Leo Jia asks:

Any thoughts on the prospect of Turkish economy? Is Turkey a good buying opportunity now for holding 5 years?

Larry Williams clarifies:

Is the Turkish economy about the same as the Turkish stock market?

Some references:

The CIA World Factbook: Turkey/economy

iShares MSCI Turkey ETF (symbol: TUR)

Nils Poertner responds:

as we know from other EM countries, listed equity can be really a good play - even with fx tanking. see Latam and many Asian countries. a vast "play" on the USD (as lots of banks are financed in USD - and EUR) and a bet on the faith in the current regime. cap controls an issue.

understanding EM requires study of previous bull-and bear mtks for EM mkts itself- doing the tedious work - building implicit knowledge over time, cycles, mass psychology, whateever it takes - it is worth it, Jia  and a lot of fun - as one learns from it and can share with others.

John Floyd writes:

Larry has somewhat taken the words out of my mouth on the economy and stocks in Turkey.  I would expand on that somewhat given the unorthodox nature of the current Turkish administration and the expanding Taliban presence and thus likely growing chance of further friction with the US, following recent and historical comments by the head of Turkey on the topic.

As economy and FX it does sure have the potential to get things right and turn for the better.  But, the odds of that happening and the headwinds against it seem rather large at the moment.  The current path is one of further unorthodoxy in policy and leadership combined with expanding debt that will likely lead to a default or restructuring and FX going from 8.6 north of 10.

Reserves are tenuous at best, local capital outflows a perennial risk, and the need to continue to pump up the economy through credit, tourism headwinds given COVID, current account deficit of 5%, etc…

Given the circa near -20% returns for the Turkish indices there may be some gems within the them with careful selection, as is needed in China given the P-like oligarch crackdown there as the aim by X is to stay in power for life and control data and tech to do so.

James Lackey suggests:

As John clearly said the news risk..what about the derivative of the big Mac index and or the hot dog stand.

If I'm forced to value a stock on foreign exchange correctly, I'd go to Turkey, rent a flat, and open a food stand and sell Harley Davidson T Shirts. The McDs index of brands is HOG. I can sell merchandise like a roadie at a show and let's use the most recognized brands in the world.


Sell shirts for 6 weeks and my guess is you're going to learn exactly what's going on.

Larry Williams adds:

Bring lots of NIKE stuff to sell.

Jayson Pifer provides local insight:

Fwiw, I can offer some boots on the ground perspective.  I spend a few weeks a year in Turkey and have done so for the past 15 years, missing last summer due to covid however please take the below comments with an appropriate amount of salt.  Each time the conversations come up on investing in real estate there.  And each year, I come away boggled at the lack of progress and steadfast in keeping money away.

If I were to hazard why the Turkish economy isn't more than it could be, I would suggest that it is the general absence of faith in any of the government constructs.  Without commenting much on their current 'populist' leadership, I mean to say that the average person has little faith in the police, courts, and laws and work around or without them.  (plied with a bit of scotch and I could relate some Keeleyesque tales of my encounters there with these systems :) )

Absent true legal financial recourse, trust stays in small personal circles that are difficult and slow to grow and this has various and deep side effects.  As an example, if one were to meet a VP of a bank in the US or UK, you might assume they had interviewed for the role from a range of candidates and/or had been in the role for a while and knew the business and their area. One would likely be correct in those assumptions.  In Turkey, you do not have that assurance as they will probably have gotten their role through a circle of acquaintances.  They may be qualified or not, but they are almost certainly in somebody's inner circle.

The low trust and inner circle workings are seen in both the political and business environments.  When new leadership comes in, it is typical and considered normal to bring in their trusted group, reward them for their loyalty and displace anyone they do not trust.  Partisanship there compounds the issue, similar to the partisan wars in Google but with more serious consequences if one supports an out of favor party (eg. non-AKP). 

Wrt the stock market, my impression is that it's a lottery.  There is money to be made, for sure, by smarter and luckier people than me.  But the risks are real.

I don't have numbers, but my anecdata shows a worsening brain drain with talented turks leaving the country and those that have returned are struggling.

Taking a further step back for the five year horizon posed originally, my impression like Mr. Floyd's is that Turkey has headwinds and not much to stop it from falling.  My questions are what could change to reverse this trend?  A change in leadership is often cited, but it would not create an overnight increase in trust.  I could barely speculate how long it might take, but would guess decades if all went well.  While it's not exactly fair and I'm out of my historical depth, I compare it with Iran when it went down the path of Islamic leadership in '79.  How will Turkey not fall into the same trap?

Theodosis Athanasiadis comments:

Historically real exchange rates have been a good predictor of emerging market economies and equities through the mechanism of cheap exports, labor, external investments etc. they are a form of valuation for the whole economy. I see them currently at multi-year lows which has been bullish for equities in Turkish lira for the long term.

John Floyd responds

Yes, on real rates in Turkey that is true and can be seen in the standard OECD PPP, but that has been like that for ages and you need the positive catalyst for change…..move to orthodoxy one way or another….monetary, fiscal, and geopolitics…should gradually grow confidence in varying degrees and speeds and drive capital flows in a positive fashion if it occurs and given valuations you can find some gems I am sure…perhaps on well capitalized companies that can benefit from the inflows and cheaper FX…plenty of meals for a lifetime if you look at Argy, Venny, Russia, SA, Zimbabwe, etc…

If anyone is bored, I did an interview on Turkey last August - it somehow has gotten just under 20k views that highlights both contemporaneous points at the time and some of these longer term issues.

Alex Forshaw writes:

Erdogan is in bed with the asset heavy industrial elite of Turkey… this is China but with very ineffective capital controls (mainland Chinese stock performance has been terrible for 12+ years btw, altho indices don't include juicy dividend yields). They're all massively overleveraged, and basically long and wrong The only way is devaluation / financial repression (forcing inflation >> cost of capital) until they deleverage… but Erdogan can't really let them deleverage because the economy would implode, Turkey is poor, the opposition is highly organized with high recourse to violence (Kurds), so Erdogan would be dead. So they just keep building and building, but who's going to come?

Seems to me that Turkey is uninvestable until Erdogan is gone…but he's a de facto dictator…so he can't go.

Leo Jia offers more data:

Turkey housing index

New home sales are down lately, which may be caused by the pandemic:
Turkey: new home sales

But existing home sales shot up sharply in recent years:
Turkey: existing home sales



Alex Forshaw writes: 

1. Is it possible to determine what % of dead people (alt'y, what % of people over 110 years old) voted for Biden over Trump, where they live, and when they last voted? AFAICT, so far, the dead demo is 100 percent for Biden, and turnout was up at least 100 percent over 2016/2012. This was a devastating rebuke to 160 years of shameless GOP voter suppression.

2. More dead voters have voted for Biden than have shown up for all of Biden's campaign rallies, combined. Outstanding GOTV by the Biden campaign here, especially considering that they had no GOTV for most, if not all, other demos.

3.  Dead Lives Matter! Just from sampling social media, dead voters are clearly the fastest-growing demographic in the United States, and Biden's outreach to this underserved minority was amazing. What policies & voter outreach should GOP'ers consider in order to compete for this underserved demographic?

K.K. Law writes: 

If there is a way to quantify voter frauds such as dead people's votes, illegal people's votes and people casting votes multiple times and destroying GOP votes, that would be great. I am sure all these happen but just don't know the magnitude.



Alex Forshaw   writes: 

CA's property tax system is idiotic and the most dysfunctional in the country.

Property taxes are assessed on purchased basis, not on assessed value. So somebody who bought a home 30 years ago for $10,000 could pay 1/10th (or less) the property tax of someone in an identical house next door.

It has placed a huge relative tax burden on recent home buyers. It has subsidized the aging hippies who bought into CA 30 years ago, who have subsequently voted to throttle housing supply in the name of environmentalism for their own benefit

Kim Zussman writes: 

Your thesis is based on commonality with losers and supplicants.  The only ones subsidized, ever and always, are the socialist organizers. 

Check back with us when you're at the end of your earning years.  Without 13 those who always know better would squeeze you out of your house when you are old and useless to them.  Even if you followed the rules, paid your taxes, and paid off the mortgage, there is always marketable pathos in the unending supply of hungry mouths to feed.

Alex Forshaw writes: 

I'm a raging conservative and I think taxes suck. But if you're going to buy into the idea of a property tax, levy it in a way that's transparent and affects people on a logical and consistent basis. The CA property tax system charges nothing to people who bought 30-50 years ago (who are sitting on gigantic paper gains) and does the opposite to new buyers. It's totally inequitable, capricious, and creates lots of terrible incentives, more so than any other vanilla state tax that I can think of.

Larry W  writes: 

Howards point, and success of prop13, was the unfairness to people that had lived/worked in homes for year and could not afford the tax hike until they sold those gains are illusory until sold and the state was taxing a value the owner never pocketed

BTW Howard was pretty amazing ball of energy, perhaps I’ll share some stories of being on the campaign trail with him one of these days



I live in NYC and the idea that everyone has dramatically changed their lives is…simply not what I observe. People are out and about in all the restaurants bars and shops.

Alex Forshaw writes: 

The same is true in the Bay Area Although in the past week, Uber/Lyft drivers bookings are -50% week on week as WFH has taken hold.



 I moved to SF with my wife and baby 7 months ago from NYC. My wife is a member of local online mothers' club, Golden Gate Mothers' Group (GGMG), in which local moms pay $75/year to access a forum to share notes around good restaurants / neighborhoods / sites / activities / etc, and generally help each other out.

Here was a barely-surprising story related by one of the GGMG moms: We live on a very steep hill, where parking is perpendicular to the curb. Last Saturday night, we were at our neighbor's potluck party - well attended with lots of older folks and young kids, including my toddler and baby. We went home at 8 to put the kids to bed. Our car was parked in front of our house at the top of the hill. Around 10, I was asleep, but my husband heard a crash - didn't think much of it. The next day, we looked out to see my car parked at a 45-degree angle. I thought, Oh no, someone hit it. Yes, indeed. Some jerk totaled my car (which I just paid off last month). Damages are estimated to be $9,000 and the car's only worth $11K. Of course there wasn't a note. People suck. But then, the neighbors rallied and IDENTIFIED the car using security footage. A guy in an SUV was backing down the hill, rammed into my vehicle, switched drivers (probably drunk), and literally sped away back up the hill. An Uber was on the street at the same time and captured his license plate number. We filed a police report and included all this information, including the license plate number. The cop said the SF police force is understaffed, no one wants to work there, and yeah, they're not going to investigate. So this drunk driver, who totaled my car, who could have run down my children, can just go on enjoying life. So, please take note - if you hit a parked car (or a moving one, or even a pedestrian), don't worry. No one is ever coming after you. I hear this type of story a lot. "I was the victim of a property crime. I did the cops' job, tracking down who did it and collecting proof, all on my own. I presented a heap of evidence to the cops. The cops shrugged and very politely responded, 'F**k off.' AFTER I did their job for them!"

Part of SF's urban breakdown is surely due to the idiot politics of its elected officials. The SF police basically can't incarcerate anyone for anything short of attempted murder, especially after SF just elected Chesa Boudin (former Hugo Chavez speechwriter and adopted son of Bill Ayers / Bernadine Dohrn) as the new DA, whereupon he fired the 7 assistant DAs for incarcerating too many people. But the cops also just don't seem to care.

As far as I can tell, these policies and government are despised by 80%+ of working liberal San Franciscans, who strike me as fundamentally rational people, aside from attributing 90% of all weather readings to either global warming or, if it's a colder day, climate change.

But nothing changes and nobody expects anything to change.

If you live in SF, it sucks. But the moral of the story is, you couldn't dream of a better example (in the US) of the moral and intellectual bankruptcy of woke liberalism in action. Every Democrat presidential candidate outside of Biden and Bloomberg wants to do to the United States what the Democrats are doing to San Francisco. If one of the idiot Democrats wins the nomination, Trump should have a full-time staff based here to log all of the stupidity that SF puts its taxpayers through. They will come up with a very original, just shocking enough, 100%-true attack ad every week.



 My main Christmas reading this year was Why We Lost, published in late 2014 by retired Lt. Gen. Daniel Bolger. Examining the ROI of US government spending has become a weird passion project of mine. What better place to start than the Afghan/Iraq campaigns, which have cost the US somewhere between $2.5 trillion (Pentagon) and $6.5 trillion (dedicated antiwar interest groups) over the past 17 years, all to turn Iraq into a restive Iranian satrapy?

I picked this book for several very specific reasons. One, Bolger is a prolific author with no apparent career agenda (he retired in 2013), political ambitions, or axes to grind–a combination that's unheard of within this subgenre. Two, it would've been written for publication before ISIS had really put itself on the map (late 2014/early 2015), which recast the Iraq debate into a finger-pointing exercise at the expense of dispassionate analysis. And three, the book's mere title takes the intra-military debate over What Went Wrong to a place most men in uniform won't go.

The book is very readable, and gives the feel of being the middle of dozens of episodic life-or-death firefights, each of which illustrated a larger success or shortcoming of the American strategy. For me, this vivid episodic detail bolstered the author's authority, but grew repetitive after a while.

In his strategic analysis, Bolger is much more nuanced than the title suggests, comes to some interesting conclusions, and, along the way, highlights some very surprising facts. I was astounded to learn, for example, that "the US military did not torture anyone" at Abu Ghraib. (Bolger doesn't hesitate to highlight other episodes of US torture, intentional killing of civilians, etc.) US troops did photograph some prisoners in compromising positions, strip some of them naked, have some dogs bark at them, and intimidate them. In the most infamous case, a prisoner was put on a box with fake electrodes attached to his fingers, and was told they were real and he'd be electrocuted if he stepped off the box, but the electrodes were fake and nothing actually happened to that prisoner. All of these things would fit semiawkwardly into the US military's prescribed environmental manipulation for interrogating suspects without physically harming them or placing them under such duress that they'd say anything escape the situation. According to Bolger, the worst that could be said about what actually happened at Abu Ghraib was that some of these intimidation/degradation incidents weren't related to any specific interrogation.

Bolger also refuses to point fingers at the easy scapegoats. President Bush gets measured credit until the 2006 Iraq Surge, when every general who'd fought in the Iraq theater had told Bush to a) cut American losses and get out, or b) even if the US was to stay, in many respects the larger US footprint was becoming as much of a long term liability as much as it may be a short term asset. Bolger was ahead of his time in assessing the Surge to be both an impressive tactical success and a major strategic blunder. He's more critical still of Obama's subsequent "Afghanistan surge," which recycled the same mediocre Iraqi formula into a theater where it was even less effective, had no justifiable long-term value once bin Laden had been killed (May 2011), and was badly hamstrung by idiotically restrictive revisions to rules of engagement which, up to that point, had been generally OK.

Stan McChrystal's handling of the Afghan theater gets particularly terrible reviews: ridiculously restrictive rules of engagement; McChrystal holding himself/the Coalition hostage to a treacherously ungrateful Afghan president (Karzai) who never would've existed without American backup; and a blatant protection racket in which the US was getting extorted by every side of the Afghan conflict, worst of all by Karzai.

On the issue of Iraqi war rationales (terrorists vs. WMD), Bolger writes as if the military never took WMD seriously: everyone knew that Saddam had no real, functioning nuclear program, and while chem/bio weapons play well in Hollywood doomsday scenarios, in reality, they require circumstances far too specific and consistent (in terms of humidity, wind direction, extremely stable delivery or storage en route, etc.) to be really effective outside of massive artillery barrages of chemical weapons. In terms of capable terrorist organizations, on the other hand, Bolger repeatedly notes that Iraq hosted a genuine vipers' nest of capable, well-equipped Sunni terrorist groups which the Americans had largely liquidated by 2005.

With the benefit of hindsight, Bolger writes, the US had completed 99 percent of its job in the war on terror, at a fraction of the original cost, by 2004 (or even 2003, after the Taliban had been kicked out of major Afghan population centers). Al-Qaeda itself had been completely destroyed aside from bin Laden himself and a few couriers. Many separate groups did claim allegiance to al-Qaeda and attempt to imitate it, but they weren't operationally coordinated. Over time, the Coalition footprint became its own casus belli against the US. The Americans were always occupiers, regardless of how much money they threw around for victim compensation or reconstruction. This was compounded, in Bolger's view, by chronic Sunni Arab double-dealing (always shaking America's hand while stabbing it in the back) and Afghan cultural treachery, in the sense that honesty basically has no place in Afghan culture.

It's difficult for me to take some of this criticism seriously. Was the US supposed to call it quits in Afghanistan in 2003 without killing bin Laden or al-Zawahiri? Would al-Qaeda proper have remained infirm had the US stopped hunting him down? No way. At the same time, if not surging in Iraq in 2006, and getting out of Afghanistan in 2011, were strategically such obvious calls, where was the military criticism of Obama's Afghanistan strategy? Enlisted personnel couldn't make the criticism, but retired personnel could (and in the case of the Iraq surge, loudly did).

Anyway, I'd strongly recommend the book for students of contemporary US military history.

Stefan Jovanovich writes: 

If one looks at American deployments for what they are - largely bloodless training exercises, then Winning and Losing has to be evaluated by what the wargaming produced. In the first Gulf War, the U.S. military capabilities were larger in scale but no greater in technology or ability to engage at the sharp end than the French or British. The victory in Kuwait was greeted almost with relief - see, the Americans can actually win something. Now? The distance between the actual warfighting abilities of the U.S. and the rest of the world is now a chasm. The only comparison that fits is Nelson's Navy. The French, Spanish and Danish navies were still capable of challenging the British in the Caribbean and Baltic in 1780 and even 1790. By 1810 the British Navy was the largest physical and financial enterprise on the planet by a factor of 10.

I am not saying this is a good thing; I am saying this is what happened. The U.S. can win the war in Afghanistan tomorrow, as the President has said; we would just have to turn the place into Carthage. That we don't says nothing more about "victory" than the fact that the British Navy chose not to destroy every American ship on the Atlantic in 1813 because there was still the little matter of Napoleon's continental empire to deal with. Britain spent the next half century enjoying the financial dominance that its Navy had won. The dollar is the world currency now in large part because the Americans have that same military monopoly that Nelson and the Admiralty had created. 



 I think Ms. Shelton's odds for surviving the attacks by CNBC et. al. will improve significantly if she adjusts her Lafferite theology. In a old C-SPAN interview I watched this morning I saw her making the same claim that Boris Johnson made this week on his hustings tour: "lowering taxes raises more revenue".

Clearly, it doesn't; taxes are the government's revenue, and lowering them means that the government has less to spend. This confusion has been a chronic problem for "conservatives" ever since Professor Laffer first scribbled on his napkin. It seems to have created a fog even for Laffer. How else can one explain his support for a single tax rate across all income levels? As a policy and political platform "lowering taxes" is a pure folly equal only to the defense of "capitalism". (Ms. Shelton commits that sin as well; she is an advocate of "democratic capitalism" which is itself an oxymoron.)

Where the progressives are instinctively right is in their belief that the rates should increase as income brackets go up. Where the progressives are and always will be disastrously wrong is to believe that the fundamental purpose of a tax system is to inflict punishment on the rich, to be a collective act of revenge against those who make the most.

A flat tax rate ignores the common sense truth we all see around us: the successful are much better than the poor at making money and the rich are much better at making money on their money. All the babble about the American dream ignores the obvious fact that the power law applies to enterprise just as it applies to the ability to hit baseballs 400 ft. All of us who love the sport can play the game, but only a very few can make the All-Star Game roster. What produces more wealth for both the government and the people who pay taxes is the lowering of TAX RATES if you get the proper shape for the stair-step of brackets and rates. The current tax code has gone a long way towards achieving that result; that may explain the seemingly inexplicable–how both net wages and tax collections can continue to grow in the United States even as they flatten out elsewhere.

Rudolf Hauser writes: 

The Laffer curve idea that lowering marginal tax rates increases revenues only works to the extend that it makes it cheaper to pay the tax than the costs and losses incurred in trying to avoid the high tax rates. In regard to the incentive impact on growth, it is best not to focus on how much the tax rate is reduced than on how much after tax income is increased. The incentive impact of reducing the tax rate five percentage points is a lot more important when the initial marginal rate is 90%, thereby increasing after tax income by 50%, than it is when the initial rate is 50 and the increase in after tax income is only 10%. When the cut applies to the capital gains tax rate, there might initially be a larger increase in tax revenues, as many long term investors might tax advantage to sell their stocks that they only held for so long because of the tax consequences of selling and/or to repurchase the shares to establish a higher cost base should the tax rate be increased again in the future.

But beyond that, there is a conflict of interest between the wealth of the nation and the wealth of the government. Lowering rates does increase the incentive for greater growth. But if the average tax rate is only 20%, the growth in the economy has to increase five-fold for the tax cut to result in more revenues. That is unlikely in most cases. It also has to be remembered that many people are by nature game players, that is they are very competitive and like to win. Why would a billionaire have any incentive to work hard? After all, he has more money than he could ever need to satisfy his consumption needs? It's because gaining the most money is like winning the most points in the game. So even when the government takes a large share of the gain, there is still the competition to have the most points, that is after tax profits and wealth, even with the reduced incentives. Naturally, that only applies to some people. Many will behave like the British aristocracy of old and become a leisure class. But it does explain why we were still able to have economic growth when marginal tax rates were so high in the 1950's, along with the fact that the various loopholes, etc. reduced the actual tax rates that were paid. 

Stefan Jovanovich replies: 

I hate to disagree with RH, especially this week when I am enjoying a biography of Gresham that I owe to his recommendation. My view may be distorted by my experiences as a low-rent criminal, both with and without a law license. My direct observation of both clients and customers is that they all followed the Gompers rule where taxes and penalties were concerned. ("What does labor want? We want more schoolhouses and less jails; more books and less arsenals; more learning and less vice; more leisure and less greed; more justice and less revenge; in fact, more of the opportunities to cultivate our better natures, to make manhood more noble, womanhood more beautiful, and childhood more happy and bright.") Taxpayers want to pay LESS at every possible rate. When rates are confiscatory - at the rates that Democrats have traditionally favored - taxpayers literally stop being taxpayers. They find ways to categorize their wealth and income so that it is not subject to any rate at all. They don't look for marginal reductions; they look for escape.

The ability to escape explains the seeming paradox of the 1950s when private incomes and wealth grew even though the legacy tax rates of WW II remained in place. Thanks to the magic of non-recourse debt financing, the effective tax rates paid in the 1950s were no higher than they were in the 1980s after Reagan's tax cut. The 1954 Tax Act became the bible of the 1950s whiz kids in Beverly Hills whom I was lucky enough to go to work for in the 1970s and it made their fortunes. (The reference is deliberate: Tex Thornton's Litton Industries offices were just down the block on Little Santa Monica.) 

When Jerry Ford, the economic moron who succeeded those other economic morons Johnson and Nixon, signed the 1976 tax reform act, he not only did me out of a job (no more 8-1 write-offs on real estate, oil & gas and movie deals); he also raised the effective tax rates on the wealthy to where they had been in the late 1940s. It produced exactly the same kind of inflation that Truman's vetoes and price freezes had done. The Federal government collects roughly 21% of the national income. The individual income and employment tax share is about 17%. It is rumored that Kevin Hassett's magic calculator at CEA produced a Laffer ziggurat (it is never a curve) that begins at 5% and ends at 30% for all personal incomes; its output was 20% of the national income - 3% more than the current collections. The result was never published because it would be the ruin of the Republican Party.

Integrating Social Security and income taxes would be even worse than Bush's "privatization"; and they would never be able to get it through the Rich's brains that their loss of exemptions and carve-outs would be more than offset by a simple 30% top rate. But, to be fair to the Rich, they know - from long experience that a simple stair-step is a Congressional impossibility. What would Representatives do is they could not offer special rules for wool growers and weavers? Still, as a thought experiment, it is intriguing. 

Alex Forshaw writes: 

Getting back to Stefan's original post, I don't understand how anybody can take seriously someone who for tight money in 2011-13 who's simultaneously in favor of loose monetary policy today. (Stephen Moore, Shelton, others) You can be for one or the other but not both, unless you 'evolved' to a completely different philosophy… which rarely happens honestly in my observation.

Stefan Jovanovich writes: 

Let's go back to RH's point as well. If monetarists think that "money supply" is both the fulcrum and the lever for Archimedesian economics, we taxistas tend to have the same certainty that tax rates move everything. They don't.

For me Ms. Shelton's heresy is the belief that legal tender in any form can be a "store of value". I also find her giving Jefferson and Madison credit for putting the U.S. dollar on "the gold standard" the worst kind of Ron Paul historical fiction. If credit is to be given to Virginia Presidents for fixing the dollar by weight and measure, it has to go to the first and last of the Founders - Washington and Monroe.

Rudolf Hauser writes: 

The monetarist point is simply that an excess of money ( the accepted means of exchange and those liquid assets held that are considered reasonable means of quickly obtaining the means of exchange at minimal cost) results in an attempt to dispose of the excess, which initially results in more nominal purchases of other assets and goods and services and subsequently inflation as the sellers of those goods and services realize that the increased production was not really economical. When there is a deficit of such liquidity, the opposite happens. If income and nominal wealth gains go to those who have a low propensity to consume, the increase may mainly be reflected in higher prices of existing asset, both physical and those financial claims behind such assets. If monetary policy is erratic and causing erratic inflation, the increased uncertainty as to the future might deter future real economic growth potential. Aside from that, monetary policy has negligible impact, if any, on real growth potential. Another mechanism is the increase in money driving up prices of financial assets, thereby lowering interest rates. That in turn can shift some purchases of durable goods financed on credit and investments likewise financed on credit to be shifted forward, whereas a deficiency of money can work in the opposite direction. Stefan believes that the central bank can control interest rates. But a central bank can only keep interest rates low when it has created an inflationary situation by continuing to accelerate the rate of monetary growth. When that stops or the public expectations catch up with what is really happening, those interest rate will rise. As the central bank is not the only creator of near forms of money, the demand for money created by the banking system can change for numerous reasons such as opportunity costs, the speed of transaction settlements, inflation expectations, and financial uncertainty. One impact of financial uncertainty is reduced access to quick credit and less confidence in the ability to convert such assets as commercial paper into money that can be used to settle transactions quickly and at minimal cost is diminished. Shifts in the demand for money depend on public desires for the amount of money they wish to hold and are not well understood or necessarily constant.

In contrast the main impact of tax policy is on economic growth potential. There are both temporary shifts as changes and expectation of changes in tax policy can drive income recognition forward or backward and the far more important permanent effects. To the extend producers try to pass on tax increases to consumers, it might have some inflationary impact as industry shifts the tax burden on to consumers, but since the income of consumers is not increased, eventually it should mainly have a real impact on the purchases of goods and services.



"If the best horse always won, this stuff would be so easy," the Old Frenchman used to tell me.

But it sure helps when the best horse is running against a field of nags. Similarly, I don't recall, in forty years, what appears to be a easier setup than right now in equities.

Not even close. Ever.

Let's start with the backdrop, which is decidedly negative at least in terms of recent news - global slowing, yield curve inverting, earnings trailing off etc.


Now, let's just look at the reality. In terms of what's going on with rates–a contrived situation on the short end, entirely inconsistent with quality spreads which have narrowed in the past couple of months, considerably, even with respect to junk.

Whatever global slowing was going on in 2018 has decidedly and abruptly turned. Since the first of the year, Shanghai is up 24%, Oil is up 27%. Global Slowdown?

To think we're still in a slowdown period is to miss what's already going on.

Employment in the US is very strong, evidenced again by this past week's jobless claims, and should be evermore evident after the next monthly jobs number where it should become clear the February number was a shutdown-induced aberration.

In fact, the basic indicator I keep (and many others do, of essentially the same thing, in various forms) of commodities prices relative to employment has again turned up–and at already high levels. This is very strong.

Earnings, here we are, end of Q1 and month-on-month S&P earnings are still growing. That;s right, despite the 21 1/2% growth in earnings on the S&P 500 last year, and the fact that they were to be contracting by now, are STILL growing, month-on-month.

The sentiment is still quite negative, and there are actually people out there who, for whatever natural-glass-half-empty they harbor, think the December lows will be challenged here. In December, we saw sentiment readings in surveys, in the press, in put/call ratios and in VIX futures that were negative along the lines of what we saw in late 2008! Such readings occur, typically, before protracted gains, bull runs that last many months. The following chart shows the 13 week rate-of-change of the S&P, as percentage, as of this Friday's close.

We haven't seen a move this vigorous, up and outta here, since 2009 Q2. Does this look like a market about to roll over? All of this backdrop, historically, set the stage for a prolonged bull run–which we are again in the early throes of it would appear.

"Roy's Red" –the six week coefficient of variance (I call it that after my late friend and fellow trader, Roy Klopper, who cooked it up with me years ago trading value line futures on hourly data) has again dipped below .10, indicating an imminent move (i.e. we're coming up and out of this congestion we've been in the past month or so–a congestion which has had an upward bias, indicative of strength coming when we break up out of it). The last time we had a reading this low in Roy's Red, this imminent of a move, of an impending and imminent trending move, was in early October last year.

The volume bars of Friday (tight, profitable-quarter-ending-stops being played) indicate one should be a buyer on weakness Monday - even if things collapse Monday, you gotta be a buyer. ESPECIALLY if you can be a buyer below Friday's close (I don't know if we'll get this chance, or if Monday is a further collapse, on heavier volume–I doubt it, the setup is such that Friday should be made up and then some in the coming week). Even if things work a little lower, the bigger picture is so strong right now, that backdrop story so counter to what's actually going on in the numbers, and the forecast so strong here, and the daily so set up for a buy I just don't recall things ever being easier than right now.

Could I be more unequivocal?

Alex Forshaw replies:


A few devil's advocate arguments:

1. Shanghai composite was trading at 10x forward earnings 3-4 months ago with aggressive supply side government stimulus. that has historically always been a good time for a trading bounce. There hasn't been a material shift in on the ground economic fundamentals in China.

2. By my math the SPX is trading at 17x 12m forward EPS. The range has been 15-18x in the past 3 years. The SPX traded over 18x forward earnings 4 times in the last 100 years — 1929, 1936, 1999, and january 2018. In each of those occasions, the SPX's sharpe ratio for the following 12-36 months ranged from quite bad to historically atrocious. so unless there's a massive expansion in earnings in the near term, the SPX is not valued attractively right now.

3. Earnings season just ended. There won't be material movement in the "E" for another month.

4. While the yield curve doesn't historically correlate with fwd 12m equity returns, how do forward 12-month returns look when we are at least 6 years into an economic expansion and the yield curve has flattened? It's one thing for the yield curve to flatten 2 or 3 years into a bull market. but 10 years? Seems like the context is materially different from a lot of the past contexts around this statistic, although I haven't studied it closely.

5. Employment is a coincident to very slightly leading economic indicator, but hasn't it decelerated very markedly recently?

6. Europe is clearly slowing down dramatically again. China has had a valuation bounce but economic activity there is still quite weak judging from company earnings reports and anecdotal. The US has managed 3.1% GDP growth with a 5% deficit/GDP that dwarfs the OECD average.

7. Why would you pay 17x ftm eps for 3-5% estimated earnings growth? 17x for 20% eps growth (12% organic), a la 1h18, is one thing…

8. Given the volume of corp borrowing and debt issuance, and the peaking of the current rate cycle, why wouldn't the next downturn be much worse than the 2008 one? I think the "next downturn" risk is maybe 20% in next 6-9 months, but even if it's 20%, why would you pay 17x for that?

Ralph Vince writes: 


All good points.

I'm considering valuations with respect to competing assets more so than historically, the notion being the investment dollars move someplace. Is the the "right" way to asses these? I don't know, it's how I usually try to look at it, but time will tell.)

Consider the long bond which is selling at a "multiple" of about 35 here vs the S&P 500 (whose earnings, as I say, are STILL rising; actual earnings, not future prognostications of events which have not transpired) of 21.48 (S&P500 PEs were riding above the long bond "multiple," dipped down and touched it around 88 and again in 95, by mid '05 the S&P500 PE dipped below the bond multiple, and has remained there ever since save for a period in 08-9 where the PE for stocks went haywire for several months. So one cannot say that the bond multiple naturally belongs above stock PEs, but they have for nearly a decade and half).

That's with the VERY rich US yields, relative to the rest of the world. The Bund, of course….a different animal here. Investment dollars flow someplace, the US, with earnings still gaining (despite the incredible gains of the past 14 months or so) look very attractive by comparison.

Employment is extremely healthy, so much so that wage pressure is finally returning. By my measures, last month was an aberration caused by the shutdown. A more accurate assessment, a proprietary one with respect to equities prices reveals: We're not even close to a sell by my employment measures.

On the more near-term, the next few weeks should see an end to this congestion we've been in for a month or a little longer in equities prices, per Roy's Red. Whereas it COULD be to the downside, I don't see it, the technicals (and sentiment) are acting far more lie 2009 Q2 here. Further, the pattern of volume (which is no different than how one might have read the tape 35, 40 years ago or before– only now we have the benefit of seeing bigger swaths of time, e.g. I look at yearly, monthly, weekly volumes as well) are ALL bullish here, all buy any weakness here. If I had to rely on jut one indicator, this would be it.

Alex Forshaw writes: 

To me, the S&P 500 is trading at almost the same valuation as it was in January 2018, except

1) S&P estimated earnings growth is 3-5%, instead of 20%
2) the 1yr/10yr spread (the most predictive of all the yield curve spreads) is slightly negative today, vs +80bps a year ago
3) all macro fundamentals have decelerated everywhere, and the rate of negative surprise has dramatically accelerated
4) SPX earnings yield minus 10 year yield (attached) is inline with its average over the past 10ish years, although if you go back further, it looks more favorable
5) there is no prospect of further policy stimulus until after the 2020 election, which remains a complete wild card, and seems like a "lose/no-win" coin toss for investors (the possible outcomes being untethered socialist idiocy or the dysfunctionally mediocre status quo)

In my experience, stocks-vs-bonds valuation logic is not very useful when stock valuations are rich by their own historical standards. It would have said to be aggressively buying through 2017/1h18 (if you were looking at the past 20 years of data) and the sharpe ratio would have been quite poor. It only takes 1 bad stretch to seriously derail one's financial career…

Ralph Vince writes: 

Re: "there is no prospect of further policy stimulus"

The transportation bill, likely to be proposed very soon, and highly stimulative. Think QE5. Giant barrel of uncooked pork.

China, among other things, agreeing to buy 500bln/yr ag and etc over next 6 years(my cheap seats guess), highly, HIGHLY stimulative (2 1/2% yr on a 20 trln economy, before any kind of a multiplier, which is at least 2, as that is just export, but goes into either consumption or investment 1x over 12 months, and that accumulates going forward).

Effects of "New Nafta" not yet felt online. We could go on and on hereon these various recent changes all of which are stimulative.

If you take away energy, and go back to our being a net importer of oil, and take away the repatriation effect of the recent tax bill (and AAPL agreeing to invest 350 bln, and Foxcon, and etc) , we would likely be at a GDP deficit here. Things haven't really gotten going yet is my point, but these are real numbers coming online. I don't for the life of me understand Atlanta Fed GDP projection.

Steve Ellison writes: 

Since 2010, the S&P 500 has not strayed too far in either direction from the level implied by a 2% dividend yield (see attached chart). From this perspective, the S&P got a little ahead of itself in 2017, and the 2018 correction overshot. In fourth quarter 2018, there was a plausible argument that the required dividend yield ought to adjust higher (implying the trend line should be pushed down lower), but the recent move in 10-year yields to multi-month lows seems to have taken that possibility off the table for now.

Dividends have been growing at roughly 8% per year recently.



They say the market is upset about the jump in bond yields but maybe she's anticipating a premature return to socialism

Stefan Jovanovich writes: 

If I thought there was any reliable direct connection between elections and speculations, I would be tempted to join LW and you other clever traders and bet my "system" - which does better than average at guessing political horse races. I don't because, if there were any such link, I would not be able to pretend to be an expert in such company. You guys would already know the odds down to the precinct levels if that mattered.

I think, in fact, you all do know what matters regarding politics and money. Now that I am 60% of the way through the House "swing" districts, I are learning what the markets have already predicted: Jim Jordan is going to be the new Speaker of the House of Representatives. When that happens, the Federal budget and the Treasury's operations are going to be subject to the approval of the 21st century successor to John Sherman; and the shock is going to be that the national debt will be brought home. The taxpayers are going to become the Federal bond holders just as they did during and after the Civil War; and they are going to want tariffs and "sound" money to protect their investments, even as Confederate paper (aka Chicago municipal bonds) is allowed to evaporate.

Larry Williams writes: 

If the new speaker shrinks debt stocks will get hit hard. Deficits are very bullish for equities.

Alex Forshaw asks: 

Larry, why do you say that/how do you strip out correlation vs causation in this? The blowoff 1998-2000 top occurred among budget surplus and deficits are inherently counter cyclical i.e. generally low in late cycle/high in early cycle (deficit as % of GDP biggest in 1981-83, during/after 2 recessions or 1 severe recession; 1991-93 after a fairly deep recession; 2002-03 after a recession; 2009-10 after a severe recession.) To the extent that the deficit is high adjusted for its place in the economic cycle (2012, 2018 ytd) it doesn't seem bullish. To the extent that deficits are unusually low cyclically adjusted (late 90s, 2007 arguably, 2015 arguably) it definitely does not seem bearish. 

Larry Williams replies: 

I don't think it is correlation but causation. Large deficits means lots of money floating around the hood. That translates to expansion, building–which translates to jobs, and that to consumer spending, and that to corporate profits. I'm traveling so lack data. The "one and only" Mr Vince may wade into this with data.

Ralph Vince responds: 

25+ years ago I bought the Commerce Dept Database of 900 data items, and set u p a program (that would take two months to run, with a math coprocessor no less!) to examine each pairwise data set, and for each pairwise data set, to skew them +12/9/6/3/0…/-12 months, and record only those dataskew pairs with absolute value of correlation > some value (I forget which, but it was quite high).

One of the (many) dataskew pairs that filtered through very highly was that of federal deficits and economic growth (and broadly, we can stipulate that ROC of economic growth correlates to equity returns). The greater the deficits, the greater the market gains.

There were periods that did not fit this pattern, of course, it was not absolute (one out-of-sample period being the Robt Rubin era which was yet to transpire).

My guess is like the Senator's here; greater money floating around menas greater economic activity. I think it;s even a deeper causation than that. I would define it by saying that debt needs be repayed only once (if ever, it can also be perpetually rolled — the "problematic" nature of this is solely a function of rates. If manageable due to rates, it is virtually nothing. Further, even if rates become problematic, the yield curve itself provides an avenue of release — cue Rubin again), whereas the borrowed dollar can circulate multiple times.

So there is the multiplier effect of borrowed money vs the borrower's asset which is a one-time shot

If it weren't for borrowing, in particular the fractional banking system, we'd be in the year 1,000.



The problem with Short Interest is that the data from the exchanges tend to be out of date. Right now the latest data I have is from December 31. - A Reader.

There are at least 2 services that plug into the back ends of 100+ HF's and basically derive a short interest with a 3 day lag (the time it takes to settle a trade). 



 It only takes 3 months (if that) to lurch from a bullish supermajority to a bearish supermajority as far as China is concerned. From a sentiment perspective it doesn’t get much more bearish than this. On our TMT buy side trip, there was 1 bullish contrarian. The most bearish person in our entire group was the analyst from CIC, the Chinese sovereign wealth fund.

The “policy cycle” promises to be much weaker now than before. The Chinese view the 2009-10 stimulus as a disaster and don’t want it repeated (or so they insist; after power has been transferred, incentives will change, and policy will no doubt follow.)

Chinese real estate transaction volumes have been recovering for two months. However, developers are not buying more land from city governments to replenish liquidated inventory.

The more connected a given investor happens to be with Chinese princelings and elites, the more bearish he seems. Nobody, and I mean nobody, knows how political power will be apportioned when the power transfer happens later this year. The Hu Jintao-Wen Jiabao “liberals” (to the extent that any Chinese faction has any accurate ideological label) seem to hold almost most, if not all of the cards, and the only question is how far they will press their advantage. The corrupt wealth accumulated by the underlings of Bo Xilai, Zhou Yongkang, Zeng Qinghong, and their many underlings, wants and needs to escape China ASAP, before the late-2012/early-2013 change of power.

The American EB-5 visa program, the fastest and most expensive route to a green card, is going nuts. (An EB-5 requires $500k of investment and 10 American jobs.) Canadian citizenship was considered highly preferable before, because it’s much easier to obtain, and Canada doesn’t tax non-Canadian income. But that door seems to have closed.

It seems like the “liberals” have compromised with the devil (the PLA) to determine the composure of the next Standing Committee. Over time the PLA, which has historically been underrepresented in political decision making bodies relative to the raw muscle at its disposal, took the side of the Bo Xilai-Zhou Yongkang nationalist-socialists in the factionalism within the Standing Committee. When Bo Xilai was in political limbo in late February, the PLA’s loyalty was judged extremely uncertain by Hu and Wen (resulting in an avalanche of headlines in People’s Daily and other organs, reminding PLA cadres of their allegiance to “the Central Military Commission *headed by Hu Jintao*”), giving way to a sense of imminent instability among Chinese elites.

The sense of imminent instability in early March is now gone, but the medium term power structure remains completely uncertain. Meanwhile, there is a growing sense amongst many Chinese elites that their the PRC’s system of governance is completely unsustainable. One of my friends, a Mainlander who went to the US for college, worked for a hedge fund, and now works for one of China’s largest internet VCs firms, bounced John Hempton’s “The Chinese Kleptocracy Is Like Nothing Seen in Human History” article around her Beijing office. Pretty much all of her Chinese friends – Mainlanders – agreed with it: the country is being looted; nobody has the power to stop it; anybody who tries to stop it is firstly a hypocrite, and secondly, on the cusp of political suicide.

Chinese people are also more skeptical than ever of everything, if that’s even possible. The Chinese wife of a Beijing-based American insisted that Bo Xilai is a hero and was an instinctive democrat, and all official accusations and “leaks” against Bo (11 murders; US$6bn laundered out of the country; wiretapping the entire Chinese Politburo) are fabrications. A very plugged-in American-born Chinese person was also sympathetic to Bo, believes Bo was no worse than average – and believes most of what has been reported about him.

Still others, also very politically attuned and connected, believe that although Bo’s liquidation was a very political power play, not only are the officially documented crimes real, but the true extent of his crimes has been significantly understated – the CCP has already lost a huge amount of credibility over the rumors which have leaked out and nobody has any interest in this spinning further out of control.

Most people shrug, say it’s none of their business, and go on with their lives.





 There are some intriguing financial aspects of the Bo Xilai case.

1. Bo Xilai racked up $26bn USD of debt while he was mayor of Chongqing. He supposedly ran the city's budget at 150 percent of revenues - *net of *the massive "sing red smash black" campaign which looted billions of private assets from the city. He is accused of moving $1.3bn overseas just for himself, most of which came during his Chongqing tenure.

2. Bo was definitely at the gangsterist extreme in terms of how violent he was (he and his wife are now accused of nine murders between them, and massive use of torture in Chongqing. These reports did not all suddenly emerge post-scandal to humiliate him - the FT and others have been running articles on the subject for months.) However, Bo was able to do this with a very large amount of protection within the Chinese government for a very long period of time, in both Dalian and Chongqing. None of Chongqing's debt was classified as at-risk. (In fairness to the PRC, you could make an identical argument against the one-third-ish of American muni bonds which aren't backed by a specific revenue stream like a toll road or utility fees

Chinese people, imho, have known that stuff like this has been going on for a very long period of time (at nowhere near this level of organization or sophistication, however). I think this is a huge driver in Chinese capital flight - rich Chinese people hear scattered stories of insane corruption (well beyond any ethical pale) and simply do not feel safe at all, and export capital at a massive rate. If the best-informed insiders are selling so much stock in PRC Inc, why should anybody else be buying?

3. Bo Xilai's close business crony, Xu Ming, was president of the Dalian Shide conglomerate. He has vanished in PRC detention for a month and his business empire is unraveling.

According to the dissident site Boxun that has been leading the news cycle on this whole scandal, Dalian Shide's core business - petrochemicals manufacture - has been unprofitable for a very long period of time. The stock-speculation side of the business has been successful, and the conglomerate also engaged in a lot of land permit arbitrage (using the commercial nature of its business, plus close government connections, to gain land and land permits very cheaply. The overall financial status of the conglomerate is very murky, but appears to have required enormous amounts of debt in order to stay functional, and the debt recall has blown the firm up.

38 lenders had exposure to Dalian Shide. Before this scandal occurred, not a single loan to DLSD was classified as non-performing, even though many of the loans had no realistic prospect of being paid back. imo, this is a blunt example of why NPLs in the PRC are massively understated.

4. Even before the Bo blowup, DLSD's Hong Kong subsidiary, Gaoden, was trying very hard to access liquidity thru HSBC, RBS, and others in Hong Kong. So the house of cards was in some trouble even before its political risk premium exploded.



 In a survey of doctors on a website I follow, 80% of responding doctors answered no way would they allow their patients to email them.

This was the response I posted:

To the 80% of responding docs who say "No way": If you wonder why many patients develop major hostility to doctors' office procedures and to doctors themselves, and why the public is happy to stay silently on the sidelines while the government and insurance companies take over control of doctors' working lives, could it be that doctors (who for 100 years had control of their practices and refused to make them patient-friendly and efficient) have failed to enter into the 21st century? And regard it as perfectly acceptable to impose inefficiency, frustration and wasted time on patients by not letting them communicate with the doctor but requiring them to make an office appointment (probably 3 or 4 hours with travel to and fro, long office waits, etc) for every question or matter?

I see nothing wrong with a doc charging for email or telephone time. Those patients wishing to use email or telephone should be willing to pay the time charge, regardless of whether such charge is covered by insurance. But if our profession continues to lord it over patients by refusing to allow them what every other profession and all of modern life does, doctors will deserve what they get in the way of government and insurance oversight and regulation.

Charles Pennington writes: 

Chiming in, that is a pet peeve of mine. What other profession won't take email? Lawyers, dentists, accountants, etc. all communicate by email, of course. Doctors make it even worse by making you communicate with them only via a voice-mail maze that begins with "If you are a physician, press 1; otherwise, your call is very important to us so please remain on the line…"

Russ Herrold comments:

I'm with the doc's here.

When the tears are flowing, everyone says they are willing to pay, but without getting into the business of FIRST AND AT THE ONSET, having a Retainer Agreement, unilateral right to draw it down upon presentation of statement, Mandatory Arbitration clause, deposit for fees in the Trust Account, all one does is lay a background for a fee dispute complaint or malpractice counterclaim to a suit to collect those fees. It's not gonna happen as a general practice. The doc is caught between the rocks of patient desire for immediacy and convenience; the professional obligation 'not to miss' something that in hindsight seemed obvious; and the fact that insurer reimbursement for web and email oriented 'treatment' lag.

Having had poor service (breaches of patient confidentiality, outright prevarication by nursing staff, and failures of delivery of test results repeatedly and after specific instruction) in the care of a wound, all since May of this year, from the standpoint of the patient, I want there to be a formal paper trail (not email; not call center notes in some database, forgotten and closed; not some other ephemeral media) … a well drafted letter explaining the issue, a file CC, and a cc to the supervising agency (hospital system privacy officer, nursing board, 'authorized provider' certification entity), and an equally formal response (or in its absence, proper escalation on my part).

Unreasonable, I know, but progress is made on the backs of unreasonable people.

The same goes for lawyering. If a client cannot keep and will not pay for an office visit, or meeting at other venue of their choice, to permit the open-ended probing that proper representation requires, they won't be MY client very much longer, as I cannot properly represent them.

Alex Forshaw writes:

The fact stands that interacting with doctors is a pain in the ass from the second you enter the door. They do not face nearly enough competition. There is no bigger beneficiary of protectionism in the entire country. The lack of competition has meant they face no evolutionary pressure. I hate "socialized medicine" as much as anyone but US doctors are as much culprits in their own demise as the tort bar and all of doctors' other favorite bogeymen.

George Zachar adds: 

In my conversations with doctors, I've been told the potential legal and regulatory liabilities risked by patient email contact are vague and large, leading them to simply shun the practice.

Phil McDonnell writes: 

Regular email is not a secure medium. Privacy regs hamper a Doc's ability to use email. Most will call you on the phone and/or write a letter with results. That is why expensive software with encryption is required that often the smaller practices cannot afford.

Gordan Haave responds: 

Sure that's what they say. But it's BS. How is the fax or telephone somehow more secure than email?

If the issue is confidentiality, why is it that Lawyers will email you but not Doctors?

There is one other group that won't send emails: The IRS.

I am in the middle of a personal and business audit, and you can't email the IRS. It's very inefficient.

To me this is just further proof that Dr's collectively are not the saints they claim to be, but rather just a cartel that uses wildly inefficient systems to extract rent's from consumers.

Dan Grossman writes:

I am surprised that a few otherwise highly astute Speclisters so easily accept doctors' excuses for refusing to permit email. As a service to the medical profession and to our country (and in time for inclusion in the President's speech tonight as a new regulation under the Patient Protection and Affordable Care Act), I have drafted and present below a few simple groundrules that a doctor can require a patient to accept as a prerequisite for emailing him.

"A Patient wishing to email Doctor must indicate his acceptance of the following:

1. Complex or detailed matters require an office visit. This email is for minor procedural, scheduling and prescription renewal matters.

2. Doctor will attempt to look at reasonable numbers of emails as time permits but because of his busy schedule cannot commit to read or deal with every email. Any information Patient wishes to convey with certainty must be conveyed by other means.

3. Emails are not secure and should not include sensitive personal information. They will not necessarily be presevered or included in Patient's medical file or record.

4. Patient agrees to pay $20.00 for each ten minutes or part thereof Doctor spends reading or dealing with emails from Patient, regardless of whether the amount is reimbursable to Patient by his insurer. Medicare and Medicaid Patients unfortunately are not eligible to use this email since such programs do not permit email charges. (Doctor regrets this and asks that you please take up such inefficiency with the Government rather than with him.)"

With regard to 3, doctors or their office assistants can instead spend 15 minutes setting up free encryption, as others on the List have already pointed out.






 This purpose of this post is to help me think out loud more than anything else, and as always, I would love anyone's feedback/discussion on any points mentioned here.

Going into the Jackson Hole meeting, the market had a range of expectations around A) to what extent is Bernanke a "dove" and how urgent another round of stimulus would e; and B) to the extent that Bernanke's trigger finger is itching on the next printer cartridge, what political constraints might force Bernanke to stimulate less than what he'd prefer, given his extremely dovish writings, speeches, and policy history — and the surrounding context of 58 percent Greek government bond yields, negative Tbill rates, BNY offering negative interest rates on institutional cash deposits, and Italian government bonds beginning to trade lower despite the ECB's recent intervention?

The market sees Bernanke as an ideological dove, driven by a zeal to correct the great imbalances of the "global savings glut" (FX surpluses, and trade and employment deficits, spawned by artificially cheap Chinese currency). He can correct that imbalance by devaluing the USD; but quantitative easing is the only tool available to him to devalue the USD. The level of USD devaluation required to normalize China's balance of trade is extremely large (over 20 percent), and would require larger and larger successive iterations of QE to accomplish.

Since Bernanke believes a significantly cheaper USD is in the long-run interest of the country, and QEs of larger size devalue the USD more than smaller-size QEs, Bernanke wants to pursue QE only at such times when the political environment will grant him the most sweeping authority possible, to implement the largest QEx possible, to devalue the USD as much as possible. In other words, to seek further iterations of QE only at the points of maximum panic among the financial and political establishment. This strategy worked somewhat effectively in March 2009 and August 2010.

Having established a framework that Bernanke is ideologically extremely dovish, several events curtailed Bernanke's political latitude going into Jackson Hole 2011.

First, less than a month ago, the Republican frontrunner for president said it would be "treasonous" for Bernanke to enact a third round of quantitative easing. No Fed chairman has ever served in office against the wishes of the sitting President, and the Fed would lose market credibility if it were seen as not having the confidence of the President — or a realistic potential future President. Bernanke cannot simply ignore that comment. Even if it was a 'rookie comment' by a relative newcomer to the Republican race, the candidate (Rick Perry) was playing to a very strong strain of anti-Fed, anti-Wall Street, anti-financial establishment sentiment among the lower/lower middle class of the country, especially the white lower middle class that is the Republican Party's political backbone. Bernanke can't ignore that constituency, at least not indefinitely. Second, the Fed did announce a mini-QE by pledging low rates until mid-2013. However, that had little effect on the market when it was announced — suggesting the market would be unmoved by non-drastic Fed action. Thus, Bernanke would have had to do something drastic — further testing the Fed's political limits — to enact a policy that would suitably impress the market. Third, industrial commodity prices (oil, food, etc) remain relatively high, despite the recent hot money de-risking across all asset classes. Fourth, despite the -10% August, there is not a sense of panic, fear, or clamor for action from American investors outside of Wall Street. In 2010 the situation was arguably different — there was a more acute bear market in the aftermath of the flash crash. Fifth, Narayana Kocherlakota, whom the market perceived as a moderate dove, joined Fed hawks Fisher and Plosser in dissenting from the Fed's pledge to keep short rates near zero for another 2 years. The Fed has not had 3 dissents since the early 90's. This marked a high in terms of dissent against Bernanke's dovish inclinations.

For these reasons among others, expectations going into Jackson Hole were low, although in my opinion there was consensus on some kind of "Operation Twist" duration extension of the Fed's balance sheet.

The Fed in turn produced nothing tangible, other than a promised 2-day FOMC meeting on Sept 20-21 (longer than the customary one day) to "allow for wider discussion of the various tools at the Fed's disposal." Wink, wink, we are going to have a really big surprise for you on Sept. 21, wink wink!

The market immediately interpreted this as a green light that some variant of "Operation Twist" would go forward — whereby the Fed would sell short-dated Treasuries and buy long-dated Treasuries, thus extending the maturity of its balance sheet and increasing the money supply by forestalling until a far future date the time at which its holdings would run off the balance sheet. The S&P proceeded to rally all day long.

Two things about the market's bullish reaction puzzled me.

One, if the Fed really intended to do something inline with market consensus, why wait? Bernanke has harped on the need for "good communication" between the Fed and the market, in contrast to Greenspan, who seemed to enjoy jolting the market with indecipherable musings that served no purpose besides Greenspan's ego. The market expected something concrete out of Jackson Hole. Why not give the market something concrete out of Jackson Hole, then, unless Bernanke is waiting for something to happen between now and September 21 that would give him more latitude to act? Does he feel that he does not have enough latitude

Two, duration extension would be highly negative for banks' earnings, because it would effectively flatten the yield curve even further, depressing financials' earnings when Bank of America is already contemplating another capital raise, and European financials are trading within distance of their 2008 lows. There would be no less stimulative way of increasing American money supply than by flattening the yield curve, which as I understand, duration extension would do. Given the fearful macroeconomic environment, why would the Fed settle for such an impotent way to expand money supply?

Bernanke had no reason to do anything other than telegraph exactly what his next step would be. The fact that he didn't is important, and in my opinion suggests one of either 2 things: either that Bernanke expects something to happen which will give him more leverage between now and 9/20, to enact more drastic policy than current politics allow; or that he feels that current conditions simply aren't ripe for him to implement a further iteration of QE, at the size he wants, relative to what he thinks the political climate will tolerate.

Either way, it's bearish for the market.

What do you think?

Gary Rogan responds: 

The market decided his impotence is bullish. Lack of liquidity doesn't seem to be the cause of the current problems. More liquidity wouldn't help. The market is somewhat confused, in that there seem to be at least two camps/thought processes that interpret his impotence in diametrically opposite ways. The bearish camp is more emotion-based and thus faster in in its response, so the market first essentially gapped down, and then recovered. This is analogous to a response of a human being to a perceived potential threat that is recognized by the thinking brain to be not a threat after the initial fight or flight response.



 This is the perfect time for Palindrome to recreate his "breaking the Bank of England" feat in reverse by buying the yen and breaking the Bank of Japan. He will probably need 100 times more capital, but he seems to have a few more friends in high places so this shouldn't be a problem. Palindromic code name for the operation? "BOJ Soros Job".

Anatoly Veltman writes:

How can a sovereign Central Bank ever be defeated in their resolve to keep their own currency from further appreciation? My (maybe simplistic) argument: what can prevent it from infinitely supplying its own currency to market gluttons?

Current important situations: what will hamper BOJ's and SNB's efforts to halt the rise of the Yen and Swiss Franc respectively? Future academic study scenarios: if Bank of China were to attempt to reign in renminbi– what would all relevant parties do, in what sequence and to what degree (please save moral suasion part, I'd like to follow the actual hard/soft payment process); what could/would Australia do to halt their currency (in case of ever-rising natural resource prices)?

Rocky Humbert agrees:

Anatoly, EXACTLY! A country with a Fiat currency and resolve has the ability to sell UNLIMITED amounts of its currency using so-called "unsterilized intervention." Or, as Chairman Bernanke explained it in 2002/2003, there is "something called a printing press." However, the opposite statement is not correct– i.e. a country with a fiat currency does not have the ability to purchase/support its currency ad infinitum. That's why Mr. Rogan's point is wrong– the Bank of England's attempt to support the Pound is not analogous to the BOJ's attempt to weaken the Yen.

I've frequently wondered why the MOF/BOJ haven't done this over the years. Other than morality and sound money principles, my best answer is that the bulk of their debt is held by Japanese. And the unlimited printing of a currency will (eventually) harm the (domestic) Japanese debt holders. 

Alex Forshaw adds:

FX intervention has a permanently distortive effect on domestic prices in the immediate term, to the extent that it is deployed in domestic positive-velocity assets (eg domestic bonds)FX intervention has a permanently distortive effect on global prices to the extent that it is deployed in foreign positive-velocity assets (eg China shorting its own currency to buy USTs)… which over time filters into domestic prices if the intervention is sustained for long enough b/c of impact to raw materials prices that filters through the chain.

Stefan Jovanovich comments:

What a few innocent skeptics wondered in 1910 is the question that a century of higher-minded thinking still cannot answer: why must the central premise of monetary authority be that all legal tender prices clear simultaneously throughout the world? Wouldn't that result in (1) the abandonment of domestic gold exchange rights of U.S. citizens and those foolish enough to put their faith in the U.S. dollar and (2) a banking theocracy? The Swiss are discovering the dubious charms of bi-metallism, but they are asking the right questions. 



Mark HurdI note with interest that the CEO and Chairman of HP suddenly resigned last evening amidst sexual harassment allegations.

The market promptly knocked $10.6 Billion off the market cap of HP stock in after-hours trading. My very progressive daughter instructed me to buy some HP stock for her account, and I happily obliged.

Mr. Hurd was a fine CEO but he is not worth $10.6 Billion in market cap–if anything, the Board's reaction is a testament to the strength and integrity of this enterprise. It's also ironic that his predecessor is Carly Fiorina– who's running for the Senate in California, and who didn't get credit for the successful HP/Compaq merger.

Alex Forshaw comments:

I couldn't disagree more, Anonymous.

Hurd took "non recurring charges" every quarter from prior acquisitions, such as the big s***pile EDS.

He rewrote the HPQ narrative so well that it was almost too good to be true. Its market cap is up 50 percent since he turned the ship around. He has been a gold mine for M&A bankers and HPQ has been assiduously massaged by the sell side as a result.

I have no idea what his "worth" is but a lot of people at HPQ owe him a lot.

It's very counter-intuitive that a five- or six-figure "improper payment" could outweigh the political clout Hurd has amassed within the organization unless some of Hurd's other decisions are going horribly wrong beneath the surface.



The Europeans ponied up $1 trillion of funny money to essentially guarantee the debts of Greece and the other members of the EU family nobody really likes to talk about at family gatherings. Ostensibly, the bailout war-chest was as much to protect major European money-centre banks as Greek and Portuguese civil service pensioners. Stock markets are acting like these countries have already defaulted. If that were actually happening, banks presumably would be doing the same thing they did in the great Credit Crisis of 2008 – not lending to each other for fear of stinky balance sheets on the other side. When this happened in 2008, LIBOR spreads spiked almost 150 basis points. Today LIBOR ranges from .25% to 1%, depending on maturities, (1 mo to 12 months) at all-time lows. It seems that banks continue to be quite happy lending to each other, and therefore there should still be plenty of liquidity in the system. Sure there is in itty-bitty up-tick in May-– not entirely unreasonable since the VIX just doubled - but no indication that it's anything other than business as usual behind the scenes.

Yes, governments are printing money and debt levels are ultimately unsustainable, but just like consumers can keep rolling over and transferring their credit card debts virtually indefinitely, so too can governments that matter, and major banks essentially underwritten by these governments, keep staving off default for a very long time. Look at how long way-over-leveraged Japan has been able to muddle along for over two decades after it blew up in 1989. I don't see banks panicking in this situation, and with all the liquidity and promise of liquidity, that's just more fuel for the fire. Someone is going to wake up soon and realize we may be going down, but we're not going down any time soon, and all those companies reporting big earnings increases are likely to snap back in a hurry. If we are to have a double-dip recession and a bear market, it would be for other reasons, which will be more slowly developing. Shorts beware.

Mick St. Amour writes:


I wish more folks agreed with you as I do. From a technical perspective one thing that I'm not hearing in the media is that Dow Transports don't seem to be confirming retest of Feb Lows by the Dow. If I'm correct on this as well Thursday's action seemed like a washout to me, I can't remember seeing 75:1 downside to upside volume days in some time. I'd love to find research that shows turning points in the market when one looks at the vix collapsing (like it did on Friday) with volume that is at least 10:1 positive to negative. I suspect that would show good turning points.

Craig Mee writes:

It appears that since the bull market run up of the tech wreck, it has been all boom and bust, and until we have renewed respect in the banking sector, and politicians pulling there belts in, and making some tough calls, and with that and a credible plan moving forward…then this charade looks set to continue. Not until we see some consolidation of prices at lower levels over an extended period of time, in essence saying that yes , we have learnt our lessons, and we are ready to come out of the naughty corner…will it seem that the market can move forward without any risk of the volatile behavior of late no matter what numbers companies are posting. 

Alex Forshaw comments:

I'm confused.

LIBOR is at 3-month highs across most maturities. The treasury/libor spread is at 10-month highs.

The series is extremely autocorrelated, which means that a reversal of trend should be taken extremely seriously, as the series doesn't change trend easily.

If anything LIBOR is flashing a big warning sign as $1T of QE has caused nary a blink in the spread's rise over the last month.



Since we're back to school lately, went back and brushed up to check whether stock market volatility spike-decay follows an exponential-decay law, of the general form:

dV/dt = -L*V(t), where

dV/dt is change in volatility with change in time
-L is the "decay constant"  for V

This can be rearranged as dV/V(t) = -L*dt

And integrated:

ln(V) = -L + C  (c= integration constant)

Which is a linear equation that can be used to evaluate the decay constant (slope). Using DJIA daily closes 1929-2009, every (non-overlapping) 10-day period I calculated stdev for the prior 10D. Then I identified volatility peaks >=3%, finding these:

 date     max D10

10/20/08    0.059
09/25/01    0.030
10/29/97    0.030
10/28/87    0.089
09/11/39    0.031
10/30/29    0.074

For each spike, checked 10D stdev for 36 subsequent periods, and plotted ln(10D stdev) for each date. For the log-transformed six historical volatility spikes, used linear regressions to fit lines to the data: Independent variable = date. Dependent = ln(10D stdev). The first regression is for the recent spike ca 2008:

Regression Analysis: ln2008 versus date2008

The regression equation is ln2008 = 143 - 0.00369 date2008

Predictor            Coef       SE Coef      T      P
Constant            143.29      16.35   8.77  0.000
date2008   -0.0036902  0.0004087  -9.03  0.000

S = 0.369075   R-Sq = 70.6%   R-Sq(adj) = 69.7%

Note the slope (-0.0037) is highly significant, and negative; following
exponential decay (see plot above).  Here are the results for the other

Regression Analysis: ln2001 versus date2001

The regression equation is
ln2001 = - 30.0 + 0.000685 date2001

Predictor           Coef    SE Coef      T      P
Constant           -29.95      16.16  -1.85  0.072
date2001   0.0006853  0.0004319   1.59  0.122

S = 0.390306   R-Sq = 6.9%   R-Sq(adj) = 4.2%


Regression Analysis: ln1997 versus date1997

The regression equation is
ln1997 = - 14.6 + 0.000282 date1997

Predictor             Coef    SE Coef      T      P
Constant           -14.65      15.38  -0.95  0.348
date1997   0.0002819  0.0004274   0.66  0.514

S = 0.387066   R-Sq = 1.3%   R-Sq(adj) = 0.0%


Regression Analysis: ln1987 versus date1987

The regression equation is
ln1987 = 80.1 - 0.00262 date1987

Predictor            Coef    SE Coef      T      P
Constant            80.11      14.09   5.69  0.000
date1987   -0.0026168  0.0004357  -6.01  0.000

S = 0.392181   R-Sq = 51.5%   R-Sq(adj) = 50.1%


Regression Analysis: ln1939 versus date1939

The regression equation is
ln1939 = - 2.10 - 0.000184 date1939

Predictor        Coef    SE Coef      T      P
Constant            -2.101      9.765  -0.22  0.831
date1939   -0.0001840  0.0006618  -0.28  0.783

S = 0.602352   R-Sq = 0.2%   R-Sq(adj) = 0.0%


Regression Analysis: ln1929 versus date1929

The regression equation is
ln1929 = - 3.24 - 0.000074 date1929

Predictor        Coef    SE Coef      T      P
Constant            -3.237      6.889  -0.47  0.641
date1929   -0.0000739  0.0006175  -0.12  0.905

S = 0.562338   R-Sq = 0.0%   R-Sq(adj) = 0.0%

Of the six historically large volatility spikes, only 2008 and 1987 followed exponential decay. This doesn't seem to be a result of the size of the spike, as 1929 was bigger than 2008 and smaller than 1987. To the extent that volatility proxies fear, Is the current volatility decay in some way similar to 1987, and different from the others? Unlike 1987, 1929 spike was the beginning of a long period of economic turbulence. In 1997 the market was already volatile, and went on to become more so. 2001 featured 911, followed by further stock declines through early 2003. In 2008, the banking system teetered on the edge of what now looks to be a fake precipice - with the only real consequences being higher debt/gdp, less home ownership, and higher taxes.

Alex Forshaw comments:

I am clueless on the science of volatility (ie approaching it with any quantitative proficiency). as a market participant though, i have found that there are three kinds of volatility.

one is VIX volatility. this seems to be negatively correlated to liquidity of risk assets, which sounds obvious to the point of tautology as i'm typing it out, but ive been surprised how insensitive it is to other metrics i've though should matter, e.g., estimate revision momentum (for example: once a sector's estimate revisions are X standard deviations above the historical average, particularly as correlations have risen to recent highs in an upward trending market, shouldn't this matter? apparently animal spirits among option market makers is a lot more important.) and so on.

two is pnl volatility, which for me is very positively correlated to volatility of volatility (in either direction, but especially volatility that trends down for surprising lengths of time), much more so than volatility alone. as a firm we very carefully watch the PnL volatility of the 30 separate books of pairs, particularly during a rising market, as a sort of jerry rigged predictor of market volatility. when it gets to intolerable levels during a rising market that sometimes signals that a trend is about to reverse, although it's not consistent enough to be reliable as a frequent go-to indicator, I believe it did work well for the firm in several very critical situations (in 2007, 2008 and 2009) when other indicators were not working.

another is "long term volatility" which i think is best captured by the seasonally adjusted price of gold. e.g., "how big will the nuclear explosion be when the world's imbalances eventually, inevitably?! readjust". the VIX seems to totally ignore that.



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.




LeverThe levered ETFs tend to underperform. Take SSO, which is double the S&P 500 compared to SPY. SSO was listed in 2006. On 7/7/2008 the SPY was back to even while SSO was down 12% since inception. YTD the SPY is down 0.15% (as of yesterday's close) while the SSO is down 4.83%. Levered ETFs are re-weighted each day to match the double daily performance of the S&P. A simple example: if the market stands at 100 and increases to 110 and falls back to 100, the double ETF will be worth 98. So levered ETFs will tend to underperform in sideways markets and naturally (for long ETFs) in declining markets. Also there must be some transaction costs and vig to be paid with the daily re-balancing, especially in volatile markets.

Yishen Kuik replies:

I've thought that owning a double up ETF and a double down ETF at the same time is really like owning a straddle. While the index drifts sideways, you keep losing value, somewhat analogous to theta, but when it takes off in one direction, you start to really get in the money.

Alex Forshaw adds:

The ultra ETFs just hedge themselves with options; a 2x long ETF buys you a basket of calls with some management overhead. A 2x short ETF buys you a basket of puts. So if you are short the ultra long and the ultra short, you are short a bunch of calls and a bunch of puts. So you're short the VIX. And you get hit if vol and vol-squared both go up at the same time.



V NI wonder naively, with the news of the bailout: will there not be clamors with the $1 trillion of assets that are being bought by the government at above market values, to extract some bits of flesh from those who are bailed out? Peter Public is being robbed to pay Paul Financial Firm, so to speak. But will Peter not complain and get his ounces of flesh? And will that not tarnish the luster of the gains in financial institutions in due course?

This is a speculation about which I have no expertise and no recommendation over and above saying, as I have for 30 years, that when you get out of the market because it's a "bear market," you have to get back in some time to reap the drift, and I don't know anyone astute enough to overcome that drift while he's out.

Alex Forshaw adds:

It reminds me of the October 15, 2007 announcement, except that this time the "Super Siv" (or MLEC) is $1 trillion-plus in size (instead of $75-100bn), the regulations are all the more drastic, the government has thrown $1 trillion away to save Wall Street's richest socialists, and… yeah, that's pretty much it.

If one had actually stuck to one's capitalist convictions throughout all this, one might actually not even be very surprised at the enormity of Bernanke's and Paulson's failure.

Alan Millhone worries:

I wonder if that 'long spoon' cradles castor oil? You hear the term hard to swallow. To me this applies to the bailout as the Bureau of the Treasury is running the presses 24/7 with someone holding the oiling can to keep down the sparks from the printing presses and all that paper may over time become nothing more than shin plasters!

Nigel Davies writes:

GM NigelOn the long term drift: Can someone please show me the data for all these centuries in which stocks went up 1 million percent, or are we talking about just one, the 20th? The last 24 hours have admittedly seen some of the most desperate short covering from a heavily leaning market, but I don't think one should extrapolate too much from this.

About the bailout: Maybe these measures will "save the system," but there's a huge cost involved for Mr Taxpayer. And as Mr Taxpayer is also Mr Voter I wouldn't want to bet against his supporting some heavy handed regulation by those seeking office. Not to mention the fact that he's being hit real hard in the wallet region by this mess.

James Sogi comments:

J SogiThe problem with the rescue plan and the upcoming regulation is that the creators of the plan are filled with hubris. Why should these few men with limited experience and knowledge compared to the smartest people of the entire financial world be able to solve the problems that the entire financial world was unable to? Like central planners around the world, they will just create new problems and backlogs and inefficiencies that were so prevalent in the authoritarian and socialist countries.

The country is sliding into socialism, which is the extension of the moral hazard. Where there is no more risk, there will be little reward. On the television, the prevailing meme seems to be the bailout is for the benefit of the greedy Wall street moguls and is paid for by Joe Sixpack. In any case, it will create new opportunities as cycles change yet again. Today's S&P high from yesterday's low was the greatest up move. This is a signal of new cycles, just as much as February 28, 2007 was a signal to move into a high vol cycle. The definition of cycles resists quantitative testing, so the qualitative will have to suffice.

Alex Castaldo takes a turn to the left:

Why should these few men with limited experience and knowledge compared to the smartest people of the entire financial world be able to solve the problems that the entire financial world was unable to? — James Sogi.

Yes, but don't we also need to revise downward our estimate of how smart the so-called smartest people were? When the Warren Spector's, the Dick Fuld's, etc. etc. issue so much mortgage debt to people who now can't pay, that the entire financial system is put at risk, can we really continue to call them the smartest people?

Irrespective of that (…maybe I would have made the same error…), doesn't it make sense at this point to have the "smartest people" take a time out while the second-rate people in government (and I fully agree that they are second rate) try to patch up the problem so the game can resume again? Or do we just let the system blow up because the mistakes were made in good faith by the smartest people available at the time?

Don't tell me that markets are better than Soviet style central planning, Mr. Sogi, I already know that. Tell me what is to be done under these circumstances.

Someone told me today that the nationalisation of AIG is just like what happens in France and Argentina. I am sorry but again I have to disagree. The French government ran Air France for 40 years. The AIG measure is temporary; rather than a nationalisation in the Argentinian sense I would call it a controlled liquidation of AIG. Rather than be liquidated immediately (as was about to happen) they will do so gradually over two years; rather than receive subsidies from the Argentinian government they will have to pay LIBOR plus 8%, a punitive rate, etc. The differences are major. Let's not put all government interventions on the same plane.

Back to the "smartest people" issue. The analogy I see is the following: you have been operated on by the best available surgeon; unfortunately he made a mistake and left a clamp in your abdomen before sewing you up. It is midnight on a Saturday and the only available surgeon is a semi-retired practitioner of average skills. Would you agree to have him operate on you to save your life? It may well be that you would have not agreed to be operated on by this guy in the first place. But what do you do now?

[Disclosure: Alex is a depositor of Washington Mutual and owns Morgan Stanley stock].

James Sogi replies:

J SogiIt is the spoiled child syndrome. Each time the spoiled child is saved from his mistakes, errors, rudeness, tantrums – he is inadvertently being trained to make these mistakes again. Better to mete out a measured negative punishment, time out, a reprimand, or suffering the consequences of bad behavior. Soon the child learns. There are behavioral cycles, adaptive mechanisms inherent in nature and free markets. By tampering with these, we end up with worse and worse swings as the adjusters over-adjust. Better to let Dick Fuld, and the overborrowers, take the hit. The entire financial system will not fail. It will start up again the next day no matter what happens. It may look different. There may be different players, but it will be there.

Remember the bitter pills Volcker dealt out in the 1980s with 24% mortgage rates, 14- 17% bonds. I saw many people take the hit. But inflation was crushed, and we enjoyed 20 years of moderation and prosperity. That was worth the price. Those who make bad choices should not be bailed out. It will encourage wild swings. It's the Greenspan Put all over again. If people know there's no second chance, they won't take the risks. If they do, they should be entitled to their profit or the pain of failure. When you do it your way, there is no cleansing cycles, and the toxin remains. Like Japan. It's just hiding the problems and they'll resurface somewhere else. Better to kill it now.

Let the big banks, big brokerages go down. New ones will take their place, smaller, faster moving. The market will find a way.



Dan GrossmanCan someone give some explanation why Intrade indicates Obama 59% likely to win and McCain 41%, while the polls show them about even?

Are there any other web sites you find useful in predicting the election?

Alex Forshaw replies:

The polls don't show them as even. Additionally, the most credible polls (Gallup, Rasmussen, ABC/WP) are generally the ones which show Obama with the largest leads.

Real Clear Politics has a summary of some of the major polls.

Tom Marks and Jason Ruspini add:

There are two methods to predict the election.

The prediction markets such as Intrade and Iowa Election Markets (chart) are probably the best predictor.  As of 10pm EST today Intrade is giving 57% chance for Obama and 43% for McCain. Iowa is also 53 vs 47.

Another way is to look at polls. However, the polls generally cited by news organizations are national polls which on the surface is fundamentally flawed since it is the Electoral College Vote and not the Popular Vote that determines the election result.

What you must do is look at state polls and infer the Electoral Vote implied by these polls.  Fortunately there are some very nice web sites that do the work for you.  They automatically look up the results of the latest polls and apply statistical adjustments (such as weighting polls differently depending on accuracy and timeliness, or performing Monte Carlo simulations to incorporate the inherent inaccuracy of any poll) to come up with their forecast.

The three best Electoral Vote prediction sites based on state polls are:

Vanderbilt U. Economist A. Moro's Forecast

Sam Wang's Princeton Election Consortium (chart )

Five Thirty Eight

Reading about the methodologies these sites use can be interesting for those who are statistically oriented.  Most people probably only care about the result.  Currently Prof. Moro gives 314 votes for Obama. Prof. Wang gives him 311 while FiveThirtyEight gives 309 to Obama. (As every schoolboy knows it takes 270 electoral votes to win the election).

In summary, both methods of prediction currently favor Obama. The rough equality shown by some national polls is misleading.



I personally believe that the Uptick Rule should be reinstated or large money pools will be created to drive stock prices down on selected companies.

Alex Forshaw replies:

Why do you find it ok that speculators drive prices up, but not down?

Sam Humbert counters:

I will show you an article, the subject of which was how CNBC was unknowingly complicit in the fall of Bear Stearns. You might find it informative. 

Jason Goepfert says:

So one of the largest investment banks and securities traders in the nation was taken down because traders didn't have to wait for an uptick to sell short? It didn't have anything to do with the fact that they had bitten off way more than they could chew and should have been deleted as on ongoing concern? That seems a little fanciful to me.

There were hundreds of stocks that were taken off the uptick rule for a couple of years prior to July 2007, in a trial balloon run by the regs. They studied the trading patterns on those stocks extensively compared to those that were still subject to the rule, and found little difference in trading patterns. The rule was not lifted by whim.

With penny pricing, it doesn't take much to get an uptick in a stock. If a large fund(s) really wanted to take down a company, the uptick rule makes no difference. They would just buy a bunch of shares, get the stock on an uptick, then short the hell out of it again. Or buy puts, or any of the other derivatives they have available.

The stock would go to zero whether the rule was in place or not. See Enron et al.

Blaming the uptick rule is lazy.

Sam Humbert  comes back again:

Marty Whitman of 3rd Ave Value Fund has issued a statement in effect also blaming the elimination of the Uptick Rule as one of the factors that the bear raid on Bear Stearns was successful.

I agree with Marty Whitman.

As to driving prices up versus driving them down, there is a difference. Quickly falling stock prices can cause a panic which could cause money withdrawals from some stocks such as brokerage and banking firms, which in turn can cause bankruptcies and job losses. 

Dylan Distasio recalls:

The fact of the matter is that uptick rule was easily avoided prior to its elimination through the use of married puts aka "bullets." When I traded intraday (before the SEC essentially eliminated this use of them in 2003), we used to use them on a daily basis. 

Gibbons Burke also disagrees with the uptick rule:

If all the artificial barriers [such as the uptick rule] are removed the knowledge that stocks are more susceptible to bear raids will temper the irrational exuberance that lofts stock prices far beyond their real value, which causes them to correct just as dramatically.

Wall Street is institutionally bullish, and it extends even to the press covering the street, so support for the uptick rule is understandable, if not reasonable and rational. For example, I know from personal experience that Dow Jones requires all employees to sign agreements when they're hired on to never ever sell short, or be effectively short with options. No one on the entire staff of the Wall Street Journal has any interest in or ability to benefit from stocks going down. It renders the Journal a tout.

Mr. Albert has the day trader's perspective:

1) the nasdaq 100 had no uptick rule for quite a while before the general repeal

2) S stocks on the Nasdaq, certainly the most subject to bear raids as they have much shakier financials and tend to be story stocks, never had an uptick rule since I began trading in 1996

3) none of the SHO pilot stocks was more volatile than the comparable non Pilot stocks (in need to find the acedemic reference but it is there). IMO the specialist system (not the uptick rule) was a stabilizing force in the markets so now we have more vol

James Lackey has seen it all before:

All you get from more rule making, margins, uptick or program rules etc is bigger gaps at opens and closes. Restrict intra day moves and the energy must be transferred somewhere else. 

Steve Leslie updates:

Yesterday the SEC announced that they were selectively reinstating the uptick rule for Fannie Mae and Freddie Mac. Why just those two stocks? I have no idea what this accomplishes other than a symbolic gesture. Could you imagine commodities having a limit up or limit down rule for just corn or beans? Couldn't they just raise the margin requirements for borrowing stocks ? As usual governments are late to the party. Back in 1987 the Government began looking at computerized trading and the use of collars. Of course this was after Oct 19th debacle. Look at Hurricane Katrina and see the government in action during a crisis situation. And yet there are still those who try to tell the public that the government is the solution to its problems. The bankrupt LA Times had a front page article arguing for government intervention in the financial markets, especially subprime. Politicians' cliches include "we can't drill ourselves out of the oil crisis and it is the speculator who is the cause of the problem." They are the ones who need to be ratted out and summarily chastised and shot. And then they use trite phrases like "We need to send a message to these oil companies and the speculator that they are going to be reined in." And then they hold a hearing in front of cameras, ask mindless, rehearsed questions formulated by their aides and attempt to project themselves as informed. Yet they expose themselves as what they truly are. Robots, empty suits whose prime objective in life is to get re-elected and retain their cushy phoney baloney jobs. And Nero fiddled while Rome burned. I think I will go outside and get a breath of fresh air.



At times like this it pays to remember why to buy a portofolio of stocks for long run is on average excellent idea :

1. Mean Drift of 3-5% p.a. because of mathematical properties of portfolios composed of shares in USD.

2. Mean Drift of 5% p.a. because the system is "self-adjustedly" skewed; politicians, bankers, companies, media & the entire economy benefits when the market is up.

3. Mean Drift of 5% p.a. as entrepreneurs demand and will get it over risk.

4. Mean Drift of 4-6% p.a., statistics by Dimson, Marsh and Staunton over 100 years and different countries.

However, that was the easy part; it is more difficult for one to sit on his hands, and not override what is backtested and what shall work.

Riz Din runs some numbers:

If you invest $5000 each year in the stock market and earn a rate of return of 7%, after thirty years the total investment is worth half a million. Stay invested for a further ten years and it doubles to just over a million. It doubles again to two million after 50 years. To ensure good returns, it makes sense to invest in one's health and increase the probability of having an abnormally long investment horizon. Also, shooting for a long time horizon may give one the ability to see a playful cub where others see a grizzly ravaging the market.

Alex Forshaw objects:

But after approximating a realistic rate of inflation (3-5%), that number becomes much less impressive.

Other amusing implicit assumptions include

1) zero information costs on the part of the retail investor;

2) zero "oops" moments e.g. auction-rate securities portfolios which end up yielding -20 percent because a bank says so;

3) zero capital gains/ income tax;

4) forex fluctuations masking the enormity of market volatility; and

5) zero probability of not-even-very-extreme events, such as having to liquidate a large portion of your holdings immediately because of a family sickness, job change, etc.



The knowledge contained in textbooks is simply not at all unique. There's no practical or ethical reason to knuckle under to the publishing industry and pay $150-250 per text for knowledge which is readily available for free elsewhere. Many people just copy or download the textbook for free.

Russ Herrold replies:

Hogwash. If so, use those free sources alone. The act of taking steps to obtain and use the publisher's source data confirms that value exists.

It is a denial of reality to assert a right to be the 'free rider' (as the torrent users do by their actions) on the backs of those who do not violate copyright restrictions. To me, it does seem to be an ethical matter, that the torrent users are on the wrong side of. It is certainly wrong as a matter of law.

As a practical matter, starve the publishers of sales, and they will raise prices higher still for legitimate users who cannot in good conscience be using 'stolen property'.

Jeff Sasmor adds:

My wife has worked for two different publishing companies that published college textbooks, and she once told me that one reason that the books are so expensive is because they often don't sell a lot of them due to copying. In years past teachers would copy sections of the books and hand them off to students (or the students would copy the books themselves), and now digital copies make it even easier.

People don't attach much value to the publishing process, they don't want to pay for it, but there is value added. The whole system (like many others) is very messed up.

Adam Robinson predicts:

Perhaps it is time to rethink the viability of textbooks regardless of price. I speak of their pedagogical value here, but in any event they will go the way of encyclopedias, swept aside by collaborative contributions a la Wikipedia. I got through Wharton having purchased only a few textbooks first semester my first year, after that I realized it was cheaper, and more effective to master the material, simply to go to the library and digest the assigned chapters on my own.

Distinguished former intern Chris Hammond recounts:

I'm finishing my PhD in math, and I have recently needed to learn techniques from a different area. I tried to learn everything by reading papers. However, each paper would focus on one aspect of the theory, leaving many questions unanswered. I worked very hard to resolve some issues on my own, not learning until later that it was done in some other paper whose existence I was unaware of. Further complicating things, one of the most important references was in French. I finally stumbled across what seems to be one of the very few textbooks (perhaps the only one) on this subject. Had I found this earlier it would have saved me so much time it makes me sick to think of it. I would have gladly paid a hefty price for it, if it was not available through the library.

Stefan Jovanovich reminisces:

I stopped following the internal fortunes of the publishing business more than 35 years ago when my Dad and I had one of our more spectacular disagreements. My brother Peter is the expert. He worked with my Dad until they lost control of Harcourt Brace Jovanovich and then he worked for McGraw-Hill and Pearson. My few comments about profitability and publishing being a "hits business" come from what I know about the history of the business in America and Europe. The inescapable economic logic of print and press runs has not changed since Gutenberg: you lose your shirt on the first copies and make your fortune on the last ones. That is the reason "free" copying has always been such an attractive proposition for the copier. Before they turned to semiconductors the citizens of Taiwan were masters at book piracy; and, as I noted recently, Thomas Paine went from being a lover of America to something quite different out of bitterness over the lost royalties from all the pirated copies of Common Sense.

What my Dad and I argued about was about "tail fins". My thesis was that publishing was only profitable for the publisher when there was a technological breakthrough that lowered unit costs of production by orders of magnitude - the original letter press, the steam press in the 19th century, the combined revolution in inks and paper-making and machine binding after WW II. The publisher could surf that wave of lower and lower unit costs as long as the public perception of what the fair price for a book or newspaper or magazine was still tied to memories of what prices were before the technological breakthrough. But, when a publisher found himself raising prices instead of lowering them, it was time to admit that the party was over. My Dad thought I was out of my head for saying that, by the time of Nixon's reelection, even the caterers had gone home. He thought the new imagining techniques in printing - particularly the ability to reproduce photographs - were so exciting that they would create a new generation of textbooks. My smart-ass reply was that they were tail fins.

After that time, whenever Dad came out to California and needed to see an author or look at a business opportunity, I was happy to see him and help him out by acting as his on-call chauffeur; but we never talked about his company or its profits again. We did speak briefly about the business one last time, when Robert Maxwell made his takeover attempt. My mother and I thought the wiser and safer course was for him to take the money and run rather than sell PIKs and put the company permanently in hock. That was the last serious conversation we ever had; thereafter, discussions were limited to the state of his health and the chances for the Giants to win another World Series.



Growth, from Denis Vako

December 3, 2007 | 1 Comment

DamodaranAswath Damodaran says 90% of finance is about PV (essentially DCF), and 95% of DCF is about estimating discount rate. Can we conclude, thus, that 80+% of DCF finance is about estimation of discount rate? Nope, he actually thinks that estimation of growth rate is much more important than estimation of discount rate — and that is the same premise Vic and Laurel initially lead me to, as I read their books a long time ago.

Since it is ultimately about true growth, which is now expected to be rare, therefore especially valuable, one can argue that the current growth industries of the market are: aerospace/defense, diversified and healthcare/medical. What other parts of the market could be growthful?

Henrik Andersson adds:

I remember a couple of years ago when this finance professor did a valuation of Google and said it was worth no more than $100 or similar. The stock was then at maybe $200 and is now around $700.  Not easy. even for someone like Damodaran, to estimate fair value…

Alex Forshaw suggests:

Are you thinking of John Hussman?

June 13, 2005:

Which brings us to Google. Initially, I estimated Google to be worth about $24 a share. It has since enjoyed some very good operating surprises. I'd currently estimate its value somewhere in the $30's.

No zero is missing in that last sentence, though the quickest way for the company to substantially enhance its intrinsic value would be to buy everything it possibly can with its own overvalued currency.

Google has been doing exactly what Hussman prescribed, even as Hussman's forecast/analysis could not have been farther off.

Hussman continues:

To paraphrase Grantham, if Google is worth $300 a share, capitalism is broken.



Is there any way I can get my hands on the historical news feed from Bloomberg for any market, for a significant time frame, in discrete (30-sec, 60-sec, 5 min) packets? For instance, all the headlines for, say, the banking sector, over the past six months, in the Bloomberg format, with a very specific timestamp next to it.



StallsSen. Pete Domenici Expected to Retire

Veteran Sen. Pete Domenici (R-N.M.) is expected to announce tomorrow that he will retire from the Senate in 2008, according to several informed sources, a decision that further complicates an already difficult playing field for Republicans next November.

The number of GOP retirements, and thus all-important open seats, is skyrocketing.

GOP Congressmen have learned that life is not much fun when you get only about 33% of the pork instead of the majoritarian 66%, so the stampede is really beginning to roll. I'm trying to mentally count the number of GOP open Senate seats: VA, NM, Widestance, Nebraska (probably a hold), CO… and Norm Coleman in MN is in for a rough ride.

Many other GOP senators are apparently going to try to defend vulnerable seats. Gordon Smith, who leaked to the press that Petraeus privately gave the surge a 25% chance of success (because Smith's newfound antiwar zeal matters more), seems to be committed to defending his seat.

The Dems seem set for 56-58 Senate seats, probably through 2014.



PointyI've been meeting with some folks who do a lot of training and development work with big companies. Recently, these T&D consultants have been hearing about a new problem their clients' managers are dealing with, and it involves their new, young employees from Generation Y (or Z), i.e., the ones fresh out of college. The clients want some sort of training program for their managers to learn how to handle this new problem. What is this new problem? When the Gen Y subs do poorly or are disciplined, the managers are getting irate phone calls from the young sub's parents.

Alex Forshaw replies: 

The WSJ ran an article about this some time ago. Helicopter parenting is making its predictable transition from high school, to college, and now to the workplace.

Baby boomer parents are obsessive about building an invulnerable system of guideposts in life (get >2200 SAT, be a co-editor of the high-school paper, which gets your kid into a top 20 college, which gets your kid into 90th percentile of starting workforce, which gets your kid into a top x%ile grad school) and they are simply incandescent when their "children" encounter any speed bumps along the way.

You have to wonder if this huge swathe of baby-boomer upper crust-dom was ever exposed to pain resulting from mistakes, or if they ever took any real risks in life.



 What's more surprising, that the US deficit/GDP ratio is the best of this lot, or that Italy looks good next to Japan?

Roger Arnold adds:

If I recall properly, Japans sovereign debt to GDP is larger than any country has ever been able sustain without a collapse of their currency. The highest debt to GDP that a country has been able to work out of was the US post WW2 at about 140%.

It's interesting that every year or so, as we discuss here, the yen repatriation and associated carry trade unwinding is supposed to kill the dollar.

Buffet / Rogers et al jump on board and the media frenzy lasts about a week or so. None of them ever mention the dire situation Japan is in, which is compounded by their aging demographic and lack of an appropriate immigration policy to change it. And I think their personal savings rate has fallen to 8%, the lowest in Asia. Western Europe is in a similar-situation although their savings rates are still roughly-14%.

How does the dollar collapse in that environment? Where would the capital go? Why would the capital go? What benefit may be achieved by either area taking their savings home from the US?

Rhetorical questions. 

Stefan Jovanovich writes:

The War of the Spanish Succession - the first European World War - left Britain, France, Austria, Spain, Netherlands, Sweden, and Russia with debts that, compared to their governments' actual cash incomes, were far greater than those owed by Japan, the United States or any of the countries of Europe. At the height of the crisis, in 1719, the costs of debt service alone for the British crown were 60% of the government's income. Yet, somehow, the Brits, alone among all the other European nations, successfully refinanced their debt and began their journey towards Empire.

You can read an introduction to the story of their financial triumph, which paid for Marlborough, Nelson, and Wellington's victories. 

From Alex  Forshaw:

Inflation was very high after WW2 ended, correct? So the real value of America's debt would have been significantly reduced. Considering that inflation was a widespread phenomenon among recovering economies, America's currency did not suffer a relative collapse, but Americans holding government debt were screwed.

In this case, Japan's currency seems destined for a relative collapse. I believe that debt service costs the Japanese government about one-third of its income.

In the British instance, didn't a group of private bankers step forward and essentially assume lots of the crown's obligations, because it faced bankruptcy after the Glorious Revolution? (As I understand it, that was when the Bank of England was founded.)

Charles Sorkin writes: 

US Inflation fell precipitously immediately after the war. There was another spike in the late 50s, but there were also two periods of deflation in the immediate decade (or so) into the post-war period. For the most part, inflation was rather benign, by today's standards, until the late 1960s. 

Alex Forshaw writes: 

Hmm, I simply can't reconcile US debt/GDP falling from about 135% at the end of WWII to, what, 20% by 1960? How could economic growth have been that high? Yeah, taxes were high (top marginal rate was about 91% and top effective rate approx. 57%) and Eisenhower was extremely frugal, but Korea would have ratcheted up the national debt again. So I have a hard time getting those figures to add up without brief but intense bursts of inflation at some point in the 1945-60 time frame. 

Charles Sorkin writes:

US Inflation fell precipitously immediately after the war. There was another spike in the late 50s, but there were also two periods of deflation in the immediate decade (or so) into the post-war period. For the most part, inflation was rather benign, by today's standards, until the late 1960s.

Stefan Jovanovich comments:

I think Charles takes the point. There was also a brief spurt of energy price inflation with the start of the Korean War, but that was entirely the product of the Truman Administration's imposition of Jimmy Carter controls. When those were repealed (with the Republican's taking control of Congress), the gas lines disappeared and Exxon was offering to put a tiger in your tank and give you free dishware with every fill-up. The consensus forecast of most expert opinion in 1945 was that the country would experience a deflationary collapse. Sewell Avery, the Chairman of Montgomery Ward, decided to hold cash. The radicals at Sears (!) chose to expand. If Mr. Avery and others holding bonds were "screwed", as Alex puts it, it was not by any precipitous decline in the value of the dollar but by having failed to participate in what John Brooks described as Seven Fat Years.

As for the bankruptcy of the Glorious Revolution, that was entirely a function of the unwillingness of Parliament to pay the King's bills, not any crushing burden of debt. The Duke of Marlborough (hero of the War of Spanish Succession) started his career as a young go-fer to the Stuart crown; he - and most of the other smart money - changed sides when the Dutch indicated a willingness to make a white knight takeover bid.

"Bankruptcy" was the cover story; the real issue was the unwillingness of the city merchants to accept even a hint of the restoration of full civil rights to the Catholics. And so, for another hundred plus years, no one who wanted to hear the mass in Latin could attend Oxford or Cambridge. That did not, of course, prevent Marlborough's forces from being the allies of the Austrians (still among Europe's most fervent Catholics) against the comparatively agnostic French.

Alex Forshaw writes:

Hmm, I simply can't reconcile US debt/GDP falling from about 135% at the end of WWII to, what, 20% by 1960? How could economic growth have been that high? Yeah, taxes were high (top marginal rate was about 91% and top effective rate approx. 57%) and Eisenhower was extremely frugal, but Korea would have ratcheted up the national debt again. So I have a hard time getting those figures to add up without brief but intense bursts of inflation at some point in the 1945-60 time frame. 



 There is a proposal before congress (H.R. 2755) to abolish the Board of Governors of the Federal Reserve System and the Federal Reserve.

Jeff Sasmor adds:

This is the second time, it seems. The first time was in 2003.

Scott Brooks remarks: 

I'm starting to become a Ron Paul fan. But I'm worried about what I've referred to as the Russia effect, meaning that Russia melted down into chaos after they went straight from socialism to capitalism resulting in anything but a capitalist society.

As much as I want to abolish the IRS and 99.99% off all government agencies, what thoughts are there on us melting down into chaos if that were to occur, i.e., abolishing the fed?

Stefan Jovanovich writes:

"Russia melted down into chaos after they went straight from socialism to capitalism" is not a very good description of what happened after the U.S.S.R. formally dissolved.

Runaway drunkenness, near demographic suicide by abortion, absenteeism rates that made Lordstown look like a Toyota factory, extortion so much a part of ordinary life that someone's not demanding a bribe was cause for paranoia, had all been part of Russia life even before the defeatism and self-doubt that came after Afghanistan. Scott's post assumes that Soviet governmental authority had some moral force in 1988. It had none.

None of us can predict the future, but I would argue that the odds for Russia's future are as good as those were for what used to be known as West Germany in the 1950s. Then there were no local German politicians who could pass muster as anti-Nazis, and the new republic's democracy was a very brittle artifact. If Russia's current leadership seems tainted by associations with the old tyranny, that situation is little different from what was happening under Adenauer.

Ironically, Scott is far more likely to see Ron Paul's monetary regime created in Russia than in the U.S. I leave it to those who really know about currencies to correct my usual amateur errors, but it seems to me that the ruble is the one world currency that can currently be seen as being entirely backed by a gold/petroleum standard. 

Alex Forshaw writes:

Hmmm…with regards to Russia, the so-called "free/ democratic institutions" that "evolved" were anything but. It's one thing to have measured, organic evolution of a free press and robust markets as the US did. But in Russia, the robber baron tycoons immediately built up media machines to massage their public images.

Putin destroyed Russian "free media" because it was Boris Berezovsky's tool, and Berezovsky probably achieved greater control of the Russian economy than the Politburo did (with lots of help from Chechen gangsters, car bombs for his competitors, Russian government force, and other ridiculously coercive methods).

Stefan Jovanovich adds:

The admiration that the official American press (Time, WP, NYT - the usual suspects) showed for the "free/democratic institutions" that Professor Sachs helped "create" (sic) has its historical match in the obtusely wrong-headed enthusiasm that the Jeffersonian press showed for the progressive insanities of the French Revolution. 

Scott Brooks responds: 

Both Stefan and Alex are doing a better job of making the point I was trying to make. These countries were run by demagogues, despots, and gangsters who simply changed their styles, but ultimately remained in charge. They changed from being in charge in the form of a government to being in charge in the form of being the most powerful gangster. The gangsters, of course, whether under the guise of a legitimate government or as just plain gangsters, were able to manipulate powerless people because the gangsters had made them dependent on them.

In the US we don't have gangsters in charge per se, but we do have a system where a large group of people like welfare recipients (no offense intended) who are dependent on the government. So I ask if a country can go from a "dependent system" to one of independence overnight? If not, then how does one move away from that system? 

Alex Forshaw replies: 

If by "welfare recipients" you mean agribusiness, the tort bar (and to a lesser extent other unnecessary functionaries which use "the law" as an excuse to siphon money from businessmen who would otherwise have no need for them) then you're getting somewhere

Just in personal experience, I'm 21, I trade about 150k total in political futures (snobbier people would call it "gambling," I laugh at the pseudo-distinction). To get even the most rudimentary legal structure (a "pooling of interest") to facilitate moving the money offshore, (because it's simply stupid and/or prohibitively expensive to risk regulatory harassment over high-risk, novel securities trading in the United States, without the economy of scale of a tens of millions of dollars of a capital pool), I had to utilize the services of two accountants and a securities lawyer.

Fortunately I had friends of the family to do it for me, but what about someone who isn't as privileged as I am? Legal overcomplexity is an incredibly high fixed cost/ barrier to entry in this country.

And I don't even have day to day interactions with other people, unlike the Korean immigrants in DC who got sued for $100 million because they refused to give a lawyercrat a $1000 new suit, or the cerebral palsy doctor ruined by John Edwards.

Stefan Jovanovich writes:

I will let Alex speak for himself, but that is not the point I was making, Scott. No ordinary Russian thinks that the changes over the past 20 years have been merely a change of styles by "demagogues, despots and gangsters".

For one thing, there is now actual freedom of conscience. (Yes, I know the Russians are giving their own national faith preference and have been less than open to proselytizing by Westerners; but that is a world of difference from the situation that had Jews, Seventh Day Adventists, and devout Orthodox regularly jailed simply for what they believed.) It is also now possible for people to have savings that are not controlled by the government and private land ownership.

These are real changes for the better that have affected millions of people, and they are occurring. But at the same time the conditions of actual life continue to be dreadful. As for the question of dependency, that seems to me a near universal. I have never known a libertarian who actually turned down the offer of a good government job. As the first Mayor Daley once said, "Everyone wants a little honest graft."

No society has ever reached that peak of pure individualism that Ms. Rand dreamed about, but we can hope for a world with enough contending interests to limit the amount of loot that any one group can haul away. 

Gordon Haave remarks: 

Russia went chaotic, yes. But most of Eastern Europe did not. Why? The rule of law. Besides, there is no reason why abolishing the Fed would create a chaotic situation.

George Zachar writes: 

Russia went from a closed-economy kleptocracy to an open-economy kleptocracy. The commanding heights of Russian industry never saw capitalism. The looting, aggregation, and export of its wealth are well-chronicled. Using the word "capitalism" in the context of Russia is to deliberately smear the term as gangsterism. 

Peter Earle comments:

The Federal Reserve, when set up, was ostensibly created to maintain a stable value for the dollar. Looking at the 90%+ drop in the value of the dollar since the creation of the Fed, I'd say there's reason to doubt their somewhat self-serving perspective. A look at Panama, where there is only nominally a central bank, may be instructive as well. 

Stefan Jovanovich continues:

When Queen Elizabeth I came to visit the United States after WW II, my grandfather, who was born in Old Serbia, wrote about the news to my dad, who was born in the coal camp near Ludlow, Colorado that has now physically disappeared. In his letter Tata wrote to his American-born son that "your queen" is coming for a visit. What he meant was that Americans, regardless of their origins, end up having an Anglo-centric view of the world - at least as far as Eastern Europe is concerned.

The Hungarians, who were fervent Nazis and are more completely thorough anti-Semites than anyone to the east, got a better press in London and New York in 1946 than our allies, those awful Russians. They still do. The economic successes in Eastern Europe - Croatia, Slovenia, Poland, Hungary and the Baltic states - have far more to do with their proximity to Germany, Austria, and Scandinavia than with any special qualities of jurisprudence in "eastern" Europe.

For their citizens and for the average Rumanian, Serb, Bulgar, and Ukrainian, the rule of law is no better than it is for the average Russian. What is better for all of them is that now the police are merely corrupt; they are no longer true Marxist believers dedicated to liquidating all class enemies. 

Gordon Haave adds: 

Russia went chaotic, yes. But most of Eastern Europe did not. Why? The rule of law. 

J T Holley asks:

Can't we simply start with the IRS first as a warm-up? 

Gabriel Ivan writes:

Having spent the first 20+ years of my life in Eastern Europe (Romania) and being exposed to the first 13 years of transition from communism to capitalism, I can second Scott's comment about the melting into chaos in all Eastern Europe, not just Russia. The looting was mind-blowing and cannot be explained if you didn't live it.

With rampant inflation, no social net whatsoever for maybe 80% of the population and opaque legislation, I'm surprised things didn't get more explosive in all these years. I personally witnessed two national distribution companies with strong brand names and infrastructure vanishing in two weeks due to central bank's policies on the exchange rates. And this was '99 - '00 after 10 years of "free market economy".

Unfortunately, fundamentals haven't improved much despite the real estate boom and commodity prices run-up masking an economic growth that is not healthy. High profile businessmen - bank presidents - still get shot in daylight in Bulgaria, (the country is a member of EU for six months now… what a joke) due to their affiliation to organized crime (there is no other way to run a business). Imagine Sandy Weill getting whacked in a drive-by shooting to understand the strength of their banking system.

I expect the majority of "emerging markets" money managers to be separated from their wealth in the foreseeable future due to their lack of due diligence and reliance on official statistics.



 In 1979 Doyle Brunson released the bible of all poker books: Super System. It is a 624-page compendium of useful information, notably instructional on hold-em poker. It also has chapters devoted to different poker games such as 7-card stud, lowball, hi-low, and draw poker. Contributing authors include Bobby Baldwin, Chip Reese, Dave Sklansky, and Mike Caro. Caro also devotes a chapter and he has very interesting insights.

Since the recent atomic explosion of no-limit hold-em, many how-to books on poker have surfaced. Books that I would recommend are Harrington on Hold-em , Volumes 1 and 2, and Play Poker Like the Pros, by Phil Hellmuth. Both are instructional and will do much to advance the knowledge of the game. Zen and the Art of Poker, by Larry Phillips, deals with the psychological side of poker and is critical to have in the poker players arsenal of book weaponry.

These are five books that if studied, read, and re-read will go far in the development of a sound poker acumen.

I do caution the student that this will only serve as a foundation for a sound poker mind. The next step is to log in very important hours at the poker table. Live poker is preferred as poor habits can be developed by playing online. And live poker is the only way to learn how to read opponents and develop a "feel for the game." The great T.J. Cloutier said that every time he sits down at a table he tries to learn something about the game or the people he is playing.

It is interesting to note that after releasing Super System, Doyle Brunson had to alter his game strategy as many who read his book began to use Doyle's own methods against him. Just as with all other games, the pursuit of poker is a never ending one. Mike Sexton who has played professional poker for more than 25 years commented that he became a much better tournament player after watching the top players and commenting for the World Poker Tour.

Poker can be a great game, a rewarding game financially and emotionally and it also can become a nightmare. It offers many paths and a student will be well served to be a lifetime practitioner of the game if they expect to extract the maximum positive aspects of poker.

Alex Forshaw writes:

What gets me about all those poker players is how much better they could do trading on a bigger market than nine people's buy-in at a table at the Bellagio.

I agree that "Super System" is a true poker bible. Can't say the same for Hellmuth's book, though. It’s kind of like how he was on TV, pretty high ratio of drama/braggadocio to substance, but that's just my two cents.

One sort-of poker book I'd recommend is The Professor, the Banker, and the Suicide King: Inside the Richest Poker Game of All Time. It's about a Texas banker who took up no-limit hold'em at around 40, became utterly devoted to it, and challenged individual poker stars to multimillion-dollar heads up games and started blowing them up, because the stakes were so unbalancing to the hold'em stars (who were not nearly as rich as he was). That's how it starts, anyway. 

Nick Marino replies:

Readers should realize that at best these books will only help you lose money at a slower rate when playing against professionals. The game is constantly changing because the players and their strategies are constantly changing. Sound familiar?

Gabe Ivan writes:

I read both Brunson's and Helmuth's books recently and I agree that Helmuth's writing is very shallow. His only theme is to play tourneys super-tight at the beginning and change gears as you go. Nothing about the game philosophy. Brunson is a delight and the Caro, Baldwin, and Sklansky chapters provide you with nuggets of knowledge about poker and betting in general. I also recommend Sklansky's "The Theory of Poker," which explains very clearly the nuts and bolts for beginners such as I.

The meal of a lifetime is the opening paragraph where Brunson says, "I made millions playing poker and I lost them at sport betting." This speaks volumes about staying within one's circle of competence when dealing in probabilistic fields, where every niche is so competitive that a legend like him gets wiped out when he steps outside. 



 It is very sad how the public continues to lean the wrong way and lose more than they have any right to. Even the big trendists who only look at charts had no right to miss the upward drift of the past few years.

How naive does one have to be to invest money with the trend followers who managed somehow actually to miss the "trend" and claim to the naïve public that there was no trend to follow?

The doomsayers keep coming back with the most unscientific and naïve reasons to stay bearish. What is more heartbreaking is that all their reasons are in fact quite bullish if they took a little time to study and analyze them.

Some reasons to be bearish are:

  1. Stock buybacks: With $600 billion in cash, S&P 500 companies are buying back stocks. For the sixth quarter in row share buybacks have exceeded $100 billion. This must be very bearish indeed since it means that these companies are depleted of any expansive ideas. In reality, stock buybacks are very bullish, as Vic and Laurel have shown. It is also an indicator that these companies believe that their shares are undervalued. Companies with buybacks outperformed over the next six months and one-year intervals.
  2. M&A activities will exceed $1 trillion this year. This is the third year in a row. Almost a quarter of this is done for cash. This must also be very bearish indeed according to the doomsayers. Again, these companies must have nothing better to do with the cash than acquiring other companies. Yes, the doomsayers believe that pumping back liquidity into the market to the tune of $250 billion annually and taking float out of the market is bearish. They believe that mergers are not an indication that these companies perceive the market as good value.
  3. The equity shrink that is taking place due to all the M&A activities must be very bearish indeed since it will leave the investor with fewer choices. Now that more money will be chasing less, stock supply could indeed be bullish-economics 101.
  4. Short positions are at all time highs. It is very bearish, as you all know since the short-sellers are the more sophisticated bunch and they are very capable of predicting the market turns. These short-sellers will have to eventually cover their shorts in the face of the ever-rising markets to avoid total bankruptcy, which will add fuel to the fire and is indeed very bullish.
  5. The most recent bearish reason is the Shanghai stock market that keeps going down. You have to admit that this is very bearish indeed. It will eventually spill over to the US and cause an economic collapse like never before. The laws of substitution dictate that the liquidity fleeing China will be looking for a safe haven in the US markets and can indeed fuel the upward drift even further specially given that the S&P, even with its recent advance under-performing the other world markets, and indeed representing great value at these levels.

As long as the public believes these reasons to be bearish and lets the pundits take their eyes off the actual supply and demand curves, there is no reason to fear that the public will get wise to the facts of speculation and life. This is indeed the most bullish time in history.

Riz Din replies:

The professional pessimists find reasons not to invest when prices are falling (they could go lower yet) and when prices are rising (markets are overvalued and a correction is imminent). By playing to the natural risk-averse mindset of the person on the street, they guarantee an audience. Maybe it is in the public's nature never to get wise.

I have no view on timing market entries and exits at current levels, but in the UK the most bullish time to invest was a few years ago when the FTSE was trading well below 4000 and the newspapers were reporting the death of the stock market. I am thirty years old and expect similar anti-equity sentiment to return at least once in my lifetime.

Alex Forshaw adds:

Well, at least you're seeing reason on China/Shanghai. Much more measured to foreordain a US bull market than a worldwide bull market.



Here is an easy to digest 55 slide powerpoint presentation for the beginner, from George Zachar.

For those interested by the subject, I remember my own short page on this topic which contains other links as well. Could this site make a good prediction market? I suspect not, because of the noticeable bull/optimistic bias.

Alex Forshaw replies:

There definitely is some debate on the issue of play money markets' allegedly comparable efficacy to that of real money markets. In my opinion, Wolfers was too hasty in putting his academic imprimatur on the notion of effective play money markets. The MidasOracle group blog (to which I am a frequent contributor) is a very good prediction markets portal.

Russell Sears remarks:

As an actuary working in the insurance industry, I wonder what the hedging risk effect is on many of these prediction markets. It would seem to me that for many of the low probability, high risk events (bird flu pandemic, specific terrorist attack) especially for thinly traded contracts that the insurance premium would overwhelm the predictive effect. Further I suspect the variance of the "risk premium" due to media noise may dwarf the change in actual risk.


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