Tuesday, August 31, 2010
Part of my job is studying comparatively rare events. This morning Galvez strolled over to my office and explained to me that he had witnessed an event so rare and so unique as to give proof to the idea of ‘non-zero probability’ and would challenge the concept of the black hole, in the remoteness of its likelihood. He then smiled broadly, reached in his wallet, and handed me his newly approved Westchester County, Concealed Carry Permit.
You can’t imagine what a man in his position has to go through to get something like that. I don’t want to go into the specifics, but I think it suffices to say that there were notarized translations of foreign documents involved, and those were translated from several languages. It’s a bureaucratic trial which few exercises can match. But he is now ‘authorized’ by the powers that be, to carry a concealed, loaded firearm in much of his local area.
I’ll ask him to tell you himself how he feels about it, but his description to me used terms like "a sacrament for free men" and "more than a right or duty". It was a clearly an almost religious experience for him. He’s so excited about it that I might even go to the trouble of forcing a judge in my area to say no to me for one.
So Congratulations to Galvez on his new Carry Permit. May he use it in good health and never actually need it.
Monday, August 30, 2010
I’m about the same age as President Obama (he’s actually just a few months older than me). Like him I’m a relatively cerebral guy whose hands are more or less free from calluses. He’s a lawyer while I’m a banker, but most people would put those two jobs into equivalent categories. And since I’m also 6 foot 1 and 180 pounds, I’m even built like the President. So I have to admit, it bothers me a little to see someone with whom I have so much in common physically, looking like such a total pansy.
To my knowledge no one has ever accused me of being too feminine. But as father of a 10 year old girl I do many of the same things in my ‘normal’ life that Obama does while on vacation. I can often be seen tooling around Monmouth County’s various parks on bikes with my daughter. If I were being followed by the Whitehouse press corps they’d see me buying cherries and frozen shrimp, and doing precisely the things that they just got done watching Obama do in Cape Cod. So how is it exactly that when I do those things it says basically nothing at all about my masculinity, but when he does it he looks like such a girl?
Don’t get me wrong here, I’m not accusing him of being a homosexual; I’m not even implying it as a joke. I think his heterosexuality is perfectly clear and I don’t dispute it in any way. Besides, I’ve had lots of friends over the years that are homosexuals and in my experience; homosexuality and femininity don’t necessarily correlate. What I’m talking about is not his sexual preference but his sexual appearance.
Of course, all this is a symptom of our culture. My friend John Derbyshire went on about it at some length in his book “We Are Doomed” (which you can preorder here in paperback edition - just in time for that Holiday gift giving season… you’re welcome John.) but the bulk of his complaint is more that society seems to have little use for real men, and less about the triumph of newly feminized man:
While it is foolish to attempt to predict the future in any detail, there are signs that the world we are heading into, with its unprecedented demographic changes and momentous advances in the biological sciences, may be a woman's world. Those qualities we are accustomed to think of as "masculine", that have been brought forward more or less intact from our origins as hunter-gatherers in the Old Stone Age, are now surplus to requirements. Masculinity, as it has been understood from the beginning of our species, is now at last obsolete.
And proof positive of this is the fact that we have, as a people, elected someone who has managed to get by totally without them. It is a triumph of femininization of some sort that America has elected as its commander in chief, a man with all the masculinity and machismo of your average 13 year old girl. Just look at the man ‘trying’ to throw a baseball as compared to George Bush doing the same and you’ll see what I mean.
The truth is, it isn't what Obama does which makes him seem feminine, but but the feminine way that he does it. And there are still plenty of important differences between him and me, in spite of our physical similarity. I was raised by tough men who were 'tough' for a living. Fighting was a profession for most of them, and a hobby for the rest. And they raised me, my younger brother, and all my male cousins to be tough too. In fact, it’s only through self discipline and years of practice 'toning it down' that I’m able to successfully navigate the newly feminized world I live in without offending everyone I know.
In the meantime, Obama was raised by women, for women. And if you ask me, it doesn’t look like he knows any other way.
Still, he and I are so similar that there remains in me this tiny nagging doubt. It’s like when you hear your own recorded voice. Part of you hopes you don’t really sound that way but in your heart you know you really do. I’m looking at Obama as feminized as he is, and hoping to god that not all tall thin professional men in their mid 40’s look that way. I know they don't... but still.
I’m told by people close to me that I shouldn’t be concerned. And I don’t mean my wife, who I know is comfortable with my level of masculinity. I mean my friends, who to be completely frank, are likely to tell me I’m acting like a ‘little girl’ just on principle. But instead what they’re saying is that compared to President Obama I look like I just stepped out of a Marlboro ad. And they say this even when I'm not carrying a firearm. I suppose that’s enough to make me feel better.
But either way, at this point I am what I am. And at my age I’m finally getting completely comfortable with that. Obama is what he is too I suppose, and since we’re so close in age he’s probably feeling a similar way about it. That’s probably a good thing. But if I were a political leader with more proven masculinity than him, like Vladamir Putin or Bibi Netenyahu, (or maybe even Angela Merkel) after this last bit of image management I would be more ready to kick sand in Obama’s face than ever. Hopefully he’ll let someone else handle all the international negotiating. Someone more masculine than him, like Hillary.
Sunday, August 29, 2010
Can you remember whose lifestyle is most seriously affected by inflation? Its people on a fixed income; typically pensioners. But the longer the Fed keeps rates at minimal levels as a reaction to a lack of inflation, the more financial trouble there is for the pensions themselves.
Most defined benefit pensions have made promises of payment which require them to make roughly 8% per year on their assets. In a market environment where a ten year treasury bond yields a paltry 2.5%, that is not going to be possible. So for them this low interest rate environment is like getting caught in a rip tide. They can paddle like crazy but in the end they’ll still end up farther from shore.
There is more trouble further up the ‘risk curve’. Hedge funds are riskier than pensions. And while they haven’t given hard promises of a 20% per year absolute return, it is a widely held expectation. The problem though is that with the implied correlation of stocks and indexes at or near all time highs, there isn’t enough difference between stock A and stock B to get anything like that. Some high frequency trading strategies are doing pretty well, (particularly those that are really just institutionalized front running) but those strategies are all constrained with regard to capacity. You may make 30% per year with very little risk, but if you can only do it on 30 million dollars, it’s not much help to you when you manage a total of 2 Billion.
Anyway, the long and short of that is that hedge funds overall are providing a much lower return in this environment than they have in the past, so their investors are feeling the pain too. And who are their investors? In many cases, pension funds. In fact, all investment classes and virtually all investment strategies are yielding substantially less than they used to, and that spells bad news for anyone who has firm commitments on their payouts. So the low risk bets pensions have made on US Treasures have fallen off a cliff and their high risk bets on hedge funds and other strategies are just limping along, but promises still need to be kept and payments made. The money is going out at the same rate as always, but it’s coming in slowed than ever. So what is a pension manager to do?
If you believe that the market is a fixed game, then in an environment like this one, you should be able to chart the progress of the S&P based on demographics. If inflation stays low the pension funds are in trouble but the pensioners are fine. Inflation gets higher the pensions will be fine but the pensioners will suffer. And that means that so as long as there are more future pensioners than current pensioners the need for inflation is greater, and policy should reflect that. Once we reach the tipping point, and current pensioners outnumber future pensioners, the policy should switch back. If you believe the market is a fixed game.
Personally I don’t buy into conspiracy. I think stupidity and incompetence explains the world more effectively than conspiracy ever does. And unlike conspiracy, hard evidence of stupidity and incompetence is everywhere we look. But the incompetent typically respond more to political pressure than the highly skilled, so the result may be the same. We may still end up with a monetary policy that looks essentially like mob rule.
That conjures all sorts of colorful images for me. First, running to the left at high speed like 1970’s British TV comic Benny Hill, is Ben Bernanke. His shirtsleeves are rolled up, his slide rule is in his hand, and his pocket protector is firmly in place. While the music plays, he’s being chased by mobs of lobbyists, union chiefs, political campaign managers and bi-coastal liberal congressmen, while he tosses gobs of money into the air like confetti. Then moments later, he’s running back to the right being chased by tennis racket and golf club wielding geriatrics pushing their walkers and wheelchairs, while he scoops the money back up off the pavement as the credits roll by. Maybe somewhere along the line a Ron Paul look alike pops out of a doorway and slaps Benny Bernanke repeatedly on his balding head.
I guess I watched too much TV as a kid.
Friday, August 27, 2010
As you may recall, the current EPA head Lisa Jackson was formerly the head of the NJ Department of Environmental Protection. Her tenure in that role was most specifically marked by a legislative attempt to pack the Fish and Game board with members of extremist animal rights groups. This would have given liberals the ability to effectively ban all hunting and fishing in the state.
Now at the EPA she's taking another swing at not just hunters, but all firearms owners, by giving ear to an effort to ban the use of lead bullets. Many is the Democrat who has suffered in the electorate by bringing anti-firearm issues to the fore, and I think Ms. Jackson should have thought more carefully about this one. Or maybe she thought that since 'Liberal' has become a four letter word, she might as well take the shot now.
The odds of this rule becoming official policy is actually very small. It would utterly DECIMATE one of the few manufacturing industries that America still possesses and cost tens of thousands of jobs (not unlike many other Democrat led efforts). I think it suffices to say that the timing for it is very poor at best.
My honest first reaction to seeing this article was to laugh out loud. Ms. Jackson apparently thinks that everyone in America is just like the people in New Jersey were when she was an official here, but even in New Jersey we aren't like that anymore. she's trying to take her radical anti-gun agenda, developed in the most anti-gun state in the country, and shove it down the throats of places like Tennessee, Alabama, Wyoming and Texas. Seriously... how clueless can you get?!
Personally I look forward to the day that Ms. Jackson does us all a favor and retires from public life. I wish she'd simply take her pension (or three) and enter obscurity, but I'm not so lucky. She can make way more money fronting for the environmental lobby anyway. Maybe Al Gore has a position available for her in his organization. I know I couldn't wish her and her loopy ideas on a nicer guy.
Thursday, August 26, 2010
What Ben Bernanke wants to see happen isn’t really in dispute, the only question is how effective will he be at reaching his goal.
What he wants it’s the same thing the rest of us want; a growing economy with slightly positive inflation. This will cast him in the role of the great savior, and his legacy will be assured. But it’s obvious to many people, maybe even him, that his odds of getting that in the immediate future are quite small. The housing market is in free fall, unemployment is not, and Congress has been spending and borrowing like there is literally no tomorrow; and burning his boats in the process. So what will Ben Do? In a word, he’ll talk.
This should come as no surprise. In his heart, Ben is an academic so he’s used to talking. He views a public debate as a way to flesh out ideas and examine consequences before making a decision. The only problem is that while he’s still an academic at heart, he’s no longer one in practice. Like most academics, he’s unaccustomed to his words having any real consequences of their own, but in his role as Federal Reserve chairman that’s very much the case. So while he and his people dither about and argue and chat and cajole and persuade, all in the too public eye, the markets vacillate from euphoria to Armageddon and back in the space of minutes.
So what will Ben Say today? Well he’s been trying to ‘split the difference’ and the markets (and the Editorial boards) have been punishing him for contributing to uncertainty. So my bet is that he’ll lean on the side of pro-inflation today. Because he knows that even if inflation gets a little hot, he can always turn off the spigot. It gives him more control over the future; more options for controlling the outcome. He knows that if we fall into deflation, either through catastrophic deleveraging (quickly) or through a Japanese style malaise (slowly) there will be little he can do about it. And in the process his legacy will be destroyed.
Ben is going to try to keep his options as open as possible, and at this point he has more options on the pro-inflation side than he does anywhere else. The only question that remains then is how committed is he to his view, and how incompetent is he at expressing it. For a guy who has made his way in the world (like all academics) by avoiding being pinned down, I’d say not too terribly much of the first, and a little too much of the second. I think he’ll lean toward a pro-inflation policy, but not enough to cause anyone to be certain. On the whole it will be more difference splitting, and too much public chatter.
Wednesday, August 25, 2010
Congrats to my buddy Jose (the handsome guy on the far right). He's one of NYSE's senior staffers, and this morning he and his customer Citi were part of the group of people that rang the opening bell on the NYSE floor. I've been to the floor before (although it's been years) but I've never been part of the bell ceremony. Must be fun.
Tuesday, August 24, 2010
There is some speculation about whether President Obama even wants to remain President for a second term. Given the times that he’s fallen into and how overwhelmed he must be by the scope and complexity of the problems he’s had to face, it wouldn’t surprise me if he didn’t. Personally I think Hillary might bump him off in the primary, but if she doesn’t, I have another suggestion for the political left on who they should put up.
It should be someone who embraces their ideals of course; someone who understands, like they do, what an exploitative and unjust place America is. It should be someone who embraces not only their economic ideals but their principles on social justice, diversity, and the necessity of regulating things like ‘hate speech’. It should be someone who has proven themselves ready to face off for real against the international corporate elite and is prepared to do what needs to be done to see that the rich are finally put in their place. Most of all it needs to be someone committed to progressive ideals and that understands how the Constitution is a living and breathing thing which must be subject to the interpretation of the times.
The person I have in mind for them is all of those things. If president Obama decides to step down after one term, the person that the Democrat party should nominate in his place, is… Hugo Chavez.
Monday, August 23, 2010
It's nice to see this being discussed so plainly on CNBC. The thing that kind of blows me away is how shocked and aghast the 'journalists' are at the idea that HF programs are front-running markets. It's my opinion that its a widespread phenomenon and I have circumstantial evidence to support that view. But like the man said, it is tough to prove. Especially if you're a day late and dollar short bureaucrat from the SEC.
Still, the one rule that always seems to be true about people that cheat the system is that they're greedy. And given enough time, greedy people will always take things too far. So far in fact, that it will eventually be possible for a semi-useless bureaucrat to finally catch them. that's probably how most criminals are caught in the end.
The salient portion is 6:30 into the video. HT to ZeroHedge
In my experience the biggest fans of Ayn Rand are those people who know that they don’t like the collectivist, PC, ‘shut up and do what your betters tell you to do’ world of the political left, but they don’t know any of the other options. They aren’t going to wade through the kind of dry reading required to establish a base in economic thinking, so instead they’ll do what they consider the next best thing, and read Ayn Rand.
My daughter’s Karate teacher is an excellent example. In his day job he’s a special Ed teacher who works with ‘at risk’ kids who also have a history of using violence toward authority figures. I like him personally and he’s a great karate teacher. But economics has very little to do with his choice of careers. He’s of more or less average intelligence and hasn’t had any other cause, so he’s never really taken any interest in the ups and downs of economic thinking. And without the basics, it can be tough to see a big difference between Frederich Hayek and Alan Greenspan.
But he’s a big fan of Ayn Rand. He calls “Atlas Shrugged” his favorite book and can quote long stretches of it from memory. But his problem where Atlas Shrugged is concerned (and it’s one that he shares with many of Rand’s other fans if you ask me) is that he thinks it teaches him something that it really doesn’t.
I don’t want you to get the wrong idea, I enjoyed most of Rand’s work. She definitely touched on something important and that the self congratulatory left perpetually ignores. She was a breakout thinker and I even like the story line. But it always seemed to me that for an idea to be workable it needs to intersect reality more firmly that Rand’s ideas ever seem to manage to.
Give me a choice between a world run by Ayn Rand or one run by either Nancy Pelosi or Mike Bloomberg, and I’ll choose Rand’s world in a second. But I think she underestimates the multitude of issue which she hasn’t address that won’t shoehorn well into her worldview.
I’ll get into it in more detail another time. In the meantime though, here is a very thoughtful criticism of Rand’s world from Jason Lee Steorts at NRO:
The Greatly Ghastly Rand
Friday, August 20, 2010
Thursday, August 19, 2010
Does anyone out there really believe that this administration won't 'bail out the public sector pensions'? It seems to me I've heard - of - this - issue - somewhere - before.
And don't forget this 'cringe inducing' analogy:
"Civil Servant's Gone Wild".
Wednesday, August 18, 2010
What does the "Assistant Associate Director for Wage and Hour Compliance" at the Health And Human Services Division actually do? Got me. Whatever it is, I can't imagine it's the kind of thing that we couldn't find a way to get by without. But as usual, when analyzing the actions of those in government I'm asking the wrong question.
When I say "What do they do" I mean, what is the end product of their position. But in the federal government no one cares what the end product is, if there is in fact an end product at all. And that's why so many of us don't 'get' government. We're too accustomed to the world of the private sector where end product is everything.
But if you were to ask Barak Obama or one of his principle advisers, or anyone in congress what that A.A.D for W.H.C. does they'll be able to tell you instantly. Their answer would be that he pays taxes. He consumes goods. He pays his mortgage and borrows money. And most important of all, he pays his union dues, and he votes the way he's told to vote.
When the administration talks about jobs 'saved or created' they aren't talking about saving the jobs of people who actually contribute to the economy. Issues like productivity are secondary. The jobs they want to save have to do with getting people elected, and that means Big Labor. So the A.A.D for W.H.C. is 'saved' and the small businessman who actually contributes to our cumulative wealth instead of just redistributing it, is the guy they learn to do without.
If the union member wants to teach a little something to a kid in a public school or put out an occasional fire, that's OK with them. (So long as they don't work 'too hard' and make the other union members look bad.) But so long as the votes keep flowing and the dues keep getting paid, the 'bailout' money is going to keep flowing.
One positive note is that the whole 'bailout' thing has been taken to such a preposterous extreme that the administration no longer feels the need to mask their efforts behind grand rhetoric. Now they're just sending the money directly to the unions instead. They no longer even care about rewarding people who actually hold jobs. Even that shabby pretense has been done away with. Now, so long as you are a union member and 'vote the right way' there is bailout money for you.
They have gone from 'saving or creating' useless unionized bureaucrats, to saving or creating entitlements for people who don't actually do anything at all anymore.
Tuesday, August 17, 2010
Monday, August 16, 2010
Victor David Hanson teaches the NRO audience what Galvez has already taught us all right here:
The city was founded by Romans and remained Western in some sense until conquered by Muslim invaders in 711, when it soon became a capital of what Muslims called al-Andalus, the Islamic foothold in southern Europe, the recurrence of which is so nostalgically evoked by bin Laden and Co. The president’s Cairo speech cited Cordoba as a beacon of tolerance during the Spanish Inquisition (“Islam has a proud tradition of tolerance: We see it in the history of Andalusia and Cordoba during the Inquisition”), but that was mostly therapeutic myth-making: Cordoba had been captured in the first wave of the Reconquisita in 1236, and most of its Muslim population had fled, been converted, or forced out more than two-and-a-half centuries before the Inquisition even began.
But even before then, the once-cosmopolitan Cordoba — as handed down from the overtly homosexual and enlightened Al-Hakam II — was already in decline due to serial assassinations, court coups, and increasing Islamic intolerance for freedom of thought and expression outside the boundaries of the Koran.
The Rest at NRO.
This post was sent to me by my buddy Rob. When I stopped by his house this weekend, he and his dad were putting the finishing touches on a fence around his back yard. I snapped this quick photo when he wasn't looking:
As you can see, he should be able to keep his highly energetic son from running into the street, and he has a line of defense in case the mongols invade New Jersey.
Friday, August 13, 2010
Does Mayor Bloomberg know why the Ground-Zero Mosque will be dedicated to “ Cordoba ”? But what can you expect from an anti-gun nut … Of course not! Instead of doing a little bit of research, he prefers to call relatives’ of 9/11 victims bigots.
Well, to understand why you just need to know about the history of Islamic Jihad in Europe :
“Osama bin Laden’s deputy explicitly linked the destruction of the World Trade Centre with events in southern Spain 512 years ago, by referring, in a post-9/11 broadcast, to “the tragedy in al-Andalus”, the watershed moment in 1492 when the Christian troops of Ferdinand and Isabella finally conquered Granada, bringing to an end nearly 800 extraordinary years of Islamic rule in Spain. With our foreshortened historical memories in the West, we see the War on Terror through a prism of recent events: Afghanistan , the Gulf War, the presence of American troops in Saudi Arabia . But in truth the landscape of Islamic memory stretches to a more distant horizon: to the Christian flag unfurling over the Alhambra , the great 14th-century Muslim fortress of Granada , and the Crusades that preceded it.”
Current Spain was invaded by Islam in the year 711 AD, where they established the Caliphate of al-Andalus. It took almost 800 years to expel the invader. Bin Laden thinks in historical terms. For him, the attacks on 9/11 were part of a struggle against the West, a struggle that started with the Jihad for al-Andalus. That was the first confrontation against Christianity, many centuries before the Crusades of Palestine (approx. 1100 AD).
As simple as that. The World Trade Center was destroyed in revenge for “the tragedy in al-Andalus”. Now, I find rather disturbing that they want to dedicate the Ground-Zero Mosque to al-Andalus’ center of spirituality, the city of “Cordoba”. Did you know that, in fact, this will be one of the very few Mosques around the world dedicated to a city of al-Andalus? Why to choose a name directly and inextricably connected to Islamic Jihad, here in Ground-Zero?? It may not mean anything to the average American, but to a Muslim this is a great provocation, like opening a museum in Tehran denying the Holocaust and inviting rabbis from around the World to participate.
I bet you the funding comes from the masters of provocation... Iran.
May God preserve America free, united and in peace.
I haven’t said much about the Mosque myself so let me take this chance to say that I’m against it.
There are lots of ways that the institutions of the Western world don’t jive well with Islam. In our minds the separation of church and state is a simple and direct thing. So too is the decent treatment of soldiers in war. But the Islamic world neither understands nor respects those principles because to them the theology of Islam and the politics of Islam are inextricably linked. You can’t have one without the other. And in many cases, the politics of Islam are actually far more important than the theology, which is a secondary consideration.
If you listen to the Islamic advocates of the Mosque, they’ve learned how to play specifically to our civilization’s weaknesses. They are complaining that all they want is to be allowed to practice their religion the same as anyone else. But the fact is, no one is stopping them from doing so. (There is already a very sizable Mosque on the upper east side... not too far from the Mayor's official residence.) Put the mosque on the upper west side and no one will have anything to say about it. But their decision to compel us to allow them to build a memorial to the murderers at the site of the murder is a political decision.
What they really want is to compel us all to recognize legally that their values are ‘normal’. Once they have that, they'll then use that designation to turn our own legal system against us and compel us to follow the tenants of their belief out of 'respect' or diversity' or whatever works for them. That’s not theology, that’s politics.
I have a problem with Gitmo because I don’t trust our government to just make up rules as they go along. I think we should sit down and write out some very specific rules for how the government deals with the un-uniformed practitioners of Jihad. But in the meantime I recognize that these people are trying to kill us all, so we had better err on the side of infringing on their rights until we figure it all out. (In truth, I wish we were trying a little harder to do so.) I feel the same with regard to the Mosque. It may be stepping over the lines as we know them, but Islam contains so many secular principles that it demands it. It’s not really a religion any more than something like ‘environmentalism’ is.
As for Bloomberg, I sat 18 inches from him at a benefit once and listened to him opine for hours. This was long before he was mayor but after he had already amassed a sizable fortune. He’s an unfathomably arrogant a$$. I’d expect nothing less from him.
Thursday, August 12, 2010
The only reason Keynesianism is still in vogue in Washington is because it reinforces the delusion of politicians that they can effectively be in ‘control’ of a growing economy. If Keynesianism is accurate, then the best way to ensure economic growth is for the anointed in government to pick ‘the right’ winners and losers. They will then ‘spread the wealth around’ and everyone will benefit. Regrettably history disagrees with this view.
In spirit anyway, the same is true at the Fed with the Monetarist school. That economic school reinforces the belief that it’s the Fed policymakers ‘in control’ of a growing economy instead of the politicians. The FOMC board will control the cost of capital and that will cause less enlightened businessmen to increase or decrease their economic activity accordingly. The truth however doesn’t seem to want to cooperate with that view either.
In reality, the tools of Keynesianism are excellent at understanding the parts of an economy, but are insufficient to understand the economy as a whole. It really never addresses the issue of what happens tomorrow, and is therefore profoundly short-sighted. Using Keynesianism to direct an economy from the top down is like trying to drive a car on the highway while looking through a microscope. You may in fact get it right, but the cause won’t be what you think it is, and the effect will be little more than a happy accident.
Now we’re learning about the limits of the monetarist school as well. Like Keynesianism its major problem is one of short-sightedness. In a ‘normal economy’ in can stabilize prices, minimize inflation and increase confidence in the monetary base. But when things become extreme, the tools of the monetary school begin to fall apart. To use the same analogy, it’s like putting down the Keynesian microscope and driving the same car in a heavy fog. So long as the road is straight and there are no big surprises things are fine. But when the highway bends, you have to either live with slowing down, or expect to end up in a tangled metal heap.
In the end I think both of these views were typified by Clint Webb who said it best when he described himself as having a ‘sociopathic narcissism’. This left him with the feeling that everyone would be better off if he were in charge of all of their decisions. Congress believes that, the Fed governors believe it, and lord knows the President and his team of fawning sycophants believe it as well. So instead of trying to look objectively at our economy and to determine the best course of action, they have each simply embraced the school of economics which helps them support their individual nihilistic view.
Right now, Ben Bernanke is projecting himself into the future and trying to manage his legacy. He doesn’t want to preside over another great depression so he’s not going to allow deflation under any circumstances. Neither does he want to be remembered for putting the world’s most dynamic economy into a Japanese style ‘lost decade’. That means that he’s going to do everything he can to ensure that we return to vigorous economic growth. That is, he’ll do everything he can short of promoting policies which will involve him surrendering control. The same can be expected of Congress and the President.
When those roads runs out is anyone's guess, but there is no doubt that they will each end eventually. And that highlights the problem with Austrian school Economics. the Austrian school puts forward the broadest and most consistent of all economic views, but it doesn’t offer much in the way of timing. While history tends to hold it correct eventually, it tends to be so far sighted a perspective that it's impossible to tell when the piper will finally demand payment. It could be tomorrow, or next year or 50 years. One never really knows.
But our rulers don't care about that.
The simple truth is, we’ll never see an Austrian school policy adopted. It may be right or it may be wrong; it may provide good solutions to our economic problems or bad ones. Our rulers don’t really care one way or the other. But what they do care very deeply about is that to adopt an Austrian school policy, they would have to surrender control. And that's something they will NEVER accept. So Congress and the President will continue to be Keynesian and the FOMC will continue to be Monetarist. And we individual Americans can expect to end up with either a happy accident, or a tangled metal heap.
For me, hope is just great, but I’m still buying insurance.
Wednesday, August 11, 2010
A while back I sat in on a meeting with the head of Morgan Stanley’s Quantitative Trading unit. The topic of the discussion was high frequency trading, dark pools of liquidity, and ‘Information Leakage’. They had gone around to several major hedge funds to discuss their ideas about how the laws concerning high frequency trading and dark liquidity pools could be ‘gotten around’ to allow a distinct and specific advantage for any investor engaging in certain practices.
Those practices were all absolutely legal under the letter of the law, but only just. The fact is, the technology was simply WAY ahead of regulation and no one knew that better then Morgan Stanley. So they had stopped by offering to partner with us to help us capture the profit that they knew they couldn’t possible do on their own without incurring the wrath of the redistributionist mob that was camped out in front of Goldman Sach’s offices at the time. Basically the whole meeting was a solicitation for an investment. Let me say this again, what they were proposing was absolutely legal, but I think most people would have seen it as unethical.
My employer’s ethics being what they are, we instantly passed on the opportunity.
Still, it was pretty clear that someone somewhere would eventually be taking them up on their offer. And that person whoever it was, would be getting a pretty reliable profit, with a minimum of ‘risk’ as it’s presently understood. But the truth is, it didn't really matter. Even if Morgan Stanley never found a partner for their plans, there are a ton of people out there already doing precisely what they were proposing. And those people are destabilizing the entire financial markets.
Take this admittedly hyperbolic example:
Suppose there were only one HF trader and only 1 professional long term investor in the market. In reality there are many, but their views on some issues are so similar that in some regards they do tend to act as one.
Suppose that both the HF trader and the long term trader each have a fixed ‘draw down limit’ imposed by their risk management team. A drawdown limit is a maximum allowable loss from peak, and even a strategy that remains profitable can exceed this measure if they aren’t careful about their risk. For most firms that number is somewhere between 10% and 20%. If the market moves 10.1% in a single day, the long term trader could conceivably be over his draw down limit, but for the HF trader it’s not necessarily so. Since his exposure is reset at such a high rate, he could have been up and down several times during a single day’s move, even if it was all in one direction.
In this circumstance the long term investor would have his strategy shut down, and he would be out of business, or at a minimum he’d be dramatically scaled back to a lower risk level. Either way, the HF trader would now represent a larger portion of the overall market activity. And that would mean that the next huge ‘short term’ move will be even more pronounced than the last. And since that’s so, it will ‘take out’ the next long term strategy in the same way. And so on, and so on, and so on. This will continue until HF systems make up a majority of the market, like they do now. And the short term moves will become more and more pronounced until events like the ‘flash crash’ happen much more frequently - pretty much all the time.
It's a simple fact that most professional investors with similar holding periods in a given market will trade in very similar ways. This is true of HF traders and of investors with a longer term view. So although my example was simplified, it can very effectively be applied to the real world. And all you need to make the real world look exactly like that simplified example is enough observations. In other words... time. So long as longer term investors are not participating in the market, limiting the short term effect of HF traders, the whole market is on borrowed time.
I’ve been an ardent defender of HF trading in the past, since in a normal and ‘healthy’ market those programs serve a meaningful purpose. But like bright sunshine on a field, even if it would be helpful in combination with occasional rain and a cool evening or two, it can’t be the only thing you have or it’s a recipe for disaster. That ham-fisted analogy is what we’re now seeing, and although you might not personally see the smoke yet, I can assure you that today's markets are in flames.
Because of the uncertainty created by the economic crisis and the ‘change’ half of the Obama administration’s ‘hope and change’ mantra, long term investors have left the financial markets in astounding numbers. It’s been so pronounced in fact that Barclays has begun cutting staff in response to the drop-off in business. And as we speak, the HF trading programs are in the process of burning through the few professional long term investors that are left.
Somewhere out there someone is saying ‘Well there are some strategies which are doing very well right now’. In response let me say that I believe only three things will increase your Sharpe ratio in this environment. You can short volatility, you can short liquidity, or you can shorten your average holding period. The first two strategies are commonly referred to with the analogy ‘picking up pennies in front of the steam roller’, where they make a profit every day but blow up spectacularly at some future date. And the third is HF trading.
So even if some strategies are doing well, it’s a fair question to ask how long they will continue to do so. The effect of shorting volatility is well known in industry literature, and shorting liquidity is what created the initial crunch of the credit crisis. As for HF trading, it’s become a game played predominantly by people who are using dark liquidity pools in a manner that employs 'questionable ethics', to skirt around regulation and (in my opinion anyway) unfairly ‘game’ the markets.
The best analogy for that is that they’ve decided to set the house on fire to try to stay warm. Like most people in that situation, they had better hope it’s a short financial winter or it may all be over for all of us.
Tuesday, August 10, 2010
I've long been a believer that you should have to surrender your right to vote in order to receive government financial support. If you can't care for yourself, then surely you can't decide how others should be compelled to care for you.
As you can imagine, this is not a particularly popular view, but I stand by it. One of the places they disagree with it is (wait for it...) The New York Times.
Remember when I said that Obama learned everything he knows about Economics at an AFL-CIO meeting? Well here is the head of that organization explaining that we don't have a deficit crisis in this country. It's guys like him (actually he's a moderate compared to many) who are shaping economic policy in this country now.
Friday, August 6, 2010
This is the latest talking point for team Obama. They want to expand the economy by 'doubling exports'. It makes sense that a president who got his entire economics education at an AFL-CIO meeting would feel that way. But there is only one way to be absolutely sure our exporting companies grow, and it's pictured above.
In yet another wonderful example of how government bureaucrats make things better, an Oregon 7 year old has her Lemonade stand shut down by diligent (unionized) civil servants because she didn't buy a $120 permit.
Makes you proud to be an Obam-erican doesn't it? Here's my favorite part:
After 20 minutes, a "lady with a clipboard" came over and asked for their license. When Fife explained they didn't have one, the woman told them they would need to leave or possibly face a $500 fine.
Surprised, Fife started to pack up. The people staffing the booths next to them encouraged the two to stay, telling them the inspectors had no right to kick them out of the neighborhood gathering. They also suggested that they give away the lemonade and accept donations instead and one of them made an announcement to the crowd to support the lemonade stand.
That's when business really picked up -- and two inspectors came back, Fife said. Julie started crying, while her mother packed up and others confronted the inspectors. "It was a very big scene," Fife said.
Well at least they managed to make a little girl cry.
Wednesday, August 4, 2010
The definitive piece describing the progress of my favorite American politician, Chris Christie.
The unions despise him (particularly the NJEA). The Democrats are simply bowled over by him. The lobbyists, the hanger's on, and the camp followers can't get him to take their calls. The media is apoplectic over what he represents and trash him and his plans at every opportunity, but he's more popular with the voters than ever.
Mark my words, short of finding a dead 15 year old boy in the trunk of his car, this man is going to be one of America's greatest Presidents.
Tuesday, August 3, 2010
A guest post from: Bernardo de Gálvez y Madrid
Before coming to the United States, I have lived several years in Spain, Switzerland and the United Kingdom. Spain and the U.K. have some of the oldest Universities in the world. Switzerland takes pride in their education system, which has formed renowned scientists, among them Albert Einstein.
Shortly after arriving, I realized that Americans confer enormous importance to an individual's college pedigree, to an extent I had never witnessed before. For example, a Harvard or Yale graduate will receive a treatment or courtesy by prospective employers that a Northwestern or University of Michigan graduate will never be dispensed. Coming from a family of European nobility, I quickly recognized that pattern.
Aristocracy is a system of domination by which a reduced number of self-selected individuals are presumed certain virtues by birth. For example, a nobleman is supposed to be honorable, truthful, courageous, just, refined, etc. More often than not, these presumptions are unfounded, but to the elite they serve an important purpose: To monopolize the access to power, for no one will give authority to a person who cannot be trusted.
The U.S. Constitution prohibits both the United States government (Article I, Section 9, Clause 8) and the separate States (Article 1, Section 10) from granting titles of nobility. But as we said, nobility is a system of domination, and this can and will adopt any means necessary to its ends. In the case of Europe, it has been through hereditary titles, privileges, prerogatives and, most importantly, prejudice against non-nobles. The Founding Fathers quickly realized how absurd and counter-productive that was for the common good, and consequently ban it in the strongest legal way. But it takes more than the Constitution to change human nature. Nobility is well and alive here in the United states, perhaps more than in Europe.
The deference I'm describing has nothing to do with an individual's ability. It is derived from the fact that a Harvard or Yale graduate belongs, sometimes by birth, to an elite. No matter what he or she later does after her 22nd birthday, that mark is indelible. She will be a candidate to American jobs comparable to those formerly reserved in the U.K. to the son of a Lord, or in Spain the son of an hidalgo. From that perspective, the U.S. society has become in recent years much more Aristocratic and compartmentalized than European societies. The history of those countries show us that this endogamy in social circles usually leads to arrogance, ineptitude, decadence and disaster.
The American people should not elect leaders who despise them.
Me: The author specifically drafted this piece for this forum. He's a good friend of mine who although he is not an American, knows more about the history of America's founding and the philosophy behind American ideals than many people born in this country. As is apparent, he did not go to Harvard or any other Ivy League University. He shall henceforth be known on this forum as Galvez.
The original Galvez was the Spanish Governor of Louisiana and fought against the British in the American Revolution. The author, like his namesake, is also a first rate pistol shot.
Monday, August 2, 2010
I think they're a little too conspiracy prone, but in a general sense I'm a fan of the website Zerohedge. Much of what they publish is geared for guys like me (and is therefore totally incomprehensible to your average retail investor) and it's nice to read public data that's a little more content heavy than the cheerleaders at CNBC, or the laughably vacuous short skirts at Bloomberg.
This article in particular tells an important story:
For ages the guys at Zerohedge have complained about the role of HF trading in the US equity markets. But the problem isn't that High Frequency traders have grown as a percentage of the market. The problem is that everyone else has run away and they're the only people left. And because of that, what we have now is a market which is totally unconcerned with valuation. Today's 'active trader' has an average holding period measured in seconds not days or weeks. And the only thing that investor (if I could mis-apply that word) is concerned with is the microsecond by microsecond relationship between the prices of various assets.
Since everyone with a holding period longer than 5 seconds has either gotten out of the market or GREATLY scaled back their risk, the bots are now driving everything. You can buy one stock or 100, it doesn't matter. You can have good news, or bad, good earnings or bad... it's all irrelevant for any period longer than a minute or two. The price of your assets tomorrow will be based only on their relationships to the S&P future.
This is unsustainable in the extreme.
At this point the only thing I can think of that will bring longer term money back into the market is inflation. The effect of inflation is something they can trust, something they can understand and rely on. Once we see inflation the differences between well run companies and poorly run companies will begin to matter again. Until then though, there is just one investor class trading the US Treasury future, and the rest of us are just lending money to electronic arbitrageurs.
So long as the bots are driving market behavior, the long term future remains in serious doubt, and the conditions for a viable financial industry will be absent.