and others have since attempted to re-establish some form of a "classical" curriculum but with little success. As long as the demand remains at high levels and our institutions of learning continue to broaden its menu of degree-able studies, costs will remain outrageously high while results will remain regrettably low. Which is fine. The worst thing that could happen would be for today's students to discover that an additional reason for pushing education is that they be better enabled to pay our debts.



 The chair asks: What fable of Aesop best explains the tendency to seek short term gain in speculation as the expense of the long term. Such situation often occur when it looks like the next 1/2 hour ( or day) will be very bad for your position but the next 8 hours (or week) will be very good. What to do? Be an ant or a grasshopper dancing and fiddling.

John Tierney, President of the Old Duck and Speculators Association replies:

In a field one summer’s day a Grasshopper was hopping about, chirping and singing to its heart’s content. An Ant passed by, bearing along with great toil an ear of corn he was taking to the nest.

“Why not come and chat with me,” said the Grasshopper, “instead of toiling and moiling in that way?”

“I am helping to lay up food for the winter,” said the Ant, “and recommend you to do the same.”

“Why bother about winter?” said the Grasshopper; “we have got plenty of food at present.” But the Ant went on its way and continued its toil. When the winter came the Grasshopper had no food, and found itself dying of hunger, while it saw the ants distributing every day corn and grain from the stores they had collected in the summer. Then the Grasshopper knew:


The REAL rest of the story:

I'm am ant. Always have been. Worked full time. Saved. Rented. Invested. Worked part-time, too. Saved more. Cars: '63 VW, '75 Civic, '87 Duster, '99 Saturn. All used, all stick, all good mileage. Vacationed in tents. Finally bought home. Paid off mortgage early. Never borrowed against it.

Others (grasshoppers) borrowed. Nice homes, big mortgages, big tax write-offs. Nice cars. Bank financing, tax write-offs on interest. Later, larger homes. Larger mortgages. Larger tax write-offs. Exotic vacations. On charge cards. Debt is good. Debt is smart. Some worked in financial fields. Neither sowed nor reaped. Middle men. Collected sowing fees. Collected reaping fees.

Early 80s: banks lent much to S. American countries. Countries go broke. Late 80s, early 90s: SLs borrow short expensively; lend long cheaply - go broke. Early 90s: bank bond holdings tank. Banks broke. Suspend accounting rules. Banks saved. 98: Nobel-winning geniuses bet on Russia. Russia goes broke. Geniuses go broke.

Consortium of investment banks saves day . 03-08: same banks make leveraged bet on real estate debt. Others (grasshoppers) can't pay. Banks go broke. Savers (ants) are losers. Low interest on savings. Less than rate of inflation. No return on loans for second homes and interest-only mortgages.

Much money lent and lost. All money comes from savers (ants). Banks and others (grasshoppers) lost other people's (ant's) money. Savers (ants) lost. Others (grasshoppers) gather to save system? Who needs saving? Grasshoppers. Who still has funds? Ants. Wonder what will happen?

On each occasion a pitiful remnant of ants were seduced by easy money and joined grasshopper parade. All have now joined 12 step program. First lesson is from Einstein: "Insanity is doing the same thing over and over again and expecting different results."

Ants looking for ways to withdraw from system. Grasshoppers trying same old thing and using government decrees to force ants into cooperation. If this effort fails only funds additional available will be from red ants. Good luck.

Russ Sears adds:

The problem with going for the short term gain is that they often are zero sum games, you against the world. Whereas long term gains often have more of a mutual benefit to them. Because of this if a long term outlook is opposed to its short term counterpart, the short term expected gain, generally has a much higher risks that is often ignored. (going long stock versus short term short position for example) Likewise if the short term gain appears too good to be true, it probably is. You are probably missing the true risks.

From nature, I recall from visiting Yellowstone, the obligatory warning of leaving food in the cars.

The bears will smell the food in an empty car. The bear will easily tear the car apart. He will leverage his size and get a quick easy delicious high calorie meal. Soon Yogi the bear will be hunting cars with food rather than foraging . And if left unchecked other bears will soon emulate his apparent windfall.

From Yogi's and his bear friend's point of view its a low risk, easy high gain meal. Of course Yogi is oblivious to real long term risks, people. He has totally underestimated, peoples ability and motivation to end his life. As more and more bears partake, the higher the risks becomes.

It's tempting to say, "Yogi's nothing but a dumb bear going on instinct. An investor would never get blind sided by unforseen risks"

But you must wonder WWYD (What Would Yogi Do?) in the mortgage bubble. If after all so many wolves as intermediaries left their marks on MBS's (mortgage backed securities). Would Yogi's instincts ever let him touch an MBS or worse a MBS CDO or CDO square, let alone leverage them up?




If you call gold a “weird asset class”, as I did, you’re bound to receive a ton of angry emails and comments. Gold is kind of like a religion, you either believe in it or you don’t. Nonbelievers are calm and rational for the most part. The believers are “a bit nutty”, as James Montier put it. They all recite identical arguments, using the same choice of words, in the similar order as they were scripted. In fact their arguments do sound very much like gold commercials that run all day long on CNBC and radio. Vitaliy Katsenelson

It must be admitted that Vitaliy's bearish argument, one which has been made on this site repeatedly since 2001, will eventually prevail. In the meantime measure it against the performance of any other asset class in that same time frame and you'll find the results are, indeed, a "bit nutty." For everything there is a season.



I found an article in the Times of London fascinating:

PARTS of the United Kingdom have become so heavily dependent on government spending that the private sector is generating less than a third of the regional economy, a new analysis has found.

The study of “Soviet Britain” has found the government’s share of output and expenditure has now surged to more than 60% in some areas of England and over 70% elsewhere.

The state now looms far larger in many parts of Britain than it did in former Soviet satellite states such as Hungary and Slovakia as they emerged from communism in the 1990s, when state spending accounted for about 60% of their economies.



 One of the imagineering tenets is to bring yourself back to your childhood to create spectacular entertainment. They like to use erector sets and play dough and sand and paints to get their ideas. I tried to go back to my childhood to get some ideas while I was driving and allow the non-logical brain to brainstorm as they recommend. I figure that kids like to rhyme and sing music and swim and do independent things and do jobs and find out about the world.

I started with rhymes. The question is whether the market rhymes. I started with the last x minutes before 10 and looked to see whether there was a one-three rhyme or a one-two rhyme. I found no evidence of a one-two rhyme but much evidence of a one-three rhyme as in "Yankee Doodle." For example, the rhymes at 10 repeat at 12 but not at 11, defined with reasonable precision, with a chance likelihood of 1/20. The subject of how rhyming and childhood play in the market deserves exploration.

Jeff Watson writes:

A common element of video games is that a series of different recurring patterns are interspersed throughout the game. The best players are the ones who practice endlessly and learn to identify and predict the patterns. It would be an interesting study to design a trading platform that mimicked a video game, and allow a group of young video game wizards to try their hand at it. With the right software, would the best video game players be the best traders?

Jim Sogi writes:

Etymology of rhyme from Wikipedia:

The word comes from the Old French rime, derived from Old Frankish language *rim, a Germanic term meaning "series, sequence" attested in Old English (Old English rim - "enumeration, series, numeral") and Old High German rim, ultimately cognate to Old Irish rím, Greek ????µ?? arithmos "number".

An essential part of rhyme is meter, as in the essential and compelling use by Shakespeare of  iambic pentameter. There is something in this structure that captures the human function and rhythm. Di dah di dah di dah, di dah, di dah.

The meter of the market might even be broken down from days, di dah, to the actual timing of the spoken and thought phrases, rather than from hour to hour.

As with jokes, ballads, most nursery rhymes come in sets of threes. It's a natural rhythm seen in natural phenomenon as well. Rhymes have application in markets and quantification.

Phil McDonnell adds:

Some years back my son was an accomplished video game player. He was rated number one on the Microsoft Zone in Warcraft. At the time they had about a million players. Our family often played as a team. I, my son, and daughter played against three other opponents. Our motto was 'The family that slays together, stays together.' That won out against 'The family that preys together, stays together.' My guess would be that became the Madoff family motto at some point.

One time my son left my PC logged on as his screen name. So I sat down to play. At the time my son was number one in the world. Immediately I was messaged by a 16 year old kid with the screen name of psycho. He lived in nearby Redmond and was rated about number three or four in the world at the time. At the time I was rated about number 10 in the world.

We played a 2 vs 2 game against some world ranked players. We kicked their butts. However the reality is that psycho won the game. I was merely a major contributor. After the game was over he asked me why I was off my game. It was clear that there was a huge difference between number one in the World and number 10. I had no choice but to fess up to psycho. The fact is that there is a huge difference between number one and number 10 in terms of performance.

To date, my daughter has been to Singapore for the local software company and is now back in Redmond at headquarters working in Treasury. My son went on to work for a Redmond based group of ex-Microsoft video game people. Then he joined the big Redmond behemoth. Subsequently he was stolen by the big G in Mountain View. His purview was as tech lead on the last software to look at your search results. Presently he is off to Zurich to improve the efficiency of the many big G programmers Euro programmers.

It is fair to say that some traders are destined to be great and others not to. It is also fair to say that many people with video game backgrounds are unrecognized for many reasons.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

From the President of the Old Speculators Club:

I suggest that searching for a rhyme is obvious and that if the market is anything, it is not obvious. A more fruitful idea may be to look for rhyme's forgotten brother: assonance.

"Assonance, (or medial rime) is the agreement in the vowel sounds of two or more words, when the consonant sounds preceding and following these vowels do not agree. Thus, strike and grind, hat and man, 'rime' with each other according to the laws of assonance." (J.W. Bright and R.D. Miller, The Elements of English Versification, Ginn and Company, 1910)

These are harder to identify and when they appear it's difficult to determine whether their existence is by happenstance or design. However, if a sufficient number occur it might be worth examining. But be careful of an overabundance of them:

"Beware of excessive assonance. Any assonance that draws attention to itself is excessive." (John Earle, A Simple Grammar of English Now in Use, Smith, Elder, & Company, 1898)

Since the vowel sound is key, and must be bracketed by non-agreeing consonants, one might look for similar volatility between simultaneously divergent averages (e.g., the S&P and the NAZ).

Russ Sears adds:

This quotation is from an interesting article entitled the "16 Habits of Highly Creative people."

While perhaps the author's ideas need some testing, the quotations alone are worth the read.

"There is no use trying," said Alice. "One can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast." - Lewis Carroll

And my favorite, considering 2008: “If you are not confused, you are not thinking clearly" — Tom Peters, quoted by Shalu Wasu

Scott Brooks comments:

Of course the market rhymes…until the poem changes. And the Mistress loves to change the poem when most are least expecting it.

During a secular bull market, the Mistress says: Up, up and away with very little volatility on any given day.

I'll make you money and you'll think it's great

you'll leverage to the hilt until it's too late

For when I change from bull to bear

you will pull out all your hair

If you confuse brains for a bull

it will be ugly when the mistress starts to cull

Culling the quants, the fundamentalist, the techs

You will feel the noose around your neck

When times are great, we all think bulls will always last

Those who do, ignore the past

During a secular bear market the Mistress says: Up today, gone tomorrow

I hope you didn't make your bull returns with money you had to borrow

The market changes from bull to bear so fast

So that if you were leveraged you lost your a$$

For a bull is very different than a bear

I know this for I've lot most of my hair

When times are bad we all think bears will always last

Those who do, ignore the past

So a trader must remember:
All the gains do not matter when you're leverage just gets fatter and fatter

So don't swing for the fences it's okay to settle for just a hit

then you'll win more than you lose and won't find yourself in deep $#!^

And finally, remember to stay out of the poo

losses hurt more than gains help you



TempletonFollowing his recent death, there has been much written about John Templeton. Most stories emphasized two aspects of his life: his most recent views on the market (very bearish) , and how he made his first big score.

It's this second aspect that interests me. To recap, in 1939 Templeton borrowed $10,000 and bought 100 shares of every Big Board stock selling for less than $1.00. There were 104 of them at the time and 34 of them were in bankruptcy. Four years later, only four of the 104 proved worthless, and his initial stake had increased by approximately 400%.

I have no idea where the market is heading from here but as I have read recently, were someone to have invested a given sum every month beginning in late '29, and continued to do so through '32, he would have realized a very nice return and one which would have continued to appreciate nicely throughout the Depression years. I don't believe many would argue that the current market is healthy but might argue that there are some excellent values for those courageous enough to take the risk. Maybe it's time to "Templeton" the market.

Could the same strategy work again? With a few modifications, I believe it's worth a try. The first adjustment I made was to calculate today's equivalent to '39s one dollar stock. The calculator I used determined that a dollar back then is $14.78 through 2007. It's no big deal to find equities that currently trade at or below that figure; however, unless you possess huge amounts of capital buying 100 of every equity below $14.78 would be awfully expensive.

Now, I have many, many watch lists — several of which go back a decade. Last evening I went through them and quickly found 17 which met the price threshold. Some I have owned, some I have not. Some treated me well, others poorly. Some are relatively new, some are very old (e.g, CX was purchased in '99 and sold in '01 — until last night I had not even remembered its existence). But all are flawed in that, at one time or another, I felt they'd be a good buy or interesting speculation. Their prices today when matched against the prices I recorded when adding them to one of my watch lists indicates, in most cases, I was wrong.

Alice Allen adds:

$3I was glad to be reminded of Templeton's strategy after yesterday morning (10/10) when I bought 100 shares each of six stocks under $3 that I had owned earlier at higher prices. For two stocks, industry experience gives me an edge to think these companies will survive. For two stocks, excellent customer experience makes me willing to take a chance. The last stock is a small oil company with all the potential for unexpected movement. Tierney's post has encouraged me to explicitly track how this strategy works out. I'm considering each position as simply a call option with delta=1 and no decline from theta, certainly among my least risky trades in this market. Now if I can just resist increasing position size on random positive fluctuations…

Kim Zussman Reflects:

'39 was 10 years after the crash, and fortuitously near the end of the Depression. Presumably by that time, with the main worry survival and the start of WWII, the few who had money were more disposed to buy stocks of food than stocks of companies in bankruptcy.

That the above question is being asked suggests we aren't there yet.



Whenever knocking a hat off I feel, and want to tear the weekly paper to pieces, and lash out at all the nabobs,  I don't take me to Nantucket but read "The Surprise" by O'Brian. There I find a passage about how the hands like to pretend that the ship is about to go under with the non-mariner dignitaries, and how the water is going to sink it, if not the waves or the backlash. It makes me think about the reasons for all the negativism. Is it the insiders trying to scare the daylights out of the public like the mariners? Yes. What difference does it make if the economy is down 1/2% this quarter and goes up 4% a year the next several years? Or what difference does it make that there was a housing recession the worst in 25 years. Or that the financial institutions had much water on their balance sheets. Such has happened before in the last 100 years, and is it bullish or bearish when all this negativism is about. One needs a Jack Aubrey with his natural ebullience to see the sweet sailing ahead on the blue waters that beckon.

Tim Melvin replies:

It makes all the difference in the world for any of us who wish to bet on US stocks… unless we are capitalized to withstand a 20% or more drawdown in stock prices. it especially matter if you are using any leverage at all (and yes I counted it. The average peak to valley drawdown in stock prices in a recession is on the order of 30+%. we have not even come close to the 1000 SPY levels that would be normal. The last time we had stagflation, the market fell over 60% peak to valley) There will indeed be blue skies ahead someday… the question is when? The combination of a falling economy, falling real estate and higher food and energy prices is crushing the consumer. If consumers do not buy luxury items, go out to eat, to the movies or even replace wardrobes, household items and even wardrobes, the companies that make these items, the retailers that sell them, and the companies that supply raw materials have lower profits. They cant borrow to make it through bad times and the water on bank balance sheets has tightened credit.

Loathe as I am to ever be opposite to one of the men I most admire, I think that most stocks are a poor bet right now. yes we will cure cancer, technology will advance and the long term future will be bright indeed. But not right now and reality is still not priced in the stock market. The dollar gets it, and bonds are starting to. The storm must pass before the sailor can safely leave the harbor. One caught in the storm must batten down and hope to ride it out as safely as possible. many , if not most, of those who ignored the warnings of wind and tide may well perish. Not even Aubrey would sail into the typhoon unless he it was a matter of the greatest urgency. As investors and traders we have one supreme luxury. We do not have to leave the harbor, and can profit by betting on the typhoon once in a great while, or simply sail a different sea.

Vic illustrates:

Here is a passage from The Surprise: "The envoy, Stanhope, had been told that water was coming in through the sides, and a seaman had told him that this was the gravest sign of all. One of the young gentlemen added that being pooped was more likely than actual foundering, or breaking in two, though neither possibility was to be overlooked. " Stephen said "The water coming in was inconvenient and even disconcerting but it was a usual phenomenon in such circumstances, particularly in aged vessels: It was what the mariners termed "the working of the ship." And be cautioned against too literal a belief in the words of the sailors: "They take an obscure delight in practicing upon us landlubbers". Once relieved of the sensation of imminent death, Mr. Stanhope…. ". Yes, the delight the brokers take in downgrading one another, and spreading rumours of runs, and trying to run the nakeds up again as they did the last two Springs, is not too innocent, but calculated to gain increased emoluments from the government and their future colleagues at the Board, and increase their share of the prizes as the landlubbers abandon ship.

Russ Humbert writes:

Perhaps it is no coincidence that Lehman, Merrill and Morgan Stanley, having received a review from the rating agencies that downgraded but still maintained their excellent ship worthiness, that the shorts would be emboldened. After getting so much wrong on the mortgage backed front any affirmation from them is similar to an endorsement from Bush's foreign intelligence chief on Iran. And perhaps it is no coincidence that Merrill, was the first to come out stating the shorts are full of hot air on Lehman's because they see they are next in line.

It will be interesting to watch for confirmation that Ben's revival meeting with all the investment banks included thinly veiled threats to those Investment Bankers who don't support their competitive brothers and reminders that  any piling on by them would be remembered for a long time. Was there a reminder that Bear Stearns did not help LTCM in 1998? Will Ben rally the troops? Will he speak in code? And how will the other brethren react? And will the SEC this time understand that their turf is in jeopardy and launch a full assault on the rumormongers, as they did on the  hyperbole of the dot com analyst? It has been my experience that a regulator fearing a turf grab is a dangerous animal backed into his own den with the hunter thinking he is cornered. And finally, could it be that the switch in NY governors will be the wind turning against those who believe their job is to protect us from big business without regard to method because size is equal to guilty?

The President of the Old Speculators Club, Mr. Tierney, issues a warning:

"Seems to me the greatest opportunities to make money going forward over the next 18 months to 24 months is to Short Gold, Short Oil, Dollar Cost into Equities as always, Long Dollar" - A reader of this web site

An interesting observation. In that it's been almost exactly 7 years since I announced the dumping my entire portfolio except for a couple of resource stocks, some retrospection is in order.

A recent post lauded the performance of IBM, hitting a multi-year high of ~$125. More recently, AXP was commended for its performance around $45. Those were among the equities I cast overboard, IBM @ $115.04 and AXP @ $39.43. As of today I would have been up 11.47% with Big Blue and 18.67% with AmEx - not exactly stunning performances over seven years (especially if one were to calculate the effects of inflation).

On the issue of shorting gold it has been an idea promoted by various List members at various times over that same time span - they have been incorrect. The concept of overpriced oil harkens back to the build-up to the second invasion of Iraq, when it was posited that the price would go back below $35; similar pullback predictions have been scattered over the past five years - once again, incorrectly.

The long dollar argument was made most forcefully by Yale Hirsch and his imported and highly regarded currency-expert henchwoman. That dates back about three years or so and, again, was incorrect.

Now the drunk who insists on looking under the street light for his lost keys because it's easier to see, may, once in a millenium, find them there. That's just luck. However, how do we judge the many sighted Street "names" who, over an extended period of time, have groped in the dark but come up empty?

More important, to whom do you listen for guidance in perilous times: the babbling and infrequently lucky drunk or to the sober and calculating historical record? The answer is obvious. Unfortunately, as has been documented and repeated innumerable times, the Market Mistress does not do the obvious.

Nor does she (nor anyone else so far) prepare meals of crow.

J. T. Holley asks:

Do you really think that we are in perilous times?

Jack Tierney replies:

Yes, I do. But in fairness, that's my nature. While many look on the markets with unflagging optimism (Vic and Laurel , L.V. Gave , Dimson et al. ), I tend to believe we have lived at a truly extraordinary time in an extraordinary country. So extraordinary, in fact, that not only those with the courage and capital, but also those who've stood and waited at the right place, have seen modest sums grow exponentially.

I am one of the latter, caught up by events and carried with the wave. Others, through risk-taking and foresight, have done substantially better, and deservedly so. However, the last 60-70 years doesn't, in my opinion, establish an immutable pattern. Historically, our past century is an anomaly. There has always existed a self-selected minority which achieved wealth through courage and daring.

But these last two (or three) generations have been unique in that wealth has "trickled down." Enough so, unfortunately, that it has become politically correct to view abundance, if not affluence, as a birthright - and one which can legislated for those who have missed out.

In itself, though, that's not enough to make me skeptical. My profit sharing account took some real whacks in '73-'75 and again in '79. I was fortunate enough to be in cash in '87, but got a minor haircut again in '91. I can live with oil crises, the slow motion crack-up of steel, autos, and aircraft. Technology, however it is defined at different times and different places, always ends up with more losers than winners.

But when major problems come out of the banking/finance sector, it's time to squeeze the pennies. Forget for the moment about those who have overspent and under saved. Instead, consider those financial institutions which have peddled gobs of their mortgage paper to pension funds, both public and private. By Greenspan's description, these are among those most able to undertake risk. In fact, they are not.

Much like myself, the memberships are made up of ordinary individuals who expect a modest sum to be available when they retire. If nothing is there, there exists no fallback positions. Already there are rumors of deficiency notices circulating… some involving major unions, others major metropolises. Jefferson County in Alabama is on the hook for over $3 billion in auction rate securities because JPMorgan and others sold them on interest rate swaps as a way to cut down on expenses.

In short, from the time of John Law, banking foul ups have had a much more severe effect on an unsuspecting public than any other business blunder. When bankers get it wrong, almost everybody gets hurt. So, yes, I'm concerned.

Stefan Jovanovich dissents:

I don't think the facts of American history support John's pessimism or his assumption that the years since the Great Depression have been uniquely profitable. The increase in wealth in the British colonies of North America from the end of King Phillip's War to the start of the Revolution was far greater per-capita than anything we have seen in the last 90 years; that is why there was an immigration boom that dwarfed anything the country has experienced since then. The period from the end of the Civil War to the passage of Smoot Hawley was equally spectacular as far as individual wealth in the North, Middle and Far West (but not the South) are concerned; and, once again, people literally flocked to the United States. Both periods depended on changes in technology that were - at least from the point of view of their effects on the rest of the world - far more dramatic than anything we have seen in our lifetimes. The improvement and broad use of Jethro Tull's seed drill was an agricultural revolution that equaled the effects of artificial fertilizer in our time, and the mating of steam power with Jacquard's loom turned India from a textile exporter to importer (with help, it must be admitted, from Britain's discriminatory trade rules).

John is right that, initially, "technology …. always ends up with more losers than winners" in the sense that machines replace people. But without that displacement no increases in wealth are possible. Socialism's real curse is that it kills all invention and change; in the name of fairness and equality Lavoisier's head is always the first to go.

The genuinely new and different improvement of our time has not been in wealth but in health. What the world has never seen before are the mortality statistics. Even with the devastations of the two World Wars and the results of Marxist national self-improvements in Europe, Asia and Africa, the change in the ability of people to be born safely, survive childhood and live long enough to suffer the diseases of old age and indulgence over the last hundred years has been breathtaking.

I wish I could share the assumption that the "public" - that anonymous sociological beast - has been duped by the evil bankers. Perhaps that has been true elsewhere in the country. But, from the point of view of California, the people who have borrowed money to buy dirt and houses and condos have been a great deal less unsuspecting than the folks who bought the securities that allowed the pyramid party to keep going. The borrowers knew they were signing for far more money than they could pay back out just the way anyone who could read knew during the Internet bubble that very few people were actually making any money from the brave new virtual world. In both cases the buyers thought it didn't matter; and, for a great deal longer than we supposedly rational business people considered possible, they were right.

My real quarrel is not with John's assumptions but with the premise that seems almost universal - namely, that bankers are still the source of enterprise capital that they were even a generation ago. Nothing that I know from direct experience or from studying the numbers for profitable non-financial public companies bears that out. We own common stock in 147 companies that do business in everything from shoes to lasers, and not one of them has relied on commercial borrowing or public financing as a significant source of cash since 2000. Of the over 100 independent business people I know here in California, the only ones people who have been able to rely on commercial credit from banks have been the folks dealing in real estate. Everyone else has been told no. Even SBA loans became dependent on the entrepreneur's having real estate that could be pledged as security.

Ironically, now that residential real estate out here is finally getting cheap enough to compete with rental prices and people with jobs and savings want to buy houses, the same bankers who issued ARM liar loans are largely unwilling to issue straight mortgages when the numbers pencil out. Having watched the Sandlers convert everyone to their cultist belief in appraisal values as the standard for credit-worthiness, most California lenders are now refusing loans because of their fears of what REO sales will do to future housing prices. The prospective buyers, who are offering to put real money down, are willing to take the risks; but the bankers still think they know the market better than people willing to put up most of their savings because they can buy a house for what it now costs them to rent an apartment.

The old bankers are always getting it wrong. That is why we end up having to find new ones.



I was down to a couple of dollars at one point. But then my luck changed and I won the bulk of my money back. In the end I lost only $10. This was a successful deal. Trader recounting his casino adventure.

This is an interesting observation and, I'm afraid, all too reflective of the mentality that seems dominates the street and those who cover it. Several years back Vic and Laurel introduced the "silo concept" whereby some of our finer firms kept stashes of hidden revenues to be reported only when needed to meet or beat estimated (in many cases, self-estimated) earnings figures.

In a neat twist on this concept, many of these same firms are coming out with estimates of staggering losses. When, in fact, the losses are not quite so substantial (but still eye-popping), our markets, as well as those in Europe and Asia, respond with enthusiastic buying. ("Yes, we thought the firm would lose $X billion, but we consider the loss of only $X-1 billion a success.")

No kidding? That's great, please sell me some more of that new and increasingly dilutive equity!

A similar scenario might feature me arriving home from the track and telling the wife to get dressed for a big dinner at a very expensive place. In her simplicity she beams and shouts "You had a big day! How much did you win?"

"Win? Who said I won? Usually I drop about $300; today it was only $200. I thought I'd blow the other C-note on a nice dinner to celebrate."

Sure, I had to settle eating a tuna sandwich alone but my pre-emptive action forestalled an evening of repetitive kvetching and by tomorrow, when her sister calls to ask if I was a loser once again, she'll respond, "No, he had a relatively good day." And her sister will report to her brother, and her brother to their parents, and, before you know it, I'll be a legendary profit-making machine.

From such tiny acorns grow mighty LTCMs. Process remains important only as long as the market recognizes it as valid. As soon as doing right is viewed as irrational and doing wrong as profitable, doing wrong will become the order of the day. And those who have failed time and time again (i.e., the banks) will be given another opportunity. Those who got chopped and dismembered will be forgotten.

Nothing is too big to fail. And a loss is still a loss regardless of how it came about. Just ask Walter Wriston.



DaHRiFDisasters and Heroic Rescues of Florida by E. Lynn Wright recounts the stories of 22 disasters in Florida starting with the Sinking of the Plate Fleet in 1710 and ending with wildfires in 1998 and a constellation of four hurricanes — Charlie, Francis , Ivan and Jeanne — in 2004. Florida is particularly prone to natural disasters because of its geographical position between the Gulf of Mexico and the Atlantic Ocean and its 12,000 miles of rivers and streams. However, the extent and prevalence of the disasters that have visited it seems to go over and above its geographic and geologic characteristics involving what seems to me a manifestation of the kind of character, promotion, and hopefulness that is engendered by warm weather, and extensive beachfront and recreational activity.

The author believes that a common characteristic of all these disasters is carelessness, ignorance, negligence, and greed. I would add that an aura of utopian thinking that nothing could go wrong as well as a lack of appreciation that the same disaster can strike twice,and a failure to appreciate that many seemingly improbably events are linked and that their conjunction is much more likely than normal multiplication of independent probabilities might suggest.

Take the Veterans Rescue Train Wipe Out of 1935 as an example, where 600 veterans imported to build a highway paralleling the Flagler East Coast Railway were drowned by a tidal wave hurricane in a rescue train. There was the utopian idea of creating work by building a public structure with inexperienced workers without local knowledge at the heart, faulty weather forecasts of a tropical disturbance that turned out to be 200 mile an hour winds, the event occurring on Labor Day, when the holiday caused hours of delay in gathering workers to get the train to the Ismeralda rescue site, usually reliable equipment that this time turned out to need repairs, a torn cable that held them to a standstill, a crane that got entangled with the train that took another hour away, and then finally a 20 foot tidal wave that did them in.

Many of the disasters seem to have signaled the beginning of real estate disasters shortly thereafter. For example the Great Citrus Freeze of 1895 came when central Florida and Daytona were in a boom stage with the orange crops adding revenues to the vacation homes and farms in the area. Developers Deland and Stetson were so sure of the boom that they guaranteed all the real estate buyers their money back. But a freeze came on Christmas Day in 1894 and ruined the citrus crops, and then when the growers relaxed, as they at least still had the trees and had lost only their income for the year. But two months later they were visited with an even worse freeze that destroyed all the fruits and seems to have cast a pall on the area. As the Tampa Time put it, "The Beauty is all gone from Florida. Everything is dead."

Similar declines in real estate followed the Capsize of the Prince Valdemar in 1926 in Miami, which seems to have had a direct causal link with the real estate bust in Florida in 1927 and then the stock market crash in 1929, and subsequent Depression. The chain of events is eerily similar to those playing out today, at least to the extent that the real estate bust caused the stock market crash. Perhaps the flooding of New Orleans will be seen as playing a similar role in the recent chain to that of the closing of the Miami Port caused by the Prince Valdemar.

The 22 disasters that are recounted in this book provides a good caution for all investors. Utopian visions have time and time again been dashed. Disasters that seem totally impossible occur with astonishing frequency.

Sam Marx explains:

HurricaneI lived through hurricanes Jeanne and Francis, that were 2-3 weeks apart and made landfall within eight miles of each other. This was a highly improbable event. The hurricanes were Category 2 when they passed over my house, but may have been a low Category 3 (130 mph) when they made landfall.

Because of the new building requirements of 1992, (Andrew was the motivator), the damage to my house was minor.  Most of the damage was to the trees. Records indicate that the last Category 3 in this area occurred over 50 years ago in Jupiter, 20 miles south and none ever recorded north of here in the last 90 years.

The heavy damage occurs on beachfront property, which Florida Governor Charlie Crist now wants to be paid for by all US taxpayers. I live 14 miles from the shore, and with the hurricane history of the area and the new building code I feel safe, but who knows. You take the great weather with the hurricanes.

The safest type of construction is a round house made of poured reinforced concrete with reinforced glass windows on raised ground. The roof is the most critical part of a house in a hurricane and it should be firmly secured to the reinforcing rods in the poured concrete.

Jeff Watson adds:

Sam makes some excellent points about the new building codes that are required in Florida. On my key, just south of Sarasota, there is strong evidence of the new codes that are being enacted. Builders are tearing down the existing homes and building new McMansions, employing much reinforced concrete, and adding elevation. From a visual perception, it is obvious that 200+ mph winds are factored into the designs. The new housing on this key is built on such a grand scale that it has changed the whole vibe of the place. Meanwhile, our 1926 cypress wood Conch House stands out as the lone reminder of what once was. Our cottage has survived many hurricanes, tropical storms, and fires without missing a beat. The designers did a good job on our cottage 80 years ago. The floors were built with a slight peak in the middle of the rooms, to allow storm surge water to run out of the house. Living at the beach, one must appreciate the grand forces of nature, the temporary aspect of existence, and man's insignificance in the whole scheme of things.

John Tierney marvels:

SurgeVic wrote "Disasters that seem totally impossible occur with astonishing frequency," and someone added "All of this drags down property values in storm prone areas of the USA."

Why is this surprising? By definition, a storm-prone area should have lower property values and higher insurance premia. Storms in areas that have been historically prone to them are neither unusual nor disastrous. "Disaster" is a term we apply to occurrences that result in the loss of human life and, increasingly, the loss of wealth. More properly, these are natural and inevitable phenomena — they are, if you will, part of an unbreakable cycle.The cycle may be ever-changing but it is certain that these periodic maladjustments will continue to occur. And those who are uninsured, under-insured, or who paid too dear a price will be hurt — again and again and again.

As it is in nature, so it is in the market. Bad times are inevitable and as fat tails occur with greater frequency than our probability tables would estimate, we must learn to expect the unexpected. We must also realize that government intervention cannot alter the unalterable. On the contrary, intrusive government in its paternalistic actions, encourages re-building where any building, except by those willing to assume all the risks, is inappropriate; and, in the markets, continued Federal action (reaction?), has encouraged the same groups and individuals to rebuild their castles on sandy soil.

Without this insurance, these occurrences would be just as unexpectedly frequent, but less harmful to the general population: the ultimate guarantors of poor fiscal policy. As Davy Crockett, a noted Tennessean, stated of his fellow  Congressmen: “Money with them is nothing but trash when it is to come out of the people. But it is the one great thing for which most of them are striving, and many of them sacrifice honor, integrity, and justice to obtain it.”

Steve Leslie writes:

HurricaneI moved to Florida 25 years ago and have lived in the same town since. I live on the Space Coast, equidistant between Jacksonville and Miami and 60 miles southeast of Orlando.When I first moved here, our city had swinging bridges that spanned the intracoastal waterway. They have long since been replaced with modern bridges. US1, a major thoroughfare, was two lanes and now is six lanes and cannot be expanded further. Most of the beachfront property has been developed and great restrictions have been imposed to slow down further building directly on the beach.

Commercialization on A1A is unmistakable and is beginning to look more like Daytona Beach than the sleepy town of Indialantic it once was. Beach erosion is a real problem and threatens property that has been around for decades. Laws have been passed to reduce lighting on the beach to avoid confusing loggerhead turtles who come ashore to lay their eggs.Wetlands have been exploited by real estate developers, and the challenge is to protect wildlife and retard the erosion of the Florida wetlands. The Florida panther, crocodile and alligator have been threatened species as are many other wildlife. Clams which used to thrive in the intracoastal have long since disappeared.

Probably the most profound real estate phenomenon in Brevard County is the largest manufactured home community in the state. Over 5,500 people who live in manufactured homes there. Many more manufactured home communities dot the county. This is a striking point considering the fact that Florida is particularly known for its hurricanes and unpredictable weather, especially lightning and tornadoes.

Florida is now the fourth-largest state in terms of population. Along with this come remarkable challenges. By all accounts, the trend will continue and populations will rise especially in the Latino community. Despite of what many think, not everyone in Florida is rich. There are vast pockets of poverty, especially in the Miami, Jacksonville and Tampa, that will continue to expand.

Yes, lessons have been learned, new building codes have been imposed, insurance laws tightened, yet it is like the horizon that one never reaches, it merely continues onward. There is a human cost to all thus that just can't be quantified. Yet I live here and this is my home and I will probably stay for some time. I hope I will adapt with the times and not become an anachronism.

Ken Smith extends:

LightningLightning strikes are another hazard in Florida. Discovery Channel once aired a story on a lightning belt in Florida. Government and university research people have placed structures in that belt to study lightning.

I am always excited by lightning storms, thunderstorms. I thought Florida would be ideal for living under them. Once my wife and I sat in our car — rubber wheels supporting us — on a lake in Glacier National Park, and watched a terrible, terrific, astounding display of lightning. Stayed until the little woman got nervous. I understand a vehicle should have a strap hanging from car frame to ground, although I have not researched this necessity.

The most spectacular storms I've witnessed were out in the deep ocean where only lone sailors are blessed with these visions. To see these lightning strikes accompanied by thunderous blasts of sound in the sky and 100 foot waves crashing into your home on the sea, these are ultimate experiences.

Dylan Distasio responds:

I've always loved lightning storms myself also. I remember watching a spectacular one when I was out in Arizona crackle across the wide open horizon.

Another time, I was actually caught in one while camping with my brother on a peak along the Appalachian Trail in Massachusetts, which while breathtaking, was also terrifying.

By the way, you should be fine in a car hit by lightning without a strap (or rubber tires for that matter). A car basically behaves as a Faraday cage where the charge is spread along the outer surface. I remember learning that in a physics class at some point, although I wouldn't want to test it out myself.



NEW YORK (AP) — Stocks wilted Wednesday as comments from former Federal Reserve Chairman Alan Greenspan and worries about upcoming economic data deflated a rally fed by takeover activity.

Those who have been around as long as I have seen these ephemeral events played out many times before after comments were attributed to the hot hand with an esteemed reputation.

There was a time when Dr. Doom Henry Kaufman was known to dramatically impact the markets, especially the bond market, with his interest rate predictions. This was while he was with Salomon Brothers in the 70s and 80s.

There have been others who had limited success with predictions and moving the markets, such as Elaine Garzarelli of Shearson, Abby Joseph Cohen of Goldman, Bob Farrel of Merrill Lynch, Bob Prechter of Elliott Wave, Bill Gross of Pimco, and Joe Granville in the 70s. Even Alan Abelson could comment on a stock in his weekly column for Barron's and have a big effect on its opening on Monday. A comment on a stock in the Heard on the Street column could also be worth a point or two. There have been others over the years.

From John Tierney: 

Here are some examples of Greenspan's forcasting history. 

From Stefan Jovanovich:

I believe Mr. Leslie was referring to the total increase in market valuations, not the percentage gains alone. By that standard the late 90s were qualitatively and quantitatively different from the other periods Professor Pennington noted.

The recovery in the ticker from 1932 was hardly viewed by the public as a "rise"; Americans remained hostile or, at best, indifferent to securities investing for another generation. It would be equally hard to see the post-Spanish-American war boomlet as comparable since the U.S. was not yet considered a financial center equal to Berlin, let alone London.

While the 1926-28 Wall Street boom may have outperformed the late 90s by a slight margin, the level of public participation was not comparable. As a percentage of the total adult population, fewer Americans had checking accounts in the 1920s than had securities holdings in the 1990s.

Charles Pennington adds: 

3-year moves following:
12/31/1932: 139%
12/31/1925: 92%
12/31/1903: 92%
12/31/1994: 106% *
12/31/1995: 79% *

(*Partially overlaps the 3-year period after 12/31/1996)

It is true that the market went up a lot after December 1996, but I don't see any basis for saying that post-December 1996 was the "greatest rise in the history of the United States."

Why make such sweeping statements without checking them first? It is like saying, "Nobody hit more homeruns than Willie Mays."

Sam Marx adds: 

Back in the early 50s or maybe the late 40s, Walter Winchell would end his heavily listened to Sunday program with a stock tip that would create a buying binge for that stock on Monday morning. The Stock's Specialist would open the stock substantially higher and buy back at lower prices as the institutions would come in selling their holdings.

When someone asked Winchell where he kept his money, he quipped, "In rubber bands".

From Sam Marx:

 Michael Milkin should be given a pardon.

He created the junk bond market, was influential in financing many of today's largest businesses including CNN, and building the modern Las Vegas. Now he is using his funds for prostate cancer research.

I believe that with all his capital and important character witnesses he could've stalled and defeated the charges against him which were mainly "stock parking" charges. He pleaded guilty to save his brother from going to jail.

He was a threat to some of the moribund corporate boards because he was able to raise the capital, through junk bonds, to enable the takeover artists (Ivan Boesky was not a takeover artist, he was an arbitrager) to gain control of these companies and remove those moribund boards and revitalize those companies. I've heard that the word came from the highest office in the government to get Milken because he was a threat to the entrenched country club set.

Ironically, although he is credited with it, the idea of using junk bonds to take over companies was not Milken's idea. A superior at his firm suggested it to him.

Some such as Ben Stein consider Milken a charlatan. I do not know the exact details of Stein's reasons but I do know that Milken used a Harvard study that showed that a portfolio of high yield bonds would over a period of time outperform higher quality bonds. This may have been valid at first when he was selling existing high yield bonds as a bond salesman but the type of bonds that Milken later created did not fit the properties of the high-yield bonds in the Harvard study.

Before he moved to California, Milken worked in Philadelphia and then N.Y.C. and lived in Cherry Hill N.J., two blocks from my house. When he was commuting to N.Y.C. he would take the bus very early in the morning wearing a coal miner's helmet to read company reports in a dark bus.



 The more sagacious detectives often say sadly at the end of a particularly tragic murder, "why is it always romance?" The particularly tragic move in the market last week needs a Rumpole to put things in perspective. But with his attentions fixed on crime in the English aristocracy and Oxbridgians, I will have to take a feeble crack at it.

It's clear to every thinking person that Ben Bernanke is a much abler chief than the fake Dr. Greenspan. He's thoroughly familiar with the academic literature, understands the full sweep of the interactions between markets, and is diplomatic, clear, and positive. What a contrast to his predecessor who was a academic manqué, prone to query about steel ingots and blast furnace stats in his bathtub for guidance as to what was happening in the economy.

Yes, the fake doctor must feel very chagrined that he's been displaced and shown to be such a straw wizard. What can he do but try to gain the spotlight with ridiculous non-falsifiable statements about "the probability of recession is 1/3?" Who is there who doesn't believe there's a probability of recession? But aren't there a million macroscopic inertial indicators in the market that tell us about them, and a boatload of forecasters that are not prone to look at the old-line heavy manufacturing sector as the key to our continuing expansion?

It is sad to see an old man or old lion displaced from the head of his pride. But what a boon it would be for the market if the fake Dr. G would stop trying to look big and "snarling" at his successor. "I'm trying not to make it hard for Ben," he said. There are people that still believe that he has insight. This just exposes them to so much more loss than they would have to face as the lieutenants of the bear raid spread their hopeful messages of doom with the fake doctor's support.

Along the same lines, it is invariable that in late February, the sage from Nebraska will say something doomsday-esque about the market. It has to get worse and worse each year or else he loses his position as the supreme moral force of abstinence for everyone else but himself. What he needs, he says, is a successor genetically programmed to avoid risk. But no, what he needs is something that Rumpole knows about, or that Hammerstein wrote about in South Pacific, that he ain't got anything besides the sunlight and the sand, the moonlight on the sea, mangoes, and bananas.

This time his message was that saving and deficits are going to cause anything but a soft landing. And you'd have to be crazy, except if you were he, to hold onto anything. Regrettably, he is completely oblivious to the economics of the matter, whereby individuals voluntarily hold debt at a price, and the current account deficit is triggered by the desires of foreigners to invest in the US. The two old curmudgeons came together in late February and their old guard of lieutenants was able to spread the old-hearted message.

It wouldn't be so bad if they were relegated, as they will be in 50 years, to the rogues gallery of old-hearted who decried the economic miracle of the enterprise system just when these pillars of Americanism, entrepreneurialism, competition, immigration, technology, trade, and respect for property rites were spreading throughout the world and setting the base for an economic expansion that will eventually bring the rate of return from stocks to close to the current bond rate, rather than close to a double, thereby proving a 100% increase in base stock values.

Only a Rumpole could do justice to it.

Victor Niederhoffer and Laurel Kenner chime in:

 Old-Hearted Men

(Sung to the tune of Stouthearted Men, from The New Moon. Music by
Sigmund Romberg, original lyrics by Frank Mandel and Oscar

Spare me from men
Who are old-hearted men
Who've been short ever since '82.
Who always call
For the market to fall
Who have always the same point of view
Shorting the dollar,
They don't like the dollar,
They don't like the market at all!
Spare me from old men
Who don't like high vol or low vol
Cynical old men,
Who don't like
Anything at all.

Give me some guys who buy stocks when they dive
And get out when the panics are through.
Give me the spec that will rise up from wrecks
with an optimist's point of view
Spare me from old men
who don't like growth or tech or vol
Cynical old men
Who don't like anything at all.

John Tierney writes:

 If there is one line that runs through Rumpole and that will outlive the series, it is his characterization of his wife: "She who must be obeyed." This line, like our recent correction, can be tentatively linked to romance, but not the more elevated kind that sadly led to the murders Rumpole was forced to solve. Rather, it's the tawdry love of a couple of harlots who deserve little but demand much. The first is the China doll, a wench who has taken much, stolen more, and given little. I believe George Friedman's assessment was partially correct: the Chinese government engineered this little play to teach its increasingly avaricious populace that you can't get rich in the market…fast. (Can you imagine members of the U.S. Fed dealing out a similar dose of reality to the American public?)

But I believe it goes beyond that initial purpose. The last time I looked out the China Doll was still firmly controlled by a communist cadre and all the good thoughts and market innovations in the world will not make them go away. It's mooted that an increasingly prosperous middle class will lead to the eventual downfall of this current ruling class. Are we to assume that this claque of engineers (well schooled, well disciplined, and with all the compassion of the Notre Dame alumni after a losing season) is unaware of this? That they will stand by meekly as their positions are voted away? History would argue otherwise. Just ask Google or Yahoo how much freedom is being dispensed.

We have been engaged with that country for 35 years now and despite repeated and numerous investments there, the big winner has been China…without costing it as much as a kiss. Many, many foreign companies have opened there only to discover that once the assiduous Chinese learned their methods, they quickly established cheaper competitors, drove them out of business, and took over their facilities. Nevertheless, our bankers, perhaps among the most venal individuals this country produces, continue to invest billions directly or indirectly. Billions are shipped over for minority stakes in some of the world's most corrupt and financially troubled financial institutions, copyright suits are brought repeatedly against the country, and theft of intellectual property is so common that it hardly merits news coverage anymore. (Meanwhile the Doll has stashed away quite a hoard with which she is purchasing natural resources, weak governments, weak presidents, and arms which can be shipped to Iran…or Iraq…or Syria…or Venezuela).

You want this woman? Take her, but when she breaks you, remember you could have read about her infidelities regularly on the pages of world's newspapers. In fact, you probably have read it, but her "opportunities" are so voluptuous it matters little, now. The second lady is much better known and has been around, in one guise or another, for some time. Her name is Carry Trade and she walks any street on which the swinging d**ks of the hedge fund world are located and within blocks of the banks which will provide the funds for leverage. She has been a generous consort for a long time now but has recently shown indications of retiring. This would be unfortunate, as she would leave behind a significant number of unfunded liabilities insured by firms without the wherewithal to cover 3% of them.

Of course, she has done this before, but a smitten lover is easy pickings. Finally, the most dangerous romance is the one that appears repeatedly in stories going back to the Achaeans and the Peloponnesians — we have become smitten with our own histories, accomplishments, and heroics, the pillars of Americanism. There exists a mentality, a very prevalent one, that because historically we have risen to the challenges, we shall continue to do so. Like Narcissus, we have fallen in love with our own reflection. And there are whole industries devoted to convincing us that the vision we adore is true. One is called Politics, and Greenspan and Bernanke are both its handmaidens. Another is called Finance, and it will tell us (as my grandmother used to), "Every day, in every way, things get better and better." (Does anyone really believe that the recently crowned "Greatest Generation" is really superior to those men who populated this country in the late 18th century?)

There are apostates. Just this week Goldman's chief global economist Jim O'Neill said, "There has been an amazing amount of leverage on currency markets that has nothing to do with real economic activity. I think there are going to be dead bodies around when this is over."

Pretty rough stuff. But for every O'Neill there are a dozen Abby Joseph Cohen's whose unfailingly bullish bellows prevail. Are our love affairs fatal? Can we win our tart's hearts - and minds - and business? Can we drag ourselves away from our mirrors of reminiscences long enough to address today's problems? Maybe, maybe not. But to pin the dip on the old dip who uttered the R word is a reach. This started in China and the maestro has little standing and less influence there. I think Rumpole would dismiss him as a suspect.

Rod Fitzsimmons Frey writes:

Freedom begins with property.

Somebody owns everything. By "own" I mean controls it, controls what gets grown there, what can be built there, who can pitch a tent there. That somebody might be the church, or more modernly, the state. But somebody owns it.

Those who own property, whether state or individual, control those who do not. Without property, one relies on others' goodwill for the most basic needs, food and shelter. One must do what the owner wants — grow wheat, send one's sons to the Middle East, work in a factory — to obtain the basic necessities. Possessing property liberates one from that tyranny. One can quit work and open a store; one can put up a windmill, dig a well, and buy a cow; one can rent out the property for income. Freedom.

Modern finance extends the freedom of property to the entire population, to those who have been denied property throughout the rest of history. Bankers are the modern Moses, leading citizens from servitude into liberty by extending the ability to own property to everyone. Of course, freedom is riskier than servitude, and not all succeed, but that cost is inseparable from emancipation.

All bets are off when the property rights aren't real, of course. Then the ownership of property is illusory and of no benefit. That is why the continuous, almost feverish defense of property by citizens of the United States is so magnificent and glorious, and why those of us in the rest of the world owe them such a debt of gratitude.



We have often talked about the signaling effect of hubristic utterances like “We are the best”. “We are first in class, best in class, and I believe we will own this class for as long as it exists” said John La Mattina, Pfizer’s senior vice president for global research, in a November 30th, meeting with analysts. In retrospect, Mr. La Mattina must have known about the problems brewing with Torcetrapib, and this must have been troubling.One wonders about the statistical significance of 82 deaths out of 7,500 for the combined regime of Lipitor and Torcetrapib, versus 51 deaths among 7,500 people for the Lipitor regime alone. This is a statistic that should really be computed by re-sampling. One would take a 1.1% probability and a 0.7% probability and run 7,500 trials for each, noting the difference in proportions random numbers. Then repeat 10,000 times to come up with the probability of observing a difference of 31 in 2 groups of size 7,500. Not having the artful simulator around, one uses the formula below.

The standard error of difference between proportions is the square root of: p1 q1 / n1 + p2q2/n2, where p1 is close to 0.01 and q1 =0.99. Thus, the standard error is the square root of (1/100x 7500 + 99/100 x 7500), or 1/86, so the difference is some 22 standard errors away from expectations. This is a very big number, and re-sampling would not change it that much … but this is also an artifact of small standard errors for small proportions.

Despite this, this kind of exercise shows what is wrong with decision making based on the chances that something can do harm rather than based on the expected value of costs and benefits. One has seen many lines of evidence that these drugs have much life enhancing value. And is a difference of 31 deaths per 15,000 — let us say 150 years of total life expectancy — really comparable to the benefits that such a drug might have vis a vis reduced heart attacks, and enhanced life expectancy. Probably not even close.

Multiply this by the hundreds of drugs not approved, the thousands that do not get tested at all because they have risks, and the other tens of thousands that do not get invented because only the billion dollar companies can afford tests like this at all (consider the approximately 1 billion dollar cost to test a drug like this), and you see the incredible loss to life.

It would be like not using a system because it loses big 30 times out of 15,000 without taking into account how many times it makes big.

Roger Longman adds:

You heard, I suppose, that they have now completely abandoned Torcetrapib? No one knows the data, but the independent monitoring board killed it… apparently independent of the hypertension issue.

In any event, I completely concur about the predictive use of hubristic utterances, as we’ve seen with Rumsfeld, Cheney, Bush & Co. And it is particularly ridiculous with drugs.

Dan Grossman comments:

While I want to think further about the implications, my initial reaction centers on the massive misallocation to one fairly marginal drug category (anti-cholesterol) caused by the combination of dinosaur drug companies like Pfizer and overly expensive, overly time-consuming, mandated statistical testing and approval procedures, (This appears a fairly equal alliance and I am not blaming only the government.)

Anti-cholesterol (anti-lipids) is one of the only, actually the only, drug regimen where the favorable circumstance of government and medical recommendation, easy and understandable measurement through an annual blood test, and effective drugs and marketing, has been able to convince tens of millions of healthy consumers to take a drug every day at an annual cost of some $25 billion.

But this category has now succeeded. Cholesterol levels have fallen and, perhaps partially as a result although it is far from clear, so have heart attacks. And now there are generics (and Pfizer’s $12 billion Lipitor will in a couple of years also be a generic) that can bring about the same result for pennies a day. So the therapeutic problem is now taken care of at low cost, the $25 billion category can be cut to a couple of billion, with great cost saving and benefit to the public.

But Pfizer has not read Schumpeter, and with its $12 billion Lipitor grandly insists on “owning” this category “as long as it exists”, the way Proctor & Gamble or somebody might “own” the multi-billion dollar toothpaste category. It cannot give it up, even though there are probably only marginal advances in cholesterol lowering to be made in return for increasing billions of dollars chasing hoped-for slight advances, and any molecule with a slightly different mode of action that can desperately be combined with Lipitor and thus perhaps extend Lipitor’s patent life.

So Pfizer, and Merck, and Astra-Zeneca, and now Abbott with its multibillion dollar acquisition of KOS, will now spend a hundred billions dollars (literally, look at their research budgets) on this drug category that has already succeeded, instead of in a truly free, Adam Smith market where the natural incentives would be to spend the money in drug categories far more needed for the cure of disease and the advancement of human health.

John Tierney mentions:

What I would also like to know is the expected mortality rate for a study of this kind, a study involving subjects and drugs of these kinds. Clearly the Lipitor-only mortality rate of 0.68% must be well-below the threshold, otherwise there would be calls for it to come off the market as well. But there are none. And apparently the combination mortality rate of 1.09% is well over the expected mortality rate, and hence the rush to end the trials. Casino operations, I am told, make or lose money based on small differences in the percentage that the house is favored in games of chance. Pharma shouldn’t be reduced to such a state. For an interesting article on this …


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