A cap-weighted or quality-weighted look at U.S. employment



 "Why can’t we see that we’re living in a golden age?: If you look at all the data, it’s clear there’s never been a better time to be alive" by Johan Norberg

Jeff Watson writes: 

There's huge money in doom and gloom.

Ralph Vince muses: 

A person should live each day of his life with the same mindset, the very same attitude of savor and gratitude for every minor thing, as if he got out of jail that morning.

Or, as the Old Frenchman himself would say, "If you have the same address as a thousand other guys, you don't have a lot going on."

Alston Mabry writes: 

Pessimism is a strategy. People who have learned, usually from childhood, that they cannot act on their most important impulses use pessimism as a way to devalue what they deeply believe they are not allowed to want.

Bill Rafter adds: 

Just a minute…

As we all know from trading, if you want to increase your profitability over time the most effective strategy is to limit losses. Possibly related to this is the result of several studies attesting that fear is a greater motivator than greed, buy a factor of 3 to 1. Furthermore, we all look at prices and know both instinctively and historically that those prices will not be constant over time. They may be higher or lower, but not the same. Thus, pessimism is historically justified, profit-saving and possibly life-saving.

But to want to trade these markets for profit, one also has to be optimistic, often excessively so in light of bad experiences. You need both.

Jim Sogi writes: 

Jeff is right. Television causes pessimism. Don't watch TV. I haven't had TV for 47 years. It's not only the content. It does something to the brain. It's harmful. 

Stefanie Harvey writes:

Exactly. Television, especially US news television, is the poster child for confirmation bias. 

anonymous writes: 

Many good reasons for worry exist. If you're not worried, you're not paying attention. All of the worries stem from something completely nobody talks about in polite company: population explosion. In 1804, the world's population was 1 billion. In 2012, it topped 7 billion. It's projected to reach 9 billion in 2042 — within my son's lifetime.

True, Paul Erlich got it wrong when he said we'd all starve by the end of the 1970s– but go back read his book. Then reflect on how much different life is.

All those people are unsettling policymakers, with these results (and they are what's secretly worrying us):

Unspoken Fear #1: War. Today's empire builders are intent on grabbing resources; nuclear weapons are in too many hands.

– China: rich and populous; thanks to the free-trade break we gave them in the 1970s, they've created a war machine and ready to go for our jugular.

– Islam: implacable and populous; we have spent trillions trying to establish a decent government, and the area keeps morphing into an empire that despises us and all we stand for; they want their old empire back, be it from Baghdad or Istanbul.

– North Korea: Our strategy is, "Let's all ignore that man in the corner, and maybe he'll quiet down."

– Russia: ruthless, and intent on restoring the empire of Rus.

Unspoken Fear #2: Dystopia.

– When people don't have honest work, nothing good can come of it. In America alone, 94 million people are out of the work force. We're not being honest about the impact of robots and artificial intelligence. It's this fear that gave Trump the nomination, not that he knows what to do with it.

Unspoken Fear #3: Central government that keeps growing.

– Confronted by the population explosion, the elites have decided that the masses must be controlled and pacified. This political philosophy shows up in the fear of liability for anything fun, in subsidies, in central banking. We see sledgehammer policy-making, from FDR to Obamacare.

– And the educated love it! Calls for authoritarianism are the norm among socialist youth, aging hipsters, authors and "educators" at all levels.

These memes and unspoken but rational fears show up in pop music, with its ugly pounding overamplified brutalist mindlessness; in contemporary academic music, with its screams and jaggedness; in art, with its sneering cynicism; in architecture, with its boxy Stalinist aesthetics.

It shows up in the piggishness of the powerful, with Hillary Clinton the prime example. The rich expect multiple homes in idyllic spots, bodyguards, private jets; the poor suffer in overbuilt, crowded, noisy, polluted cities.

I happen to be an optimist, and always see the glass as half-full. Please note I am not prescribing anything; for one thing, it's gone too far. Nor do I think that going to Mars will help.

Russ Sears writes: 

First, human super-cooperation is built on trust. To evolve as a group, a high percentage of that group must be trustworthy for the compounding effect of the prisoners dilemma to work. As the group grows too big, it becomes too easy for a individual to feign cooperation. Hence the need for creative destruction and for power being placed in the smallest sized group necessary. It has always been easy to look at the big groups and see the corruption and assume that they are in control of the long term future. But the truth is they are dinosaurs and will lose out to the small but wise group/ businesses that still operates at the human individual trust one another level and are quite hidden from the spotlight, because of size. But these time and time again raise the tide for all.

Second, personally, it is too easy to dwell on the jerks that simply can ruin it for everyone but that fall into everyone's life. They can ruin many nights even if as a rule I try to avoid them. A single jerk can derail my perspective and keep me up at nights and easily crush my spirits if I let them. I found the best antidote for me is to turn the tables if I start thinking of the jerks and think instead of those in everyone's life that have blessed them with love, grace and patience. I think of my Dad's second wife, caring for a dementia patient at home for 13 years and weeping tears of love on his passing, the coach that helped me, the friend that's always there, etc. I try not to let the jerks own my mind rather than those loving, lovely (my spouse), good and virtuous people in my life. This also goes with those news makers, politicians and on the dole.



 I rarely have erudite thoughts. Occasionally I have some pedestrian views.

First, oil has made a fool out of me. Nevertheless, I believe oil prices will revert to $80 and beyond. Unless there's a geopolitical event, oil prices should remain low for the next 24-36 months as the market rebalances and works down excessive inventories. However, I believe one or more geoplotical events will take place. It will likely take place within the 24-36 month timeframe. It could be severe enough to cause crude oil and LNG prices to spike.

Second, Mexico will become an important energy partner for US and Canada. Energy powerlines, pipelines, and unit trains will cross borders to facilitate trading, blending and shipping commodities. By merging Canadian, US, and Mexican resources, North America can become energy independent and energy secure.

Third, here are different views about North American electric and gas.

One trend underway today is for producers to exit from commodity markets and migrate towards regulatory assets. In some cases where the migration isn't possible, producers want to force consumers to pay above-market prices for electricity and natural gas. For example, nuclear power producers have convinced New York State, Georgia, and South Carolina regulators to force consumers to buy their electricity at above market prices. Coal producers argue that consumers should be paying above market prices and, at the same time, regulators should allow their customers to pollute air, land, and waters so the state can save mining companies and jobs. In addition, companies like Dominion, Duke, Exelon, PPL, and NextEra are dumping market assets and buying regulated assets (or hedged assets). It turns out, traditional utilities dislike free markets. These "conservative" companies prefer being regulated.

Industry leaders describe other trends. You may find some of these ideas interesting - or not:

1. America can no longer build large nuclear or coal-fired power plants. Yes, there are five nukes under construction. One is scheduled to reach commercial operations shortly. However, capital costs far exceed any financial benefits, and government subsidies are necessary to finance construction.

2. The only profitable option for those needing large-scale power producing assets is high technology gas turbines (combined cycle gas turbines). While capital costs are low, there are substantial [financial] risks in owning gas turbines. If fuel prices leap, generating assets depending on that fuel could become marginalized and unprofitable. Also, gas turbines need to be built near interstate gas pipelines with surplus capacities. Profitable locations are rare. As such, geographic limitations have become substantial barriers to widespread development.

3. Thermal coal consumption will continue to decline in North America. As more coal-burning power plants' production costs drift towards the markets' margins, owners will throw in the towel and retire uneconomic units. Like renewable energy, coal burners have been granted substantial government supports, which are slowly dissolving. Without government supports, coal burning costs increase and energy production becomes uneconomic.

4. Investors and regulators will continue to favor [new] wind and solar assets. Returns on these assets are substantial and financial risks are comparatively minimal. Compared to other alternatives, wind and solar are winners because they are frequently the markets' cost leaders.

5. The biggest winner is energy efficiency. It is the cost leader. It requires minimal investments in new infrastructure. Companies like Exelon are exploiting energy efficiency with success. Most expect energy efficiency programs will grow. As more technology is introduced and merged with energy infrastructure, investments in energy efficiency could explode.

6. You guys like might like one trend. It's called transactional energy. Instead of buyers and sellers transacting bulk power deals at the wholesale level, transactional energy will allow retail buyers and sellers trade electricity at the local level. Transactional energy is currently limited by policy. Those limits may change as regulators struggle with increasingly difficult choices.

7. A precursor to transactional energy is distributed energy, which is gaining traction. Distributed energy turns the current utility system upside down. Instead of spoke and wheel system centered around a single central power station, small generating assets are moved closer to consumers. High costs associated with spoke-and-wheel systems provides growing economic incentives for locally-owned fuel cells, batteries, solar panels, wind farms, and energy efficiency. It also eliminates the need for more transmission lines and associated costs.

8. Local electric and gas utilities will likely migrate to a different business model. They will keep their monopoly status, but they will likely change their core activities to the simple business of renting wires and pipes. After they change their model, they will likely allow customers to hang approved equipment off their distribution systems for a fee. Presently, California and New York State are heading in this direction; others will follow.

9. Motivation to change the current model will likely come about by consumer frustration. Today, wholesale regulators are piling on costs that reward power producers at the expense of consumers. At the same time, retail regulators are adding costs that must be borne by consumers. Taken together, the cost of electricity is substantially less than the cost of renting wires and related equipment to deliver that electricity. In some areas the ratio is 2-to-1. In other areas, it's 4-to-1. As the ratio grows, consumers will be motivated to self-generate or build distributed energy systems. The first to exit will likely be large business and government [military] consumers, followed by small consumer groups. In fact, the exodus has already begun. It will accelerate should natural gas prices jump above $5.00, because that price will be ripple through the value chain and amplify electricity prices.

Some trends are in progress and may accelerate in the near future. Others could take decades to gain traction. The underlying assumption is that all things will remain equal. Of course, all things will not remain equal. A recession will slow change. A recovery will accelerate change.



Many people feel guilty and wish to atone for their wrongs and have a wish to suffer.



This piece on the "20 Rules of Being a Knight" might be of interest and enjoyment to the many of us who are still fascinated and enraptured by Don Quixote.



Let's hope a woman of such infinite jest brings some levity to the markets today (2016/08/26), lest we end up like poor Yorick.



 By far, the worst day in my life has been the day our family arrived in Denver (by train!) and got the news that grandfather Jovanovich had died of a heart attack while walking to Union Station to meet us.

Whenever we visited Denver and when I had lived there as a small child, he and I would walk around the terminal and he would tell me stories. They were wonderful; he found humor in all his (mis)adventures, even the ones that were violent (being up on the hogback with the other striking miners watching the National Guard strut their stuff after Ludlow ).

On his last visit to see us in New York, he and I went for our usual drive to look at the "New" Croton Dam. He loved the engineering; I loved the fact that he let me drive the car even though I had no license and was well under the age for one. (This established a family tradition; 40 years later Eddy began her illegal driving career in the back roads of north Contra Costa County behind the abandoned Spreckels sugar factory in Martinez.) You can no longer do what we did - drive across the top of the dam. (Yet another gift of the permanent official fright that is the true legacy of 9/11.)

I was thinking about that trip the other day and trying to remember if I had ever once heard him malign anyone by name. The answer is "one time". He was reading from his stack of magazines that had made their way to America from what was then Yugoslavia; and I heard him mutter "rot in Hell, you bastard" to himself. (He said it in a language I used to know - Serbo-Croatian.)

I asked him who he was talking about. He said "never mind, I said something foolish." He hadn't; but it was kind of him to avoid explaining why, even at my young age, I had no surviving relatives from his immediate family.

Who had he read about in the paper? It was Mile Budak, Ustasha ideologue



I am sitting at the Philadelphia Union vs Kansas City game to find out that the park was renamed this year to Talen Energy Stadium. Ticker: TLN.



 Should one follow a purely Quant approach, as seems increasingly popular today, or should one on the contrary combine quantitative and qualitative ideas for best results in trading? 

Intuitively mixing qualitative judgment with quantitative signals matches pension funds' desire to blame someone if something goes wrong, so intuitively it should command higher fees and more assets. Less cynically qualitative judgment is harder to replicate. Theoretically. In reality I find most people's qualitative judgment is just a randomly executed quant system.

For similar reasons I can imagine purely quantitative processes performing better, when the sole mandate of the manager was to define methodologies to turn systems on then subsequently turn them off. But it's hard to ignore the effect of AQR on fees and industry events like Cohen plowing into Quantopian, as both worsening pricing and increasing competition in the quant space.

I'm trying to figure out what method is the best to pursue. Should I be reading the earnings transcripts, talking to management, using the software companies make and ad platforms of tech companies, doing my best to make a robust qualitative view? Or should I be improving my use of machine learning models and getting more proprietary data sets?

More simply, does the next 20 years in have asset management have a stronger bid for the qualitative, the quantitative or the hybrid?

I would be most grateful for your wisdom.

Bill Rafter writes: 

Let's say you have a quant "system" that you have tested and it has a positive expected value that is of interest. Adding some qualitative/anecdotal tinkering on top of your tested program has a real risk of lowering your expected value (assuming you have no ability to test your tinkering.) So why tinker? Well, it's human nature to do so, and by tinkering you might find something better. Okay, then put 90 percent of the capital into the program with the tested positive expected value and experiment with 10 percent, or just hold that latter capital back for when you positively test another system.

BTW you might want to read Ralph's thoughts on how much to bet.

The tougher part is coming up with the "system". Obviously test everything, especially your assumptions. From reading your note I see that you might have some untested assumptions. For example do you think earnings are important, something which I myself do not know? I'm not saying they are unimportant, just that I don't know. For example we do a lot of macroeconomic forecasting, but we never trade based on it because we have learned that the market does what it wants to do, and not necessarily what the economic numbers suggest. And also we know that a lot of the macro releases are fudged.

One thing you should give serious consideration to is which time venue you will target. Unless you have the right infrastructure it will not be high frequency trading. So will it be days, weeks, or much longer? That will dictate the type of approach you pursue and your research. If it will be very long term, then you have to get deep into company research.

The people who care about earnings tend to look at the much longer time frame. Meaning that your capital is exposed for a long time during which lots of randomness can work their evil ways. [The factors that we are most capable of dealing with are momentum and sentiment, and consequently our time frame of interest is shorter, say 4 days to 6 months.] So identify your strengths and go with them, particularly if those strengths differ from that of the crowd. If you don't know what your strengths are, be prepared to put in a lot of time on research. Minimize your trading during that period otherwise you will not have seed capital to trade when you acquire the skills. You know that, but it bears repeating.

Be prepared for the counterintuitive. For example, when we first acquired the computer skills to do the research we did "test 1". Test 1 was "if you know the market is going to go up, which stocks do you buy?" We assumed it would be the high beta stocks, as they would go up more. But they didn't. Turns out that beta is backward-looking and going forward the high-beta moniker just means higher volatility, which is a negative. So test everything and assume nothing.



 Thanks to someone who has actually made a living dealing with Central Banks and their best friends, I have discovered Holger Zschaepitz. Mr. Zschaepitz is a journalist who has a talent for observing the obvious.

There will be no government debt problem in Europe in another decade. The prudent Finns will be "debt-free" in 7 years; for the Irish it will take twice as long.

This calculation assumes that the ECB will continue its current pace of bond buying for the duration. But, one asks, why wouldn't they? When all is done, they will have achieved what Henry Pelham did - the outstanding government debt will have no maturity. Since there is no one left in the world who will trade coin for paper at a par value, they do not have Pelham's challenge; where, in a world of fiat currencies, would a disgruntled holder of euros, dollars, pounds want to go in order to take the money and run?

We may want to look back at the "inflation" of the 1970s and early 1980s and see it as a kind of nostalgia craze. The U.S. Central banks thought it had to "preserve the value of the dollar" - i.e. prevent the exchange rate from declining. (Why, at a time when U.S. costs were no longer competitive with our major trading partners, this should be perceived as a "threat" is itself an interesting question.) So, using the Bagehot formula (x% will draw gold from the moon), the U.S. restored "faith" in the dollar with double-digit interest rates.

The more I study the history of political economy the more I find that that money has become a matter of theology. How the stuff was actually invented and used as a unit of account has no bearing on present belief. As someone recently said, all money is now credit - entirely a matter of faith.



I would note that 3 independent events in currencies over the past few days have raised my antennae. First, comments from the Reserve Bank of New Zealand caused a 1% or so spike higher in the NZD. Second, the potential question of the South African FM has caused a 3% plus move weaker in the Rand. Third, the downgrade of a rating's agency outlook of Mexico caused a 1% or spike weaker in the MXN. The same was true of Korea and the KRW a week ago. Granted these currencies are not the most liquid but I think the reactions in both prices and market commentary following them are above normal. Given the compression in volatility cross markets, lack of general fund performance, market participant risk aversion, and upcoming geopolitical and economic events these moves may be a foreshadowing. I recognize that much of this is qualitative and to be tested a bit further.

Jim Sogi writes: 

Here is some anecdotal info on John's NZD post. New Zealand is booming, thriving and growing fast. It's peak ski season and I hear Japanese, Chinese, Italian, French, American, spoken in crowded restaurants and stores. Prices are very high, much higher than exchange rate justifies. Compare the high prices to low prices in Italy and Japan. Real Estate is booming in part due to Chinese purchases. Chinese tourists outnumber all others 10-1 at parks and heli tours. I wonder if now China is exporting inflation after years of exporting deflation with cheap manufacturing. Money seems to be flooding out of China.



On Friday (8/19/16), the 30-day average true range of the S&P 500 emini was 14.8, the lowest since July 31, 2014. Today's range would have to widen by 5 points to avert another 2-year low.



This came across my twitter feed.

, Gow et al.


Based on two samples of high quality personality data for chief executive officers (CEOs), we use linguistic features extracted from conferences calls and statistical learning techniques to develop a measure of CEO personality in terms of the Big Five traits: agreeableness, conscientiousness, extraversion, neuroticism, and openness to experience. These personality measures have strong out-of-sample predictive performance and are stable over time. Our measures of the Big Five personality traits are associated with financing choices, investment choices and firm operating performance.

and conclusion:

Finally, we examine associations between CEO personality traits with observed investment and financing choices and firm performance. We find that openness is positively associated with R&D intensity and negatively with net leverage; whereas conscientiousness is negatively associated with growth. In performance tests, extraversion is negatively associated with both contemporaneous and future return on assets and cash flow. However, our results are descriptive and further work is necessary to understand the nature of the causal relations, if any, between personality and firm policies and performance.



 The movie Florence Foster Jenkins is poignant and beautiful based on a true heroine and her solicitous cohabitiere from 1944.

Great walk on by Toscanini, Cole Porter, and Earl Wilson.

Brings tears to the eyes.

People love it because it's part of idea that has world in its grip and it makes people feel small.

But it's beautiful and highly recommended. 



 I've been studying the history of market corners in wheat, and ran across a gem which I thought there were no intact copies.

D. W. Griffith made a silent movie called A Corner in Wheat back in 1909 about a ruthless speculator who cornered the wheat market much like Leiter attempted to do in 1898. The spec put on his squeeze, got rich and took his friends and bevy of beauties to celebrate in high style complete with toasts of champagne and gallons of hubris.

Incidentally, his movie had the first cinematic depiction of trading in the wheat pit. While the spec and his gang were partying, the poor suffered, children went hungry, farmers were wiped out, bakeries ran out of bread, and there was social upheaval with police action.

The tone of the movie was not kind to speculators which was par for the course in those days. Grain traders have never been popular, blamed by everyone from the farmer, the miller, the government, all the way to the consumer for the ills in the world.

The period of 1875-1915 was a time when the grain trade was under fire on all sides. Griffith capitalized on that public sentiment and made sure to follow the age old Hollywood program where the rich are always evil and the poor are noble beings. He made sure that the protagonist met a bad end(drowning in his own wheat in an elevator accident), proof that karma will always catch up with the bad rich guy. Still, nobody ended up happy at the end of this movie.

The Griffith movie is based on the Frank Norris story "A Deal in Wheat" and his novel The Pit. Norris was working on his Epic of the Wheat trilogy of novels when he died of a ruptured appendix at age 32. He and Stephen Crane, who also died at a young age, are essential reading if you want to understand why so many European and American intellectuals thought Socialism would surely be coming to America after the turn of the 19th century.



Do we want to protect the jobs of those who work in industries where the U.S. is uncompetitive, or do we want to allow U.S. consumers as a whole to minimize their cost of living? [I]t's one or the other. - Howard Marks.

[It is not a question of uncompetitiveness, or the future coming of robots.] A tremendous percent of middle class jobs are already obsolete. Indeed many of the jobs and even entire professions have been obsolete since they came into existence as part of things such as the "great society" program. Regulation, the welfare state, etc, is a huge middle class jobs program. It's not really the supposed beneficiary who truly benefits, it's the overhead, the regulation enforcers, compliance officers, case workers, etc.

The real crisis is that these 'Make work" jobs can now often be done by software of by a communication line to a cubicle farm in India–it kind of killed the idea of it–kind of like offshore manufacturing arbitraged the increased labor protections and union rules, etc. It's not that automation is making more jobs obsolete (though it is), it's that it is making jobs that have always been obsolete more transparently obsolete to more people.

I don't think we will see mass "joblessness" much more likely, we will see a massive expansion of regulatory state in a way that requires "jobs". take the boondoggle of the TSA who mostly just inconvenience the rest of us. If there is not enough crime to hire all the people with social work degrees or who would like to be police officers, etc, we will import criminals to create the need. etc. It's already happening.

Rudolf Hauser writes: 

Or create more crimes so that more people living their ordinary everyday lives become criminals for not being in compliance for some stupid regulation.

Stefan Jovanovich writes: 

To add my worn shilling to what Ed and Rudolph have so beautifully said: so much of the warfare in European history from the Greeks onward can be attributed to the need to find something for the "middle class" males to do. The Great Alexander's initial Macedonian Army - the one that crossed into Asia - was over 75% mercenaries, and their replacements were almost entirely mercenaries. (The good people back home in Macedon who still had farms and pastures wanted and needed no part in his conquests.) Where would the British Empire have been without all the younger gentlemen who were never going to inherit?

Productivity has absolutely nothing to do with the number of hours worked. Part-time workers are no more "marginal" than full-time ones; they just can't put in a full day because they have other responsibilities. (Having owned 7 "small" businesses, I know more than I would like to about this basic fact of economic life. There are only two categories of employees: those who actually want to be told what the job is and then left alone and those who think kissing higher asses is what employment is really about.

Before the labor "reforms" of the Progressive era, coal miners and mill workers and garment workers were paid on the piece rate. This "horror" was complemented by the fact that people could work "odd" shifts - for the women who were garment workers, that could be 8 hours on Sundays (not the Jewish Sabbath), 4 hours on weekdays so there was time for shopping, cooking and childcare. The Progressive reforms were based on the notion that women should not be in the workplace and they most certainly should not be competing with men. A "man" should have a full-time job with wife and children at home. Almost all of the current social legislation - disability, unemployment, welfare - is still premised on this ridiculous presumption. And, of course, payment for piecework is as completely illegal as selling moonshine.

Machines do not have to be "more productive" than people to be a sensible investment. People are a very large liability tail; and they require management by other human beings, which is, of course, the very activity that is least capable of being measured economically. (Try doing a look-up on productivity in government and education, where middle management - mostly gone from manufacturing and distribution - is now the principle job category.) The tax and labor codes also help; you can get a great deal more after-tax profit out of money spent on equipment than the same money spent on labor.



 Recently there was a discussion on the site of money and credit and the relationship of the two. Allow me to give you my take on this issue.

While they are related, money and credit are two different concepts. As the world became more complex and people were dealing more with strangers than with people they knew, barter became rather inefficient. Having all goods and services priced in a standard unit, i.e. the currency unit, was a more efficient way to transact. That way one only had to know the price of any item in dollars rather than in terms of every other available good and service. It was even more convenient to receive payment in that form of money and to buy using such money.

In essence money in its narrow definition is that which will be accepted by the government in payment of taxes and that which is generally accepted in transactions throughout the country in question. It is a question of ultimate settlement. You can pay by credit card, but the seller is not really paid until the credit card company pays the seller in money. That is why the credit card is not really narrow money.

The narrow money or ordinary people and businesses consists of currency and checking accounts. Both can be deposited into the seller's checking account. But when banks net out all the checks drawn each other's bank, they have to settle in bankers money, namely currency (insignificant) and their reserve balances at the central bank (i.e., the Fed). The latter is referred to as high powered money. High powered money is not public money—it is banker's money. So when banks keep this idle as excess reserves, it does not impact general CPI type inflation as it cannot be used by the public to bid up the price of goods and services because it is not something that the public can spend.

In addition to narrow money, any asset that has a steady value and can rapidly be converted into narrow money at minimal costs is quasi money and is the relevant measure when one considers not only the money needed in the active transaction process but also that the public wishes to hold as liquid balances. Assets have varying degrees of such moneyness that changes as market conditions change. For example, quality commercial paper had a reasonable degree of moneyness, but the financial crisis in 2008 when it was not sure if companies could refinance and pay off such commercial paper when due, almost totally eliminated any moneyness such paper had.

There is no single measure of broader money. Rather one might choose a definition of such a variable like M2 realizing that it is only a proxy and that the demand for such money will change in part based on the available moneyness of other assets.

People produce for their own use (of great importance when people lived on farms but relatively insignificant today) and for what they can sell to others. When people earn more on what they produce than what they spend on consumption, they save the difference. They may invest some of this on their own businesses or houses. To the extent they do not invest it themselves, it is savings that must either be kept in narrow money or invested either in credit or equity. (Equity might be considered a special form of credit in which neither the return on investment or the principal is specified but dependent on residual values of the enterprise and for most of rest of this discussion considered included with credit.) So credit is the sum of production values in excess of what the producers either consume or invest themselves that in turn is borrowed by others who are either consuming or investing in excess of the value of their production. (I might add that inventories are considered self investment.)

Money is not always necessary when there is a credit transaction. For example, an business might supply drilling equipment to an oil company in return for a future payment of so many barrels of oil (a loan) or a certain percentage of the oil produced (more akin to equity). But most credit transactions are done with the exchange of money, just as most other transactions for the purchase of goods or services are settled in money. When a bank makes a loan, the borrower sees it in an increase in his or her checking account balances. They are then free to buy goods or services using their checks in payment.

In this case the bank has created narrow money and there is also a credit transaction. This is what makes this business of what is credit and what is money a bit confusing. When the borrower buys something, the seller receives a check and deposits it in his or her bank. The money is still in the system. The borrower still owes the bank for the loan but no longer has the money. These are separate items. The money is what was used to facilitate the transaction. It is not credit. Nor is the credit money. It still exists even after the money has left the hands of both the bank that created it and the borrower.

In a sense all money is credit. When you deposit a check, the bank owes you for that money. Currency is a form of non-interest bearing loan to the government. Much is made of sound money in the form of a commodity such as gold. When governments settle with each other, they can only settle in what is generally accepted by most nations as ultimate payment. Gold services such a purpose. As long as it is widely accepted, a reserve currency such as the dollar will also serve as international money. But as it relates to its use as backing for a domestic currency caution on this assumption is in order.

Gold does have value in and of itself for industrial uses and as jewelry. But to the extent there is a demand for gold as money (i.e. as a store of value or as a backing for money), total demand is increased and with it the price of gold. If people lost confidence in gold for this purpose its value as money would disappear and the price reduced again to what its industrial and ornamentation use would value it at.

In that sense it is no different than any other form of money that is dependent on its general acceptance except for its value. The general desire is to maximize the well being of people by producing as efficiently as possible. Gold requires a lot of resources to produce. Fiat money does not. Hence fiat money is a much more efficient form of money.

The main argument for the use of gold is as an insurance against overproduction of money as in the case of gold that is related to the physical availability of the metal and the difficulty of its production. But gold backing can always be stopped by government action. So the only form of insurance is to deal in and hold the gold oneself. Unless the government prohibits ownership of gold as it had in the U.S. for a few decades, there is no reason why any individual cannot do so now. Both fiat money and gold backed money are dependent on government integrity and discipline, so there is no reason not to go with the more efficient form of money.

In our economy, money is created by the Federal Reserve. It can do so in two ways. One is to lend to the banks (or, when permitted, to anyone else). Another is to buy some asset and paying by a check drawn on itself, i.e. the creation of reserves at the Fed. It does not matter for the purpose of money creation, if what it buys are Treasury bills or bottles of fine wine. What it creates is high-powered money. To convert that into public money (M1), the bank has to use its reserves to buy assets or make loans. When a loan is made, the borrower has purchasing power that allows them to consume or invest just as with any loan. When the Fed buys securities it just changes the asset composition of the seller.

A certain amount of money is necessary for the transaction process, such as the time a mailed check is in the hands of the postal system. The rest is held as for purposes of liquidity. When the supply of money is equal to the demand for these two purposes (without fueling a overall rise in prices), money does not add to the savings available for investment or to raise prices. When it is in excess of this amount, it will be spent as holders attempt to reduce money holdings from their portfolio. But since it does not change what can be produced, it means that one will eventually end up in higher inflation. Until the general rise in the price level is realized, suppliers may assume that the real value of their offerings has increased and increase production that will turn out not to be profitable (money illusion). The amount of money demanded will depend on the efficiency of the transaction process, the opportunity cost of holding money (the interest rate on investments and the inflation rate) and how cautious people are. Crisis and uncertainty clearly increase the demand.  It also depends on the moneyness of other assets, which changes with conditions.

Money is just one asset in a portfolio. The amount of money desired will often be viewed as desired percentage of the portfolio. So when excess money creation can end up being used to bid up the price of existing assets such as equities and real estate to the point where the excess creation of money is equal to the desired percentage of the increased value of the portfolio and/or to increase the nominal volume of transactions until the amount of money to support the higher level of transactions equals the increased supply of money. The monetary creation process may end up directing more activity into credit and investment at the expense of consumption as the process does impact who gets their hands on money.
If the government does not prohibit it, anyone can attempt to create private money as Bit-coin has attempted to do. It will never be a complete form of transactions money if the government refuses to accept it in payment of taxes. But if one can get most people and businesses to accept it as final form of payment and to price their goods and services in terms of it, it can be a semi-complete form of transactions money. But the large swings in price of Bit-coins in dollar terms and the limited acceptance of it as final payment for transactions means it has not made the grade. I doubt anyone prices what they sell in terms of bit-coin irrespective of what has happened to the bit-coin to dollar pricing.

Before the Fed, banks issued their own notes. They were never a complete form of transactions money in that notes from a geographically distant bank were not usually accepted in full without a discount for the uncertainty of the solvency of the issuing bank. One could argue that would be less of a problem today. In many respects that is true, but ex deposit insurance and the Fed, consider the experience of 2008 and tell me why such notes would be more trusted than prime commercial paper was during the worst of that crisis.
In times of financial crisis, the desire for more liquidity becomes manifest and financial institutions might not have enough of it forcing them to sell less liquid assets to obtain it. This depresses financial and other asset prices to distress levels. In such times, it should be the function of the Fed to provide liquidity to solvent banks (or at least those that would be solvent but for distressed pricing on their assets). Failure to do so can create a wave of bankruptcies because of lending to lenders. If loans were all just made to ultimate borrowers, the failure of those businesses and consumers would impact that institution but would not necessarily spread throughout the system. But when most lending is not for ultimate purchases, every such failure by ultimate borrowers can cascade throughout the entire financial system. That risk is compounded when institutions are highly leveraged and have only thin equity cushions to absorb losses.
Hence, gross credit is another factor to consider. When loans are made that will in turn be used to make other loans (or equity purchases), the total gross amount of debt in the system is increased. When the ultimate borrowers are not able to repay that debt, it can impact the ability to repay of all the borrowers who used credit to extent credit. When this chain of non-ultimate lending and obligations undertaken by various contingent financial instruments becomes too extensive, the whole system becomes more vulnerable to panic because in situations of distress liquidity becomes scare and there is panic selling of all saleable assets along with the depressed pricing that results and no lender can have much confidence in any borrowers convoluted balance sheets so dependent on others in the credit chain.
Net credit is dependent on the amount of savings in the economy. It can be domestic savings or foreign savings (the current account deficit).  The question is if there is enough productive investment that can make efficient use of that credit or if it will be used for consumption (i.e. most of the use of government deficits) or investment that will not earn enough to allow repayment. Someone recently asked me if the low interest rates might not mean that monetary policy has been too tight. I answered him and will send that answer out in a following post because it deals with this question in the current context.



This is the response to an fellow economist who wondered given Milton Friedman's comments on Japanese monetary policy in the 1990s if our current low interest rates were a result of Fed policy having been too tight. It was written on July 9th.

I can see that your focus is on the sentence that "Low interest rates are generally a sign that money has been tight; high interest rates that money has been easy." Starting from an overheated situation (or any other for that matter), a tightening of monetary policy in terms of slower or negative monetary growth will slow nominal economic growth, including real economic growth, or even turn such into negative growth. Typically with more of a lag, inflation will also come down.

While the initial tightening of monetary growth will raise interest rates, the decline in inflation premiums and in real interest rates because of the slow real economic environment will cause nominal interest rates to decline. This is the basis of the statement above. In Japan the Bank of Japan kept monetary growth too low. That contributed to keeping the economy depressed and interest rates down.

The current situation is somewhat different in that our monetary growth has not been that slow and our economy has had mediocre growth, but interest rates are still low. In the past two years M2 has grown at a 6.2% rate and at a 6.9% rate in the past year.

There is false impression that the Fed controls interest rates. It only influences them. The impression that the Fed controls rates is one of the ways that the Fed influences rates by its interest rate targets, but it is through the creation or contraction of reserves that the Fed has its direct impact.

As noted above, the initial efforts as reflected in monetary growth rates has a lagged impact of economic activity and prices, which in turn moves interest rates. So the question is, if we have had respectable monetary growth, why has nominal economic growth not been higher and why are interest rates still so low.

Slow growth and low inflation abroad is one factor, but one would expect differing interest rates due to different local rates of inflation and economic activity to impact forward exchange rates and spot exchange rates rather than mainly a convergence of interest rates. A difference in the supply of money and the demand for money should impact economic activity. But aside from that the Fed's impact on real economic activity is limited.

Erratic and inflationary monetary policy will create more uncertainty, which in turn will hinder real growth potential. A situation of accelerated monetary growth can shift some demand forward (and a contraction the reverse), as participants engage in capital and durable goods spending (investment) sooner to lock in the lower interest rate costs. It could even result in overall investment being higher because the lower cost of capital might allow more investments to be profitable to a greater extent than periods of higher interest rates might permanently reduce investments. However the poor economic conditions of the time also tend to reduce expected returns, limiting the impact of temporary lower capital costs. But overall these impacts are either limited or temporary.

Real growth will depend on technological developments, capital investment, culture (including attitudes toward risk and innovation), legal and regulatory conditions, political conditions, etc. Savings depends on the desire of people to save for emergencies, retirement, education, etc.; rates of return; inflation; income distributions; diversification opportunities; acceptable risk levels on investments, etc. Investment depends on expected rates of return, the ability to get money to those willing to make capital investments, capital market trends, alternative uses of borrowed money, etc. The relation of savings to interest rates is complicated.

On one hand, people tend to prefer current consumption to deferred consumption, so require returns on savings to postpone consumption. But the marginal utility on basic necessities in retirement or future medical costs, etc. might be higher than on additional current consumption.

In essence people may have fixed level of savings objectives based on the expected costs of that future consumption. When returns are low, more savings flows might be required to meet those objectives. The net effect of these two reactions is an empirical question that can vary from place to place and from time to time.

Income distribution is a factor in this savings/investment situation. When you have countries such as China running up dollar reserve balances for domestic political and social reasons and others such as the oil producers some years ago having such strong revenue growth that they also accumulated dollars, you had a larger amount of savings provided to the U.S. As income growth has mainly gone to the upper 1%, etc. who have a lower marginal propensity to consume for obvious reasons, overall savings is high. (Note that since some of these saved funds will be borrowed by consumers, you would have to have a focus of savings by income groups, not just overall households to really analyze this question.)

But if income growth of the main part of the population is minimal to negative and population growth is limited, who will buy the increased output that results from investment? That lowers the prospect of future returns.

Increased regulatory burdens and delays, also discourages investment, as does all the uncertainties about the EU, future growth potential in China, the U.S. election outcome, etc. There is also a reluctance to undertake some types of risk, which makes it more difficult for new businesses outside of a few high tech glamour areas to get the necessary investment. With returns so low, those with savings will tend to bid up prices of existing assets. That reduces term spreads on interest rates, overpricing longer term securities and may also result in bubbles in other areas.

The ability to borrow cheaply encourages short term speculation. Excessive monetary creation may not result in faster nominal economic growth under such circumstance with attendant higher consumer price inflation but result in asset price inflation instead.

That is what happened with the housing bubble in the first decade of this century. The government has to create more favorable conditions for economic growth and reduce the advantages of crony capitalism to deal with some of the income misdistribution.

In essence I disagree with the conclusion that low interest rates here are a result of monetary policy that has been too tight. There are two approaches to monetary policy. One is to focus on interest rates, with moves by the Fed to nudge interest rates either above (tight policy) or below (easy policy) the fundamental non-inflationary real rate.

The other is to aim to have the money supply equal the amount of money demanded in a non-inflationary environment. Friedman favored a constant non-inflationary rate of monetary growth. Both approaches depend on an assumption for the latter items, that is, the fundamental real interest rate and the non-inflationary demand for money. We cannot measure either.

Given the experience of recent decades, I no longer assume a stable demand for money and hence do not necessarily believe a steady rate of monetary growth is the ideal policy for all situations. We do not really have an ideal measure of money. It seems that a measure that is broader than pure transactions money (M1) is desirable, that is the inclusion of some deposits or instruments that can easily be converted to transactions money with minimal or no cost. Friedman and I have both tended to favor M2.

But there are many other short term assets that have a degree of moneyness that varies over time. I prefer to look at both approaches to determine how easy or tight monetary policy is. Monetary growth at present at a time when other assets like short-term Treasury bills have a high degree of moneyness seems modestly easy to me. I say modestly as international uncertainties might increase the demand for money.

I should note that monetary growth has not been steady and there have been some periods when the growth rate was a bit too low. That may or may not have had some temporary impact on economic growth over short periods. Recent higher growth suggests that this is not a current problem.

There are some who believe that the real fundamental interest rate has declined so much that monetary policy is currently tight. I believe that most have lowered their perception of this rate from the past norm but not by so much as to characterize the current policy as tight.

I might also note that some like Meltzer have preferred to focus on the monetary base. My focus is on public money, that is what the public uses for its transactions, which is M1, or can easily convert to M1, such as M2-M1. Aside from the currency component which is present in both, reserves are bankers money. That is transactions between banks require use of the monetary base.

In theory rapid monetary base growth should result in banks making loans and buying securities. But if they hold such as excess reserves, it is like hoarding cash. It has no direct economic impact. The only impact is whatever impact results from a shift in bank holdings from the securities they have sold to the Fed to excess reserves. That is the impact on the interest rates on those securities relative to the Fed funds rate may be impacted.

The public does not have reserves in its balance sheet. As such those inactive reserves would not be expected to have any impact on the public's economic activity. The longer term risk is that those excess reserves will be utilized, rapidly increasing M2 growth at some future time if the Fed is not successful in counteracting such trends. That would likely result in more inflation.



 I spent the Aug 8-Aug 13 week in Vinalhaven with my wife, son, and a friend's family of four. During that time I read the complete set of 130 years of their weekly newspaper, The Wind, I read the book Cities and Economic Development: from the Dawn of History to the Present by Paul Bairoch [link ], and the book Salt in Their Veins: Conversations with Coastal Mainers by Charles Wing [link ]. I resided at the Tidewater Inn, owned by Phil Crossman, who compiled the highlights of the local newspaper and just finished a three year walk and reminiscences of the 20 square miles of the town. I had occasion to interview Phil. I supplemented this with daily visits to the Surfside where local salts gather each day at 4 am to provide council on the byways of town life. In addition, I have the good fortune to be married to Susan Cole, who spent her childhood summers on the Island, has 100% salt in her veins, and whose mother born Norma Skoog lived on the Island and whose father is one of those salt in their vein boat builders so prominent in the building and heartthrob of coastal Maine. I supplemented this with conversations with Shawn Chilles, a local caretaker, descendant of a Skoog, (almost all the families on the Island are at least second cousins to each other ) and long term resident with many jobs. Although I am not a nautical person, I learned a lot from my visit and thought that my observations from the grandstand or from Mars might be of interest.

As background, Vinal is an island fishing village with a population of 1,200, covering 20 square miles, about the size of Manhattan. The density of Manhattan about 100,000-200,000 per square mile with visitors compares to Vinal's density of 60, a differential ratio of 1,500 to 3,000 greater for the City. There are 300 boats, 300 families, 550 households in Vinal, augmented each summer by about 2,000 summer people who come for the beauty, solitude, and vitality of the place. It's one of the coldest places in the US with average temperature of 48 degrees, 35-40 in the spring and winter, 64 degrees in the summer, a record winter low of -30. The town is said to capture the largest lobster catch in the world, perhaps 25% of the Maine Lobster catch of 120 million.

Vinal was once famous as the granite capital of the world, and in 1880 it had a population of 3,000, and provided the granite for such famous entities as the Brooklyn Bridge, the Chicago board of trade, and the Penn. Railroad. The granite industry and the rope industry, it's two majors at the time, have gradually withered away and the town is dotted with abandoned quarries and a rope factory or two, which the kids use as swimming holes and hideouts. The population has steadily decreased since then. Hardly a dozen retail stores still exist, and real estate prices have been in a decline for the last decade. As one walks down Main Street, which once had 3 grocery stores, 3 hardware stores, and a booming retail economy, one notes that almost every remaining store including its iconic restaurant, The Harbor Gawker, the paper store, the ice cream store, are for sale. The two or three restaurants remaining close are open mainly on weekends and close down after the summer.

 And yet, the town is vibrant. There are concerts every day. Volunteer organizations provide almost all the amenities of city life. There is little migration off the island. The locals are able to put on a big city vintage car exhibit. Many artists including the hermit Robert Indiana who lives on Main Street with boarded windows the whole year thrive, and there is a very active tourist industry during the summer months. Almost all the residents have salt in their veins, are self reliant, many have 3 or more jobs. The price of lobsters, now at an all time high of $4 a pound, provides a buffer of wealth that lifts up the spirits and economy of the town. My pleasure was enhanced by playing on one of the three soft court tennis courts in town, before being rained out, an opportunity that must exist only a handful of days in the year.

I found the town a great case study in the growth of cities and civilization from rural beginnings as its halfway between a hunting, fishing and gathering village and a city. The pace of life is slow (all the stores close down at 6.) There is outdoor recreation, mainly boating and kayaking, but there is hardly any indoor recreation on the island aside from a Peyton place locus of romance (the movie theater, and the bowling alley closed down, and there is no chess or checkers), except for drinking (Phil Crossman shrewdly owns the Island Spirits store). There is ample opportunity to reflect on the better or worse of Island Living, and how it relates to the more specialized life of information, trading, specialized professionals, finance, and city administration (police, fire, garbage, education et al) of the city.

The tyrannies of transportation costs, agricultural and fishing productivity, population density, heating costs, and change in life styles provides a nice foundation for appreciating the limits and potentials of life in villages versus cities, and augments one's understanding of day to day activities and markets. One of the first things to realize is that a fishing or hunting village can't sustain much more than 1,000 people, the minimum necessary for a city. Bairoch puts it this way: "The especially crucial point is the existence of true urban centers presupposes not only a surplus of agricultural produce, but also the possibility of using this surplus in trade. These possibilities are directly conditioned by the amount of ground that has to be covered in transporting it." There is an iron law of how much and how far a human can carry on his back. A good estimate is 75 pounds over 15 miles in a day. But a human needs 2 pounds a day for food. That's 4 pounds back and forth for 15 miles. And 40 pounds needed for 150 miles. Thus, he consumes 1/2 of his food by transporting his food, and this doesn't even take account of the needs of his family which say, adds another 1/2 to food needed, thereby taking up the entire weight of the good transported over 150 miles. But in order to have trade you must transport the goods.

You might say that horses and oxens and wagons extend the distance that a man can travel but it turns out that when you take account of the cost of roads, and the driver of the horses, and the food required by the beasts of burden, they don't add much to what can be transported. Indeed, camels seem much more efficient than cars or wagons throughout the Mideast as a man can drive four camels but usually not more than one horse.

Granted that goods can't be transported over large distances, what about the productivity of hunting and fishing. It's estimated that in primitive hunting or fishing societies without agriculture a man can capture about 10% more food than he needs to survive. There are 8,000 lobstermen in Maine and they capture 120 million pounds of lobster in a year. That's 15,000 pounds of lobster a year–revenues of 45,000 a year at a price of $3.00 a pound. Taking into account the cost of fuel, and bait and the depreciation on a $200,000 boat, to say nothing of the cost of a sternman if he wishes to increase his chances of survival, the average lobsterman is lucky to gain income of $30,000 a year, which is in line with the census figures for the average income of the working population of Vinal. That's close to the cost of food and housing for a family. Thus, no surplus is produced…no profitable trade is possible, and without a surplus the population can't grow and cities and civilization can't be born.

One notes again that there are some 20 square miles of area in Vinal, and with a population of 60 per square mile. It compares to France with a density of 100, US with a density of 84 and Israel with a density of 50 and 3 in Iceland. There are many cities in these other countries. Thus, the reason for Vinal's lack of growth and lack of urban activity is not population density. My colleagues suggest that the weather, location upstream to a river, and the proximity to wealthy enclaves might be the answer.

But the pace and quality of life on this island must be a matter of choice. The degree of happiness and satisfaction with life on the Island seems to the outside observer to be considerably greater than that achieved by most city dwellers. There is little migration from the island, and a high proportion of those that leave temporarily for such things as schooling and family seem to eventually end back where they started. A reading of the weekly newspaper reveals countless examples of inordinate benevolence and happiness at big gatherings that seem to dwarf the comparables in city life. While this is hard to measure, the inordinate satisfaction would seem to arise from the independence, self reliance, competence, and hard work that is required to survive in such a self contained community.

Self interest and local knowledge is the key to profitability. The lobsterman developed and strictly enforce a program of throwing back all female lobsters and those below a certain length thus ensuring that the population of their prey will be conserved and increase.

Perhaps in closing one should add some augmentations to ones business and personal life that one gained from a one week stay that has been grafted on 30 years of shorter enforced visits to keep the family at bay.

Everything on the island depends on nature. The working day starts at 4 am, with the rise of the sun. The lobsters are numerous in the morning, the bait is plentiful, and there is much ground to cover to net the say 150 lobsters that is required for a living. The activity varies by day of the week with a plenitude on Monday morning at 3 am as all lobstermen rush out to capture the prey in their traps who are active from Sunday when no fishing is allowed by state law. The tides are key to the efficiency of all activity and they wait for no man and they influence the profitability and safety of the hunt. The weather especially the temperature, the wind, and the fog determine the profitability of all activity. A city trader like myself receives a emphatic reminder that nature is key to market activity and ignorance of it leads to disaster.

No visitor to the Island can leave without a deep sense of appreciation for the wisdom, abilities, knowhows, and all around talents of the old salts that populate the island.

Vic adds:

I will point out that one indicator of the level of happiness of the Island is that there is hardly any crime. One policeman works part time on the Island coming over a few days during weekends. True, in the 1880s a curious incident occurred. A lawyer rowed in from the mainland at midnight and went directly to a local fisherman , woke him up and told the fisherman that he was the legatee of a a $500,000 inheritance. He asked the fisherman to sign off on the inheritance The fisherman refused saying there would be plenty of time to look into it after reflection. The lawyer rowed back the same nite. Apparently he wished to steal a much larger inheritance from the poor islander.

I added a few paragraphs about what the visit taught me about markets, especially the importance of nature, and days of the week. The tides wait for no man, especially on Monday, et al.

Rocky Humbert writes: 

Vic, very nice essay. I suggest you compare and contrast with Nantucket, which was a dominant whaling community, similar size island land mass, but has grown and prospered despite the demise of whaling. The population of Nantucket was fairly constant from 1880 to 1970 around 3,000-4,000. By 1980, it had grown to 5,100. It's now up to 10,200 in the winter and an estimated 20k in the summer. Median household income for year-round residents is $55k with per capita income of $31k. Median income for households (which includes part-timers) is $83k however. Largest single employer is the Town of Nantucket by orders of magnitude. Like Vinalhaven, it's accessible only by ferry, which restricts trade, commutation, and elevates the costs of everything.

Real estate prices on Nantucket often rank as the highest of any US county. Yes — more expensive than the Hamptons!

So the obvious question for the 21st Century (as distinct from the 19th century): How does a community with natural beauty become a summer haven? I suspect the answers include : (1) Proximity to wealthy urban centers; (2) Critical mass of residents which has a networking effect; (3) Weather; (4) Luck. (5) Rising sea levels (just kidding).

Steve Ellison writes: 

Before the invention of the railroad, travel on water was far easier than travel on land (one looks around 3 times for Mr. Jovanovich). Thus a settlement might be able to jump the hurdle and become a city by having favorable water transportation. One of the earliest examples was the Nile River, where the prevailing winds blew from the north, and the river flowed from the south, so travelers could use a sail in one direction and drift with the river in the other direction. Here is a map of the 146 counties that contain half the US population. Many are along rivers or at natural port locations on the coasts.

Jeff Watson writes: 

That reminds me, by a large factor, that the cheapest way to ship grain within the lower 48 is by barge.

Stefan Jovanovich writes: 

3 facts in support of the Mr. Ellison's observation:

1. The canal mania that began with the Midi [in southern France] and continued through the 1840s was based entirely on the productivity gain. A draft animal pulling a barge from a towpath could go 3 times farther and carry along its own feed AND have more than twice the useful life.

2. The railroads that made money from day 1 were the ones that chose the same routes as the canals or stayed close to the water. The Pennsylvania and Baltimore & Ohio and NY Central literally followed the routes of the earlier canals. James J. Hill made his money from the spur line that followed the Red River, not from the transcontinental route across the prairies.

3. Water transportation still has the greatest efficiencies - now because you can reduce the crew sizes literally to zero. The first driverless freight hauling will be done not on land but on water.

Once, we lived. Enjoyed life to the full, now we have all become slaves of the yields. We run and produce more quickly and in greater quantity, but we do not have the time to appreciate, valorize and enjoy life with the tranquility and the carefree of once. All running…who knows why…?

anonymous writes: 

[To understand Vinalhaven's comparatively low level of economic activity,] consider the proximity of Cape Cod, Martha's Vineyard and even Block Island to wealthy urban centers. Network density at work.

anonymous writes from San Francisco: 

The most recent rise in the price of housing in the Bay Area is not a function of demand; employment numbers for SF and Silicon Valley have been flat for over a decade. The rise is the direct consequence of the restrictions on supply through zoning and other land use regulations. Check the building permit numbers for new construction; they are remarkably unaffected by price changes because permission to build more units in the same spaces is almost impossible to acquire. This disconnect between housing supply and demand has been going on for half a century now, and there is no likelihood that the politics that have produced this result will change. Everyone who gets elected agrees that the environment must be protected at all marginal costs.



 The film "Money as Debt", produced by Canadian filmmaker Paul Grignon, presents the idea that money is created out of thin air when someone signs a 30-year mortgage—does anyone find that idea problematic?

Stefan Jovanovich writes:

Mr. Grignon's "idea" has a few problems.

The first is his notion about where the "money" comes in. When someone signs a 30-year mortgage, they don't get money; their escrow gets a promise to pay from the bank. What is created is a financial asset, secured by the real estate, for the bank and a liability for the borrower. The payment in escrow is itself an IOU that will be discharged when the escrow company's bank and the borrower's bank have their accounts cleared. Even then, there will be no money involved. Whatever is the net balance between the two banks will be handled by adjusting their reserve accounts with the Fed. (The bankers among us are asked to suspend their laughter; this is a simplified illustration, not a description of how financial institutions actually clear their credit transactions with each other.)

This process of clearing is at least 900 years old in Europe. Merchants were doing the same borrowing and lending by accounts at the trade fairs, in volumes that we can only guess at. What we do know is that in England and Wales alone there were 8 fairs and 169 markets as early as 1100 C.E. By 1516 there were 2761 fairs and 2443 markets.

The other part that poor Mr. Grignon does not understand is the fact that money has its origins, not in exchange but in sovereign taxation. Contrary to the textbooks, credit exists and even flourishes in barter economies. The medieval peasant, who never saw a coin, dealt in a variety of exchanges of promises with his neighbors and the local fief. Money only came into importance when the kings demanded tax payments instead of duties of service.

Money has always been the residual - the stuff people hoarded when they wanted to keep their wealth out of the hands of the government and other licenses and unlicensed thieves - as long as the money itself was "good". Hoarding bank notes made no sense; the government could literally abolish their status as legal tender, either by decree or by printing(Hello, Venezuela). Gold, silver, copper all had the virtue of being tangible; the government did not define their reality.

But, as soon as people find it safe to come out of hiding, they want to resume dealing in credit. Why? Because the profits from speculation can only come from exchange. Your hoard of gold is only worth something when you spend it or use it to create credit. The famous example of unopened cigarette packs being used for exchange in the ruins of post-WW II Berlin and Vienna is yet another instance where instruments of credit are described as "money". The cigarette packs were asset-backed securities; they could be broken up into tranches - i.e. individual smokes - whenever demand pushed the price of tobacco above the exchange price of the pack.



 This is a very old adage: don't fight the central banks. That provides me the gumption to label them as the Gods of the markets. Einstein had quipped God doesn't play dice. Perhaps he felt the unmanifest, invisible, unascertainable authority in the universe is the creator of the universe and had control over its creation. Coming back to the manifest, visible and ascertainable behemoths of the marts a.k.a. the central banks, one is pushed to think that for the first time in recorded history they are sitting on trillions of dollars of negative yielding securities.

Are these visible Gods of markets playing dice or they are still the deterministic factor in the markets who will still determine what happens?


a) Keep dying a slow death losing small chips every year for a long time to come with the negative yields.

b) Raise yields and kill the balance sheet?

c) Inflate dramatically some asset to shore up the balance sheet while exercising option b to make financial assets have sense. In scenario c, the traditional asset of bonds is already inflated. In 5,000 years we have never had yields below zero. Equities are at all time highs. What else is not at all time highs? Again a real estate bubble? Or will it be gold sitting in the vaults beneath metro stations around the world? Gods wont let go of their stature to be Gods, even if these are man made Gods.

Now, after scenario c also plays out, since nothing is permanent and ever changing cycles will again at some point bring something down, what is it that is going to go down first and what is it that will go down most?

If the unthinkable of negative yields came in too, why can not the unthinkable and the least obvious scenario (a) persist? Imagine eventually people getting money to buy cars, homes, tuxedos, rolexes and receiving an interest for taking away the trash called cash from lenders, banks and Gods? This then is not an option that can persist for long? Or it can?

The whole earth is going the Amazon way!? Will Jeff Bezos be known as the pioneer of the new world, where you get paid to usurp and use up money that in any case is at a discount? Is the motor created by John Galt working now to produce energy from nothing? Who will cut this motor off? When? Why?

Is the motor already broken? The endless mint-churning has produced endless currency. This currency is akin to endless static charge that has accumulated. Its not creating motion. This currency is unable to and unwilling to move into the system. Why? Is it that the window dressing of every bank balance sheet that began in the aftermath of 2008 in the developed world is not yet complete? Only book entries are happening?

Why do I get illusions that the cigarette buts in my ash tray sometimes appear to have a $ insignia printed in gold? Well if I were to go by the wisdom of the Reflexivist that one makes big packets on betting on the unobvious, I call this Gold insignia bit an illusion since fundamentally gold is too obvious a bet.

Will the world return back to before Bretton Woods? Will every key central bank agree together to print only more currency equivalent to gold it has making the yellow shining bars jump up to 2200? Then chart reading pros and amateurs will find a divergence in momentum and short sellers will come in and the dream of the gold bugs would be fulfilled to have record shorts in the move from 2200 to 1800 so as a jump to 4000 will become feasible? Will that suddenly bring a solution that none of the banks are sitting really on junk anymore? Will it still allow the permanence of the Senator's observation that a good suit has always costed an ounce of Gold? Or then, a good suit will be available at half an ounce of gold?

Despite change being the only permanence in markets, few things have never changed. Of those unchanging ideas the infinitude of the abilities of mankind at struggle for survival, conceit, deception, keenness to find the next scapegoat don't seem will dissipate away with just negative interest rates. No one will believe that everyone will go down equally and in fair proportions. So who is the lunch now, when its almost lunch time?

Monkeys have been now using the Discounted Cash Flow model. Yes, the longer you hold negative yielding assets the larger becomes your Net Present Value. The more you are willing to bleed the wealthier you are now! If this negative yield quagmire has any shelf life in plain simple English (no Greek and no grammar-nazis required) no one will have an incentive to save. If there no savings incentivized why would investors be incentivized? Lord Keyenes we really wish this day has not come, yet it has.

The most illogical times have arrived. Why am I seeking to imagine the odds using any logic? Would an illogical unintended consequence save the world? Why don't we remember that in the yo-yo moment of 2008 when the biggest churning of the USD mints happened, the biggest flight of capital until then in the history of this world happened INTO the USA and not OUT of the USA?

Would logic have to prevail, eventually?

So I am sending out this humble hat to the spec-list citizens, please pour in your (ill)ogical bets into this seeking hat. If trend is your friend, until it bends or ends.



 Based on the timing indicated, he must be significantly underwater at this time. That assumes he has not thrown in the towel by now: "Soros Doubles His Bet Against S&P 500 Index"

John Bollinger writes: 

The interesting question for me is: Why is he advertising this now?

Peter Tep writes: 

Good point, John.

Sounds like he is releasing the hounds, so to speak.

Did the same for his short Aussie dollar trade some years back and also his long gold position–get long, get loud.

Jeff Watson writes: 

The more important thing is, who cares what the Palindrome says he does. Whenever anyone who's purportedly a big player discloses his supposed position, I look at his motives with a big grain of salt.. People bluff in the markets as much as they bluff at final table of the WSOP. It's all a mind game, and while one should take in what the opponent says, keep in mind that their disclosure is not for your benefit and it could be a bluff. A good lesson is to look at announcements like this and try to find tells….they exist. Nobody ever discloses their position(real or fake) to the media to be altruistic and benevolent. The sad thing is that many people(retail investors, CNBC watchers etc) believe in the good will of the Palindrome and the Oracle to the small investor. Those same unknowing investors are the pilchards that are eaten by the sharks.

anonymous writes: 

"keep in mind that their disclosure is not for your benefit"

That is a key. Even if it is true it is still not for our benefit. For example "they" cover while "we are riding a growing loss waiting for the idea to play out. Our entry was their exit. The flexions/greats/insiders see angles we can't, if we listen regularly our account balances will be eaten. 

Petr Pinkasov writes: 

I struggle to see how in 2016 it's even intellectually sound to present Q as another 'dagger on the steering wheel'. It's hard to quantify the intellectual capital that investors are willing to pay 50x earnings. 

Alex Castaldo writes: 

Exactly. What is the Q ratio for AAPL, how many factories do they own and how much are those factories worth in the marketplace? (Rhetorical question). The Q Ratio is a statistic from another era, when John D. Rockefeller built oil refineries bigger than anybody else's or when Mr. Ford bragged about his new River Rouge plant. It has limited value in many businesses today.

Another smaller point: the proposed tail hedging strategy is designed to break even if the S&P declines by 20% in a calendar month. In the last 30+ years (367 months) this has happened on only one occasion (October 1987). It is quite a rare event. Would you do this tail hedging all the time? I am not convinced that the numbers work when you consider that every month you are paying for put options.

 Alston Mabry writes: 

Doing some searching, I ran across this on FRED:

Nonfinancial Corporate Business; Corporate Equities; Liability, Level/Gross Domestic Product

Cheap-seat question: I know what GDP is, but I'm not sure about "Nonfinancial Corporate Business; Corporate Equities; Liability". Is that simply adding up the liabilities side of the ledger for public companies? Actually, it peaks Q1 2000, so it must involve market capitalization.

But it does peak Q1 2000 and Q3 2007. Of course, ex ante how do you know it has "peaked"?

Ralph Vince writes: 

All measures from an era when there was an ALTERNATIVE to assuming risk — that alternative now is to assume a certain loss, or, at best, a large rate markets exposure for the (slightly) positive rates at the longer durations.

This is an ocean of money that is coming through the breaking dam. It likely will go much farther and for much longer than anyone ever dreamed. Imagine the unwinding of the government-required-soviet-style Ponzi schemes like Social Security, which, at some point must start affording for self-direction to provide an orderly unwinding. Not only from the natural bookends of life expectancy, and pushing out the book ends to where too few could expect to ever collect from it, but the pressure from below in a runaway market for self-direction. This too will fuel the hell out of this run and make it last much longer than anyone dreams of.

Every equity that yields a dime has greater value than the certain loss; every wigwam that provides shelter too, from investing in the ingredients of pizza in Pulaski to Poontang in Pyongyang, all the wealth of the world must come out of the shadows and find a risk — and this creates a self-perpetuating feedback that is something we've never seen.

This is the move that comes along once in a century at best, and we're already starting into it. The measures of the world of positive rates (which may not be seen for a long time) I do not believe are germane to the world today.



 "Captain" Vic in Vinalhaven Maine, looking over the harbor and thinking about analogies between boats and trading…

Bill Rafter writes: 

Observing boats can be very interesting because of the diversity of the boats. They are constantly being modified to fit circumstances. The phrase "different horses for different courses" holds very true for boats. It is indeed fair to say that the sea designs all boats as the unsuccessful designs wind up at the bottom.

The diversity of design is evident in ugly commercial vessels, but also true for sailing vessels. Observe the different positions of the masts. The Swiss mathematician Euler won several prizes related to naval architecture, after finishing second in the first contest about mast positioning. If you are lucky you will get to see a ship with the masts raked (tilted) sternwards, common with clipper ships and also a Chinese junk with the mast raked forward.

Interesting also is the trade-off between speed and stability evidenced by the ratio of length to beam (width). The tipping point between the two seems to be a ratio of 6 to 1.

There's a lot to see.



 I'm down in New Zealand skiing and kiting. This year is a fairly cold year and has had considerable amount of snow. I've noticed this seems to be a harbinger of global patterns. Another anecdote is that 2005 was an outstanding wine vintage. I had a 06 Pinot Noir and it very good. In Burgundy France my vintner friend tells me that 05 was the best in a decade and that 2015 will be the best in more than a decade. I ve tasted the 2015 en Cave and it's absolutely out of the park compared to recent vintages and may the best of this century. Note the global pattern.

Jeff Watson writes: 

At this low in this solar cycle 24, the sunspot count is extremely low with the sun being very quiet in all solar measures There is a correlation between sunspot minimums and lower earth temperatures. It would not be a stretch to call for a Maunder type minimum (1645-1715) when the sun got quiet and average earth temperatures plummeted. Not all "experts" agree that the lack of sunspots caused the little ice age, some attribute increased volcanic activity.

anonymous writes: 

Check out the site

The site has a running tally on "spotless" days per year:

2016 total: 20 days (9%)
2015 total: 0 days (0%)
2014 total: 1 day (<1%)
2013 total: 0 days (0%)
2012 total: 0 days (0%)
2011 total: 2 days (<1%)
2010 total: 51 days (14%)
2009 total: 260 days (71%)



 I have been listening to this book on Audible all day.

A Mad Catastrophe: The Outbreak of World War I and the Collapse of the Habsburg Empire

We all knew from basic history the state of the Austro-Hungarian empire prior to WW1, but this book really drives home just how dysfunctional it was.

The meal for a lifetime is how ideology can cause you to eschew the practical solution.

From the basic narrative, both the Ottomans and Austrians were vying for the title of sickest empire. The Ottomans and successor Turkish state survived everything intact and with a foothold in Europe because the Young turks were willing to give up that which they couldn't hold to keep the body strong. That is, they were willing to chop off the diseased arms so that the body would be healthy.

My interpretation of the AH Empire from the book is that they could have done the same and retrenched from their weak position back to their core, but they were unwilling due to a strong belief in the pride and honor of their once strong empire, which not only kept them from retrenching but forced them into a war they couldn't win in order to avoid the non-stop embarrassments of their collapsing empire.

The lesson of course is to get rid of your ideology and always analyze if you are over-extended.

I highly recommend the book.



 Mr. McGuire: I want to say one word to you. Just one word.

Benjamin: Yes, sir.

Mr. McGuire: Are you listening?

Benjamin: Yes, I am.

Mr. McGuire: Batteries

Benjamin: Exactly how do you mean?

Mr. McGuire: There's a great future in batteries. Think about it. Will you think about it?

"A new proposal shows how the gas shortage may accelerate storage's integration into the bulk power system"



We are rapidly approaching the middle of August 2016, from which a 150 big S&P point decline occurred last year. The question emerges: is it bullish or bearish or random. Wyckoff liked to concentrated on memorable holidays in his trading and had ambiguous theories about its continuation or reversal as do most voodoists. I looked at all occasions when the market declined 150 points in the corresponding 20 trading days of the previous year and found 59 of them since 1999. The average move in the next 7 days is 11 big S&P points versus a normal expectation of drift of 1 with a standard deviation of 28.



Sport? The one you were great at. Do you still play? Of course you will until the day….

Common injuries: shoulders, knees, ankles and every dude has broken a finger playing. Question:

What is the best non pharmaceutical pain management routines you have brilliantly created, yet no one before Lack has asked you. What and how do you complete this exercise for maximum efficiency? The outcome from this routine is to manage pain after vigorous exercise. Yea, like a 49 year old dude racing motocross a few weeks ago.

After a long weekend I pick up weights. An American born before 1920 would consider this a waste of time. Their advice is usually, pick up hay bales for the same 2 hours. I pick up and hold as much weight as able for as long as my threshold. It is far batter than massage therapy. Yet, never a happy ending.



One would think that with all the benefits of flossing, and the difficulty of doing it manually, someone would invent relatively easy a mechanical flosser with a small electric motor that could be guided smartly to the gums and bacteria. Hardly any innovations have been made in tooth cleaning at home since Singleton's Teledyne bought water pik in 1967.



Reading about the birth of cities, it is clear that a strong and productive agriculture was necessary to support the cost of heating, transporting, and feeding the urban craftsman and infrastructure. Cities had to grow near productive agriculture and be downstream where the cost of transportation was low. One wonders if there is a relation between the grain price versus the manufactured good price that is predictive today. In the old days manufactured goods used to cost 100 times the cost of agricultural good, like cloth versus wheat. If the ratios get out of whack today, are there predictive moves? This is a good start: "The Global Pattern of Urbanization and Economic Growth: Evidence from the Last Three Decades"

anonymous adds:

This economic phenomenon is why many towns in Europe emerged in the middle ages as communities which grew up in proximity, often surrounding, Benedictine Abbeys, and why St. Benedict is the patron saint of Europe. The monasteries, which excelled in agriculture and the production of byproducts like cheese and alcohol, offered hospitality, and medical care to travelers, because in that Catholic spirituality, anyone in need who knocks on the door is treated as if they were Jesus Christ, because they might well be, and in any case that is how he promised we would be judged at the end of time. (c.f. Gospel According to St. Matthew, xxv. 31-46) The monasteries were walled to provide save haven from bandits and barbarians.

Jeff Watson writes: 

I don't think you are asking the right questions, but then again I never seem to ask the right ones either. I've pondered this same question for 30+ years, and found that any solution is way above my pay grade. For the past 125 years, real grain and real manufacturing prices have been racing to the bottom, and the race isn't over and probably won't be for awhile. Maybe when they both finally hit bottom, we'll find a good ratio, but until then one should study other factors like world supply, demand, yields, weather, exports, country movement, dollar value, etc. Maybe I'm overlooking something that's outside the box, and should pay the price for missing the mark, but again, I don't know. Playing the grain markets is the same as beating your head against an ancient master of the game of Go who's holding a tree stump in the way of your head. Grains are a very tough game, the toughest game there is. Despite the fact that many outsiders seem to think how slow the grains seem to move vis a vis the currencies, ES, bonds etc, the grains are designed to extract the maximum money possible out of the outsiders. Grains to the outsiders look easy, seductive, and that's the beauty of the game/con….they're like a carny game that look so easy. Jadwin won the game……until he didn't.

Allen Gillespie writes: 

I found Profitable Grain Trading by Ainsworth a good economic text with some forward thinking on his Dow Theory of Grain Trading.



 August 5 is a special day for baseball fans. Many probably don't appreciate it, though. Baltimore Os fans should find it of interest even as it was 3 years before the Browns moved into Memorial Stadium. You see, there's are lots of connections between the Giants and the Os—and in 1951, that connection showed itself, so to speak. For on Aug 5, 1951, the Giants began what may have been the most improbable of comebacks seen in baseball history. And if began on Aug 5. For on August 5, the Giants completed a series against the Cards, coming off a 10-0 shutout the day before, winning 8-4. And in so doing, they captured the series. It was the first of many such series wins during the last third of the 1951 season.

The 1951 team had lots of connections to the Os—well beyond the Giants taking on the Os colors, the black and orange.

1951 saw the arrival of William "Say hey" Mays, the season's Rookie of the Year. The Giants played in the Polo Grounds back then, in Manhattan across the Harlem River from the Bronx Bombers, the Yanks. Mays was made for the Polo Grounds—not so much his bat (though there was that dimension to his place on a roster) but his legs. He could run around in the Polo Grounds' center field better than anyone else in the game. It was because of that need to run like crazy to field center field in that ball park that Mays developed his over the shoulder basket catch—the one that the PTO issued a patent to him because basically it was his. Mays once saw the Os' Paul Blair playing center field. After watching Blair make some outstanding plays, Mays commented that he thought Blair was better as a center fielder than he, Mays, was. Quite a compliment!

Nor was it that Leo Durocher, a deserved legend in the game, was managing the team. (Durocher would rival O's skipper Earl Weaver both in results and lifetime ejections—they are tied for the latter; Weaver had the better win pct, Durocher the greater number of wins. I don't know, though, if Durocher was ever ejected even once, never mind twice, before the first pitch was made as Earl had.) Both Weaver and Durocher would also secure reputations as trainers of future managers, though the 1951 Giants had I think 5 such players. Durocher is probably best remembered for his misquote—he said, "Nice guys. Finish last." The reference was to the Giants (and Mel Ott, in specific) when Durocher managed the Dodgers. That didn't stop the observation from being "Nice guys finish last." Durocher did have a connection, though not through the Giants. Before managing New York, Durocher managed the Dodgers, woking for Larry MacPhail. He an MacPhail would go out drinking some evenings, and MacPhail would fire Durocher, only to rehire him in the morning when sobriety ruled.

Think George Steinbrenner and Billy Martin had an interesting owner-manager relationship? It was nothing compared with Durocher and MacPhail. The connection to the Os is that MacPhail's son Lee was the GM of the Os who began the negotiations that brought Frank Robinson to the Orioles.

For Durocher, competitiveness was everything. If you competed, you had no problems with him. When Jackie Robinson joined the Dodgers in the last 1940s, Durocher said he didn't care about a man's color, just whether the guy wanted to win. (Vince Lombardi was of the same mindset. "During his first year in Green Bay, Lombardi called his team together on the practice field and delivered a rare lecture on racism. 'If I ever hear nigger or dago or kike or anything like that around here, regardless of who you are, you're through with me. You can't play for me if you have any kind of prejudice.' His actions that year were often more quiet behind the scenes, like paying Tunnell's hotel bill when it was hard to find suitable housing, or making sure the black players had enough money to go to Milwaukee or Chicago on off-days. But as his status and power increased in his second season, his sensitivity to racial inequities intensified as well, and his responses became more overt. Before the season began, Lombardi spread the word among Green Bay's tavern and restaurant owners that any establishment that did not welcome his black players would be declared off limits to the entire team. At Tunnell's suggestion, he allowed the black players to leave the St. Norbert training camp twice during the preseason for quick trips down to Milwaukee, the closest city where they could find barbers who knew how to cut their hair." (There was also Lombardi's intolerance of any expression of any homophobic sentiment, perhaps reflective of his basic human decency, perhaps the result of having a gay brother and being aware of the cultural challenges gays faced at the time).

But I digress.

I mentioned that many members of the 1951 team, like Alvin Dark and Eddie Stanky, would go on to manage their own teams. Not that Weaver did ok by that measure too, but perhaps most notable wasn't a player but a coach. A key member of the coaching staff—George Bamberger. Bamberger was a ne'er do well pitcher for the Giants. He didn't find his place in baseball until he began coaching. And it was coaching, as the pitching coach for the Os, that Bamberger would make his mark. In 1967, when Bamberger took on the assignment. He was familiar with the Gray Lady on 33rd Street from when he pitched, briefly, for the Os during the 1959 season. No stranger to Memorial Stadium he.

In 1967, the Os had trouble just about everywhere—but pitching most of all. The arms were sore that season. Bamberger went to work. When Weaver came on board in 1968, he found in Bamberger the man to run the pitching staff. (Weaver was a shrewd judge of hitters and fielders. Pitchers? Not so much. Palmer, no stranger to the art of the pitching craft, once observed that "the only thing Earl knows about a curve ball is that he couldn't hit one." Bamberger was the orchestrator of the 4 20-game winners in 1971. The oversight of Jimmy Palmer as he ascended to become the dominant pitcher in the AL during the 1970s. Bamberger was a connection.

So today has significance in baseball history, at least for Os' fans. Today was when the Giants' hunt for the Dodgers began that season. 65 years ago. In New York City. The Giants would lose only one more series during the remainder of the season—and that was to the Dodgers—the next series, in fact. And after that series, the Giants not only did not lose a series for the remainder of the season. They didn't lose a game to the Dodgers. I'll leave Bobby Thompson for another time.



 I am struggling to find some headline grabbing pundits who are very bullish. If you are aware of any, please highlight them as I'm curious.

Steve Ellison writes: 

I have come across a non-headline grabbing blogger named Logan Mohtashami who is very bullish with a thesis that the so-called millenial generation in the US is close to ramping up its household formation and spending. The ten ages in the US with the largest populations are 25, 26, 24, 23, 27, 56, 55, 22, 52, and 28. This is a US-centric thesis as most other advanced economies do not have large millenial generations.

The productivity drop fits into this thesis because the existing workforce has been aging fast.

Here is a sample:

Interview: "Why the American Recession Bears Failed":

Let me take this opportunity to remind Mike and the other recession callers that a true recession requires certain things to occur. First, we need over investment that creates a supply and demand imbalance in the economy which in turn creates demand destruction leads to a recession. I am not talking about just two negative GDP prints either. We also need a cycle where unemployment claims rise as companies lay off people to keep their stage budgets manageable. When unemployment claims gets to a 323K, 4 week moving average with breath, then we can start talking about a U.S. recession.

But, unemployment claims have never broken come near this level, despite weakness from Europe, Japan, China, Brazil and many other countries since 2011. Even with the oil and commodity collapse, we never broke higher on unemployment.



The main benefit of brushing your teeth is partial removal and disruption of developing bacterial plaque between the teeth. As plaque grows the layer becomes organized*, with deeper layers developing anaerobic bugs which are more pathogenic.

Long ago researcher Harald Loe had his students refrain from oral hygiene and observed the development of gingivitis, which went away when hygiene resumed.

*like America



Jeff Watson writes: 

Temperature minimums tend to increase grain prices. The second chart below is Dutch Guilders per 100 kg of wheat (in France, Italy, England, Germany) . The first chart is rye: an indexed price series in Germany. Cold weather crops like rye, barley, oats, milo etc also show huge increases in prices.

Stefan Jovanovich writes: 

Jeff may disagree, but I think you have to include the effects of
war. The two conflicts that were, in their own ways, as ruinous as the 2
World Wars: the 30 Years War (1618-1648) and the Napoleonic Wars
(1803-1815) - both overlaps the periods of dramatic increases in grain
prices in the charts.















anonymous writes: 

Or perhaps, during minimums, war is more prevalent, I don't know. As an aside, here's an interesting article from the National Geographic.
While not a peer reviewed journal, an interesting takeaway quote that
provides food for thought is: "Temperature is not a direct cause of war
and social disturbance…The direct cause of war and social disturbance
is the grain price. That is why we say climate change is the ultimate



Most investment is currently directed to the most profitable asset: Renewables. It's so voluntary that non-utilities and utilities alike are jumping into the game. This includes Exelon, Southern, Duke, Dominion, NextEra. Google, Apple, Microsoft, Berkshire and several new players.

Today, renewables are the industry's cost leaders. Everyone wants margins. Few are willing to risk billions in marginal assets (new coal, new nuclear, new gas boilers, new oil burners).

Keep in mind, that the nation has surplus capacity. The market for that capacity is clearing, but it will take several more years to reach stability.

Also, keep in mind that the nation's utilities all received 100% government guarantees when they build existing coal, nuclear and oil-fired power plants. Some utilities, like Southern, are capturing more than 100% government assistance. Others, like Exelon and Entergy are capturing a second round of government guarantees on fully depreciated power plants (New York). However, for the most part, government tired of these guarantees and told utilities that (1) they would be compensated for any stranded costs, (2) after receiving payment they are on their own and (3) they must rely on the free market for future revenues. Apparently, the free market valued these depreciated assets so low that owners are now begging for new government support (Exelon, Entergy, Dynegy). Renewables never received the same level of government assistance as their larger cousins and they are not needing additional financial support.



What advantage do we have over our reptilian brains? How can we overcome our instincts, and act against over-stimulation and it's negative side effects?

Here is an interesting article about that very subject: "Supernormal Stimuli": with the rapid pace of technology, have we been able to keep up with the new stimulation that is available?



A typical " objective" report by the wire service used by all media:

"A Tale of Two Conventions: As GOP Nominates a Dangerous Lunatic, Democrats Reaffirm Commitment to Diverse America" by Greg Sargent, July 29 (Washington Post)

anonymous writes: 

Time for the Pauline Kael quote:

"I live in a rather special world. I only know one person who voted for Nixon. Where they are I don't know. They're outside my ken. But sometimes when I'm in a theater I can feel them."

Mr. Sargent has the same broad circle of acquaintances, and he shares the same dim sense that there may be somebody out there who does not read Salon but is still allowed to vote.

Oh, the horror.



 Here's a recording of the full 2+ hour speech that the late legendary bond trader Charlie DiFrancesca gave in 1989. It's very pit centric and somewhat outdated, but he still delivers a hundred meals for a lifetime.

Gary Phillips writes: 

There is a great story about Charlie D. After a particularly tumultuous day in the bonds, the pit had emptied out as usual, except for a few stragglers who remained sitting on the steps. 'SPL' was sitting there looking unusually despondent as his clerk P&S'd his remaining cards. Charlie happened to walk by and ask one of SPL's other clerks "what was wrong with Steve?" I wasn't privy to those words, but as Charlie walked away I heard him say, " Shit, I thought Steve could handle dropping 2Mil better than than THAT!



 With all its faults was the pit system better than the hft system we have now for the public? A vial of vipers compared to flexions galore?

Gary Phillips writes: 

There are many analogies between the pit and hft i.e., spoofing, front running, etc. However, on the floor, when liquidity was pulled (locals simply put their hands down) traders were still under pressure to make markets in order to maintain quid pro quo relationships with the order fillers they depended on a daily basis. Flash crashes appear to be the direct result of hfts.

anonymous writes: 

Talking strictly flash crashes for a moment: they're ignited by HFT front-running, and then perpetuated by their shut-ins. We know they only provide liquidity when not required.

anonymous replies: 

Sure. HFTs kicked off an arms race that added billions to cost of entering or maintaining a business of trading. And the outsiders will always remain cannon meat.

Then again, in the culture perpetually searching out a greater fool, anything and everything can be inflated ad infinitum, and thus maybe everyone can win?



 Suzanne Simard is a Canadian scientist who has been studying forests for the last few decades, with her work focusing on the underground networks that trees use to share resources with each other and other species such as fungi.

Her TED talk starts slowly (you can skip the first 5 minutes) but has a summary of her ideas.

This episode of the RadioLab podcast also covers the basic ideas (and visits the New York Botanical Garden).

That podcast includes Jennifer Frazer who writes The Artful Amoeba blog for Scientific American. Here is an article she wrote on Simard's work: "Dying Trees Can Send Food to Neighbors of Different Species"



 There is a game called Logic Links where the object is to put colored chips onto rectangular or circular grids based on clues like "the green chip is not next to the red".

It brings to mind the colored chart of bond stock co-movements that doc has been putting up for the past 3-5 years.

The object of the games seems similar.

I would recommend the game for all your kids, and as an antidote to excessive barbeque as one ages.



 No one else seemed to notice that Big Dog, horn hound Billy C, at his stemwinder "humanizing" blurring of reality for his toughguy wife, said how he was so drawn and attracted to Hillary [back in Jurassic 1971] cause "she wore these big horn-rimmed glasses" and had "thick blonde hair"?

But fellas, back then, Hillary was a dark brunette.

She became blonde years and years later.

(Maybe he wasn't even talking about Hillary!)



 Book Review: "Who Needs the Fed?" by John Tamny 2016

What really attracted me to this book was the title, something I am in agreement with. I had not been aware of this author before reading a positive review in Forbes and the WSJ. Among other notables is a review from Andy Kessler, whom I have previously found to be objective, and of course a markets person.

First, in favor of the book: the author makes a very good case. Indeed it is safe to say that he finds nothing of value in the Fed's existence. Although a supply-sider, he criticizes them also. He is an adamant free-market advocate who favors no reserve requirements for banks and no FDIC. The Fed was originally created to provide liquidity to solvent banks, and has morphed into providing liquidity to insolvent institutions and even forcing solvent ones to take its money. The author favors creative destruction, whereas the Fed is a major player in central planning and the redistribution of assets to the "weak". "Why keep around that which intervenes in the natural workings of the markets? Didn't we learn in the twentieth century (often through mass murder and starvation) just how dangerous it is to empower central planners?"

The flip side: The tome is 180 pages whose points could have been successfully made in 45. There is so much repetition that it occurred to me the book could be an anthology of previous articles. Why else would the author repeat the exact same text over and over? Does he assume the reader to have Alzheimer's? In each of the 21 chapters he defines his meaning of "credit". He even repeats the exact quotes from Hazlett. Some text is occasionally difficult to read in that some sentences are too long to follow if only read once. He also frequently drops articles (e.g. "the"), probably because he thinks it sounds cool. It doesn't.

The book has no charts, graphs, tables or formulae. Undoubtedly someone told him that those things discourage readers. It is quite the opposite, as they can be used to illustrate a point. One chapter is devoted to how the price of oil responds solely to the price of the dollar with respect to gold. Being a "data monkey" I have the ability to check that out, and when I did I learned why there was no such chart. Yes, there is a sometimes relationship, but nothing to be relied upon.

His concept of real estate is that it solely constitutes consumption by households, not investment. Interestingly my best investment ever was when I acquired and improved a vacant lot 15 years ago for X dollars. Without any subsequent improvement that property currently produces 1.25 X each year in profits. If I were to characterize that as something other than an investment I would possibly call it a winning lottery ticket. I wish I had more of those.

My real reason for acquiring the book is that with a title like that, the author must have some idea as to what non-Fed variables might be of interest. That is, I agree that the Fed is detrimental, so if I had previously been a "Fedwatcher", what do I watch now? Fortunately I found one (just one) that might prove to be valuable.

If you need a guidebook on being skeptical of the Fed, get the book. His examples are great: Taylor Swift, Jim Harbaugh, Uber, etc.



 Omgoodness 10 year projections! A joke.

Stephan, Ralph and all are correct about old Henry.

He gave 5 bucks simply to keep labor.

Our awful history books praise the 5$ yet neglect the labor strikes on later wage demands. Not sure if it's true that Mrs Ford ended that. What is certainly true is Ford inc was a total cluster @#$@ post WWII and the intel boys had to make order of the books.

Chrysler was a cluster in the BK as Iococca asked the accounting department their projection for the year. Apparently no one knew the math.

I want a Tesla! Enough said by the spec list car guy.

Engineers are always terrified by something. That's why they are working in engineering, certainty.

There is no certainty in the future of hybrid, batteries or hydrogen powered carz.

They all work, but at what cost/demand at offer prices. All traders know this. Always watch Toyota. T

hey go with certain bets before they sell fleet.



 It is interesting to consider if certain "self-help" people who offer advice on "refraining" and supposed "nlp brain programming" with insistence on "not being your guru" are unintentionally the ultimate hoodoos.

I recall a legendary golfer hanging out with a fellow and I swear he never won again.

I read of a famous entrepreneur consulting with this individual and I believe he lost his business.

I see a legendary hedge fund manager on twitter taking selfies with a fellow and I hear he has not beat the risk free rate in at least 15 years for his clients.

The secret might be that the "self-help" type is actually (and unintentionally) a parasite feeding on the celebrity of these formerly esteemed, perhaps washed up people to better fleece the sheep by borrowing their prestige.

If it is true, the conclusion is very negative for bonds for the lifetime of, say, someone who might be listening to a self-help guru for financial advice.

Jim Lackey writes: 

No. NLP is learned natural by all athletes. The best way to communicate with another person is to figure out their state. It's very good.

Guru? Self help books? There is always something to learn from any human on this earth. A good book has a meal for a life time. A decent book a meal for a day. If we realize a book is bad we have a quick laugh, then a cold shiver of humility.

I assume your point is buying into a guru/system. That is learned right here on the Dailyspec. All fixed systems are doomed for failure. Humans are dynamic and life is not static, unless you stop learning.

I think I know whom the previous post was about. I read those books in my 20s. Here is what I learned:

How to focus

Example: consistent reaction times in my race cars. That requires a pure visual state focus on one light. How? Relax, even though my car was making 950 horse power and I was very excited. Tune out all auditory with out the use of ear plugs as I needed to hear 5 seconds into my run. Eyes see better into dusk and at night learn how to adjust for the tenth of a second reaction time gain or lose to a false start, redlight. My reaction times were always good, under a tenth. However to be great they must be 0.005 to 0.000001 every time. Trading? Why was it when I lost big, my heart rate went to 180? Yet 125 fast walk when I won? A joke. One day I put on my motocross helmet and took a picture of myself at my desk. I was going to send it to a friend that was in the crash with me. My heart rate dropped to 99. That was learned behavior or the state I was always in at the starting line on a dirt bike. With visualization I can put on my helmet in any situation for life, figuratively.

Lastly kinesthetic.

If you can't get into that state, quit. Trading, sales, romance, which I have at this point in my life reversed that order of preference. Point is if you're satisfied with a small profit, if you don't get excited closing deals, if your only interested in a quickie– take time off, a disaster is imminent. Get the joke? Paying for a life coach? It's a percentage of profit on a mutually beneficial exchange. No profits, someone is fired. I've been fired. I like tacos.


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