- The Glory Of Government Fixed Prices

As if they haven't done enough to prove their stupidity lately, the Greek government has decided to order a 25% reduction in the price of all medical products sold in the country. This has caused the leading European Insulin maker to pull it's product from Greek shelves, since they would then be forced to sell at a loss.


Insulin giant pulls medicine from Greece over price cut


Once again, as if there were any doubt, price fixing has led directly and immediately to shortages. The same as it has the last 20 gazillion times the socialists tried it.

Can't these people ever learn anything?!

- Thieves Looking For Gold Coins

This is a story from the Bloomberg terminal so I'm afraid I don't have a web link. It came from the Athens Independent News Service, an English language service reporting in Greece.

Three caught burgling house to find gold coins
2010-05-27 16:12:25.975 GMT

Police on Thursday reported the arrest of three men who were caught in the act of burgling a house in Thessaloniki to look for gold coins with the aid of a metal detector.

The three men were all Greeks, aged 27, 29 and 77 years old, respectively. They have been charged with a series of robberies and violating laws concerning weapons and protection of antiquities.

- One More AR15 vs. AK47 Fight

It's not like the AR15 - AK47 debate lacks enough participants, but I've recently been given a reason to choose sides in this ongoing battle. For ages I’ve had a bunch of spare parts for an AR15 in my basement; almost a whole rifle in fact. So a few weeks ago I finally got around to ordering a lower receiver (which under the law is the actual ‘firearm’ part of an AR15) along with a few other customized parts, and I put it all together. The results of my effort are pictured above. And before you “experts” start lecturing me… the adjustable stock is pinned, the bayonet lug has been filed off, and that’s not a flash hider… it’s a ban compliant muzzle break that has been permanently attached to the barrel. The gun is in complete compliance with all of NJ’s firearm laws – even the stupidest ones.

When I was going through the catalog of parts figuring out what I already had and what I still needed to buy, I was a little put off. When you build it from scratch there seems to be a bewildering number of little pins, springs, screws, and tiny doodads made of aircraft aluminum that go into an AR15, especially when compared to my former “go to” gun, the AK47. And by the time I was finished assembling them, my new rifle looked to me like a needlessly complex, surprisingly heavily little carbine. I was a little disappointed…until I took it to the range.

The AK47 is a monument to the virtues of simplicity. Its vices are many, but with nearly 100 million copies out there it’s not like they aren’t well known. And it makes up for them by being the only rifle I’ve ever seen that will continue to function under virtually any conditions imaginable. It’s relatively inaccurate, but they say that the only thing scarier than the sound of a gun going off is the sound of a gun ‘not going off’, and in that all important area, the AK will never disappoint. Not only have I never seen one fail to fire for any reason except bad ammo, I’ve never even heard of it occurring. And neither have any of my gun-nut friends. It goes bang, every time, and when you run out of ammo you can still beat someone to death with it.

The AR15 on the other hand, has been dogged by claims of unreliability since its inception, but in my opinion they’re overstated. The fact is, a few early problems aside (which were in fact caused by bad ammo and no cleaning kits), a version of the AR15 has been faithfully serving as the small arm of the world’s most powerful army for coming up fast on 50 years. It may require some cleaning now and then, but no more than my 45 caliber Beretta pistol does. And the firm consensus by those using them to stay alive, is that its early problems have long since been put to bed. It’s a precision instrument whose virtues are a little harder to find than those of the AK, but it doesn’t mean they aren’t there.

My AK is actually a Romanian WASR designed to comply with New Jersey’s famously idiotic ‘Assault Weapons Ban”. It’s not a particularly well built gun, even by the loose standards of the Kalashnikov, and its accuracy has always suffered for it. The first ten rounds will usually go where you want them to if what you’re shooting at is no more than 200 yards or so away. But after the barrel heats up it’s anybody’s guess where you’re bullets go. The best performance I’ve ever gotten out of it was about a 13 inch spread at 200 yards with a hot barrel. I’d be confident using it to shoot a deer at 50 yards, or to strafe a hoard of approaching zombies or something, but a precision instrument it is not.

Not so my new AR15. After a dozen shots to center the inexpensive scope I bought for it, I put 18 holes in a 1.5 inch circle at 200 yards. And to be perfectly honest about it, I wasn’t even really trying that hard. I only brought two boxes of ammunition and was just trying it out. Had I used a little discipline I’m convinced that I would have done even better. But it wasn’t just the accuracy that was different than my AK. The fact is, it was a pleasure to shoot in comparison.

The AK is reloaded by a mammoth piston driven bolt carrier and heavy operating handle that in most cases has the look of something that was made with hand tools in your buddy’s garage. It would probably make a pretty good weapon in it's own right. I can easily picture the desperate Russian peasant soldier, starving and long out of ammo, using it alone to bludgeon some poor farmer to better steal a chicken.

Anyway...shoving all that weight around with every shot greatly increases the shimmy and shake of an AK even if the recoil is generally pretty light. The AK’s standard bullet is more than twice the mass of the bullet from the AR so combine the two and accurate repeat fire is made more difficult than with an AR. It also has a short and uncomfortably shaped stock that might have been great for Russian soldiers sporting thick layers of insulation, but it doesn’t really suit the average t-shirt clad American sport shooter.

In the meantime, the AR uses a gas impingement system that’s been designed from scratch to shed weight and to be carefully balanced. The bullet is a smaller 5.56 caliber round delivered at a a blistering speed. And in spite of its smaller weight, has been shown to turn flesh into so much pink colored goo. The recoil is absolutely minimal and is made even less so by the straight design of the stock. The stock length is also designed to be adjusted, even if one of NJ’s stupider laws negates that benefit for me personally. But even so, it makes for a much more comfortable fit than any AK.

Describing these virtues and vices actually reminds me of a scene from that classic golf movie “Tin Cup”. At one point the hero has a tantrum and breaks all the clubs in his bag except the seven iron. He then uses it alone to shoot par on the back nine. Bragging later, he says to his professional rival “Have you ever shot par on the back nine with nothing but a seven iron? And his rival says “To be perfectly honest, it never occurred to me to try.”

That’s what the AK looks like next to the AR. It can survive all manner of things that the AR never thought to try. It’s wholly unnecessary “abuse insurance”, and it comes at the cost of accuracy, comfort, and practical effectiveness at range.

The AK can be run over by a truck and keep shooting. It can go years without cleaning and keep shooting. You can feed it a fistful of sand, dunk it under water, throw it from an airplane, drag it behind a truck, or toss it straight into a fire, and when it cools off or slows down enough for you to touch the trigger, it will probably still go bang. But why in the world would you want to (or for that matter even need to) do any of those things to your rifle?

The AR on the other hand wasn’t designed for durability as much as ease of use. It’s built so that anyone can become an excellent rifle shot using it, with only a minimum of time and effort. At some level recoil is the enemy of accuracy so the AR15 removes as much of it as possible as a central focus of it's design. Rather than the ‘spray and pray’ philosophy required for the AK, even an inexperienced wielder of an AR becomes a real rifleman; able to strike his enemy at a great range, with great reliably. It’s a completely different philosophy of fighting tool.

The AK puts an untrained soldier in the field and keeps him there no matter what, even if he’s not being terribly effective while he’s there. The AR takes an untrained soldier and makes him as useful as possible, so long as he has the support he needs to keep him in the field. A minimum amount of training goes much further with the AR than the AK. And if you ask me I think that gives it the advantage. Those illiterate AK wielding peasants might be able to stay in the field under any conditions, and their weapons can take unimagined abuse. But what good are they to your enemy if you’ve killed them all 100 yards before they can even get you inside their effective range?

What’s more, for the sport shooter, the AK is an exercise in failure… or at least in managing your own expectations. It’s about learning to live with not being able to hit something as small as you wanted to or to hit it from as far away as you would like. It's like shooting a par on the back nine with your seven iron. It's a triumph if you can mange it, but there is almost certainly no point in going to all the trouble. The AR on the other hand seems to be specifically designed for sport shooter success. You hit what you’re shooting at… even if you don’t really know what you’re doing… and even when you aren’t trying very hard to do it.

If I was sucked back in time to the 14th century I’d want to take the AK with me because there are no circumstances too tough for it. I’ll bet you could clean and lubricate it with whale oil and fire bullets reloaded with homemade black powder and it will still do fine. It’s designed to keep going no matter what. But the truth is, I’m not going back to the 14th century, I’m staying here in the modern world. And as bad as things will ever get here, there will still be plenty of modern solvents, oils and smokeless powders (or at least nitro-cellulose) available to keep my AR shooting.

It feels so much better than my AK, that in less than 100 rounds it’s become my “go to” rifle. That's the side of this argument I've now come down on.



%%%%%UPDATE%%%%%

Since a regular reader has asked via email, the rifle above is a 5.56 caliber Rock River lower with a 16 inch heavy barrel, m4 feed ramps, a mid length gas system, a chrome bore, chamber, bolt, and carrier, and has a light weight free float 4 rail tube and closed end Muzzle Brake - both from Yankee Hill Machinery, and an M4 adjustable stock that's been pinned into position.

The scope is a fixed mag 4x32 NcStar Rubber Armored Tactical Scope with a side mounted red laser, and blue illuminated Sniper Reticle.

- Christie Vetoe's Democrat's "Millionaire" tax

And he did it in front of the media, about 30 seconds after they walked the bill down to his office. Naturally this was orchestrated by the Democrats who apparently believed that when the masses saw how the governor would keep prevent from squeezing a little more blood from the rich, they would rise up in righteous anger. The media tried to accommodate their plan but I don't think it's worked out that way. In reality the people of New Jersey are cheering Christie and the only groups who have a problem with him are the media elites (liberals all) and the unions who have been fleecing the state budget for decades.

The way it looks to me, the Democrats had better hope they can find old video of Christie at a Klan meeting or something because short of that, he may very well end up in the Whitehouse.

(The Democrat's "millionaire" tax added additional taxes to everyone making more than $400,000 per year. With math that poor they don't deserve to be writing tax law.

- Greece Is Not Too Big To Fail

Although I'm sure it seems so to many people, Greece is not actually too big to fail. On the contrary, I think it's just about the right size to fail.

The people who run governments always want the same thing; whatever will keep them in power for a little longer, and to hell with what the people want. But if take a look at the EU bailout package from the perspective of the European citizen, what we see is a very different view than the one held by their leaders. The Germans don't want to give Greece a bailout, and the Greeks don't want to take it. Their reasons for feeling that way may be prudent or may be foolish, but it's clearly how they feel. So why are we going through the charade of pretending otherwise? Because it's what the politicians need to be able to stay at the helm a little longer.

If we want to end this continuing crisis in the capital markets, then we need to let Greece fail. The banks will take their write downs, the Spanish and Italian socialists will be frightened into behaving like adults, and the EU - ex Greece will be able to begin the long slow painful slog forward. The EU needs to amputate the limb to save the body. They need Greece to be their Lehman Brothers.

Spain on the other hand probably is too big to fail if the European union want's to endure. And by letting Greece fail, the moral hazard of rewarding bad behavior will be greatly diminished. The other at-risk social welfare states will all be frightened into prudent fiscal behavior because they may be next. It's a tough medicine, but at this point I think it's necessary. It's the only thing that will give the EU enough gravitas on the issue to be believed by the markets.

Let the Greeks have their dramatically devalued Drachma and the Albanian living standard that will come with it. Let them cope with a credit rating in the C- range. It's what their civil servants and labor unions are demanding. And sometimes the only way to teach a child is to let them learn for themselves. We have to let them stick their finger in the socket, and hope for the best.

- Here We Go...

Over the Waterfall...

"Estimates put the unfunded liabilities at between $1,000bn and $3,000bn after years of states promising benefits but not contributing enough in both good times and bad to cover them.

US state pensions becoming federal issue

Like Greece, we'll be forced to fund a federal bailout of our own civil service pensions, and that will be the beginning of the end.

Chalk another triumph for America's labor unions.

(I wonder what we'll call the country next time around.)

- The German Short Sale Ban

Short sale bans don’t prevent assets from going down or increase available liquidity; in fact they do the exact opposite. But try telling that to a politician. People should remember this German short sale ban and its direct effect on an already troubled market. Everything even vaguely German is being sold aggressively by everyone, everywhere. Not out of vindictiveness as a leftists would surely have you believe but because the short sale ban limits the ability to effectively manage risks.

Liquidity is more of a problem for professional investors than volatility, but I think most retail investors don’t really understand that. If you had a billion dollars what would you do with it? Buy the S&P? If you submitted a market order for a billion dollars of the S&P the price would skyrocket until your order was filled and then fall again - effectively preventing you from making a profit any time soon. In reaction to that, markets have evolved to make it possible for investors to buy large amounts of assets without causing price distortion.

But when you eliminate short selling, you cut off a substantial portion of those tools making it impossible for large investors to participate. And rather than being legislatively forced into a long position, large investors will simply sell out until a 'normal' market resumes. But politicians, retail investors, and ‘experts’ from the internet chat rooms don’t believe that. They think the short sellers are evil and driven only by malice. This is silly and childish – exactly what I’ve come to expect from politicians of all stripes and leftists everywhere.

In my world however, short sellers are buyers when markets fall because they need to take profits. They are sellers when markets rise for no reason (like a dot.com or credit bubble) and prevent pricing from becoming excessive. In that way they provide price stability to markets during volatile times. They are a free market - market regulator. They make sure the valuations of assets are based on something real. They go a long way to preventing the kind of excesses that financial regulators try to prevent themselves.

So by all means let’s ban them immediately.

Whenever you set a lower limit on the stupidity of politicians and say “they can’t possibly be this idiotic” sure enough, some elected official somewhere manages to slip under the bar. This German short selling ban is so stupid, even the talking heads, fresh from the Leon Trotsky School of journalism and still smelling of smoke from burning Goldman Sachs employees as witches, are all agreeing with me. That is a pretty low bar.

In my world when pols ban short selling it sends a signal. It means that the short sellers are right but the pols don’t dare let the markets unwind naturally because it will mean their end. This German short selling ban is telling me that the Euro is in worse trouble than anyone realized. Up to now I’d have bet that things in Europe will eventually work out. Predictions of the apocalypse aside, things almost always do. It would have been painful and would have settled at a much lower level, but it would have worked out more or less peacefully.

But this is an important message. To the professional investor it says that Europe can’t handle the truth, and that means this may be the very end for the common currency.



%%%%UPDATE%%%%%

The specific effect of a short sale ban is always the same. First comes a small rally while shorts cover their now 'illegal' positions. Then the market will gently sell off over a longer period as longs slowly liquidate their holdings as well. As they do, the relative volatility of the affected markets will rise from lack of liquidity. In the end, the market will end up at a lower level, with a higher volatility than it was before the ban.

- A Failing Model

The model for keeping your job if you were elected to Congress in the last 5 decades was simply this:

Lie to whoever you have to about whatever you have to so long as you get elected. Once elected, trade favors until you can lay your hands on some federal spending to take place in your district. “Bringing home the bacon” is what they still call this. That money should come in the form of spending on federal projects which you route to key people in your district.

The big paving company CEO who contributed major dollars to your campaign should certainly get something… maybe a highway expansion project. You should get something else for the rest of the construction fols who were so generous as well. But the govenrment does a lot of things now so there is room for everyone. The labor unions who gave you money will have a deal worked out with some large employer to route money to them once you get it attached to some unrelated bill. That can be anyhting really. Your brother in law needed a job so you should get a consulting contract for the company that hired him. And the Dean at the local university who gets you tickets to basketball games whenever you’re in town should get some grant or something. It’s all a game of ‘give and take’, contributors give you money at election time, and you take it all back for them from taxpayers in other districts once elected.

A congressman who came home with hundreds of millions would be called a big success in the past, and he would sometimes literally get his name on the front of the building once it’s finished. Just take a look at the pointless “Frank R. Lautenberg” train station or the countless things named after John Murtha in southwestern PA. This used to be a sign that they were an effective legislator but that model is now failing. These days it’s being viewed more like ‘evidence of malfeasance’. No one, not even the most economically illiterate Democrat, will run with pride on their earmarks record in this election cycle. If the tea party has accomplished nothing else, at least it’s given us that.

There will always be some Americans who think the best thing that could happen to them would be for someone else to take full responsibility for their lives other than them. They believe that politics is the best way to decide the winners and losers, and things like merit and a good work ethic are quaint but useless leftovers from a time that’s passed. To them, congress will always look like a meal ticket.

But for the rest of us, firing people for getting big earmark allocations makes a lot more sense than naming the buildings after them. And if we can’t just send them to prison like any other common criminal, at least this is a step in the right direction.

- Melt-Up The Movie

In case you thought I'm an inflation fan:

- Another Labor Union Triumph

Detroit will be demolishing 10,000 abandoned homes that it's anemic high tax economy can no longer sustain. All of Detroit's troubles can be directly linked to the UAW. And with any luck, one day soon maybe the labor unions will have the same effect on government work that they've had on the auto industry. I live for the day that there are 10,000 homes abandoned in Bethesda and Alexandria that used to belong to government workers.

- The Next Reagan...

Looks like an extra from the Sopranos and but for the accent... sounds a lot like me:



Honestly, I don't see how I could have been more wrong about this guy. In a life filled from end to end with mammoth errors, I still can't remember ever making such a big mistake. I'm thrilled of course... and if you have to be wrong about something this is the way to do it. But I feel like I owe him an apology, and I hope this will suffice.

Chris Christie has made a believer out of me.

- Wall Street Inquisition Jumps The Shark

If a no account, self aggrandizing, political hack like Andrew Cuomo is getting in the act, then I think it's safe to say that the trumped up Wall Street Inquisition has finally jumped the shark. I'd expect a sentiment change on main street at any moment.

- A Liberal Education

For some time now I’ve been saying that a recession is a learning experience for leftists. Hardship turns liberals into conservatives because a liberal philosophy (what we call liberal in the states) cannot withstand much contact with reality. The tantrum we’re watching in Europe right now is what happens when those perpetually immature leftists are finally forced to learn.

My conversational catch phrase since last week has been that the politically pragmatic thing to do is let Greece fail. If the ECB can hold things together in the markets long enough for Spain, Portugal, Italy, Ireland and the German opposition to see what happens after Greece demands a ‘restructuring’, it will greatly smooth out the politics for all the rest. Think of amputating a limb to save the body. If the socialists get their way in Greece…frankly … who cares? But if they get their way in Spain then the Euro is finished.

Let Greece fall back into Zimbabwean levels of growth and stability, and it will hurt the Greeks but help everyone else. But I do admit… there is a hole in this logic that I as an American might not have a handle on. The question is, are the Spanish, Portuguese, and Italian leftists capable of learning from other people’s suffering without requiring some pain of their own. It’s in the nature of socialists to believe that the same old thing will somehow be ‘different this time’. I may be wrong but it seems to me that if the consequences are dire enough (as they surely would be) then even a socialist can accept a little reality without having to have it shoved down their throats.

- A Word On Inflation

I can’t think of a concept that is more broadly (almost completely) misunderstood than inflation. Its enemies despise though its effect isn’t all negative. Its proponents fully embrace it despite its very obvious risks. And the talking heads that appear on my TV can’t seem to agree whether they see it or don’t. So I thought I’d clear up some of this apparently total confusion for at least a few of you. First the good news.


Why (some small amount of) inflation is good.

For all intents and purposes IBM created the PC industry out of whole cloth. Bill Gates tagged along, as did Steve Jobs and a handful of others. But whoever was personally responsible, the emergence of the PC was a profoundly creative act. It created an industry, which in it’s turn created much commerce, which in turn created a generous amount of wealth. But all that creativity could have easily been for naught.

In order for economically creative events like that to take place you need a dynamic and growing economy. But if Bill Gates et al. and their fellow entrepreneurs have to spend all their time groping around in the darkness for capital to fund their creative endeavors, it places an obstacle in the way of economic growth. The tools for central bankers to manage the availability of capital are very imprecise. And over the years it’s been determined that the least harmful practice is to have just enough money around so that there is a little extra in case someone wants to invent the ipod or something.

There are other more technical reasons I can go into, but I think that gets’ the basic point across. If you want to optimize your economy for growth, you need to set the level of capital available as 101% of what’s necessary.

Now the bad news.

Why (too much) inflation is bad.

Increase the capital supply much faster than the supply of ‘stuff’ and you set up a situation where everyone has money, but no one has stuff. Supply - demand curves being what they are, this will cause prices to rise even if nothing else changes. This is the real threat of inflation. But there are other more pernicious effects. For instance, those rising prices reduce the ‘purchasing power’ of savings and lower the living standard of the population. If you worked hard in a low inflation environment and managed to save a million dollars across your lifetime, what’s that matter when inflation makes a big mac cost $100,000. The numbers don’t adjust to your benefit. More to the point, it benefits people who have borrowed money and punishes those who lent it. This is particularly troublesome when the people who control inflation are also the people who owe all the money.

So how do I know what inflation is right now?

The traditional view of ‘inflation’ has in the past referred only to a rise in wages and prices. And when you hear someone on TV saying that there are no signs of inflation lately, this is always what they mean. But this is like saying that there is no sign of a gunshot wound even though we know for certain that the bullet has left the rifle and is on its way. The more contemporary view (since Milton Friedman anyway) is that rising wages and prices are a symptom of inflation not a cause of it. The real cause of inflation is an increase in the supply of money. Eventually it will find it’s way to consumers, and that will causes rising prices.

This newer definition explains ‘asset inflation’ which we saw in dot.com stocks and in real estate. The older definition says that those aren’t manifestations of inflation at all, but are caused by ‘animal spirits’. The new definition is most widely embraced by market participants who have their careers on the line. But economic departments haven’t embraced the new definition even if they do arguably understand it. This is why you see such heated arguments between Steve Leisman (an Economist) and Tea Party hero Rick Santelli (A trader) every morning on squawk box.

As regular readers have probably figured, I prefer the Friedman view as well.


What can I do about it?

If you believe inflation is imminent, there are 3 ways you can protect yourself. The first is to buy hard assets. The prices of real estate, commodities and even something like baseball cards or Harley Davidson motorcycles all have their prices positively affected by inflation. It will also affect the prices of the gasoline you buy, the food you eat and the electricity you use… so you had better hope the price of one rises faster than the price of the other. Still… it will be better to keep your money there than to leave it in the bank.

The second thing you can do is to buy currencies where you think the inflation would be lower. Currency exchange rates are directly and immediately affected by inflation rates. Typically the value of the high inflation currency falls and the price of the low inflation currency rises. But in today’s market there probably aren’t any currencies where inflation will be any lower where there aren’t other risks involved. (If you’re interested in this idea then you should google the phrase ‘competitive devaluation’ to learn more.) The short story is that in this environment I wouldn’t recommend this strategy for anyone who isn’t a pro.

The third thing you can do is to make sure you are a borrower and not a lender. If inflation skyrockets your mortgage won’t change a bit. If you have a 500K mortgage and it takes 100K to buy a Big Mac, then you can pay your mortgage off for the price of a decent meal. If however, you own bonds and are therefore a lender, their value is going to collapse because the coupon payments you get won’t be changing either.

How likely is any of this? Well… right now the largest debtor in the world is the US Treasury. That’s not going to change any time soon. Inflation helps debtors and hurts lenders, so you can decide for yourself.

But if interest rates begin to go up then the amount of money required to service our massive debt will also rise, and that makes the federal deficit math look apocalyptic REALLY quickly. What’s more, rising interest rates would slow economic growth and negatively affect the one economic number our politicians really do care about …. unemployment. Higher rates, slower growth, higher unemployment.

Under those conditions, more inflation is how I’d bet, even if wages and prices don’t demonstrate a rise anytime soon.

- To Each According To Their Need: Part 894,343

I find the sense of entitlement here astounding.



Labor unions and the politicians they control have artificially increased the cost of labor and driven tens of thousands of entry level jobs offshore. Government has put a choke hold on the last few vital industries in the country with new regulation, new taxes and bureaucratic interference. The threat of much higher energy prices being brought on by a shortsighted 'green energy' plan has kept those businesses operating at a profit from hiring even essential employees. Any business that succeeds is being dragged into congressional committee hearings to explain their transgressions.

And in an environment like that, these idiot kids think a new political 'movement' is the best way to get the very industries that they vilify to hire them. They support all the government run plans to smash the evil capitalists and put an end to their greed, and haven't figured out that those were the people who would otherwise be hiring them. Well as one of those evil fat cats who could potentially do some hiring in the next year let me respond this way..."Fat freakin chance."

About 4 years ago I interviewed a potential intern candidate who was a senior working on an economics degree at Cornell. He didn't know who Adam Smith was. It wasn't that he was nervous and couldn't remember. Even when I mentioned 'the Wealth of Nations" he didn't know what I was talking about. So if all you kids want to know why no one wants to hire you, don't go blaming the fat cats and getting all 'community organizer' on us. Blame the professors who taught you that failure should be rewarded and success punished. The last thing I need is an employee who believes nonsense like that.

No one gives a rat's patootie what you need. When it comes time for me to hire again, the first place I'm going to look is in Chinese and Indian Universities. They may speak English with an accent different than mine... but at least they aren't chock full of this massive sense of entitlement.

- Check Out Mohammad's Image

I've added an image of Mohammad to the right in support of this Swedish cartoonist who was attacked at a lecture by a crowd for doing the same thing. For those fanatics out there who would like to threaten me or my family with harm because I'm displaying an image of Mohammad I have 2 words:

Live ammunition.

- Unions Trying To Destroy America

The CWA (the state government's largest labor union) is planning to sue NJ governor Christie for having the nerve to prevent them from driving NJ into insolvency. The Obama administration is making it easier for unions to enslave labor in the airline industries whether the workers like it or not. Big labor is waging a war against America, and if they have their way, it will mean MUCH higher prices, MUCH higher unemployment, and a MUCH lower standard of living for all Americans.



More about all of this later, but remember... it was civil service unions with their eternal sense of entitlement, who were doing all the protesting and killing in Greece in recent weeks.

- How HF Trading Caused The Selloff

The truth - I have firsthand knowledge that HF trading apps were responsible for bringing the markets back from the bottom. But with the politicians bloviating (never waste a crisis) and the lemmings all demanding someone's head, I think I'll just stick with blaming the colonel and his wee beady eyes.

I really need to stay away from the internet today or I'll get too upset at how little people actually understand about how markets work.

- An Open Letter To Greek Protesters

Morons,
There is no money. There is no one else’s pocket left to pick. You can’t borrow anymore, you can’t print anymore, and you can’t steal anymore from anyone else. The people who will be paying the bill to keep you from reentering the 15th century are, unlike you, working very hard. They deserve better than you spoiled pampered children are giving them.

You object to the bond market, but the bond market is just the voice of reality calling. It’s telling you that 2 plus 2 is still 4, no matter what your union bosses would have you believe. Your bosses tell you that ‘the people’ didn’t spend the money, but it’s not true. That’s exactly who has wasted the money, and now the bill is coming due. Right now the Bond Market is actually your very best friend. It’s telling you what a horrible mistake you’ve made, and giving you a chance to undo it, before it’s too late.

The standards that the Germans are living by right now are unsustainable in their own right, but they are a lot closer to reality than you are. At the very least you should pull up your pants, wipe that stuff off your face and be responsible enough to live at that level. Since it’s they who will be coming up with the bulk of your shortfall you should do it out of good manners if you can’t manage any other reason. And once you do, the rest of us will step up and pull you back from the brink.

But the truth is, we’re not going to pull you that far. If you continue to make no contribution to productivity, your life from here on out will be one of relative hardship and poverty. And frankly that’s how it should be. You can live your lives any way you like as far as we’re concerned, but no one is going to reward you for getting drunk on the beach anymore. In the modern world you’ll only get out of the system what you put into it. Either work – or learn to live without.

Socialism always was (and frankly – still is) a horrible idea. It’s the reason you’re in this embarrassing position in the first place. In the eyes of the world you all look just as stupid and spoiled as can be. You could be protesting in diapers and demanding that ‘the state’ wipe your behinds and it would only marginally affect your public image. You need to accept the fact that there are no circumstances under which politics can arrange for nothing to be equal to something. You can not make a contribution of zero and expect to get a benefit greater than that.

You’ve thrown your bottles, burned your flags, waved your signs and had your fun. Now it’s time for you to learn the lessons of history and abandon this idiocy before we finally lose our patience with you. Grow up – and get back to work.

- Open Mike Night

...Or it's blogging equivalent. One of my readers, Mark from The New Jerseyan, wrote a comment to this post of mine that was so well crafted and thoughtful that I didn't want any of you to miss it. It's not just that it basically agrees with me, which it does - but it says things in a manner that's so clear and expressive that it's hard not to get what he's driving at.

For the record Mark, saying anything better than I do isn't usually a path to making friends around here, but this once I figured ... what the hell. And I'm certainly not going to pass up an opportunity to exploit the hard work and dilligence of someone else when the opportunity presents itself.

Here is what Mark had to say.

- Mentally Challenged Derivatives Regulation

Thanks to the government regulators and their media enablers completely misrepresenting the issue, most people don’t understand where exotic derivatives come from, so let me explain it to you. When the government makes a rule which violates the economic realities of the free market, the incentive to create a new kind of derivative is born.

Free market economics has internal rules which if left alone, will moderate virtually all of its own potential excesses. These rules are so basic that most people wouldn’t think of them as economics at all. They are things like “the law of supply and demand” or “the law of diminishing returns”. These are the internal moderations of the free market. Like the rules of nature, they are all independently self correcting. There is no point where the law of supply and demand forms a bubble or the law of diminishing returns provides a perverse incentive to throw money around needlessly.

But the problem in the real world is that the free market hasn’t been left alone. Instead, governments have decided that rather than coping with the real world as it is, they would rather mess with the market until it gives them a result that they want for political reasons. As an example, unions represent voting blocks, so they’re given enormous legal advantages by elected officials who also write such rules. Ordinarily labor cost is determined in broad terms by the economic value added of the job. But when the union gets it's legal advantages it begins to distort things. It artificially causes the price of labor to rise without any other justification. This makes things more expensive for the company and in turn makes it more like that they move their manufacturing overseas. Now the union staffers are unemployed.

The same sort of thing is true in finance.

It’s a little arcane to offer an example for derivatives in this format and it wouldn’t read nearly as well. I can provide specifics if pressed. But if you can take my word for it then I assure you, every single derivative that’s been developed in the last 40 years – from interest rate swaps on down – has been created in response to an arbitrary change in the legal, regulatory or tax codes. The instinct to make the world bend to political will is what has created the derivatives marketplace, not greed. (Which is what the people who are trying to bend the world would have you believe.)

People in government believe in control. They believe they can make a decision and the world will change to conform to their view of how things should be rather than how they really are. It’s never been true, but since the advent of computers in finance, that idea has gone from tragic to farce. There has, in my opinion, never been so great a gap between the people writing the rules (the dim and misguided) and the people trying to get around them (the clever and motivated). Imagine how things would look at NASA if when he created it, Lyndon Johnson had decided to put ladybird’s cousin with downs syndrome in charge of the whole thing. That’s how the financial markets look to many people today.

Moon shots would still get done, and shuttles and satellites would be launched, but much of the time it would be in contradiction to, and over the specific objections of the ‘person in charge’. The interest of that person won’t have anything to do with space exploration much of the time anyway. Rules would come down from management like ‘On Tuesday everyone must wear a ‘blue shirt’, or “We all have to smile when we say hello.” In response to all this, the PhD’s and engineers would all nod and smile at each other, then get on with the actual business at hand.

The culture that would develop would be one where the people who are the most respected and the most rewarded would be those who can best find the blind spots of ‘management’, and succeed in getting things accomplished in spite of the rules. In effect it would be a culture where the ‘gray’ area becomes the most important. If you don’t work on Wall Street you’re probably aghast at reading that characterization, but if you do work here, then you’re probably nodding knowingly right now like one of those PhDs.

I figure that right now someone out there is trying to come up with an analogy between Apollo 13 and the financial crisis, but the analogy doesn’t hold. The incentives that created the crisis of 08 were in place long before the actual event, and the bail out was long implied. but for Fannie and freddie and the pressure to increase home ownership rates, the whole thing would have never happened.

And if we had followed the rules of the free market afterward, all the banks would have been folded up for repurchase by smaller banks that hadn’t been caught in the asset bubble. The new management would fire the people responsible (rather than holding witch hunt congressional committee meetings with the people who weren’t) and life would have gone on as before. the main difference would have been that without the people in charge promising to punish the winners and help the losers, the markets could have had the confidence to come roaring back instead of trickling as they have. Unemployment by now would have been lower and the economy would have been better. But instead we got more ‘control’ from the top.

But I'm not saying that markets don't need rules; of course they do. But they need rules like language need rules. They should be rules designed to better reveal the truth rather than try to ‘control’ or obscure it. In fact, if the regulators simply make the data which facilitates short selling more transparent, the very idea of an asset ‘bubble’ may be ended for good.* But in this political climate, that’s the last thing we’ll see. Instead we’ll get more attempts from our mentally challenged rulers to ‘control’ the markets, and the market will respond to them by going further to get around those rules. We on Wall Street will continue to manage risk and to provide products and services that make economic and financial sense, no matter how convoluted the rules get. Ban activity and you simply drive it offshore or obscure it behind the next class of ‘exotic instruments’.

Over the long term, Government can’t control the markets any more than they can control nature. The best shot they have at control is to set all we snarling greedy wolves in opposition to each other like the checks and balances of old. It’s the only kind of control the markets will ever really respect. The sooner we get that idea through to the mentally challenged people in government, the better off we’ll all be. But if recent demonstrations of their intellect are any indication, they probably wouldn’t understand it anyway.



* The term 'financial bubble' is widely misused, and I do the same here. Information cascades (their technical name) will always exist at high frequency but making short selling easier will keep them from expanding to a size where anyone cares.